Friday, September 4, 2020

Weekly Commentary: Summer of 2020

QE fundamentally changed finance. What commenced at the Federal Reserve with a post-mortgage finance Bubble, $1 TN Treasury buying operation morphed into open-ended purchases of Treasuries, MBS, corporate bonds and even corporate ETFs holding high-yield “junk” bonds. Markets assume it’s only a matter of time before the Federal Reserve adds equities to its buy list.

For years now, Treasury bonds (and agency securities) have traded at elevated prices – low yields – in anticipation of an inevitable resumption of QE operations/securities purchases. Conventional analysis has focused on persistent disinflationary pressures as the primary explanation for historically depressed bond yields. While not unreasonable, such analysis downplays the prevailing role played by exceptionally low Federal Reserve interest-rates coupled with latent (and escalating) financial fragility. Meanwhile, near zero short-term rates and historically low Treasury and agency securities yields have spurred a desperate search for yields, significantly inflating the demand and pricing for corporate Credit.

The Fed’s COVID crisis leap into corporate debt has wielded further profound impacts on corporate Credit – yields, prices and issuance.

September 2 – Financial Times (Joe Rennison): “Companies have raised more debt in the US bond market this year than ever before… A $2bn bond from Japanese bank Mizuho and a $2.5bn deal from junk-rated hospital operator Tenet Healthcare helped nudge overall US corporate bond issuance to $1.919tn so far this year, surpassing the previous annual record of $1.916tn set in 2017, according to… Refinitiv. The surge marks a dramatic revival for the market since the coronavirus-induced rout in March, when prices slumped and yields soared… ‘There has been a phenomenal amount of issuance,’ said Peter Tchir, chief macro strategist at Academy Securities… ‘It’s been the busiest summer I have ever seen. It’s felt like we have been setting issuance records month after month.’”

Future historians will view The Summer of 2020 as a Critical Juncture for the financial markets, with parallels to the Q1 2000 “blow off” top in Nasdaq (highs not exceeded for 16 years). From March 23rd trading lows to Wednesday’s highs, the NDX rallied an incredible 84%. At the close of Wednesday trading, the Nasdaq100 (NDX) enjoyed a year-to-date gain of 42.2%. But an abrupt reversal saw the NDX sink 5.2% on Thursday and another 5% at Friday’s trading lows (before ending the session down 1.3%).

The Fed’s crisis operations unleashed a historic speculative Bubble, most conspicuously with the big technology stocks. FOMO (fear of missing out) forced professional asset managers into rapidly inflating tech stocks and tech-heavy indices – with nothing more than lip service paid to fundamentals and valuation. Meanwhile, the online trading community (further energized by government stimulus payments) went into speculative overdrive. The Robinhood, E-Trade, Schwab and Fidelity platforms posted unprecedented trading volume surges as retail “investors” fully embraced technology stocks, the mantra "stocks always go up", and the unfailing Fed “put.”

Less obvious - but likely at least as consequential in fueling the destabilizing speculative melt-up – has been the system-wide proliferation of derivatives trading. From the Wall Street Journal: “Data by the Cboe Options Exchange show that U.S. equity call-options volume has risen 68% this year. That compares with 32% for put options…” Purchasing call options has been a highly lucrative endeavor over recent months. Owning call options on some of the big tech stocks has been nothing short of a once-in-a-lifetime bonanza.

The retail trading community has adopted options trading like never before. And I can only assume institutional derivatives trading (listed and over-the-counter) has exploded. During a speculative market melt-up backdrop in the face of readily apparent downside risk, playing the wild market upside with call options (or comparable derivatives) has been a reasonable institutional strategy. Selling call options also seemed to have made sense, both to boost returns and as a mechanism to offset the cost of purchasing put option downside protection.

I’ll assume an unprecedented quantity of upside “call” options (trading on the exchanges or “OTC” derivatives purchased from brokerages) are currently outstanding. And when the market rally gained momentum, the writers/sellers of these derivatives were forced to buy the underlying stocks (or ETF shares, futures contracts) to hedge their rapidly increasing exposures to a rising market environment. A confluence of FOMO, manic retail speculation, and derivatives-related hedging fueled a historic speculative melt-up.

The equities market blow-off has been a key Monetary Disorder manifestation. To this point celebrated as one of the great bull market advances, surging prices are nonetheless indicative of acute market instability. Was this week’s dramatic technology stock reversal a signal of a change in trend – a historic market top with euphoria succumbing to a much less appealing reality?

Thursday trading saw the VIX (equities volatility) index jump 10 to 36, only to then trade at a 10-week high 38 during Friday’s session (before ending the week at 30.75). The Treasury market was similarly instructive. Ten-year Treasury yields traded to 0.78% last Friday – and were as high as 0.73% in late-Wednesday trading (with equities at record highs). Yields then swiftly sank as low as 0.60% as technology stocks reversed sharply lower.

Why might Treasury bonds respond so keenly to an overdue pull back in the big technology stocks? I view this dynamic as confirmation of the pivotal role the tech stock speculative melt-up has been playing in the general market Bubble. If as much leverage has accumulated in technology stocks (within derivatives, in particular) as I suspect, then a reversal in Nasdaq holds the clear potential to spark an unwind of derivatives-related leverage. Those that have written/sold call options - previously aggressive buyers to hedge exposures – would reverse course to become forceful sellers into a declining market. Moreover, deleveraging in derivatives markets might then provide a catalyst for a more systemic de-risking/deleveraging dynamic.

Treasuries (and the VIX) are these days fixated on the big tech stocks as the marginal source of speculative leverage and, as such, marketplace liquidity.

Curiously, this week's equities market drama had little impact on corporate Credit. Investment-grade CDS prices ended the week little changed, with high-yield CDS prices actually declining slightly. Both ended the week at or near March lows. The iShares Investment-Grade Corporate Bond ETF (LQD) was little changed in price, with the iShares High-Yield ETF (HYG) declining only about 0.5%.

And why would corporate Credit fret a Nasdaq reversal? A faltering stock market Bubble, after all, will ensure more aggressive Fed balance sheet expansion, certainly including corporate bonds and ETF shares. Besides, sinking Treasury yields only adds to the appeal of relatively higher-yielding corporate Credit. And while a faltering stock market Bubble will have major negative ramifications for corporate Credit quality, corporate bonds are priced these days relative to Treasuries with little regard for default risk. Both investment-grade and high-yield CDS prices trade below average prices from the past decade, despite today’s highly elevated risk of widespread defaults.

Let's return to that $1.9 TN of y-t-d corporate debt issuance (already a new annual record), Credit perceived to be underpinned by extraordinary Federal Reserve liquidity, market and economic support. I would argue this gross mispricing of Credit risk is a major Monetary Disorder manifestation with momentous ramifications.

I don’t buy into the notion that central bankers have everything under control – or that aggressive Federal Reserve stimulus measures will support financial markets indefinitely. I see instead aggressive stimulus having been administered to a system already suffering from years of powerful Bubble Dynamics. And I’ve pointed to two key Monetary Disorder ramifications – egregious market Bubble speculative excess (with tech stock derivatives at its epicenter) and massive issuance of mispriced corporate Credit.

In both cases, I believe strongly that aggressive Fed stimulus exacerbates dangerous financial excess and economic maladjustment – fomenting precarious “Terminal Phase” Bubble excess. Fueling a spectacular equities speculative melt-up comes with great risk. Spurring the issuance of Trillions of mispriced corporate Credit will haunt the system for years to come.

