Friday, June 12, 2020

Weekly Commentary: Extraordinary Q1 2020 Z.1 Flow of Funds

Financial crisis erupted in March. The Fed slashed rates at a March 3rd emergency meeting – and then began aggressively expanding its holdings/balance sheet (creating market liquidity). Even from a “flow of funds” perspective, it was one extraordinary quarter.

Total Non-Financial Debt (NFD) surged a nominal $1.597 TN during the first quarter ($6.379 TN seasonally-adjusted and annualized!) to $54.325 TN. This was the strongest quarter of NFD growth on record (blowing past Q1 2004’s $1.234 TN). Indeed, Q1 growth surpassed full-year NFD expansions for the years 2009, 2010, 2011 and 2013. This pushed one-year growth to $3.271 TN (6.2%), significantly exceeding 2007’s record $2.521 TN expansion. NFD increased $20.857 TN, or 59%, since the end of 2008. NFD as a percentage of GDP rose to a record 260%. This compares to previous cycle peaks of 226% (Q4 ‘07) and 183% (Q4 ’99).

Financial Sector borrowings jumped $963 billion during Q1, surpassing the previous record $656 billion from Q3 ’07. This pushed one-year Financial Debt growth to $1.247 TN (7.6%), the strongest expansion since ‘07’s $2.065 TN.

Total Credit (Non-Financial, Financial and Foreign) surged nominal $2.391 TN for the quarter to $77.861 TN, surpassing previous record growth from Q1 ‘04 ($1.512 TN). One-year growth of $4.790 TN was the strongest since 2007. Total Credit jumped to 362% of GDP, the high going back to 2010.

Federal Liabilities (excluding massive “contingent”/off balance sheet liabilities) jumped to $22.0 TN during Q1. At 102%, Federal Liabilities surpassed 100% of GDP for the first time in at least six decades. For perspective, Federal Liabilities ended the seventies at 50% of GDP; the eighties at 63%; the nineties at 59%; and 2010 at 85%. It would not be surprising to see this ratio approach 150% over the next three to five years.

Outstanding Treasury Securities jumped nominal $500 billion during the quarter to a record $19.518 TN. This pushed one-year growth to a staggering $1.612 TN (9.0%) and two-year growth to $2.472 TN (14.5%). Treasuries ballooned $13.467 TN, or 223%, since the end of ’07. Treasuries-to-GDP jumped to 91%, more than doubling the 41% from the end of 2007.

The Dept. of the Treasury and Federal Reserve are not the only profligate debt issuers in Washington. Outstanding Agency Securities jumped a record $340 billion during the quarter to a record $9.771 TN. Agency Securities surged $899 billion, or 10.1%, over the past year – just below 2007’s record expansion ($905bn). It’s worth noting outstanding Agency Securities increased $1.866 TN, or 24%, over the past five years.

Washington didn’t merely fail to resolve the GSE issue during the “longest expansion on record.” These institutions were once again exploited to juice the markets and economy. The government-sponsored enterprises these days essentially have no meaningful amount of capital. Since receivership, hundreds of billions of accounting profits were transferred to Treasury coffers, helping dreadful fiscal deficits appear a tad less dreadful. Payback time starts now. Treasury will be on the hook for what will surely be years of enormous losses.

Combined Treasury and Agency (“Washington”) Securities surged $840 billion during Q1 to a record $29.289 TN, or 137% of GDP. Combined, “Washington” Securities jumped $2.237 TN over the past year and $3.371 TN over two years – accounting for the majority of system Credit expansion. This is a replay of the “alchemy of Wall Street finance” dynamic from the mortgage finance Bubble period. Endless “AAA” debt securities these days transform increasingly risky end-of-cycle Credit into perceived money-like, safe and liquid instruments (experiencing insatiable demand).

Total Debt Securities jumped $973 billion during the quarter (vs. $357bn from Q1 ’19) to a record $48.362 TN. This pushed one-year growth to an unprecedented $2.912 TN, surpassing previous record growth of $2.679 TN from the 2007 period. Total Debt Securities-to-GDP jumped to a record 225%. This ratio ended the nineties at 162% and the eighties at 75%.

The S&P500 fell 20% during Q1. Total Equities dropped $12.064 TN during Q1 to $42.460 TN, the low since Q1 ’17. Total Equities dropped to 198% of GDP, down from Q4’s record 251%, yet remained above the cycle peak 181% from Q3 ’07 (and just below Q1 00’s 202%). Total Equities-to-GDP bottomed at 93% during Q1 ’09.

Total (Debt and Equities) Securities dropped to $90.922 TN during Q1. Total Securities-to-GDP fell to 422%, down from Q4’s record 469%. Even after Q1’s decline, Total Securities-to-GDP remains significantly above previous cycle peaks of 379% during Q3 ’07 and 359% in Q1 ’00.

As always, the Household (and Non-Profits) Balance Sheet is an essential facet of Bubble Analysis. Household Assets dropped $6.464 TN during Q1 to $127.421 TN. With Liabilities increasing $84 billion during the quarter, Household Net Worth fell $6.548 TN to $110.787 TN.

As a percentage of GDP, Household Net Worth declined to 514% (from Q4’s record 540%), while remaining above previous cycle peaks - 492% during Q1 2007 and 446% in Q1 ’00. For comparison, Household Net Worth bottomed at 419% of GDP during Q1 ’09. Household holdings of Financial Assets declined to $87.00 TN, or 404% of GDP (down from Q4’s record 432%). This compares to previous cycle peaks 376% in Q3 ’07 and 355% during Q1 ’00. It’s worth noting the value of Real Estate holdings increased $433 billion during Q1 to a record $33.950 TN. At 158%, Household Real Estate-to-GDP increased to the highest percentage since Q4 2008.

Rest of World (ROW) holdings of U.S. assets dropped $2.903 TN during the quarter to $31.990 TN, led by a combined $1.651 TN decline in Equities and Mutual Fund holdings. As a percentage of GDP, ROW holdings declined to 149% from Q4’s record 161%. This ratio ended ’07 at 108% and ’99 at 74%. ROW boosted holdings of Treasuries by $118 billion (to a record $6.813 TN) and Agency Securities by $84 billion (to $1.265 TN). Over the past year, Treasury and Agency holdings rose $340 billion and $147 billion.

Bank (“Private Depository Institutions”) Assets gained an unprecedented $1.866 TN during Q1 to a record $21.918 TN. This was more than triple the previous record expansion during Q4 ’08 ($596bn). During the quarter, the Asset Reserves at the Federal Reserve increased $926 billion to $2.474 TN. Loan Assets jumped $575 billion, or almost 20% annualized, to $12.302 TN. This was more than double the previous record expansion (Q4 ‘18’s $261bn). Loans gained $1.033 TN over the past year, or 9.2%. The previous record annual Bank Loan growth was 2005’s $690 billion. Q1 saw Bank holdings of Agency Securities jump $189 billion (to $2.823 TN), while Treasuries added $15.0 billion (to $894bn).

