Friday, April 9, 2021

Weekly Commentary: Keeping the Dance Party Rolling

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While ebullient markets have briskly moved on, I’m not done with Archegos. The thesis holds that speculative leverage evolved into an integral source of liquidity throughout historic global market Bubbles. The spectacular collapse of Archegos marks a significant inflection point, ushering in a tightening of lending conditions at the “margin” for increasingly vulnerable Bubbles.

April 8 – Bloomberg (Erik Schatzker and Sonali Basak): “Credit Suisse Group AG is tightening the financing terms it gives hedge funds and family offices, in a potential harbinger of new industry practices after the Archegos Capital Management blowup cost the Swiss bank $4.7 billion. Credit Suisse has been calling clients to change margin requirements in swap agreements so they match the more restrictive terms of its prime-brokerage agreements… Specifically, Credit Suisse is shifting from static margining to dynamic margining, which may force clients to post more collateral and could reduce the profitability of some trades… Swaps are the derivatives trader Bill Hwang used to take highly leveraged positions in stocks at Archegos… When his positions suddenly lost value the week of March 22, Archegos blew through its margin and equity, and Hwang lost $20 billion in just a few days.”

I drew comparisons last week to the June 2007 collapse of two Bear Stearns structured Credit mutual funds. Below is a Reuters article from the day of the initial bailout.

June 22, 2007 – Reuters (Dan Wilchins): “Bear Stearns… on Friday said it would provide up to $3.2 billion in financing for a struggling hedge fund it manages, raising concern about other funds that invested in bonds linked to subprime mortgages. The biggest bailout since Wall Street’s 1998 rescue of Long-Term Capital Management signaled that the funds’ main investments -- a type of bond known as a collateralized debt obligation (CDO) -- may be riskier than previously reckoned. ‘The big worry is: Are there other funds like this out there? Are whole markets going to seize up?’ said James Ellman, president of financial services hedge fund Seacliff Capital, adding that he thought concerns were overblown. Analysts said in the worst-case scenario, the stock market could broadly decline as companies could face higher borrowing costs and leveraged buyouts could grow less attractive.”

The S&P500 was trading near record highs and pulled back only about 3% on the initial Bear Stearns saga – before promptly rallying almost 5% to new record highs by mid-July. It was during this rally (July 9th) that Citigroup CEO Chuck Prince bestowed market historians with his infamous remark: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

After a five-year boom, where the S&P500 almost doubled from 2002 lows while Credit market conditions turned extraordinarily loose, bullishness was well-entrenched. It was easy to dismiss the relevance of a couple smallish mutual funds. Sure, post-2008 collapse, it was as if the Bubble had been rather obvious all along. But in early-summer 2007 – at the pinnacle of Bubble excess - few recognized the scope of the Bubble, and even fewer appreciated the ramifications of the Bear Stearns fund collapses. Most believed subprime was a relatively small issue and clearly not systemic.

Yet in less than two months, crisis dynamics were in full force. Key markets had turned illiquid. In particular, liquidity for high-risk mortgage loans, securities and derivatives had all but evaporated. Institutions – including the highly-levered hedge funds, securities firms and insurance companies – were unable to accurately value holdings. Scores of mortgage companies had lost access to new borrowings and were failing. Even lending behemoths Countrywide and Washington Mutual were facing funding market disruptions. CDS prices were spiking higher.

Lenders, certainly including Countrywide, were rapidly tightening lending standards and trying to slash subprime exposures. The marketplace began questioning the viability of the entire mortgage insurance industry (Radian and MGIC, in particular) – whose guarantees were fundamental to “AAA” ratings for pools of hundreds of billions of less-than-pristine Credits.

Then, on August 15th, Countrywide Financial sank 13% after liquidity and solvency concerns prompted a “sell” rating from Merrill Lynch. Market disarray brought comparisons to the 1998 “LTCM” crisis, as deleveraging and illiquidity contagion propagated across the Credit market. The so-called “subprime” crisis had engulfed “Alt-A” mortgages along with corporate Credit and LBO finance. After trading at a near-record 1,555 on July 19th, the S&P500 had sunk to an intraday low of 1,371 less than a month later on August 16th.

When the Bear Stearns Credit funds faltered, 10-year Treasury yields were hovering above 5.0%. Fed funds were at 5.25%, leaving the Fed ample room to operate. They slashed the discount rate 50 bps during an unscheduled August 16th meeting, with the financial media referring to Ben Bernanke (appointed Fed chair the previous year) as a “rock star” and “the new maestro.” Fed funds were cut 50 bps to 4.75% in a surprise move on September 18th. Rates were down to 4.25% by December 11th. Ten-year Treasury yields had sunk to about 4.0% by year-end – on their way to a March low of 3.34%.

Even during mid-August 2007 market tumult, there was a lack of understanding with regard to myriad risks posed to financial and economic stability. St. Louis Fed president William Poole captured the general complacency: “It’s premature to say this upset in the market is changing the course of the economy in any fundamental way.” And, for a while, this complacency appeared justified. From August 16th lows, the S&P500 rallied 15% to a record high 1,576 on October 11th. The Bernanke Fed had seemingly saved the day – and the mighty bull market. GDP expanded 2.5% during the fourth quarter, the strongest growth in a year.