In particular, the notion of “insurance” monetary stimulus is dangerously ill-conceived. It has resulted in the Fed aggressively employing stimulus upon a system already under the command of powerful Bubble Dynamics. In the case of equities, it rather quickly fueled a destabilizing historic speculative melt-up – the type that traditionally ends with dislocations and crashes. For corporate Credit, it almost immediately spurred massive bond fund inflows and record debt issuance. Both Bubble Dynamics are self-defeating.

Markets have become well-conditioned to assume aggressive monetary stimulus will launch a new speculative cycle. That unprecedented stimulus measures were employed only days after record stock prices made this cycle unique. Stimulus hit a system already overcome by speculative impulses, helping explain both how Bubble excess could so quickly attain powerful momentum along with why markets so easily detached from troubling economic fundamentals.

Especially over recent weeks, the view that the global Bubble has been pierced hasn’t seemed credible. Yet I do see support for the analysis that we’re witnessing a degree of excess and speculative blow-offs consistent with a major top. I wouldn’t be surprised if the Nasdaq top is in. It wouldn’t be surprising to see equities unravel from here. But the risk of a serious de-risking/deleveraging episode rises significantly when we begin to see risk aversion return to the corporate Credit market. QE may have changed finance, but it didn’t abolish market or business cycles. It made them more perilous.

Mainly, we’re seeing latent risks now beginning to surface. After this week, it’s more easily discerned why Treasury yields have remained so low - and the VIX elevated - in the face of record stock prices. As an analyst of Bubbles, I see compelling support for the Bubble thesis. I see fragility. And we’re now less than two months from the most pivotal of elections. Can financial markets remain attractive as politics turns ugly, repulsive and problematic?

For the Week:

The S&P500 dropped 2.3% (up 6.1% y-t-d), and the Dow fell 1.8% (down 1.4%). The Utilities added 0.6% (down 7.3%). The Banks gained 1.1% (down 30.1%), while the Broker/Dealers slipped 0.5% (up 1.8%). The Transports declined 0.9% (up 3.0%). The S&P 400 Midcaps fell 2.5% (down 8.0%), and the small cap Russell 2000 lost 2.7% (down 8.0%). The Nasdaq100 sank 3.1% (up 33.1%). The Semiconductors fell 2.3% (up 19.6%). The Biotechs dropped 2.4% (up 3.4%). With bullion down $31, the HUI gold index lost 2.6% (up 40.4%).

Three-month Treasury bill rates ended the week at 0.0975%. Two-year government yields added two bps to 0.145% (down 142bps y-t-d). Five-year T-note yields rose three bps to 0.30% (down 139bps). Ten-year Treasury yields slipped a basis point to 0.72% (down 120bps). Long bond yields fell three bps to 1.47% (down 92bps). Benchmark Fannie Mae MBS yields dropped eight bps to 1.36% (down 135bps).

Greek 10-year yields rose four bps to 1.13% (down 30bps y-t-d). Ten-year Portuguese yields declined three bps to 0.37% (down 7bps). Italian 10-year yields dipped three bps to 1.02% (down 40bps). Spain's 10-year yields fell three bps to 0.35% (down 12bps). German bund yields dropped six bps to negative 0.47% (down 29bps). French yields fell seven bps to negative 0.17% (down 29bps). The French to German 10-year bond spread was little changed at 30 bps. U.K. 10-year gilt yields declined five bps to 0.26% (down 56bps). U.K.'s FTSE equities index dropped 2.8% (down 23.1%).

Japan's Nikkei Equities Index gained 1.4% (down 1.9% y-t-d). Japanese 10-year "JGB" yields slipped two bps to 0.04% (up 5bps y-t-d). France's CAC40 declined 0.8% (down 16.9%). The German DAX equities index fell 1.5% (down 3.1%). Spain's IBEX 35 equities index dropped 2.0% (down 26.8%). Italy's FTSE MIB index lost 2.3% (down 17.5%). EM equities were mostly lower. Brazil's Bovespa index declined 0.9% (down 12.5%), and Mexico's Bolsa sank 3.6% (down 16.3%). South Korea's Kospi index added 0.6% (up 7.8%). India's Sensex equities index dropped 2.8% (down 7.0%). China's Shanghai Exchange fell 1.4% (up 10.3%). Turkey's Borsa Istanbul National 100 index lost 1.3% (down 5.2%). Russia's MICEX equities index dropped 2.0% (down 4.1%).

Investment-grade bond funds saw inflows of $10.726 billion, and junk bond funds posted positive flows of $319 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose two bps to 2.93% (down 56bps y-o-y). Fifteen-year rates fell four bps to 2.42% (down 58bps). Five-year hybrid ARM rates rose two bps to 2.93% (down 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 3.12% (down 109bps).

Federal Reserve Credit last week declined $13.7bn to $6.962 TN. Over the past year, Fed Credit expanded $3.240 TN, or 87%. Fed Credit inflated $4.151 Trillion, or 148%, over the past 408 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $12.0bn to $3.401 TN. "Custody holdings" were down $49.7bn, or 1.4%, y-o-y.

M2 (narrow) "money" supply fell $62.7bn last week to $18.386 TN, with an unprecedented 26-week gain of $2.878 TN. "Narrow money" surged $3.453 TN, or 23.1%, over the past year. For the week, Currency increased $4.8bn. Total Checkable Deposits rose $25.2bn, while Savings Deposits dropped $84.6bn. Small Time Deposits declined $6.0bn. Retail Money Funds slipped $2.0bn.

Total money market fund assets dropped $45.2bn to $4.495 TN. Total money funds surged $1.114 TN y-o-y, or 33%.

Total Commercial Paper dropped $15bn to $997bn. CP was down $127bn, or 11.3% year-over-year.

Currency Watch:

September 2 – Bloomberg (Mark Gilbert and Marcus Ashworth): “‘It's our currency, but it’s your problem,’ John Connally, Richard Nixon’s treasury secretary, told the world in 1971. Four decades later, the dollar’s weakness threatens to incite a full-blown currency war that could distract policy makers from their key task of mending the post-pandemic global economy. The U.S. currency has been on a downward trend for several months. The Federal Reserve’s recent shift to an even more dovish stance — saying that it will allow inflation and the labor market to run hotter for longer than previously — looks set to exacerbate the dollar’s decline.”

August 30 – Reuters (Winni Zhou and Andrew Galbraith): “China’s central bank lifted its official yuan midpoint to the highest in 13 months on Monday to reflect persistent weakness in the U.S. dollar in global markets.”

For the week, the U.S. dollar index gained 0.7% to 92.974 (down 3.7% y-t-d). For the week on the upside, the Brazilian real increased 1.7%, the Mexican peso 1.0% and the Canadian dollar 0.3%. For the week on the downside, the Swedish krona declined 1.3%, the Australian dollar 1.1%, the Swiss franc 1.0%, the Norwegian krone 1.0%, the Japanese yen 0.8%, the British pound 0.6%, the euro 0.6%, the Singapore dollar 0.5%, the South Korean won 0.5%, and the New Zealand dollar 0.3%. The Chinese renminbi increased 0.33% versus the dollar this week (up 1.76% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.0% (down 10.5% y-t-d). Spot Gold dipped 1.6% to $1,934 (up 27.4%). Silver dropped 3.9% to $26.712 (up 49.1%). WTI crude dropped $3.20 to $39.77 (down 35%). Gasoline sank 10.5% (down 30%), and Natural Gas fell 2.6% (up 18%). Copper gained 1.4% (up 10%). Wheat increased 0.3% (down 2%). Corn slipped 0.3% (down 8%).