On the Bank Liability side, Checkable Deposits surged $519 billion (to $3.157 TN) and Time & Savings Deposits jumped $621 billion (to $13.505 TN). This had Total Deposits expanding $1.140 TN, or almost 30% annualized. Over the past year, Checking Deposits expanded $740 billion, or 30.6%. Savings Deposits rose $1.076 TN, or 8.7%. Total Deposits expanded $1.816 TN y-o-y, or 12.2%. Net Interbank Liabilities jumped $471 billion during Q1 to $489 billion.

Securities Broker/Dealer Assets surged $281 billion during the quarter, the strongest expansion since Q1 ‘07’s $440 billion. Assets expanded to $3.749 TN, the highest level since Q3 ’08. Repo Assets jumped $87 billion to $1.483 TN. Miscellaneous Assets gained $173 billion to $831 billion. On the Liability side, Loans jumped nominal $208 billion (to $1.114 TN). Bond Liabilities rose $83bn (to $257bn).

Total Checking Deposits and Currency expanded an unprecedented $905 billion in Q1 to a record $5.750 TN, with one-year growth of $1.167 TN, or 25.4%. Money Market Fund Assets (MMFA) surged a record $704 billion during Q1 to $4.338 TN. MMFA jumped $1.259 TN over four quarters, or 40.9%. Fed Funds and Security Repurchase Agreements gained $393 billion, or 36% annualized – with one-year growth of $710 billion, or 17.6%. I received a lot of pushback in 2009 when I argued that QE was spurring growth in bank and money market deposits (“money supply”) then flowing into the markets. It’s become rather self-evident these days.

It’s been a historic global Bubble, with bipolar U.S. and China epicenters. It’s no coincidence then that recent Credit dynamics share alarming similarities. China’s Aggregate Financing (a gauge of system Credit expansion) surged $450 billion during the month of May. This was 86% ahead of May ’19 growth. A booming May put year-to-date (five months) growth in Aggregate Financing at a blistering $2.450 TN. It’s crazy to contemplate how much Chinese Credit will grow this year – Credit of Rapidly Deteriorating Quality. How long can systemic risk continue to inflate parabolically?

Global markets reversed sharply lower this week. “Risk on” careens to “Risk off” – for global stocks, corporate Credit, EM currencies/equities/bonds and commodities. One Big Unwieldy Speculative Trade. Pundits struggled to explain the abrupt reversal of fortunes. Was it something Powell said? A second wave of COVID infections that might hinder economic recovery? Election anxiety?

Let me suggest Plain Old Speculative Market Dynamics. Daydream, fantasize or hallucinate - if you choose. But this is a fiasco – and rather tangible, at that. It started years – even decades – ago. The craziness turned extreme last year, with the Fed aggressively stimulating in the face of highly speculative markets. It was never going to end well. And when the Bubble began imploding in March, the Fed and global central bankers responded immediately with Trillions of liquidity support. This fueled a rally, short squeeze and reversal of hedges that developed into one dazzling speculative melee.

From my analytical perspective, events over the past few months confirm Bubble Analysis – the Global Bubble Thesis. This week likely marked the beginning of a painful second leg of the bear market or, at the minimum, the return of wild volatility. There appears to have been both capitulation on the short side and “blow-off” speculative excess on the part of the bulls. It was almost like 1999 all over again – frenetic retail online trading, penny stock euphoria, derivatives run amuck, fun and games and throw caution to the wind speculative froth.

The Fed owns the frail Bubble – this disastrous mania. How ironic is it that the more cautious (i.e. realistic) the Fed’s view of economic prospects, the greater liquidity-induced market euphoria propagates delusions of V’s, perpetual bull markets and permanent prosperity? And of all the nonsense emanating from this historic financial mania, history will trash this foolhardy notion that there is no limit to the quantity of central bank Credit and government debt that can be issued. Reviewing the Fed's Q1 Z.1 report, I was thinking this is how things look as a system self-destructs. Q2 will be worse.

For the Week:

The S&P500 dropped 4.8% (down 5.9% y-t-d), and the Dow sank 5.6% (down 10.3%). The Utilities fell 3.8% (down 8.7%). The Banks sank 10.8% (down 31.2%), and the Broker/Dealers dropped 6.7% (down 6.7%). The Transports slumped 8.0% (down 16.7%). The S&P 400 Midcaps dropped 7.9% (down 16.7%), and the small cap Russell 2000 fell 7.9% (down 14.7%). The Nasdaq100 declined 1.6% (up 10.7%). The Semiconductors sank 5.0% (up 2.9%). The Biotechs declined 2.2% (up 7.4%). With bullion recovering $46, the HUI gold index added 0.3% (up 8.3%).

Three-month Treasury bill rates ended the week at 0.1475%. Two-year government yields declined two bps to 0.19% (down 138bps y-t-d). Five-year T-note yields fell 14 bps to 0.33% (down 136bps). Ten-year Treasury yields sank 19 bps to 0.71% (down 121bps). Long bond yields fell 21 bps to 1.46% (down 93bps). Benchmark Fannie Mae MBS yields dropped 20 bps to 1.57% (down 114bps).

Greek 10-year yields fell seven bps to 1.27% (down 16bps y-t-d). Ten-year Portuguese yields increased three bps to 0.57% (up 13bps). Italian 10-year yields rose four bps to 1.45% (up 4bps). Spain's 10-year yields gained four bps to 0.59% (up 13bps). German bund yields dropped 16 bps to negative 0.44% (down 25bps). French yields declined six bps to negative 0.04% (down 16bps). The French to German 10-year bond spread widened 10 to 40 bps. U.K. 10-year gilt yields fell 15 bps to 0.21% (down 61bps). U.K.'s FTSE equities index sank 5.8% (down 19.1%).

Japan's Nikkei Equities Index fell 2.4% (down 5.7% y-t-d). Japanese 10-year "JGB" yields declined four bps to 0.01% (down 2bps y-t-d). France's CAC40 sank 6.9% (down 19.0%). The German DAX equities index slumped 7.0% (down 9.8%). Spain's IBEX 35 equities index fell 7.4% (down 23.6%). Italy's FTSE MIB index lost 6.4% (down 19.6%). EM equities reversed lower. Brazil's Bovespa index declined 1.9% (down 19.8%), and Mexico's Bolsa dropped 3.3% (down 13.5%). South Korea's Kospi index fell 2.3% (down 3.0%). India's Sensex equities index declined 1.5% (down 18.1%). China's Shanghai Exchange slipped 0.4% (down 4.3%). Turkey's Borsa Istanbul National 100 index dipped 0.2% (down 4.0%). Russia's MICEX equities index fell 1.8% (down 9.9%).