Almost everyone was blindsided by the scope of the 2008 financial crash and subsequent economic downturn. Somehow, policymakers remained oblivious to how mortgage Credit had come to dominate both financial and economic spheres. The unprecedented expansion of speculative leverage had become key to financing the housing Bubble, with the tsunami of “Bubble finance” fostering systemic distortions and maladjustment. When risk aversion eventually took hold, the dramatic tightening of market liquidity conditions forced deleveraging and an abrupt reassessment of lending terms. Mortgage Credit tightened, home prices began to sink, and prices of trillions of dollars of securities were increasingly detached from the harsh unfolding reality.  Destabilizing adjustments were unavoidable.

Each cycle is different, with individual characteristics and analytical nuance. The mortgage finance Bubble was chiefly fueled by an unprecedented expansion of risky mortgage Credit, much of it intermediated through money-like “AAA” securities and derivatives. Over the course of the Bubble, the global leveraged speculating community accumulated enormous amounts of highly levered holdings (securities and derivatives). The raging Bubble ensured the entire system was increasingly vulnerable to any unwind of speculative leverage and resulting illiquidity and Credit slowdown; the proverbial ticking time-bomb.

The world is now more than a decade into the historic “global government finance Bubble.” In contrast to the previous Bubble period, government “money” (sovereign bonds and central bank Credit) has been a principal Bubble fuel. Policymakers have enjoyed incredible latitude to inflate government finance, a unique dynamic that has worked (miraculously) to prolong this incredible cycle. Consistent with the mortgage finance Bubble, speculative leverage has expanded momentously over the course of this cycle – to the point where it has greatly exceeded previous cycle peaks. I'm convinced it has ballooned exponentially over recent years, as the incredible lengths policymakers were willing to go to sustain the boom emboldened the speculator community .

April 7 – Wall Street Journal (Alexander Osipovich and David Benoit): “Investors are borrowing huge sums of money to buy stocks. Is that a problem? The ‘everything rally’ that started in stocks last year has been boosted by investors betting money they have borrowed. That includes both small players like the day traders on Robinhood Markets Inc. and heavyweights like Archegos Capital Management… As of late February, investors had borrowed a record $814 billion against their portfolios, according to data from the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm. That was up 49% from one year earlier, the fastest annual increase since 2007, during the frothy period before the 2008 financial crisis.”

We know equities margin borrowings have inflated parabolically (almost 50%!) over the past year to a record level. We can assume a similar trajectory for levered holdings throughout the global leverage speculating community, a view supported by the egregious leverage exposed at Archegos. A guesstimate of tens of Trillions of speculative leverage having accumulated globally over this extraordinary cycle is not preposterous.

Markets, understandably, are content to fixate on the stability of government monetary inflation as ensuring an irrepressible boom. At this point, “whatever it takes” central banking is a proven commodity. And now markets have grown comfortable with the notion that no amount of government debt is too large to be financed by the marketplace at low yields. This new and phenomenally powerful financial structure has demonstrated itself as robust and, to this point, essentially bulletproof. In this context, markets view Archegos and its de-leveraging as inconsequential.

According to CNBC, Morgan Stanley (with the permission of Archegos) liquidated $5bn of Archegos positions on Thursday, March 25th, a day ahead of Goldman Sachs’ block trade fire-sale, “to a small group of hedge funds.” Morgan Stanley and Goldman’s quick move to dump shares left others, including Credit Suisse and Nomura, holding the bag (full of big losses). Once word got out, the entangled stocks tanked. The hedge funds that bought shares were none too pleased Morgan Stanley had offloaded positions they surely knew would soon be hit by large forced sales from Archegos’ other prime brokers. As CNBC (Hugh Son) put it, “…Morgan Stanley isn’t likely to lose them [hedge funds clients] over the Archegos episode… That’s because the funds want access to shares of hot initial public offerings that Morgan Stanley, as the top banker to the U.S. tech industry, can dole out.”

And while Morgan Stanley’s hedge fund clients may recover (Archegos-related) trading losses through some choice IPO allocations, Credit Suisse and Nomura won’t enjoy such a luxury. Prime brokerage risks that were easily dismissed can no longer be ignored.

April 9 – Bloomberg (Ambereen Choudhury and Patrick Winters): “Credit Suisse Group AG is planning a sweeping overhaul of the hedge fund business at the center of the Archegos Capital blow up, as the drama forces Wall Street banks to reconsider how they finance some of their most lucrative clients. The Swiss bank is weighing significant cuts to its prime brokerage arm in coming months, people familiar with the plan said. The lender has already moved to tighten financing terms with some funds, and hopes changes to the unit can allow it to forgo major cuts to other parts of the investment bank, which just had a banner quarter…”

It may not be immediately discernible, especially with markets towering new heights, but conditions will be tightening in leveraged securities and derivatives finance. Rising asset markets essentially create their own self-reinforcing liquidity. Yet Illiquidity Lies in Wait. It’s when markets are in retreat that liquidity issues come to the fore. It’s worth noting, however, recent underperformance of the small cap stocks, a sector especially susceptible to shifting liquidity dynamics. It also appears the game has changed for the SPAC Bubble, a sector directly financed by the leveraged speculator/prime brokerage nexus.