Coronavirus Watch:

August 31 – Reuters (Allison Martell and Julie Steenhuysen): “High-profile COVID-19 vaccines developed in Russia and China share a potential shortcoming: They are based on a common cold virus that many people have been exposed to, potentially limiting their effectiveness, some experts say.”

August 31 – CNBC (Will Feuer): “Coronavirus cases are rising across more than half of the nation even as the outbreak slows across former hotspots in Arizona, Florida, California and Texas. New cases are up by at least 5%, based on a seven-day average, in 26 states as of Sunday, compared with just 12 states a week ago…”

September 1 – Reuters (Susan Cornwell and David Morgan): “Tens of thousands of loans worth billions of dollars may have been subject to fraud, waste and abuse in the $659 billion taxpayer-funded program aimed at helping small U.S. businesses survive the coronavirus pandemic, according to a report released by Democratic lawmakers…”

September 1 – Reuters (Anthony Boadle): “Brazil reported 42,659 new cases of the novel coronavirus and 1,215 deaths from the disease caused by the virus in the past 24 hours… Brazil has registered 3,950,931 cases of the virus since the pandemic began, while the official death toll from COVID-19 has risen to 122,596…”

Market Instability Watch:

September 2 – Bloomberg (Joanna Ossinger): “Key U.S. markets now appear to be pricing in the risk of a delayed or inconclusive result from the upcoming presidential election, according to fresh analysis from JPMorgan… Pricing for volatility protection in interest rates -- where investors trade and hedge bond exposure through various derivatives -- is ‘very high relative to the same stage in previous cycles,’ strategists led by Joshua Younger said… Both over-the-counter derivatives and options on U.S. Treasury futures show volatility priced at about six times its normal level, compared with a rate of two times normal in the 2008 and 2012 presidential elections and three times in 2016, when Donald Trump surprised pollsters by defeating Hillary Clinton. Meanwhile, the cost of hedging exposure to U.S. corporate bonds also shows investors paying more for protection than in previous elections…”

August 30 – Financial Times (Patrick Jenkins): “If 2008 was a heart attack for the world’s banks, 2020 is showing the sector to be both morbidly obese and dangerously addicted to prescription drugs. A repeat of the banking sector coronary of 12 years ago, which the global economic shutdown amid Covid-19 might well have triggered, appears to have been averted. But the central bank interventions that have held down capital costs and helped mitigate customer loan losses — via ramped-up quantitative easing and a further lowering of perennially ultralow interest rates — have had a nasty side effect. Combined with the build-up of plump capital buffers that policymakers have insisted on over the past decade, they have conspired to destroy returns, rendering many banks essentially uninvestable.”

August 31 – Financial Times (Adam Samson, Hudson Lockett and Richard Henderson): “Stock indices from New York to Tokyo have pushed higher over the past month in the biggest August market bonanza in decades. A sagging dollar has combined with sparks of fiscal and monetary stimulus — reinforced by the US Federal Reserve last week — to help ignite a global equities rally during a month when traders would usually prefer focusing on the beach instead of data terminals… The MSCI World index of stocks in developed nations jumped 6.6% in August, the sharpest rally for that month since 1986.”

September 1 – Bloomberg (Yakob Peterseil, Katherine Greifeld, and Jan-Patrick Barnert): “Wrinkles in the relationship between stock and options markets have a few Wall Street sleuths claiming to have unearthed clues to the storm raging in technology shares over the last few weeks. They point to recent days when implied volatility on the S&P 500 and Nasdaq 100 rose even as equities rallied -- a rare alignment that is out of step with historical patterns. One theory is that an explosion in demand for call options to bet on megacap tech is feeding into gains in the stocks as dealers hedge.”

August 31 – Bloomberg (Lu Wang): “The record-setting advance in U.S. stocks is fueling readings of investor bliss not seen since the dot-com era. Gains in Tesla Inc. and Apple Inc. following stock splits helped push the Nasdaq 100 past 12,000. A sentiment gauge, Citigroup’s panic/euphoria model, which tracks metrics from options trading to short sales and newsletter bullishness, is having its longest run of extreme bullishness since the early 2000s.”

August 30 – Financial Times (Joe Rennison): “The vast scale of central bank support for the corporate bond market has fired up prices to the point where some investors are willing to accept a loss for buying them, once inflation is taken into account. After blasting higher in the financial-market ructions of March, the real yields on some high-quality US corporate bonds, which strip out inflation expectations from basic nominal yields, have slipped below zero. For investment-grade corporate bonds with a maturity of between one and three years, this marks the first dip into negative territory since March 2017…”

September 2 – Bloomberg (Michael P. Regan): “As the U.S. stock market continues to rally to record highs, the attention of many investors is turning toward November’s elections as a source of risk. However, hedging against that potential volatility doesn’t come cheap. In fact, it’s currently the most-expensive event risk on record based on a common way to bet on volatility known as a ‘butterfly trade.’”

August 31 – The Hill (Niv Elis): “There is a growing gap between what markets are expecting and a likely wave of defaults among struggling companies before summer 2021, according to an analysis by S&P Global… The report by Nick Kraemer, head of S&P Global Ratings Performance Analytics, found that the dire state of the U.S. economy suggests a higher rate of defaults for what are known as speculative-grade companies. His analysis concluded that between this past June and the same month next year, defaults in that sector would rise from 5.4% to 12.5%. The baseline scenario, which would see 229 speculative-grade companies default, involved a range of possible outcomes, from as few as 74 defaults to as many as 284.”

August 31 – Wall Street Journal (Alexander Osipovich): “It’s one of the year’s biggest market stories: Mom-and-pop investors have fallen back in love with stocks, lured by free trading apps, a resurgent bull market led by technology companies and a pandemic that has left millions of Americans at home with little to do. New data show a number of ways in which the individual-trading boom has reshaped the U.S. stock market. Here are… takeaways: Trading by individuals accounts for a greater chunk of market activity than at any time during the past 10 years… The individual-investing boom has led to historically high levels of ‘dark’ trading, in which stocks are bought and sold on opaque private venues, rather than public exchanges… The firms that execute individual investors’ orders have enjoyed surging volumes…”

September 4 – Wall Street Journal (Heather Gillers): “Add the municipal market to the long list of American institutions reshaped by Covid-19. The pandemic is threatening the creditworthiness of many municipal securities long seen as safe investments—bonds for higher education, health care, tourism and travel. Prices across much of the market remain at or near pre-pandemic highs even as borrowers’ finances have become more precarious. Moody’s… has lowered its outlook to negative on all municipal bond sectors except for housing-finance agencies and water, sewer and public power. Analysts predict downgrades.”

August 31 – Bloomberg (Katherine Greifeld): “Investors are abandoning cash holdings at a record clip as momentum continues to build behind 2020’s risk rally. Roughly $5.4 billion has exited from the $20 billion iShares Short Treasury Bond exchange-traded fund -- the biggest ultra-short duration ETF -- over 14 consecutive weeks of outflows. That was the longest streak on record for the product… Meanwhile, investors have pulled $2.4 billion from the $14 billion SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) over 10 weeks…”

Global Bubble Watch:

September 3 – Wall Street Journal (Kejal Vyas and Vibhuti Agarwal): “From India to Mexico and Brazil, the world’s biggest developing countries are witnessing some of the steepest economic contractions on record, throwing tens of millions out of work and turning back the clock on gains against poverty. Developing nations haven’t felt this kind of pain since the Great Depression. India’s economy shrank by nearly a quarter, 23.9%, during the April to June period compared with a year earlier, its worst performance since quarterly figures began in 1996. Peru’s economy contracted by 32% during that same period from a year earlier, Mexico’s by 18.9%, Brazil’s by 11% and Turkey’s by 9.5%.”