Investment-grade bond funds saw inflows of $9.474 billion, and junk bond funds posted inflows of $5.122 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained three bps to 3.21% (down 61bps y-o-y). Fifteen-year rates were unchanged at 2.62% (down 64bps). Five-year hybrid ARM rates were unchanged at 3.10% (down 41bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down seven bps to 3.46% (down 71bps).

Federal Reserve Credit last week expanded $12bn to a record $7.113 TN, with a 40-week gain of $3.391 TN. Over the past year, Fed Credit expanded $3.303 TN, or 87%. Fed Credit inflated $4.302 Trillion, or 153%, over the past 396 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $17.3 billion last week to $3.407 TN. "Custody holdings" were down $54bn, or 1.6%, y-o-y.

M2 (narrow) "money" supply gained $37.7bn last week to a record $18.153 TN, with an unprecedented 14-week gain of $2.645 TN. "Narrow money" surged $3.448 TN, or 23.4%, over the past year. For the week, Currency increased $9.5bn. Total Checkable Deposits dropped $60bn, while Savings Deposits surged $98.2bn. Small Time Deposits fell $8.6bn. Retail Money Funds slipped $1.3bn.

Total money market fund assets dropped $34bn to $4.718 TN. Total money funds surged $1.546 TN y-o-y, or 49%.

Total Commercial Paper fell $9.1bn to $1.028 TN. CP was down $71bn, or 6.4% year-over-year.

Currency Watch:

June 8 – Bloomberg: “China’s currency has moved away from testing its 2008 low versus the dollar, but that’s not stopped the yuan from weakening against its peers. The yuan has fallen for a record 16 straight days against a basket of trading partners’ currencies -- the longest run since the basket was created in 2015… The yuan slumped more than 4% versus the euro and Australian dollar over that period, while it has strengthened about 0.4% versus the greenback.”

For the week, the U.S. dollar index recovered 0.4% to 97.319 (up 0.8% y-t-d). For the week on the upside, the Japanese yen increased 2.1%, the Swiss franc 1.0%, the South Korean won 0.3%, and the Singapore dollar 0.1%. For the week on the downside, the Norwegian krone declined 3.4%, the Mexican peso 3.1%, the Brazilian real 1.7%, the Australian dollar 1.5%, the Swedish krona 1.3%, the Canadian dollar 1.2%, the South African rand 1.2%, the British pound 1.0%, the New Zealand dollar 1.0% and the euro 0.3%. The Chinese renminbi was little changed versus the dollar this week (down 1.71% y-t-d).

Commodities Watch:

June 6 – Reuters (Ahmad Ghaddar, Rania El Gamal, Alex Lawler): “OPEC, Russia and allies agreed… to extend record oil production cuts until the end of July, prolonging a deal that has helped crude prices double in the past two months by withdrawing almost 10% of global supplies from the market. The group, known as OPEC+, also demanded countries such as Nigeria and Iraq, which exceeded production quotas in May and June, compensate with extra cuts in July to September.”

The Bloomberg Commodities Index retreated 1.5% (down 21.2% y-t-d). Spot Gold rallied 2.7% to $1,731 (up 14.0%). Silver was little changed at $17.482 (down 2.4%). WTI crude dropped $3.29 to $36.26 (down 41%). Gasoline sank 7.4% (down 34%), and Natural Gas dropped 2.9% (down 21%). Copper rallied 2.5% (down 6%). Wheat declined 1.5% (down 9%). Corn gained 1.0% (down 14%).

Coronavirus Watch:

June 12 – Bloomberg (Emma Court, Vincent Del Giudice and Jonathan Levin): “As Covid-19 cases soar to new highs, U.S. governors are again in the crucible, facing wrenching choices about how to balance economic recovery and the health of citizens. Their divergent approaches are inflaming tensions within states as well as with neighbors. While some have paused to reassess the wisdom of allowing movement and commerce, many are plunging ahead despite daunting numbers like Florida’s 2.8% increase in reported cases Friday, its largest daily jump since May 1. The surge also has produced record numbers of new cases in Arizona, Oklahoma, Arkansas, Alabama and North Carolina. ‘The disease is spreading,’ Governor Roy Cooper said Friday afternoon.”

June 12 – Bloomberg (Kate Kelland): “Fears of a second wave of COVID-19 infections grew on Friday with a record daily increase in India, warnings against complacency in Europe and word from half a dozen U.S. states that their hospital beds were filling up fast. Health officials worldwide have expressed concerns in recent days that some countries grappling with the devastating economic impact of lockdowns may lift restrictions too swiftly, and that the coronavirus could spread during mass anti-racism protests.”

June 11 – CNBC (Thomas Franck): “Treasury Secretary Steven Mnuchin told CNBC… that shutting down the economy for a second time to combat the spread of Covid-19 isn’t a viable option and could cause even more headaches for Americans… Texas has reported three consecutive days of record-breaking Covid-19 hospitalizations while nine California counties are reporting a spike in new cases or hospitalizations of confirmed cases… ‘We can’t shut down the economy again. I think we’ve learned that if you shut down the economy, you’re going to create more damage,’ Mnuchin said…”

June 11 – Reuters (Mica Rosenberg, Kristina Cooke and Christopher Walljasper): “From apple packing houses in Washington state to farm workers in Florida and a California county known as ‘the world’s salad bowl,’ outbreaks of the novel coronavirus are emerging at U.S. fruit and vegetable farms and packing plants. A rising number of sick farm and packing house workers comes after thousands of meat plant employees contracted the virus and could lead to more labor shortages and a fresh wave of disruption to U.S. food production.”

Market Instability Watch:

June 8 – Reuters (Rodrigo Campos): “Trading volume for emerging market credit default swaps (CDS) rose 3% in the first quarter to a record $521 billion from $505 billion a year earlier, according to a survey of 12 major dealers… The largest volumes were for Brazil at $49 billion and China at $48 billion, followed by Mexico and Turkey with $37 billion each. Total volume rose 20% from the final quarter of 2019… EMTA, the emerging markets debt trading and investment industry trade association, said quarterly volume was the highest since it began collecting the data in 2009.”

June 9 – Reuters (April Joyner): “The U.S. presidential election is re-emerging as a potential risk to markets after a shift in polls that has seen President Donald Trump lose ground to Democrat Joe Biden. Concerns over election-fueled volatility have regained prominence in recent weeks, even as broader market swings have subsided and stocks have surged. Futures on the Cboe Volatility Index , known as Wall Street’s ‘fear gauge,’ show a visible bump in volatility expectations near the election.”