April 9 – Financial Times (Ortenca Aliaj and Aziza Kasumov): “A crucial source of funding for blank-cheque company deals is drying up, pointing to a slowdown for one of Wall Street’s hottest products after a record-breaking quarter. Advisers to special purpose acquisition companies… say they are struggling to find so-called Pipe financing to complete their planned acquisitions. Pipe is short for private investment in public equity. Institutional investors such as Fidelity and Wellington Management have ploughed billions of dollars into Pipe deals since the Spac boom emerged last year, providing a route to the public markets for businesses ranging from established software and entertainment companies to speculative developers of flying taxis and electric vehicle technology.”

Yet “global government finance Bubble” vulnerability goes much beyond a tightening of conditions in leveraged speculation.

April 6 – Bloomberg: “China’s central bank asked the nation’s major lenders to curtail loan growth for the rest of this year after a surge in the first two months stoked bubble risks, according to people familiar with the matter. At a meeting with the People’s Bank of China on March 22, banks were told to keep new advances in 2021 at roughly the same level as last year… Some foreign banks were also urged to rein in additional lending through so-called window guidance recently after ramping up their balance sheets in 2020… The comments give further detail to what the central bank stated publicly after the meeting, when it said it asked representatives of 24 major banks to keep loan growth stable and reasonable. In 2020, banks doled out a record 19.6 trillion yuan ($3 trillion) of credit…”

Markets, at this point, have a difficult time taking Beijing “tightening” talk seriously. After all, they’ve talked tough too many times - only to timidly backtrack. But I believe Chinese leadership is today more determined - and markets too complacent. Especially after last year’s Credit melee, the entire Chinese system is acutely fragile. And it’s this fragility that has markets so convinced Beijing won’t dare risk bursting the Chinese Bubble. Still, I believe Chinese officials have come to recognize the risk of not reining in the Bubble has grown too great not to act.

April 9 – Bloomberg: “China’s producer prices climbed in March by the most since July 2018 on surging commodity costs, adding to worries over rising global inflation as the pandemic recedes. The producer price index rose 4.4% from a year earlier after gaining 1.7% in February…, higher than the 3.6% median estimate… ‘Our research has found that China’s PPI has a high positive correlation with CPI in the U.S.,’ said Raymond Yeung, chief economist for Greater China at Australia and New Zealand Banking Group Ltd. ‘The higher-than-expected PPI data could impact people’s judgment of inflation pressure in the U.S. and globally, and this impact shouldn’t be underestimated.’”

U.S. Producer Prices surged a full 1.0% in March, double estimates. This pushed y-o-y Producer Price Inflation to 4.2%, the strongest advance since 2011. The ISM Non-Manufacturing (services) Index surged to a record high 63.7, with all 18 industry groups reporting they’re paying higher prices (up from 67% in December). The ISM Non-Manufacturing Price Index jumped to 74, the high going back to July 2008.

Mounting inflationary pressures are a global phenomenon. While the Fed has been dismissive, the prospect of an overheating U.S. economy seems clearer by the week. The Federal Reserve should begin contemplating when to signal an approaching QE tapering. Such unparalleled government monetary inflation has stoked myriad inflated price levels and distortions throughout the asset markets and real economy. Accordingly, we should expect any attempt to ween the system from QE will at this point prove highly destabilizing.

April 9 – Reuters (Thyagaraju Adinarayan, Sujata Rao and Julien Ponthus): “Equity funds have attracted more than half a trillion dollars in the past five months, exceeding inflows recorded over the previous 12 years, according to data from BofA, which has likened the stampede to a ‘melt-up’ in markets. The flows are also raising fears of a pullback from record highs, given valuations are at the highest since the dotcom bubble of the late 1990s, with the S&P 500 trading at nearly 22 times forward earnings.”

“Melt-up,” indeed. It all reeks of a historic market topping process. A tightening of conditions throughout speculative finance has commenced. Global bond yields have been rising. China has begun a tightening cycle fraught with extreme risk. Vulnerable emerging markets have sustained the first round of de-risking/deleveraging. And the global central bank community is facing a confluence of runaway speculative manias and mounting inflationary pressures.

The risk of market liquidity accidents is highly elevated – and rising. Those that dispute this analysis should ponder the scenario where the leveraged speculating community and public race to the exits simultaneously: panicked speculator deleveraging and a run on the ETF complex (kind of like March 2020 but bigger). It’s not farfetched. At this point, with the Bubble inflating so late-cycle crazily, it’s not clear how such a scenario is to be avoided. And while Archegos has started the clock ticking, inebriated markets are hell-bent on Keeping the Dance Party Rolling.