September 3 – Bloomberg (Alexandre Tanzi): “Public attitudes about the economy have become more bleak as the coronavirus outbreak continues to weigh globally, according to a Pew Research Center survey… Overall, a median of only 31% of adults across the surveyed nations assess their country’s current economic situation as good, while more then two-thirds say conditions are bad.

September 1 – Reuters (Swati Pandey): “Australia fell into its deepest economic slump on record last quarter as coronavirus curbs paralysed business activity, while fresh outbreaks threaten to upend any immediate recovery, piling pressure on the government to keep fiscal taps open… Data from the Australian Bureau of Statistics on Wednesday showed the country’s A$2 trillion ($1.47 trillion) economy shrank 7% in the three months to end-June from a 0.3% decline in the March quarter.”

Trump Administration Watch:

September 2 – Bloomberg (Vince Golle): “The U.S. federal budget deficit will soar to a record $3.3 trillion this fiscal year, swelling government debt to a size bigger than the economy in the wake of massive spending to cushion Americans from the coronavirus pandemic, according to the Congressional Budget Office’s latest tally. Debt held by the public will reach $21.9 trillion in the fiscal year ending September 2021, or the equivalent to 104.4% of gross domestic product, up from 98.2% in the current year… Debt will increase to $33.5 trillion at the end of 2030, or 109% of GDP; the previous 10-year projection, in March, saw the figure at 98% in 2030.”

September 1 – CNBC (Tucker Higgins): “White House chief of staff Mark Meadows told CNBC… aid to state and local governments poses the biggest obstacle to a pandemic relief deal, even as ‘real progress’ was being made between Democrats and Republicans. Democrats have pushed for nearly $1 trillion in aid to municipalities hit by revenue shortfalls as a result of the coronavirus crisis, but Meadows told ‘Squawk on the Street’ that figure was not ‘based on reality.’ Meadows said the GOP would support only $150 billion in new funding to state and local governments.”

September 1 – Reuters (Eric Beech): “U.S. House Speaker Nancy Pelosi said after a phone call with Treasury Secretary Steven Mnuchin on Tuesday that ‘serious differences’ remain between Democrats and the White House over coronavirus relief legislation. ‘Sadly, this phone call made clear that Democrats and the White House continue to have serious differences understanding the gravity of the situation that America’s working families are facing,’ Pelosi said… No negotiations on another round of coronavirus aid have taken place since early August…”

September 1 – New York Times (Demetri Sevastopulo and Aime Williams): “As Donald Trump gears up for the final stretch of the presidential race following the Republican convention, a glaring contrast with his 2016 campaign is his silence on the US trade deficit with China. Mr Trump took aim at China during the convention over everything from its responsibility for coronavirus to its human rights abuses… But as the November election grows closer, the president has become conspicuously quiet on trade. During the 2016 campaign, Mr Trump pledged to get much tougher on trade with China, which he accused of ‘raping’ the US. After launching a trade war with Beijing, he secured a limited trade deal in January… The US trade deficit in goods with China in 2016 was $347bn. For 2019, it was only marginally lower at $345bn.”

September 2 – Financial Times (Katrina Manson): “The Trump administration said it would now require Chinese diplomats to seek permission before visiting US universities, meeting local government officials or hosting large cultural events in America. US secretary of state Mike Pompeo… said the new requirements were ‘a direct response to the excessive restraints already placed on our diplomats’ by China and aimed to provide further transparency on the Chinese government’s practices. The decision is the latest in a series of tit-for-tat moves highlighting rising tensions between the US and China, including over trade, Hong Kong and espionage, as President Donald Trump takes a hard line against Beijing in the run-up to the US presidential election in November.”

September 2 – CNBC (Diana Olick): “Late Tuesday, as temporary, coronavirus-related eviction protections in several states had expired, the Trump administration announced a somewhat creative plan to stop most rental evictions through the end of the year. The White House issued an order through the Centers for Disease Control and Prevention that declared evictions during a pandemic are a national health hazard. The unprecedented order by the CDC came after a federal moratorium on evictions from properties with federally backed mortgages expired at the end of July.”

Federal Reserve Watch:

August 30 – Wall Street Journal (James Mackintosh): “The Federal Reserve has just given itself a license to do pretty much whatever it wants. Chairman Jerome Powell will no doubt disagree: His speech on Thursday set out a new target for average inflation of 2%. But because he ruled out any mathematical definition of the average, anything from serious deflation up to inflation of 3.2% over the next five years could count as success. This isn’t really a problem. The broad thrust of the Fed’s new strategy is that it will be even more dovish, and interest rates will stay low for even longer. But—and it is a vital point—what the Fed is really saying is that we should trust that it won’t let inflation spiral out of control, so any overshoots of 2% won’t last long. The Fed wants people to believe inflation will be roughly 2% in the long run, and more precision than that isn’t really necessary.”

August 28 – Financial Times (Michael Mackenzie): “The Federal Reserve’s newly revised long-run policy goals announced this week enshrine a now familiar pattern of investment behaviour: a higher tolerance of riskier assets and higher use of leverage among investors seeking some kind of return. The shift accentuates the importance of central banks containing future bouts of market turmoil in their efforts to facilitate an economic recovery, and deepens the involvement of central banks in markets, further distorting asset prices and nurturing recurring bubbles. The message from Jay Powell at the annual Jackson Hole Symposium is that US interest rates will sit in the basement for a very long time, perhaps even well after the central bank reviews the progress of its new framework in five years' time.”

August 31 – Wall Street Journal (Nick Timiraos): “A top Federal Reserve official said the central bank would resume discussions at its meeting in two weeks over how it could refine its guidance about plans to keep interest rates lower for longer. Fed Vice Chairman Richard Clarida offered little specifics about what changes might be considered or when they might be unveiled… The Fed’s next policy meeting is Sept. 15-16. Officials are turning their attention to what ways they can provide more support to the economy after cutting rates to near zero in response to the downturn caused by the coronavirus pandemic in March. They are buying Treasury and mortgage securities at a rate of more than $1 trillion a year and have signaled no interest to raise rates for years.”

September 2 – Wall Street Journal (Michael S. Derby): “Federal Reserve Bank of New York leader John Williams said the central bank’s plan to allow inflation to overshoot its 2% target to compensate for times when it runs short of that goal will help the central bank better achieve its job and inflation goals. The new policy regime is ‘an important evolution in our thinking about how to achieve our goals and another step toward greater transparency,’ Mr. Williams said…, adding the change ‘positions us for success in achieving our maximum employment and price-stability goals in the future.’”