June 11 – Bloomberg (Jack Pitcher): “Investors poured $14.6 billion into funds that buy U.S. investment-grade debt, high-yield bonds and leveraged loans in the week that ended June 10, just before a sell-off caused credit markets to tumble. It was the second-highest inflow ever behind last week’s record.”

June 8 – Financial times (Paul Britton): “Covid-19 has brought us to a historic turning point in financial markets. A fundamental investment strategy that has protected institutional and retail investors alike for decades — balancing equity risk by holding high-quality government bonds — has finally run its course. When the Fed lowered short-term rates to zero in response to the pandemic, the last shoe dropped. The implications of this change are huge. For one thing, millions of retail investors have been left largely defenceless, lacking a tried and tested means of diversifying the inevitable risk of holding equities. Similarly, the sophisticated and extremely successful hedge fund strategy known as Risk Parity faces an existential challenge: without meaningfully positive government bond yields, it has been thrust into a harsh environment in which it is unlikely to prosper.”

June 11 – Bloomberg (Justina Lee): “Quants are getting lashed by some of the most violent stock swings in more than a decade as fears of a second virus outbreak fuel huge waves of selling on Wall Street… The value factor versus momentum is on track for its third-worst performance since 2009 in Thursday trading. The popular investing style -- which scoops up cheap companies over recent market winners -- posted its biggest loss since the global financial crisis on Wednesday.”

June 8 – Reuters (Yoruk Bahceli): “Italy’s debt is unsustainable in the long term and will eventually require a restructuring, Schroders’ senior European economist said… The southern European economy, hit hard by the coronavirus pandemic, is having to raise even more debt on top of its hefty debt pile at 134% of GDP. This ratio is expected to rise to as high as 159% this year.”

June 10 – Reuters (Thyagaraju Adinarayan and John McCrank): “A raft of small cap stocks has soared by hundreds of millions of dollars in value in recent weeks as frenzied retail traders piled in to a blistering stocks rally. Increased savings, stimulus checks from the government, and ultra-low interest rates due to the coronavirus pandemic have led to a flood of money into the markets from punters, leading to chaotic trades via mobile phone apps… ‘In my 20 years of experience I’ve never seen retail traders push stocks around like they’re doing right now,’ said Dennis Dick, a trader with Bright Trading LLC.”

June 10 – CNBC (Maggie Fitzgerald): “Retail investors are snatching up any piece of the market to get in on the major comeback rally — this time its penny stocks. Stocks trading below $1 per share have an average gain of nearly 80% in the past week, according to… Institutional Equity Derivatives team at Citadel Securities…”

Global Bubble Watch:

June 10 – CNBC (Silvia Amaro): “The coronavirus pandemic is on track to cause the worst recession outside of wartime in 100 years, the Organization for Economic Cooperation and Development warned… The strict lockdowns and travel restrictions imposed by countries around the world have led to a steep decline in business activity. Global supply chains have been halted, inequality and debt levels have soared, and confidence levels have fallen. ‘Economic impacts are dire everywhere,’ the OECD summarized in its Economic Outlook… ‘The recovery will be slow and the crisis will have long-lasting effects, disproportionately affecting the most vulnerable people.’”

June 8 – AFP (Heather Scott): “The coronavirus pandemic inflicted a ‘swift and massive shock’ that has caused the broadest collapse of the global economy since 1870 despite unprecedented government support, the World Bank said… The world economy is expected to contract by 5.2% this year -- the worst recession in 80 years -- but the sheer number of countries suffering economic losses means the scale of the downturn is worse than any recession in 150 years, the World Bank said in its latest Global Economic Prospects report. ‘This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges,’ said World Bank Group Vice President for Equitable Growth, Finance and Institutions Ceyla Pazarbasioglu.”

June 8 – Financial Times (James Politi): “Emerging and developing economies will shrink this year for the first time in at least six decades, according to the World Bank… The bank’s forecast is that as many as 100m people in the developing world will be tipped into extreme poverty by a projected 2.5% contraction in emerging markets’ gross domestic product, with incomes per capita set to shrink 3.6% globally. The bank defines extreme poverty as an income of less than $1.90 a day. In recent weeks coronavirus has spread… to major emerging nations including Brazil, Russia and India, and shutdowns to tackle the spread of the disease are taking an increasing economic toll.”

June 11 – Reuters (Stephanie Nebehay): “International trade is set to plunge by 27% in the second quarter and by 20% for the year, as major sectors, including the automotive and energy industries, collapse from the effects the pandemic, a United Nations agency said… ‘Assuming persisting uncertainty, UNCTAD forecast indicates a decline of around 20% for the year 2020,’ the U.N. Conference on Trade and Development said in a report. ‘Trade in the automotive and energy sector collapsed while trade in agri-food products has been stable.’”

June 9 – Bloomberg (Eric Martin and Enda Curran): “The head of the International Monetary Fund called on private creditors to join the Group of 20 in providing debt relief for the world’s poorest nations, saying that the alternative to suspension and restructuring is defaults. A debt-service suspension would provide time for restructuring debt on a case-by-case basis in countries where debt sustainability needs to be restored, Managing Director Kristalina Georgieva said… A proposed $500 billion SDR allocation was blocked in April by the IMF’s biggest shareholder, the U.S.”

June 10 – Financial Times (Chris Giles): “Rich countries face a disappointing economic recovery from the historic downturn caused by the pandemic, which will leave deeper scars than any peacetime recession in the past 100 years, the OECD has warned. In a downbeat set of forecasts, the international organisation said… that although developed economies were likely to experience a rapid initial bounceback from the recession, it would probably fall far short of bringing living standards back to their pre-pandemic level in early 2020.”

June 10 – Bloomberg (William Horobin): “The coronavirus pandemic is splintering the world economy, and policy makers can’t risk a premature withdrawal of lifelines to businesses and the most vulnerable people, the OECD warned. It made the grim assessment as it forecast a global slump of 6% this year… That’s based on a scenario of the virus continuing to recede. A second wave, which the OECD said is an equally likely scenario, could mean a 7.6% contraction.”

June 9 – Bloomberg (Priscila Azevedo Rocha and Paul Cohen): “Sales of new bonds in Europe reached a fresh milestone on Tuesday, breaking through 1 trillion euros ($1.13 trillion) for the year at the fastest pace ever amid funding conditions that favor borrowers. The region’s syndicated bond market is having its busiest day since January, with 21 deals to raise around 41.6 billion euros, bringing the total for 2020 to 1.01 trillion euros. ‘The amount issued is staggering,’ said Giuseppe Sersale, a portfolio manager and partner at Anthilia Capital Partners Sgr SpA in Milan.”