For the Week:

The S&P500 jumped 2.7% (up 9.9% y-t-d), and the Dow rose 2.0% (up 10.4%). The Utilities gained 1.4% (up 3.1%). The Banks increased 1.5% (up 25.9%), and the Broker/Dealers rose 1.8% (up 21.3%). The Transports advanced 1.2% (up 19.3%). The S&P 400 Midcaps increased 0.9% (up 15.8%), while the small cap Russell 2000 slipped 0.5% (up 13.6%). The Nasdaq100 surged 3.9% (up 7.4%). The Semiconductors rose 1.7% (up 17.9%). The Biotechs fell 2.6% (down 5.4%). With bullion rising $15, the HUI gold index gained 2.4% (down 5.5%).

Three-month Treasury bill rates ended the week at 0.0075%. Two-year government yields declined three bps to 0.16% (up 3bps y-t-d). Five-year T-note yields sank 11 bps to 0.86% (up 50bps). Ten-year Treasury yields fell six bps to 1.66% (up 74bps). Long bond yields dipped three bps to 2.33% (up 69bps). Benchmark Fannie Mae MBS yields fell 12 bps to 1.94% (up 60bps).

Greek 10-year yields gained four bps to 0.86% (up 24bps y-t-d). Ten-year Portuguese yields rose seven bps to 0.28% (up 25bps). Italian 10-year yields jumped 10 bps to 0.73% (up 18bps). Spain's 10-year yields rose seven bps to 0.38% (up 33bps). German bund yields increased three bps to negative 0.30% (up 27bps). French yields gained four bps to negative 0.04% (up 29bps). The French to German 10-year bond spread widened one to 26 bps. U.K. 10-year gilt yields declined two bps to 0.77% (up 58bps). U.K.'s FTSE equities index jumped 2.6% (up 7.0% y-t-d).

Japan's Nikkei Equities Index dipped 0.3% (up 8.5% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.11% (up 9bps y-t-d). France's CAC40 gained 1.1% (up 11.1%). The German DAX equities index increased 0.8% (up 11.0%). Spain's IBEX 35 equities index was little changed (up 6.1%). Italy's FTSE MIB index dropped 1.1% (up 9.9%). EM equities were mixed. Brazil's Bovespa index jumped 2.3% (down 1.0%), and Mexico's Bolsa gained 0.9% (up 8.2%). South Korea's Kospi index increased 0.6% (up 9.0%). India's Sensex equities index declined 0.9% (up 3.9%). China's Shanghai Exchange fell 1.0% (down 0.6%). Turkey's Borsa Istanbul National 100 index sank 2.6% (down 5.7%). Russia's MICEX equities index dropped 2.0% (up 6.0%).

Investment-grade bond funds saw inflows of $4.079 billion, and junk bond funds posted positive flows of $3.809 billion (from Lipper).

Federal Reserve Credit last week gained $14.9bn to $7.657 TN. Over the past 82 weeks, Fed Credit expanded $3.930 TN, or 105%. Fed Credit inflated $4.846 Trillion, or 172%, over the past 439 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $2.6bn to $3.549 TN. "Custody holdings" were up $233bn, or 7.0%, y-o-y.

Total money market fund assets declined $12.6bn to $4.485 TN. Total money funds rose $10bn y-o-y, or 0.2%.

Total Commercial Paper surged $72.1bn to $1.172 TN. CP was up $73bn, or 6.7%, year-over-year.

Freddie Mac 30-year fixed mortgage rates fell five bps to 3.13% (down 20bps y-o-y). Fifteen-year rates declined three bps to 2.42% (down 35bps). Five-year hybrid ARM rates jumped eight bps to 2.92% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 3.18% (down 68bps).

Currency Watch:

April 6 – Wall Street Journal (Julia-Ambra Verlaine): “Among those paring U.S. dollar holdings in recent months: central banks. The dollar’s share of global reserves has decreased to its lowest level since 1995, according to International Monetary Fund figures… The currency now stands at 59% of global reserves as of December 2020—a 1.5 percentage point decline over the quarter.”

For the week, the U.S. dollar index declined 0.9% to 92.163 (up 2.5% y-t-d). For the week on the upside, the Swedish krona increased 2.2%, the Swiss franc 2.0%, the euro 1.2%, the Japanese yen 0.9%, the Mexican peso 0.7%, the South Korean won 0.6%, the Brazilian real 0.4%, the Norwegian krone 0.4%, the South African rand 0.4%, the Canadian dollar 0.4%, the Singapore dollar 0.3%, and the Australian dollar 0.2%. For the week on the downside, the British pound declined 0.9%. The Chinese renminbi increased 0.22% versus the dollar this week (down 0.39% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index added 0.2% (up 7.7% y-t-d). Spot Gold rallied 0.9% to $1,744 (down 8.2%). Silver gained 1.0% to $25.266 (down 4.3%). WTI crude fell $2.13 to $59.32 (up 22%). Gasoline dropped 3.0% (up 39%), and Natural Gas sank 4.3% (down 1%). Copper rallied 1.2% (up 15%). Wheat surged 4.5% (unchanged). Corn rose 3.1% (up 19%). Bitcoin declined $540, or 0.9%, this week to $58,334 (up 101%).