September 1 – Yahoo Finance (Brian Cheung): “Current and former Federal Reserve officials say the timing of its interest rate hikes between 2015 and 2018 may have been a mistake, a rare moment of humility spurred by the Fed’s adoption of a new framework for approaching inflation. Lael Brainard and Richard Clarida, both serving on the Fed’s Board of Governors, said this week that the Fed may have curbed a quicker post-2008 recovery in the job market by lifting off of zero interest rates too soon. ‘There would have been a different concept of inflation, and a sense that there was no need to preemptively withdraw, or prepare to withdraw, on the basis of an expectation of inflation materializing,’ Brainard said…”

September 1 – Reuters (Howard Schneider and Ann Saphir): “The Federal Reserve ‘in coming months’ will need to roll out new efforts to help the economy overcome the impact of the coronavirus pandemic and live up to the U.S. central bank’s new promise of stronger job growth and higher inflation, Fed Governor Lael Brainard said… ‘With the recovery likely to face COVID-19-related headwinds for some time, in coming months, it will be important for monetary policy to pivot from stabilization to accommodation,’ Brainard said, and do what’s appropriate to hit the new goals of ‘maximum employment and average inflation of 2% over time.’”

September 2 – Bloomberg (Christopher Condon): “A group of more than 100 prominent economists, including seven Nobel Prize laureates, have signed a new open letter to U.S. senators urging them to reject President Donald Trump’s nomination of Judy Shelton to the Federal Reserve’s Board of Governors. The letter is nearly identical to one published in August by former Federal Reserve officials and staffers. That version now has 70 signatories, including four former regional Fed presidents and a former Fed governor.”

U.S. Bubble Watch:

September 2 – Wall Street Journal (Kate Davidson): “U.S. debt has reached its highest level compared to the size of the economy since World War II and is projected to exceed it next year, the result of a giant fiscal response to the coronavirus pandemic. The Congressional Budget Office said… federal debt held by the public is projected to reach or exceed 100% of U.S. gross domestic product, the broadest measure of U.S. economic output, in the fiscal year that begins on Oct. 1. That would put the U.S. in the company of a handful of nations with debt loads that exceed their economies, including Japan, Italy and Greece. This year the ratio is expected to be 98%, also the highest since World War II.”

September 2 – Reuters (Richard Cowan): “The nonpartisan U.S. Congressional Budget Office… said the federal budget deficit for fiscal 2020 will hit $3.3 trillion, 16% of gross domestic product, down from its April 24 preliminary estimate of $3.7 trillion. Federal deficits were projected to fall to $1.8 trillion in the fiscal year beginning Oct. 1, the CBO said, and will total $13 trillion over 10 years. So far this year, more than $3 trillion in emergency coronavirus pandemic aid has been enacted into law… The $3.3 trillion budget deficit this year, if realized, would be more than triple the shortfall recorded in 2019. And a budget deficit at 16% of GDP would be the largest since 1945.”

September 3 – Reuters (Lucia Mutikani): “The U.S. trade deficit surged to its highest level since 2008 in July amid a record increase in imports, suggesting that trade could be a drag on economic growth in the third quarter. The… trade deficit jumped 18.9% to $63.6 billion, the highest since July 2008… Imports soared by a historic 10.9% to $231.7 billion. Goods imports vaulted 12.3% to $196.4 billion. Exports increased 8.1% to $168.1 billion. Goods exports rose 11.9% to $115.5 billion.”

September 2 – Bloomberg (Romy Varghese): “Last September, California entered its bi-annual bond sale flush with a ratings upgrade from Fitch Ratings and a $21 billion budget surplus. A year later, California kicks off its fall debt sales under dramatically different circumstances. Wildfires scorching thousands of acres are creating another stress on the state’s resources and its response to the coronavirus pandemic. S&P Global Ratings is warning that it may lower the Golden State if its finances become unbalanced for a long period. To close a $54 billion shortfall, California resorted to deferring payments and plumbing reserves, while holding out hope for federal aid that has yet to materialize… Such long-term concerns won’t impede the state’s access to capital. But relative yields on its $2.6 billion general-obligation sale, which sold Wednesday, show investors receiving more in compensation. Ten-year bonds were priced to yield 1.2% yield, or 40 bps over benchmark debt…”

September 4 – Reuters (Lucia Mutikani): “U.S. job growth slowed further in August as financial assistance from the government ran out, threatening the economy’s recovery from the COVID-19 recession. Nonfarm payrolls increased by 1.371 million jobs last month after advancing 1.734 million in July, the Labor Department’s closely watched employment report showed on Friday. The unemployment rate fell to 8.4% from 10.2% in July. Economists polled by Reuters had forecast 1.4 million jobs added in August and the unemployment rate sliding to 9.8%.”

September 2 – Reuters (Lucia Mutikani): “U.S. private employers hired fewer workers than expected for a second straight month in August, suggesting that the labor market recovery was slowing as the COVID-19 pandemic persists and government money to support workers and employers dries up… Private payrolls increased by 428,000 jobs last month, the ADP National Employment Report showed… Economists polled by Reuters had forecast private payrolls would increase by 950,000 in August.”

September 1 – CNBC (Diana Olick): “Exceptionally strong demand, historically low supply and record low mortgage rates are combining to fuel the fastest home price growth since 2018. Nationally, home prices in July were 5.5% higher than in 2019. That is a marked increase from the 4.3% annual gain seen in June, according to CoreLogic. Falling mortgage rates helped bolster the pent-up demand from spring, when home sales ground to a halt due to the start of the coronavirus pandemic.”

September 2 – CNBC (Diana Olick): “Homebuyers are rushing for mortgages, but fewer homeowners are refinancing even though rates are heading toward record lows… Mortgage applications to purchase a home fell 0.2% for the week but was 28% higher than a year earlier.”

September 1 – Reuters (Lucia Mutikani): “U.S. manufacturing activity accelerated to a nearly two-year high in August amid a surge in new orders, but employment continued to lag, supporting views that the labor market recovery was losing momentum. The Institute for Supply Management (ISM) said… its index of national factory activity increased to a reading of 56.0 last month from 54.2 in July.”

September 1 – Reuters (Lucia Mutikani): “U.S. construction spending barely rose in July as an increase in outlays on private projects was almost offset by a plunge in public construction projects… Spending on private construction projects advanced 0.6%, boosted by investment in homebuilding amid record-low mortgage rates.”

September 1 – New York Times (Ben Casselman): “The United States faces a wave of small-business failures this fall if the federal government does not provide a new round of financial assistance — a prospect that economists warn would prolong the recession, slow the recovery and perhaps enduringly reshape the American business landscape. As the pandemic drags on, it is threatening even well-established businesses that were financially healthy before the crisis… Tens of thousands of restaurants, bars, retailers and other small businesses have already closed. But many more have survived, buoyed in part by billions of dollars in government assistance to both businesses and their customers.”

September 2 – Bloomberg (Jenny Surane): “Subprime borrowers, who rely more on credit cards than any other group, are seeing their limits cut the most as banks reduce exposure during the coronavirus pandemic. The risk-management strategy shows a squeeze is coming for households with the most precarious finances as the U.S. government pares assistance for people who have lost their jobs amid the Covid-19 crisis. Not only are many losing income, they’re also losing access to credit. Banks cut overall borrowing limits for subprime borrowers by about 19% during the second quarter… That compares with an average reduction of just 1.2% across all card accounts during the same period.”

September 3 – Reuters (Lucia Mutikani): “U.S. services industry growth slowed in August, likely as the boost from the reopening of businesses and fiscal stimulus faded. The Institute for Supply Management (ISM) said… its non-manufacturing activity index fell to a reading of 56.9 last month from 58.1 in July… The ISM survey’s measure of new orders for the services industry dropped to a reading of 56.8 last month after surging to a record 67.7 in July.”