June 10 – Bloomberg (Siddharth Vikram Philip and Christopher Jasper): “Airlines around the world will resume flying this month after an unprecedented shutdown forced by the coronavirus pandemic. Projections released by the International Air Transport Association show just how grim the situation has become… IATA… calculates that the industry has received $123 billion in various forms of state aid. Of that amount, $67 billion or 55% is repayable, creating a debt time-bomb… IATA says airlines will lose a combined $100 billion this year and next. That dwarfs the $31 billion loss during the 2008-2009 recession, itself reckoned to be the worst economic slump since the Great Depression of the 1930s.”

Trump Administration Watch:

June 10 – Bloomberg (Vince Golle): “The U.S. federal budget deficit almost doubled in May from a year earlier, as government spending surged amid efforts to limit the economic fallout from the coronavirus while revenue slumped. The shortfall increased to $398.8 billion last month from $207.8 billion in May 2019… Government spending rose 30% from a year earlier to $572.7 billion… Revenue dropped to $173.9 billion from $232 billion a year earlier, reflecting the economic slowdown… In the first eight months of fiscal year 2020, the U.S. budget deficit was $1.88 trillion, compared with $738.6 billion at the same point last year.”

June 9 – Reuters (Engen Tham and Scott Murdoch): “Chinese companies are putting off plans for U.S. listings as tensions between the world’s top two economies rise, lawyers, bankers, accountants and regulators involved in what has been a major capital-raising route told Reuters.”

Federal Reserve Watch:

June 11 – Wall Street Journal (Caitlin Ostroff and Sebastian Pellejero): “Investors are preparing for the Federal Reserve to tap a policy tool untouched since the aftermath of World War II, a move that could change how key financial markets behave and give an even bigger boost to the stock market’s best performers. Members of the Fed are embracing the idea of putting caps on government bond yields. The Fed would buy Treasurys in whatever amount necessary to keep borrowing costs from getting above a specific range or maximum yield. It last introduced yield caps during the 1940s, when the Treasury needed help financing war expenditures, exiting them in 1951. The Fed has offered trillions of dollars to quell the economic shock of the coronavirus shutdown. The caps would be a way to make sure those efforts aren’t undermined by rising yields.”

June 8 – Bloomberg (Stephen Roach): “The era of the U.S. dollar’s ‘exorbitant privilege’ as the world’s primary reserve currency is coming to an end. Then French Finance Minister Valery Giscard d’Estaing coined that phrase in the 1960s largely out of frustration, bemoaning a U.S. that drew freely on the rest of the world to support its over-extended standard of living. For almost 60 years, the world complained but did nothing about it. Those days are over. Already stressed by the impact of the Covid-19 pandemic, U.S. living standards are about to be squeezed as never before. At the same time, the world is having serious doubts about the once widely accepted presumption of American exceptionalism. Currencies set the equilibrium between these two forces — domestic economic fundamentals and foreign perceptions of a nation’s strength or weakness. The balance is shifting, and a crash in the dollar could well be in the offing.”

June 10 – Reuters (Gertrude Chavez-Dreyfuss): “The U.S. dollar would probably come under further pressure if the Federal Reserve adopts targets for U.S. Treasury yields that would limit their rise and ensure that interest rates remain near zero for some time. Capping bond yields could diminish the attractiveness of U.S. Treasury debt, as investors look to other alternatives, analysts said. That may exacerbate a downtrend in the U.S. currency that has been partly triggered by a gradual reopening of global economies following shutdowns aimed at curbing the spread of the novel coronavirus.”

June 10 – Reuters (Ann Saphir and Jonnelle Marte): “Federal Reserve Chair Jerome Powell… said the coronavirus crisis is worsening racial inequality and delivered a passionate pledge to reverse the massive U.S. job losses that have fallen most heavily on blacks and other minorities… The ‘biggest thing’ the Fed can do to combat high black unemployment and other economic inequities, he said, is to use its tools to push down unemployment. ‘The economy can have very low unemployment, very low unemployment’ without sparking inflation or financial imbalances, Powell said… ‘We can use our tools to support the labor market and support the economy. We can use them until we do fully recover,’ he said.”

June 10 – Bloomberg (Craig Torres and Matthew Boesler): “Federal Reserve Chairman Jerome Powell sent a powerful message… that the central bank will keep pumping stimulus into the U.S. economy until its traumatized labor market has healed from the harm of the coronavirus pandemic. ‘We’re not even thinking about thinking about raising rates,’ he told a video press conference… ‘We are strongly committed to using our tools to do whatever we can for as long as it takes,’ Powell said. ‘The Fed is clearly very sensitive to the fact that the Great Depression was made worse by not taking action, and they don’t want to make that mistake again,’ said Stephen Stanley, chief economist at Amherst Pierpont Securities. ‘The Fed, at least right now, wants everyone to believe that it will be easy for as far as the eye can see.’”

June 7 – Bloomberg (Saleha Mohsin and Davide Scigliuzzo): “The Federal Reserve is about to launch a $600 billion gambit to save swaths of U.S. businesses and tens of millions of jobs threatened by the coronavirus crisis. Wall Street is far from confident the Fed can pull it off. At issue is the Main Street Lending Program, a high-stakes juggling act whose success likely hinges on multiple factors: Companies lining up for loans that come with punitive strings attached. Banks lending to risky businesses at rock-bottom interest rates -- meaning lenders’ profits might be minimal or even non-existent. Getting firms that lack access to debt and equity markets back on their feet amid the worst economic downturn in a generation.”

U.S. Bubble Watch:

June 8 – Wall Street Journal (Kate Davidson and Richard Rubin): “The U.S. budget gap more than doubled in May, pushing the deficit for the fiscal year to near $2 trillion… For the past 12 months, the deficit as a share of gross domestic product stood at roughly 10%, the highest level since February 2010… CBO has estimated the deficit could reach $3.7 trillion for the fiscal year that ends in September, easily surpassing the high-water mark hit during the last downturn.”

June 6 – Reuters (Andrea Shalal): “A mounting wave of protests demanding police reform after the killing of a black man in Minneapolis swept across the United States on Sunday, building on the momentum of huge demonstrations across the country the day before… In some of the largest protests yet seen across the United States, a near-festive tone prevailed over the weekend. Most unfolded with no major violence, in sharp contrast to heated clashes between marchers and police in previous days.”