Coronavirus Watch:

April 7 – CNBC (Berkeley Lovelace Jr.): “The highly contagious variant first identified in the U.K. is now the most common Covid strain circulating in the U.S., the head of the Centers for Disease Control and Prevention said… ‘The variant, known as B.1.1.7, is ‘now the most common lineage circulating in the United States.’ CDC Director Dr. Rachelle Walensky said… ‘Testing remains an important strategy to rapidly identify and isolate infectious individuals, including those with variants of concern,’ Walensky said.”

April 7 – CNBC (Rich Mendez): “Hospitals are seeing more and more younger adults in their 30s and 40s admitted with severe cases of Covid-19, Centers for Disease Control and Prevention Director Dr. Rochelle Walensky said… ‘Data suggests this is all happening as we are seeing increasing prevalence of variants, with 52 jurisdictions now reporting cases of variants of concern,’ Walensky said…”

April 6 – Reuters (Pedro Fonseca): “Brazil’s brutal surge in COVID-19 deaths will soon surpass the worst of a record January wave in the United States, scientists forecast, with fatalities climbing for the first time above 4,000 in a day on Tuesday as the outbreak overwhelms hospitals. Brazil’s overall death toll trails only the U.S. outbreak, with nearly 337,000 killed… But with Brazil’s healthcare system at the breaking point, the country could exceed total U.S. deaths, despite having a population two-thirds that of the United States… ‘It’s a nuclear reactor that has set off a chain reaction and is out of control. It’s a biological Fukushima,’ said Miguel Nicolelis, a Brazilian doctor and professor at Duke University…”

April 6 – Reuters (Steve Scherer, David Ljunggren and Moira Warburton): “Toronto will cancel all in-person learning at elementary and secondary schools…, health authorities said as Canada deals with a variant-driven third wave of the coronavirus pandemic, which has hit the younger population hard.”

April 4 – Bloomberg (Debjit Chakraborty and Dhwani Pandya): “India added more than 100,000 coronavirus infections over the last 24-hours, a record increase that pushed its richest state to order offices to work from home and shut malls and restaurants through April.”

April 8 – Reuters (Neha Arora and Francis Mascarenhas): “India reported another record number of new COVID-19 infections on Friday and daily deaths hit their highest in more than five months, as it battles a second wave of infections and states complain of a persistent vaccine shortage. Evoking memories of the last national lockdown when tens of thousands of people walked on foot back to their homes, hundreds of migrants in badly affected Mumbai packed into trains as bars, malls and restaurants have again been forced to down shutters.”

Market Mania Watch:

April 5 – Financial Times (Steve Johnson): “Investors have swarmed like bees around a honeypot to the VanEck Vectors Social Sentiment ETF (BUZZ). The fund, which targets the US stocks favoured by investment-related posts on social media sites, has already harvested $420m of assets, just weeks after its launch last month. But, in a period when exchange traded funds have been attracting record inflows, less sexy ETFs have also been raising significant assets straight out of the gate. Their rapid success stands in sharp contrast to the experience of mutual funds, where many investors want to see a three-year track record before parting with their cash. In the US, 62 ETFs launched since the start of 2020 have already raised at least $100m… Europe has also seen 62 equally successful debuts over the same period, while in the Asia-Pacific region there have been 13…”

April 7 – Wall Street Journal (Michael Wursthorn): “Cathie Wood’s new ARK Space Exploration & Innovation ETF is already on track to be one of the most successful fund launches ever despite criticism that it doesn’t necessarily reflect the nascent space-exploration market. Investors poured $536.2 million into the actively managed exchange-traded fund, known as ARKX, in its first five days of trading… That trounces the industry average of three years to gather $100 million and puts the fund on course to top $1 billion in assets within days…”

April 8 – Reuters (Munsif Vengattil): “Online brokerage Robinhood said on Thursday that 9.5 million users traded cryptocurrency on its platform during the first quarter of 2021, a near six-fold rise from the previous quarter.”

April 4 – Wall Street Journal (Caitlin McCabe): “Individual investors kicked off 2021 at a sprinter’s pace. Now, they are finally showing signs of fatigue. Trading activity among nonprofessional investors has slowed in recent weeks after a blockbuster start to the year, with the group plowing less money into everything from U.S. stocks to bullish call options. Daily average trades for at least two online brokerages have edged down from their 2021 highs. Across the industry, traffic to brokerage websites, as well as the amount of time spent on them, has fallen. The decline in enthusiasm marks a sharp reversal from just a few months ago, when individual investors’ frenetic activity took center stage in financial markets.”

April 7 – Bloomberg (Paula Seligson): “Money managers are once again piling into U.S. junk bonds with abandon, pushing risk premiums so low that some fear any stumble in the economic recovery could lead to bruising losses. The extra yield investors demand to own speculative-grade bonds instead of Treasuries fell below 3 percentage points this week for the first time since 2007… Yields are close to all time lows as well, fueling a surge in borrowing as companies look to lock in historic rates. The first quarter was the busiest ever for high-yield debt sales, while volumes for bonds and loans backing leveraged buyouts are on the upswing.”