September 3 – Wall Street Journal (Liz Hoffman): “Investment-banking and trading revenues hit an eight-year high in the first half of 2020, a counterintuitive boom that shows the heavy hand of the Federal Reserve and a growing gulf between financial markets and the real economy. Global banks raked in fees from companies scrambling to raise cash and panicky investors scrambling to sell, then buy again as markets surged. Revenue in these traditional Wall Street businesses was 32% higher than in the same period last year… The surge is being driven by two factors: huge need for cash from pandemic-hit companies and the Federal Reserve flooding the system with money, which props up market prices and nudges investors into its riskier corners.”

August 31 – Bloomberg (Matthew A. Winkler): “At 6 a.m. on Aug. 3, Google bought a 6.6% stake in ADT Inc., the largest U.S. home security company, for $450 million. ADT appreciated 100% as soon as the stock market opened. But the headlines detailing the transaction weren't a total surprise because more than a few people knew ADT was poised to benefit from an event big enough to be gaining Google's hitherto inaccessible technology. Three days earlier… a series of computerized trading alerts derived from the algorithms of Bloomberg Automated Intelligence (BAI) revealed insiders' unmistakable handiwork: On July 29, the frequency of people searching for articles about ADT and reading them exceeded the most recent 30-day average. The same day, ADT rose 6.3% via trades 90% more numerous than the 20-day average… On July 30, ADT bonds changed hands four times more than the five-week average. The following day, ADT volume jumped to more than five times the 20-day average.”

September 1 – Wall Street Journal (Amrith Ramkumar): “A swift recovery in fuel consumption by U.S. drivers is petering out, posing new challenges to the oil market, economy and global energy industry. After demand for gasoline surged from mid-April to late June, consumption has stayed relatively flat in the past two months and remains well below its prepandemic levels… The fizzling rebound highlights the lingering effects of coronavirus precautions and travel restrictions.”

August 31 – Reuters (Jessica Resnick-Ault, Dmitry Zhdannikov, David Gaffen and Ron Boussoh): “Oil and gas companies plunged over $156 billion into corporate takeovers and land deals during the second U.S. shale boom, in a massive bet that good times would continue and crude prices would rise. Many of those deals have become financial albatrosses… The shale revolution turned the United States into the world’s largest crude producer, pumping out more than 12 million barrels per day (bpd) at its peak. The industry beat forecasts again and again for production growth, but rarely for financial returns.”

September 1 – Reuters (Nick Carey and Rachit Vats): “Toyota… reported a 23% drop in U.S. new vehicle sales in August versus the same month in 2019, as a two-month industrywide shutdown of auto production in the spring to halt the spread of COVID-19, as well as an uncertain economic recovery, weighed on sales.”

September 2 – Bloomberg (Natalie Wong): “Manhattan office leasing in 2020 could reach the lowest level in 20 years, according to… Colliers International. New leases totaling 1.3 million square feet were signed in August, nearly 64% below the 2019 monthly average of 3.6 million square feet… So far this year, about 13.7 million square feet worth of office leases have been signed in Manhattan. If that doesn’t pick up, it will be the worst full year since the turn of the century.”

September 1 – CNBC (Pippa Stevens): “Amid Tesla’s incredible rise that has seen shares soar to new highs, the electric auto maker said Tuesday it will sell up to $5 billion in new stock. The additional shares will be sold ‘from time to time’ and ‘at-the-market’ prices, Tesla said in a filing… It said banks will sell shares based on directives from Tesla. ‘We intend to use the net proceeds, if any, from this offering to further strengthen our balance sheet, as well as for general corporate purposes,’ Tesla said.”

Fixed Income Watch:

September 2 – Financial Times (Joe Rennison): “Companies have raised more debt in the US bond market this year than ever before… A $2bn bond from Japanese bank Mizuho and a $2.5bn deal from junk-rated hospital operator Tenet Healthcare helped nudge overall US corporate bond issuance to $1.919tn so far this year, surpassing the previous annual record of $1.916tn set in 2017, according to… Refinitiv. The surge marks a dramatic revival for the market since the coronavirus-induced rout in March, when prices slumped and yields soared… ‘There has been a phenomenal amount of issuance,’ said Peter Tchir, chief macro strategist at Academy Securities… ‘It’s been the busiest summer I have ever seen. It’s felt like we have been setting issuance records month after month.’”

August 31 – MarketWatch (Joy Wiltermuth): “U.S. corporations now owe a record $10.5 trillion to creditors, either in the form of bonds or loans, a stunning 30-fold increase from a half-century ago, according to a new BofA Global Research report. By far, the biggest chuck of debt has been taken out by American companies with high ‘investment-grade’ credit ratings of AAA to BBB, a segment of the market where borrowing has more than doubled in the past decade to roughly $7.2 trillion… However, half of investment-grade corporate debt, or $3.6 trillion, resides within the borderline BBB credit-ratings category, only a few notches away from speculative-grade, or ‘junk,’ territory.”

September 1 – Bloomberg (Christopher Maloney): “The Federal Reserve has snapped up $1 trillion of mortgage bonds since March, a record pace of purchasing… The Fed bought around $300 billion of the bonds in each of March and April, and since then has been buying about $100 billion a month. It now owns almost a third of bonds backed by home loans in the U.S. Buying the securities has pushed mortgage rates lower, with the average 30-year rate falling to 2.91% as of last week from 3.3% in early February. That drop has allowed homeowners to refinance their mortgages, tantamount to giving them a raise by cutting their monthly loan payments. It’s also helped consumers buy homes.”

September 4 – Reuters (Winni Zhou and Andrew Galbraith): “China may gradually cut its holdings of U.S. Treasury bonds and notes, in light of rising tensions between Beijing and Washington, state-backed newspaper Global Times cited experts as saying. With Sino-U.S. relations deteriorating over various issues including coronavirus, trade and technology, global financial markets are increasingly worried if China would sell the U.S. government debt it holds as a weapon to counter rising U.S. pressure… China, the second largest non-U.S. holder of Treasuries, held $1.074 trillion in June, down from $1.083 trillion the previous month… China has steadily decreased its holdings of the U.S. bonds this year…”

September 3 – Reuters (Karen Brettell and Kate Duguid): “More U.S. corporate bonds are paying negative inflation-adjusted yields, as expectations that interest rates will stay near historic lows send investors seeking higher payouts in riskier assets. The ICE BofA U.S. corporate index for bonds maturing within five to seven years…, for example, is paying negative real yields for the first time since 2013."

China Watch:

September 1 – Reuters (Gabriel Crossley): “China accused the United States… of using ‘national security’ concerns as an excuse to act against Chinese firms, in a response that followed days after the Pentagon listed 11 more Chinese firms as being owned or controlled by the military. ‘I don’t think this kind of behavior will be of any benefit to the U.S., China’s Foreign Ministry spokeswoman Hua Chunying told reporters…”

September 2 – Bloomberg: “Warning signs are flashing for China’s $45 trillion banking industry, just when Beijing needs it the most to keep the world’s second-largest economy on its recovery path. Enlisted to ease the financial hardship of millions of people and businesses hurt by the pandemic, Chinese banks are under increasing stress. Bad debt has hit a record and capital buffers are eroding. Bank executives and analysts predict the damage is likely to continue in the second half of this year. The strain risks hamstringing Beijing’s efforts to prop up the economy, raising pressure on the central bank to follow up with deeper stimulus. It’s also of global importance, with behemoths such as Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, and China Construction Bank Corp. on the global ‘too-big-to-fail’ list.”