June 8 – Reuters (Howard Schneider): “The U.S. economy ended its longest expansion in history in February and entered recession as a result of the coronavirus pandemic, the private economics research group that acts as the arbiter for determining U.S. business cycles said…”

June 10 – Associated Press (Martin Crutsinger): “U.S. consumer spending plunged by a record-shattering 13.6% in April… Last month’s spending decline was far worse than the revised 6.9% drop in March, which itself had set a record for the steepest one-month fall in records dating to 1959…. Even with employers cutting millions of jobs, though, incomes soared 10.5% in April, reflecting billions of dollars in government payments in the form of unemployment aid and stimulus checks.”

June 8 – Bloomberg (Kim Bhasin): “As many as 25,000 U.S. stores could close permanently this year after the coronavirus pandemic devastated an industry where many mall-based retailers were already struggling. The number would shatter the record set in 2019, when more than 9,800 stores closed their doors for good, according to… Coresight Research. Most of the closures are expected to occur in malls, with department stores and clothing shops predicted to be among the hardest hit.”

June 8 – Bloomberg (Sophie Alexander): “Katrina Kehl warned her clients not to expect many offers on their $1.7 million home in Marin County, just north of San Francisco. They were, after all, in the middle of a pandemic and economic collapse. They ended up with 13 bids. ‘We took offers at four o’clock and they just started rolling in -- now we’re at seven, now we’re at eight,” said Kehl, a real estate agent with Compass. “At 4:15 I got one, at 4:24 I got another.’ Across the San Francisco Bay area -- home to some of America’s earliest and strictest shelter-in-place rules -- demand for real estate is soaring in outer suburbs and wealthy havens known for their gorgeous landscapes. From affluent Marin County to Napa wine country and south to Monterey’s Carmel Valley, brokers say the coronavirus outbreak is leading to a surge of interest from homebuyers looking to spread out. ‘I’ve never seen the demand higher for Marin County real estate than when Covid-19 hit,’ said Josh Burns, an agent with Sotheby’s International who has been in the business for about 20 years.”

June 11 – CNBC (Diana Olick): “Barely a week ago it looked like mortgage rates were finally breaking higher, but in a sudden reversal, they just set a new record low. The average rate on the popular 30-year fixed mortgage hit 2.97% Thursday…”

June 10 – CNBC (Diana Olick): “Rising interest rates did nothing to deter an onslaught of mortgage demand from homebuyers. Applications for loans to purchase a home rose 5% last week from the previous week and were 13% higher than a year ago, according to the Mortgage Bankers Association’s seasonally adjusted index.”

June 9 – Bloomberg (Allison McNeely, Katherine Doherty and David Wethe): “Chesapeake Energy Corp. is preparing a potential bankruptcy filing that could hand control of one of the leading lights of the U.S. shale revolution to senior lenders… The dwindling options for a powerhouse that once rivaled Exxon Mobil Corp. for title of king of American natural gas comes after Chief Executive Officer Doug Lawler’s 7-year effort to untangle the financial and legal legacies of Chesapeake’s late founder, Aubrey McClendon.”

Fixed-Income Bubble Watch:

June 11 – Bloomberg (Sally Bakewell, Claire Boston, and Katherine Doherty): “A massive wave of corporate distress is pitting beleaguered companies against their lenders in brawls that are shaping up to be nastier than ever before. Desperate firms and their private equity owners are seeking to take advantage of years of weakening creditor protections to help cut obligations and raise cash after the coronavirus outbreak brought businesses to a standstill. Be it via allowances written into borrowing documents when times were good or simply loopholes in deal terms, they’re siphoning collateral and transferring assets while pushing deeply discounted debt swaps onto investors… Still, money managers aren’t just rolling over. Credit powerhouses like GSO Capital Partners, BlackRock Inc. and HPS Investment Partners have lined up scores of lawyers and financial advisers to defend their interests…”

June 11 – Bloomberg (Reade Pickert): “U.S. nonfinancial business debt soared in the first quarter by the most in records back to 1952, as bank loans and corporate bond issuance jumped in companies’ all-out effort to stay liquid during the coronavirus pandemic. Firms boosted debt by $754.8 billion, or at an 18.8% annualized rate, in the first quarter to a total outstanding $16.8 trillion that surpassed the level of household borrowing, according to a Federal Reserve report…”

June 10 – Bloomberg (Michelle Kaske): “To judge by the municipal junk-bond market, it would seem like the economic collapse is already over. High-yield state and local government debt… have returned 7.8% since April 1, putting them on track for the biggest quarterly jump since the end of the Great Recession in 2009. The rally signals speculation by investors that even the riskiest borrowers in the $3.9 trillion municipal-securities market are likely to weather the fallout of the coronavirus…”

China Watch:

June 10 – Financial Times (Sun Yu): “China is facing a public outcry over its claim that Beijing had ‘basically won’ the war against poverty after Premier Li Keqiang admitted that more than two-fifths of the population made less than $140 a month. A week after Mr Li announced the figure, saying it was ‘hardly enough’ to rent a home in a big city, academics and netizens raced to question Beijing’s pledge to eradicate poverty by the end of this year. ‘Given the current price level, the premier is suggesting 600m Chinese people are having trouble maintaining a basic living standard,’ said a Beijing-based policy adviser… ‘The poverty relief [campaign] needs to carry on.’”

June 10 – Wall Street Journal (Jacky Wong): “Jobs, instead of growth, will be the focus of China’s post-Covid-19 economy. The plight of the country’s millions of low-income workers is highlighting the gaps in China’s social safety net—and creating political fissures as well. A recent speech by Chinese Premier Li Keqiang has brought the stark contrast between the haves and have nots to the fore. Mr. Li said last month that 600 million people, or more than 40% of the country’s population, have an income of just 1,000 yuan ($141) a month…”

June 6 – Reuters (Yawen Chen, Stella Qiu, and Ryan Woo): “China’s exports contracted in May as global coronavirus lockdowns continued to devastate demand, while a sharper-than-expected fall in imports pointed to mounting pressure on manufacturers as global growth stalls… Overseas shipments in May fell 3.3% from a year earlier, after a surprising 3.5% gain in April…”

June 11 – Associated Press (Zen Soo): “China’s auto sales surged 14.5% in May, a second straight month of growth as the global industry’s biggest market gradually recovers… The China Association of Automobile Manufacturers said… sales of passenger cars jumped 7% from a year earlier to 1.67 million, an improvement over April’s 2.6% contraction.”

June 11 – Wall Street Journal (Liza Lin): “China has embarked on a new trillion-dollar campaign to develop next-generation technologies as it seeks to catapult the communist nation ahead of the U.S. in critical areas. Since the start of the year, municipal governments in Beijing, Shanghai and more than a dozen other localities have pledged 6.61 trillion yuan ($935bn) to the cause… Chinese companies, urged on by authorities, are also putting up money. Under a plan outlined earlier this year by China’s Ministry of Industry and Information Technology, these efforts would contribute to at least $1.4 trillion in investments during the next five years in artificial intelligence, data centers, mobile communications and other projects.”