April 5 – Reuters (Gertrude Chavez-Dreyfuss): “The cryptocurrency market capitalization hit an all-time peak of $2 trillion on Monday, according to… CoinGecko and Blockfolio, as gains over the last several months attracted demand from both institutional and retail investors.”

April 6 – Reuters (Pavel Polityuk and Vladimir Soldatkin): “Inflows into cryptocurrency funds and products hit a record $4.5 billion in the first quarter, suggesting increased institutional participation in the once-maligned sector, data from digital currency manager Coinshares showed…”

April 6 – Bloomberg (Joanna Ossinger): “The cryptocurrency entrepreneur who spent more than $69 million for a piece of digital art has a message for speculative buyers of non-fungible tokens: be prepared to lose your money. Vignesh Sundaresan, also known by the online moniker MetaKovan, vaulted into the spotlight last month after paying a record-breaking sum for the NFT of Beeple’s ‘Everydays: The First 5,000 Days.’ As Sundaresan tells it, his motivation wasn’t to make money but to support the artist and showcase the technology. Anyone trying to profit from NFTs is ‘taking a huge risk,’ he said… ‘It’s even crazier than investing in crypto.’”

Market Instability Watch:

April 5 – Reuters (Brenna Hughes Neghaiwi and Matt Scuffham): “Credit Suisse said… it will take a 4.4 billion Swiss franc ($4.7bn) hit from dealings with Archegos Capital Management, prompting it to overhaul the leadership of its investment bank and risk divisions… ‘The significant loss in our Prime Services business relating to the failure of a US-based hedge fund is unacceptable,’ Credit Suisse Chief Executive Thomas Gottstein said... ‘Serious lessons will be learned.’”

April 8 – Wall Street Journal (Margot Patrick, Julie Steinberg, Juliet Chung and Duncan Mavin): “Credit Suisse Group AG’s double-barreled financial crisis shares a common theme: a bank that looked the other way when warning signs argued for pulling back on lucrative corners of its business. The Swiss bank with a big Wall Street presence was caught off guard starting in late February when $10 billion in complicated investment funds it ran with financing firm Greensill Capital unraveled, despite years of internal warnings… Then it lent more than other banks on big, concentrated positions to Archegos Capital Management, run by longtime client Bill Hwang. Though Archegos was flagged as a client of special interest, Credit Suisse acted more slowly than other banks, and ended up on the wrong side of a fire sale. The bank said… it would take a $4.7 billion charge on the Archegos trade, equivalent to more than a year’s worth of profit.”

April 6 – Bloomberg (Tom Maloney): “For the world of finance, it was must-watch TV. A U.S. congressional committee summoned an odd assortment of Wall Street characters to testify about a saga that captured so much public attention it was discussed on Good Morning America. How did amateur traders, billionaire hedge fund managers, social media posts, and an opaque market structure fuel a dizzying surge, and sudden crash, in the shares of video game retailer GameStop Corp.? But for Wall Street’s savviest, one person in particular mattered most of all… Wall Street insiders tuned in to see how Ken Griffin, the… hedge fund billionaire, would handle the glare. Over the past 19 years, with little public attention, Griffin has built his startup, Citadel Securities, into one of the world’s dominant trading enterprises. The closely held firm has become a key part of the plumbing underlying the U.S. stock market and is rapidly expanding into others.”

April 5 – Bloomberg (Ruth Carson and Susanne Barton): “Almost six months after Goldman Sachs… recommended shorting the dollar, it’s calling it quits on the trade. In a note titled ‘tactical retreat,’ Goldman’s currency team closed its recommended short greenback position against a basket of Group-of-10 commodity currencies, including the Australian and New Zealand dollars. The firm joins hedge funds and other investors capitulating on bearish dollar bets after surging Treasury yields triggered a rebound in the U.S. currency, capsizing one of the world’s most crowded macro trades.”

Inflation Watch:

April 6 – Bloomberg (Michael Sasso and Leslie Patton): “A resurgent job market is creating more opportunities at a faster clip than many economists and employers expected. What’s more, too few people are applying for positions that are reopening, and that’s setting up a battle for talent. Restaurants and hotels are raising wages, offering bonuses for worker referrals or luring people from other states to cope with the shortage…. Nonfarm payrolls rose by 916,000 last month, blowing away economists’ median estimate of a 660,000-job gain. Meanwhile, a measure of service-industry activity released this week saw the fastest growth on record in March…”

April 7 – Bloomberg (Isis Almeida, Rachel Graham and Annie Lee): “For a glimpse of how quickly and unevenly economies are recovering from the pandemic, look no further than the market for shipping raw materials. Rising demand for everything from soybeans to steel has sent the cost of hauling dry goods soaring more than 50% this year. Manufacturing… is now accelerating elsewhere, and countries are stepping up commodity purchases to rebuild stockpiles after running them down during lockdowns that slowed port operations and hit economic activity globally. Analysts say the rally isn’t over, with rates to carry unpacked commodities like grains, iron ore and coal -- known as dry bulk -- expected to remain high this year and possibly into 2022.”