August 30 – Bloomberg: “China’s biggest banks posted their worst profit declines in more than a decade, putting pressure on their dividend plans, as bad debt ballooned and the government drew them into efforts to backstop a slumping economy. Profit at Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, China Construction Bank Corp., the second-largest, Agricultural Bank of China Ltd. and Bank of China Ltd. dropped by at least 10% in the first half, the lenders said on Sunday. Loan loss provisions jumped between 27% and 97% at the four banks. ‘Profitability in the banking sector will continue to face relatively large pressure in the coming one to two quarters as risks may further increase,’ said Zeng Gang, deputy director of National Institution for Finance & Development…”

August 30 – Reuters (Cheng Leng, Zhang Yan and Engen Tham): “China’s largest state-owned banks are readied for rising bad debt and increased margin pressure in the months ahead as forbearance policies designed to give borrowers breathing space during the coronavirus crisis expire. All five banks, which have been raising provisions to counter expected losses due to rising soured loans, have reported their biggest profit falls in at least a decade. ‘The external challenges in the second half are unprecedented,’ Bank of China Ltd (BoC) President Wang Jiang said…”

September 1 – Bloomberg (Anjani Trivedi): “This isn’t the bottom for Chinese banks’ bad loans. Be prepared for more and weaker balance sheets. China’s lenders reported large declines in net profit for the first time in decades Sunday, citing dire economic conditions fueled by Covid-19. In preparation to deal with ballooning bad debts and future losses, provisions rose sharply by 656 billion yuan ($95.8bn) for souring loans. Prudent as that may seem, the worst is yet to appear… The industry regulator has already said that banks will dispose of 3.4 trillion yuan of bad loans this year, up almost 50% from 2019. In the first half of 2020, 1.1 trillion yuan were written off. Compare that to the 5.8 trillion yuan of such loans culled from the books between 2016 and 2019. In addition, the regulator says that about 4% of banks’ troubled debts have been ‘deferred,’ equivalent to about 7 trillion yuan of loans headed for delinquency and put on hold until next year.”

September 4 – Bloomberg: “Chinese developers are facing the biggest liquidity test in more than four years, exacerbating challenges brought on by stringent funding restrictions and a prolonged profitability drop. Cash reserves of the nation’s 50 largest-listed home builders were just enough to cover short-term debt as of June 30, the least since 2016… That metric fell below 0.5 for eight companies, the most in four years, signaling greater risk. Homebuilders also face renewed financing restrictions after a brief relaxation during the Covid-19 outbreak as policy makers seek to prevent asset bubbles that could destabilize the economy.”

August 31 – Reuters (Stella Qiu and Ryan Woo): “China’s factory activity expanded at the fastest clip in nearly a decade in August, bolstered by the first increase in new export orders this year… The Caixin/Markit Manufacturing Purchasing Managers’ Index(PMI) rose to 53.1 last month from July’s 52.8, marking the sector’s fourth consecutive month of growth and the biggest rate of expansion since January 2011.”

September 3 – Bloomberg: “Chinese President Xi Jinping said nothing will come between the Chinese people and the Communist Party that has governed them for more than 70 years, setting a defiant tone in the face of criticism from the U.S. Speaking at an event marking the 75th anniversary of Japan’s formal surrender at the end of World War Two, Xi outlined areas where China would ‘never’ accept foreign interference. He took aim in particular at threats to the Chinese Communist Party’s continued one-party rule. ‘The Chinese people will never allow any individual or any force to separate the CCP and Chinese people, and to pitch them against each other… The Chinese people will never allow any individual or any force to distort the CCP’s history, and to vilify the CCP’s character and purpose.’”

Central Bank Watch:

September 2 – Financial Times (Martin Arnold): “The head of Germany’s central bank has warned that the economy risks becoming overly reliant on the massive fiscal and monetary support provided since the coronavirus pandemic struck and called for it to be scaled back soon. Jens Weidmann, president of the Bundesbank, also criticised the EU’s plan to issue €750bn of new debt for its new recovery fund, warning that it risked creating ‘a kind of debt illusion’ because the money would not be included in national debt figures. His comments in a speech… signal that a fresh north-south split could be opening up in Europe over the pace at which the exceptionally loose fiscal and monetary support should be withdrawn, as countries like Germany rebound faster from the pandemic than others such as Spain.”

September 4 – Bloomberg (Alexander Weber and Harumi Ichikura): “The European Central Bank is likely to step up its crisis response later this year, according to economists, as a faltering recovery and a stronger euro threaten to exacerbate price declines. Most respondents in a Bloomberg survey expect an increase in the 1.35 trillion-euro ($1.6 trillion) pandemic bond-buying program by December, with a median prediction of 350 billion euros. The Governing Council is seen keeping policy steady when it meets virtually next Thursday, but some analysts expect President Christine Lagarde to hint at the chance of more action in the future.”

EM Watch:

August 31 – Reuters (Nallur Sethuraman, Chandini Monnappa, Derek Francis, Sachin Ravikumar, Chris Thomas and Anuron Kumar Mitra): “India’s economy contracted at its steepest pace of 23.9% in the June quarter as the pandemic lockdown dented consumer and business spending, putting pressure on the government and central bank for further stimulus and a rate cut.”

August 31 – Reuters (Manoj Kumar and Nidhi Verma): “India’s federal fiscal deficit in the four months to end July stood at 8.21 trillion rupees ($111.7bn), or 103.1% of the budgeted target for the current fiscal year… The deficit is predicted to cross 7.5% of GDP in the 2020/21 fiscal year that began in April, private economists said, from initial government estimates of 3.5%...”

September 1 – Reuters (Jamie McGeever and Marcela Ayres): “Brazil’s economy shrank in the second quarter by the most on record as anti-coronavirus lockdown measures slammed activity in almost every sector, dragging Latin America’s largest economy back to the size it was in 2009. The pandemic triggered a 9.7% fall in gross domestic product from the prior quarter…, and an 11.4% decline compared with the same period last year. The magnitude of the slump in activity across the economy in the second quarter was huge: industry fell 12.3%, services 9.7%, fixed investment 15.4%, household consumption 12.5% and government spending 8.8%.”

August 31 – Reuters (Jamie McGeever): “Brazil’s finances continued to deteriorate in July as the COVID-19 crisis pushed the public sector debt and deficit as a share of the economy to new records…, although not as badly as economists had feared. The national debt rose to a record 86.5% of gross domestic…”

Europe Watch:

September 3 – Reuters (Balazs Koranyi): “Some euro zone countries are running unsustainable public finances as they try to cope with the coronavirus pandemic but they may still struggle to exit crisis fighting policies, European Central Bank policymaker Pierre Wunsch said… ‘We are going to have public deficits that probably would not be sustainable,’ Wunsch, Belgium’s central bank chief told a conference… ‘Exit is not going to be easy... (but) we have time, it’s not like we have to solve these issues in the next six months or even two years,’ he added.”

September 1 – Bloomberg (Carolynn Look): “Consumer prices in the 19-nation euro area are falling for the first time in four years, highlighting that a recent rebound in economic activity hasn’t managed to offset the pandemic’s profound impact on demand. The inflation rate came in at -0.2%... Core inflation hit a record low, in part dragged lower by discounting during summer sales.”

September 3 – Wall Street Journal (Anna Hirtenstein): “The interest rate that European banks use to lend among themselves dropped to a record low this week in a sign of how credit markets have been distorted by central banks’ aggressive measures this year. The euro short-term rate, known as €STR, slipped to minus 0.555% Wednesday, from minus 0.539% at the beginning of the year. On Monday, the cost of overnight lending operations between the banks dropped to minus 0.557%, the lowest it has been since coming into effect in October 2019 after rate-rigging scandals led to the elimination of previous benchmarks.”