June 8 – Bloomberg: “The Chinese government said it has agreed to delay debt repayments for low-income countries, as part of the Group of 20 nations debt relief program. The country has suspended debt repayments from 77 developing countries and regions, Ma Zhaoxu, Vice Minister of Foreign Affairs, said…”

June 9 – Reuters (Kevin Yao): “China’s producer prices fell by the sharpest rate in more than four years, underscoring pressure on the manufacturing sector as the COVID-19 pandemic reduces trade flows and global demand… The producer price index (PPI) in May fell 3.7% from a year earlier…, the sharpest decline since March 2016.”

June 8 – Reuters (Yawen Chen, Cheng Leng and Ryan Woo): “In May 2019, China’s central bank announced a shock takeover of a lender, its first such move in 20 years, citing ‘serious credit risks’. Creditors in small Baoshang Bank were to take a hit, assets would be sold and an example set for governance. But a year on, regulatory and banking sources say, the rescue of a bank that had expanded rapidly, well beyond its own city base, has veered off its planned trajectory amid infighting between regulators, limited help from big state banks and a larger-than-expected role for financially stretched local government. In future, such deals are likely to see a mix of support and mergers with bigger institutions, one senior regulator said, asking not to be named due to sensitivity of the matter.”

June 10 – Wall Street Journal (Xie Yu): “Chinese companies are avoiding or minimizing bond defaults, even as the economy shrinks for the first time in decades. China’s domestic corporate-bond market is one of the world’s largest, with a total face value of about $5.1 trillion, according to Wind. Yet while there have been defaults recently, the shock of the coronavirus pandemic hasn’t produced anything to rival high-profile U.S. collapses… Some Chinese companies are asking bondholders to wait longer for repayment, to forgo the right to redeem bonds early, or to switch into new longer-dated securities.”

Central Bank Watch:

June 8 – Reuters (Francesco Canepa and Balazs Koranyi): “European Central Bank President Christine Lagarde… defended the aggressive stimulus measures taken by the ECB in response to the coronavirus pandemic, saying they are proportionate to the risk faced by the euro zone. Lagarde was facing criticism from conservative lawmakers from the Netherlands and Germany at a hearing in the European Parliament… The ECB’s massive purchases of government bonds have already come under fire from Germany’s Constitutional Court, which has given it three months to justify them or lose the German Bundesbank as the main buyer in its flagship debt-buying scheme. Lagarde emphasised that the ECB took into account ‘proportionality’ when making decisions and carried out a ‘cost-benefit analysis’ — two keywords from the German verdict. ‘Our crisis-related measures are temporary, targeted and proportionate ... to the severe risks to our mandate that we are facing,’ Lagarde told EU lawmakers.”

Europe Watch:

June 8 – Financial Times (Martin Arnold): “German industrial production plunged by a record 18% in April, as the coronavirus lockdown caused major disruption to factories across most manufacturing sectors of Europe’s biggest economy. The vast German auto industry was hit hardest by the pandemic after its output collapsed to a quarter of its level the previous month.”

June 8 – Reuters (Madeline Chambers): “German exports and imports slumped in April, posting their biggest declines since records began in 1990 as demand dried up in the coronavirus lockdown, casting further gloom over the outlook for Europe’s biggest economy… Exports plunged 24% on the month, far more than economists expected, while imports slid 16.5%.”

June 11 – Reuters (Neha Malara): “The European Union is planning on filing formal antitrust charges against Inc over its treatment of third-party sellers… The EU has been building its case and circulating a draft of the charge sheet for a couple of months and could officially file the charges as early as next week or the week after…”

June 11 – Bloomberg (Todd White and Charlie Devereux): “Spain’s $6 trillion home market looks headed toward another crash, according to economists who are studying the impact on property demand stemming from Europe’s strictest pandemic lockdown. While it’s too early to estimate the full dimensions of the blow to demand caused by the health emergency that flared up in March, experts who study the Spanish market say the hit to housing prices in 2020 could range from 6.5% to 15%.”

EM Watch:

June 11 – Bloomberg (Michelle Jamrisko, Anirban Nag and Karlis Salna): “Emerging-market economies are grappling with a new dilemma as they begin the slow journey to recovery: how to rescue state-owned businesses without also triggering a debt crisis. Cash-strapped governments in Indonesia, India, South Africa and elsewhere are being pressured to bail out national airlines, energy utilities and other state businesses brought to their knees by virus-related travel restrictions, collapsing demand and plunging oil prices. The debt risk is putting credit rating companies on watch and prompting nervous investors to sell off assets before the situation gets any worse. In emerging markets, state-owned enterprises, or SOEs, are key job creators, woven tightly into the economic fabric and even the national identity. They are responsible for 55% of infrastructure investment in those countries…, and account for about 60% of non-financial corporate debt…”

June 8 – Reuters (Stefanie Eschenbacher): “Mexico is facing its deepest recession in decades and prominent investors believe it could soon follow state oil company Pemex in seeing its credit rating relegated to ‘junk’ territory as the COVID-19 pandemic rages on. Losing the investment-grade rating that Latin America’s second-largest economy has held for almost two decades would be a bitter blow for leftist President Andres Manuel Lopez Obrador.”

June 10 – Bloomberg (Rahul Satija and Divya Patil): “A credit crisis facing lower-rated Indian borrowers is deepening and the lack of liquidity in the rupee corporate bond market is making matters worse. The number of note sales by firms that don’t have an AAA rating has dropped to nearly a decade low this year… The extra spread that investors demand to hold short-term AA rated debt over AAA notes has also risen to its highest in about nine years… A funding shortage for smaller businesses -- the bedrock of India’s $2.7 trillion economy -- comes at a time when they need money the most to counter the financial impact of the crisis.”

June 9 – Bloomberg (Muneeza Naqvi): “India’s capital of 16 million people is set to be the latest city overwhelmed by Covid-19, and the worst may be yet to come. The defense ministry has closed its doors, its top bureaucrat is in quarantine, while a senior finance ministry official and the government’s top spokesman have the coronavirus. Authorities have requisitioned more hotels and community centers to be used as Covid-19 wards, while bodies are piling up in hospital morgues and crematoriums.”

June 10 – Bloomberg (Rahul Satija and Divya Patil): “A credit crisis facing lower-rated Indian borrowers is deepening and the lack of liquidity in the rupee corporate bond market is making matters worse. The number of note sales by firms that don’t have an AAA rating has dropped to nearly a decade low this year… The extra spread that investors demand to hold short-term AA rated debt over AAA notes has also risen to its highest in about nine years.”