April 8 – Bloomberg (Agnieszka de Sousa and Megan Durisin): “The global food-price rally that’s stoking inflation worries and hitting consumers around the world shows little sign of slowing. Even with grain prices taking a breather on good crop prospects, a United Nations gauge of global food costs rose for a 10th month in March to the highest since 2014… Food prices are in the longest rally in more than a decade amid China’s crop-buying spree and tightening supplies of many staple products, threatening faster inflation.”

April 6 – Bloomberg (Andres Guerra Luz): “Drivers eager to get back on the road more than a year into the pandemic will face the highest summer gasoline prices since 2018, according to a U.S. government report. Prices at the pump will average $2.78 a gallon from April to September in the U.S., more than 30% higher than last summer.”

Biden Administration Watch:

April 7 – Bloomberg (Nancy Cook): “President Joe Biden is ramping up pressure on Republicans to support his $2.25 trillion infrastructure plan, appealing directly to GOP voters while lawmakers are in their home districts during the current congressional recess. Biden will deliver his second major sales pitch in a week for the ‘American jobs plan’ with a White House speech Wednesday, as he and his team reach out to governors, mayors and the broader public through phone calls, briefings and local TV appearances to make their case. In addition to emphasizing the need for urgency, with the pandemic exposing weaknesses that left millions of families struggling, Biden in his… remarks will argue that infrastructure needs go far beyond just roads and bridges…”

April 5 – Associated Press (Lisa Mascaro and Josh Boak): “With an appeal to think big, President Joe Biden is promoting his $2.3 trillion infrastructure plan directly to Americans, summoning public support to push past the Republicans lining up against the massive effort they sum up as big taxes, big spending and big government. Republicans in Congress are making the politically brazen bet that it’s more advantageous to oppose the costly American Jobs Plan, saddling the Democrats with ownership of the sweeping proposal and the corporate tax hike Biden says is needed to pay for it. He wants the investments in roads, schools, broadband and clean energy approved by summer.”

April 5 – Financial Times (Aziza Kasumov): “No sooner had President Joe Biden’s $1.9tn stimulus package passed than attention turned to his next big spending bill for infrastructure — and the tax rises that are likely to pay for it. For equity markets, the corporate tax increases proposed by Democrats to fund the $2tn package could get quite costly quickly… Goldman Sachs calculated that Biden’s tax plan would knock 9% off earnings per share for companies in the S&P 500 next year. Under Biden’s plans… the US corporate tax rate would rise from 21% to 28%, a sharp reversal from the cuts rolled out during Donald Trump’s presidency. The proposal would also add a global minimum tax of 21%, determined on a country-by-country basis, to target tax havens.”

April 5 – Reuters (Eric Beech and Patricia Zengerle): “The U.S. Senate parliamentarian ruled on Monday that Democrats may use a procedural tool known as reconciliation to pass more legislation this year, a spokesman for Democratic leader Chuck Schumer said, which could clear the way for passage of an infrastructure bill without Republican support.”

April 7 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen… fleshed out the details of a corporate tax hike plan linked to President Joe Biden’s infrastructure investment proposal, aiming to raise $2.5 trillion in new revenues over 15 years by deterring tax avoidance. Yellen’s plan relies on negotiating a 21% global minimum corporate tax rate with major economies and a separate 15% minimum tax on ‘booked’ income aimed at the largest U.S. corporations. Dozens of big U.S. companies use complex tax strategies to reduce their federal tax liabilities to zero. Yellen said that promises of increased U.S. investment by corporations under the 2017 Republican tax cuts failed to materialize.”

April 5 – Bloomberg (Saleha Mohsin and Christopher Condon): “Treasury Secretary Janet Yellen outlined the case for a harmonized corporate tax rate across the world’s major economies, part of an effort to restore global leadership and credibility with U.S. allies following the unilateralist approach of the Trump era. In her first major speech on international economic policy, Yellen marked an American return to the ‘global stage.’ She singled out China, saying the U.S. needs a ‘strong presence in global markets’ to level the playing field. The Biden administration tax proposal also marks a U.S. return to years-long talks -- led by the Organization for Economic Cooperation and Development with about 140 countries -- to develop a global agreement on minimum levies.”

April 9 – Bloomberg (Eric Martin): “The U.S. added seven Chinese supercomputing firms to a list of entities banned from receiving exports from American companies, citing activities contrary to the national-security or foreign-policy interests of the U.S. The companies were added so-called entity list, which prohibits American firms from doing business with them without first obtaining a U.S. government license, the Commerce Department said…”

Federal Reserve Watch:

April 5 – Axios (Dion Rabouin): “To brace the U.S. economy and stave off another Great Depression, the Federal Reserve has taken control of it through unprecedented intervention — manipulating market prices, controlling rates and propping up companies on a previously unimaginable scale. Why it matters: The U.S. is a market-run, capitalist economy. But the market is ostensibly now governed by an unelected and largely independent group of technocrats that directs it by creating ridiculous sums of money to buy assets.”