September 1 – Reuters (Michael Nienaber): “German retail sales fell unexpectedly in July…, dashing hopes that household spending in Europe’s largest economy can drive a strong recovery in the third quarter from the coronavirus shock… Retail sales were down by 0.9% on the month in real terms in July after a revised drop of 1.9% in June and a 13.2% jump in May, when authorities eased lockdown measures.”

August 31 – Reuters (Catarina Demony, Sérgio Gonçalves and Maria Gonçalves): “Portugal’s record economic contraction in the second quarter saw exports of goods and services plunge by 40% as the coronavirus eroded revenue from overseas tourists…”

September 1 – Reuters (Huw Jones): “Stock markets face possibly significant corrections after rebounding beyond their coronavirus-hit economic fundamentals, the European Union’s securities watchdog said… The European Securities and Markets Authority (ESMA) said there has been a ‘potential decoupling’ of financial market gains and an economy hit by the COVID-19 pandemic, raising questions about the sustainability of the current market rebound.”

Japan Watch:

August 30 – Financial Times (Robin Harding): “Japan is likely to have a new prime minister within weeks after the ruling Liberal Democratic party set a rapid timetable for replacing the departing Shinzo Abe. In meetings over the weekend, party elders discussed plans to vote on Mr Abe’s replacement by the middle of September, with the electorate restricted to members of parliament and heads of regional party chapters. Since Mr Abe is leaving halfway through his term, party leaders can cite Covid-19 as the reason to adopt an emergency procedure.”

Geopolitical Watch:

August 29 – Bloomberg (Anthony Capaccio): “At the center of the latest U.S.-China military tensions in the South China Sea was a reconnaissance jet better known for its key role in the Cold War between America and the Soviet Union. The U-2 spy plane flew from South Korea to monitor Chinese military exercises near the Paracel Islands, prompting the People’s Liberation Army to fire four medium-range ballistic missiles into the disputed body of water. The missiles landed harmlessly in the sea.”

August 30 – Wall Street Journal (Chun Han Wong and Joyu Wang): “Beijing’s crushing of pro-democracy forces in Hong Kong has deepened Taiwanese fear and resentment of China’s Communist Party, injecting new energy into the island democracy’s efforts to build up its military defenses. In recent weeks, Taiwanese President Tsai Ing-wen has unveiled her self-ruled island’s largest-ever military budget and pledged closer security cooperation with the U.S. and other democracies, as Beijing enforced a new national security law in Hong Kong and conducted saber-rattling military maneuvers in the Taiwan Strait. ‘After Hong Kong, Taiwan stands increasingly on the front lines of freedom and democracy,’ Ms. Tsai said… Taiwan is strengthening its defenses, she said, because ‘we know that in terms of our current situation, strength can be correlated with deterrence.’”

September 4 – Reuters (Ben Blanchard): “The United States and Taiwan said… they were seeking ‘like-minded’ democracies to join a shift in global supply chains during the coronavirus pandemic, as Washington looks to accelerate a move away from economic reliance on China… De facto U.S. ambassador in Taiwan Brent Christensen, speaking in front of his Japanese, European Union and Canadian counterparts, Taiwan’s foreign minister and the visiting Czech Senate speaker, said everyone in the room was connected by their shared values, like freedom of the press and religion.”

September 1 – Financial Times (Katrina Manson): “China’s military is set to double its arsenal of nuclear warheads over the next decade, as it races to become a ‘world-class’ force, according to a Pentagon report… The unclassified, 200-page version of the Department of Defense’s annual report to Congress charts ‘staggering’ amounts of new military hardware as Beijing looks to expand its overseas military footprint in an attempt to rival the US. ‘China is already ahead of the United States in certain areas,’ said the report.”

September 2 – Forbes (Michael Peck): “China has the largest navy in the world. And it’s not just big, but it’s getting better. ‘The PRC [People’s Republic of China] has the largest navy in the world, with an overall battle force of approximately 350 ships and submarines including over 130 major surface combatants,’ states the U.S. Department of Defense’s 2020 annual report to Congress… ‘In comparison, the U.S. Navy’s battle force is approximately 293 ships as of early 2020.’ In itself, that statistic is somewhat misleading: While the People’s Liberation Army Navy (PLAN) has more warships than the U.S. Navy, the American fleet is ahead in tonnage due to having larger warships, including 11 aircraft carriers that weigh in at 100,000 tons apiece.”

August 29 – Reuters (Dominic Evans): “Turkey said it will hold a military exercise off northwest Cyprus for the next two weeks, amid growing tension with Greece over disputed claims to exploration rights in the east Mediterranean. The long-running dispute between Turkey and Greece, both NATO members, flared after the two countries agreed rival accords on their maritime boundaries with Libya and Egypt, and Turkey sent a survey vessel into contested waters this month.”

September 1 – Reuters (Devjyot Ghoshal): “India’s foreign ministry… accused Chinese troops of taking ‘provocative actions’ on the disputed Himalayan mountain border while commanders from both sides were holding talks… to defuse tensions between the Asian giants.”

August 30 – Associated Press (Yuras Karmanau): “Tens of thousands of demonstrators rallied Sunday in the Belarusian capital of Minsk to begin the fourth week of daily protests demanding that the country’s authoritarian president resign. The protests began after an Aug. 9 presidential election that protesters say was rigged but that election officials say gave President Alexander Lukashenko a sixth term in office.”

September 4 – Reuters (Kristy Needham): “Australia is standing up to China. Watch closely: It may be a harbinger of things to come, as the world’s smaller countries respond to the increasingly coercive Asian economic superpower. For years, the Australian political and business establishment had a paramount goal: protect and expand this natural resource powerhouse’s booming exports to fast-growing China. Iron ore, coal, natural gas, wine and more: Until COVID-19 struck, Australia had a 29-year run without a single recession as it sent its signature goods to the world’s voracious No. 2 economy. Canberra’s diplomacy came to focus on balancing the Chinese trade relationship with the nation’s equally important defense alliance with the United States. But the paradigm through which the government of Prime Minister Scott Morrison now views China has shifted dramatically, people inside his government told Reuters. The relationship is no longer shaped just by trade…”

September 2 – Bloomberg (Saritha Rai): “India banned over a hundred Chinese apps, including versions of Tencent Holdings Ltd.’s popular game PUBG Mobile and online payments giant Ant Group Co.’s Alipay, as tensions escalated on the nations’ disputed border. The government has received complaints about the apps stealing user data and surreptitiously transmitting it to servers abroad, the country’s Ministry of Electronics and Information Technology said… It said the apps are ‘prejudicial to sovereignty and integrity of India’ as well as ‘security and public order.’ The late evening ban came as India upped the ante in its feud with China after multiple rounds of high-level military talks failed to end the months-long standoff.”

Friday Evening Links

[Reuters] Wall Street ends lower as Nasdaq rout persists

[Reuters] Oil falls 3%, posts weekly drop on demand concerns

[Reuters] Global stocks falter as tech stays weak, dollar dips after three-day run

[Reuters] Fed Chair Powell: jobs report 'good,' low rates to stay

[CNBC] Worries grow over a K-shaped economic recovery that favors the wealthy

[Reuters] Exclusive: Trump administration weighs blacklisting China's chipmaker SMIC

[Reuters] Russia scrambles jets to escort U.S. bombers over Black Sea: news agencies