June 9 – Reuters (Sharay Angulo and Diego Ore): “The Mexican economy most likely shrunk 17% in April and will probably shrink ‘a little less’ in May, the finance minister told local radio on Tuesday, as officials push a re-opening after more than two months of lockdown.”

Brazil Watch:

June 12 – Bloomberg (Julia Leite): “Brazil surpassed the U.K. in number of deaths from Covid-19 as the pandemic continues to spread in Latin America’s largest nation. The country reported 909 new deaths on Friday…, bringing the total death count to 41,828. The number of infections rose by 25,982, pushing the toll to 828,810. A new study showed the illness may be far more widespread in Brazil than official data suggests. Researchers at the University of Pelotas in southern Brazil estimate there are six unreported cases for every one confirmed diagnosis across 120 cities included in the study.”

Japan Watch:

June 9 – Reuters (Aishwarya Nair and Leika Kihara): “S&P Global Ratings… lowered its outlook on Japan’s sovereign debt rating to stable from positive, citing increased uncertainty over the country’s fiscal health as it boosts spending to overcome the effects of the coronavirus pandemic… ‘Japan’s weak government finances have deteriorated further in fiscal 2020 owing to the COVID-19 pandemic,’ S&P said. Two supplementary budgets rolled out by the government will raise the general government deficit for this fiscal year to about 16% of the country’s gross domestic product, it said.”

June 8 – Reuters (Leika Kihara): “Japanese bank lending rose at the fastest annual pace on record in May as cash-strapped companies tapped loans to meet immediate funding needs to survive slumping sales from the coronavirus pandemic… Total bank lending by banks and ‘shinkin’ credit unions rose 4.8% in May from a year earlier to 562.5 trillion yen ($5.13 trillion), accelerating from a 2.9% gain in April and marking the fastest pace of increase since comparable data became available in 2001…”

Leveraged Speculation Watch:

June 8 – Bloomberg (Cormac Mullen): “Speculative excess has surged to the highest in at least 20 years among U.S. options traders…, according to Sundial Capital Research Inc. Traders established fresh bullish positions last week by buying 35.6 million new call options on equities, according to Sundial founder Jason Goepfert. That’s up from a peak of 28.7 million in February, when speculative activity was rampant… ‘Options traders make stunning bets on rising prices,’ Goepfert wrote. ‘This kind of activity has a strong tendency to lead to negative returns in the S&P 500 and other indexes over a multi-week to multi-month time frame.’”

June 8 – CNBC (Thomas Franck): “Longtime hedge fund manager Stanley Druckenmiller told CNBC… the market’s strong performance over the last three weeks has ‘humbled’ him and that he underestimated the power of the Federal Reserve. ‘I had long-term concerns for the last few years that because of easy money, too much debt was being built up in the corporate sector,’ Druckenmiller said… ‘When Covid hit, I was pretty much of the view that there was a good chance that the credit bubble had finally burst and the unwinding of that leverage would take years.’”

June 7 – Bloomberg (David Finnerty): “The Australian dollar’s relentless rally is prolonging the pain for hedge funds that have been betting against it all along the advance… The currency, which is a proxy for risk appetite, has rallied as much as 27% against the greenback from a 18-year low in mid-March amid expectations of a global economic recovery on easing lockdowns.”

June 9 – Bloomberg (Adam Tempkin): “According to deal documentation, many collateralized loan obligations must enter into a restricted trading period if tranches are downgraded by ratings firms, which may have the effect of inhibiting liquidity in the leveraged loan market if managers are handcuffed from buying in and out of loans, JPMorgan analysts wrote in a recent research note. Given that a large and growing number of CLO tranches are now on ratings watch negative, a wave of CLO downgrades could trigger documentation rules demanding that the deals enter into a restricted trading period. As CLOs are the largest buyers of leveraged loans, there could be liquidity issues if less trading were allowed in portfolios, JPMorgan analysts Rishad Ahluwalia, Heather Rochford, and Michael (Xin) Huang said…”

Geopolitical Watch:

June 8 – CNBC (Weizhen Tan): “From a trade fight to a war of words over the origin of the coronavirus, to greater scrutiny of Chinese firms on Wall Street — relations between the U.S. and China have nosedived in recent years. A new ‘cold war’ is here and things could get uglier as other countries get dragged into the conflict, analysts warn. ‘Things will get worse — perhaps much worse — before they get better. Decoupling is underway,’ said Dan Ikenson, director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute… Beijing could also start targeting America’s allies, as it embarks on what analysts call the ‘wolf warrior diplomacy.’”

June 11 – Reuters: “China… condemned the U.S. military for the ‘provocative’ flight of one of its aircraft over Chinese-claimed Taiwan, saying the move infringed upon China’s sovereignty and contravened international law. China considers democratically ruled Taiwan its own territory and one of its most sensitive diplomatic issues, regularly denouncing the United States for its support of the island.”

June 10 – Bloomberg: “China has lodged a complaint with Japan over the government’s plan to lead push for Group of Seven statement on Hong Kong, Foreign Ministry spokeswoman Hua Chunying tells regular briefing… ‘China has expressed grave concerns to the Japanese side,’ Hua says. ‘National security legislation in Hong Kong is China’s internal affairs.’”

June 8 – Associated Press: “North Korea said it will cut off all communication channels with South Korea at noon Tuesday as it escalates its pressure on the South for failing to stop activists from floating anti-Pyongyang leaflets across their tense border. South Korea's liberal government, which espouses greater ties with North Korea, repeated that it will work toward restoring peace on the Korean Peninsula… Relations between the Koreas have been strained during a prolonged deadlock in broader nuclear diplomacy between Pyongyang and Washington.”

June 11 – Reuters (Sangmi Cha and Josh Smith): “North Korea sees little use maintaining a personal relationship between leader Kim Jong Un and U.S. President Donald Trump if Washington sticks to hostile policies, state media reported on Friday - the two-year anniversary of the leaders’ first summit.”

June 11 – Reuters (Kirsty Needham): “Prime Minister Scott Morrison said… he would not be intimidated by ‘coercion’ after China restricted some Australian exports and urged Chinese tourists and students to avoid Australia. Diplomatic tensions between Beijing and Canberra have worsened since Australia called for an international inquiry into the source and spread of the new coronavirus…”

Friday Evening Links

[Reuters] Wall Street ends higher but indexes mark worst week in more than two months

[Reuters] 'Persistent fragilities' ahead for households and businesses -Fed report

[AP] Fed says ‘full range of tools’ in play to counter pandemic

[CNBC] CDC warns U.S. may reimplement strict coronavirus measures if cases go up ‘dramatically’

[Reuters] Brazil deficit to reach $140 billion this year -survey

[Bloomberg] Hedge Funds May See $100 Billion Redeemed in 2020, Barclays Says