April 5 – CNBC (Patti Domm): “As the economy booms over the next couple of months, the Fed will have a more difficult time defending its super-easy policies. Economists expect the second quarter to grow by more than 9%, and the monthly jobs reports are likely to show very strong hiring, with job growth averaging more than1 million new payrolls in each of the next several months… March’s report Friday showed the surge in new jobs to 916,000, nearly 250,000 more than expected. After the data was released Friday, the fed funds futures market began to immediately bring forward expectations for a Fed rate hike to December 2022, from the spring of 2023.”

April 7 – Bloomberg (Craig Torres): “Federal Reserve Chair Jerome Powell’s dovish message on an incomplete economic recovery won the day when officials met last month, with a record of the gathering showing a unanimous near-term policy outlook. ‘Participants noted that it would likely be some time until substantial further progress toward the committee’s maximum-employment and price-stability goals would be realized,’ according to minutes from the March 16-17 Federal Open Market Committee meeting… Officials left their asset purchase program of $120 billion per month unchanged at the meeting and forecast they would keep the benchmark lending rate near zero until at least 2023…”

April 7 – Financial Times (James Politi and Colby Smith): “Federal Reserve officials said the danger of unexpectedly high inflation was roughly equal to that of unexpectedly sluggish inflation, shrugging off fears of a rapidly overheating economy in the wake of President Joe Biden’s $1.9tn fiscal stimulus. ‘Most participants noted that they viewed the risks to the outlook for inflation as broadly balanced,’ according to minutes of the Federal Open Market Committee’s meeting in March…”

April 7 – Reuters (Jonnelle Marte): “The Federal Reserve should begin to withdraw monetary support soon after the pandemic is over, a moment that could set off robust economic growth, Dallas Fed Bank President Robert Kaplan said… The central bank should start by reducing the scale of its asset purchases from the current pace of $120 billion a month, Kaplan said… ‘My thought is the tapering would come first,’ Kaplan said… ‘I think in my mind it would be substantially completed before you dealt with Fed funds rate, but I would like to retain flexibility on that.’ …The U.S. economy could grow by 6.5% in 2021 and the unemployment rate could approach 4% by year end, he said. ‘Once we do emerge, we’re going to have very robust growth,’ Kaplan said.”

April 5 – Reuters (Ann Saphir): “The U.S. economic outlook is brightening, Cleveland Federal Reserve Bank President Loretta Mester said…, adding that the Federal Reserve should stick to its easy monetary policy to help support growth further. ‘I’m thinking that we’ll see a very strong second half of the year, but we are still far from our policy goals,’ Mester said…”

April 7 – Reuters (Ann Saphir): “Chicago Federal Reserve Bank President Charles Evans… said that while he’s become much more positive about the economic outlook, he continues to expect the U.S. central bank will need to keep policy easy for some time in order to boost inflation to healthier levels… ‘I am optimistic that the economy is poised for strong growth later this year,’ he said. The unemployment rate, now at 6%, is expected to decline below most Fed policymakers’ estimate of a 4% long-run sustainable rate by the end of next year, putting the Fed’s goal of full employment ‘within sight,’ he said.”

U.S. Bubble Watch:

April 4 – Financial Times (Raghuram Rajan): “Is inflation the chief risk arising from colossal levels of US public expenditure during the pandemic? Spending has been spurred by a belief that, as long as the federal government can borrow without a rise in low interest rates, no one really needs to pay. In case markets disagree, the rich can be taxed. However, with populations ageing and potential growth slowing, the notion that industrial countries can allow their sovereign debt to grow indefinitely at even the more moderate pre-pandemic pace seems optimistic. Past experience suggests it will be hard to make the rich pay — they will oppose new taxes vigorously and avoid them if implemented. If the $5tn of US spending so far enacted eventually requires ordinary taxpayers to bear some burden, its lack of targeting or restraint will have adverse consequences.”

April 7 – Bloomberg (Olivia Rockeman): “The U.S. trade deficit widened in February to a record high… The gap in trade of both goods and services increased to $71.1 billion in February from a revised $67.8 billion a month earlier… A decline in exports exceeded a drop in the value of imports during the month as severe winter weather disrupted two-way trade. The U.S. deficit has been widening fairly consistently on a monthly basis since reaching a more than three-year low in February 2020.”

April 5 – Reuters (Lucia Mutikani): “A measure of U.S. services industry activity surged to a record high in March amid robust growth in new orders, in the latest indication of a roaring economy that is being boosted by increased vaccinations and massive fiscal stimulus… The ISM’s non-manufacturing activity index rebounded to a reading of 63.7 last month… That was the highest in the survey’s history and followed 55.3 in February… But businesses are grappling with logistics challenges, port and shipping delays as well as shortages of materials, with some saying ‘it is still difficult to find trucks for loads and to secure shipping containers.’ Those supply constraints are raising costs for businesses. The survey’s measure of prices paid by services industries jumped to the highest reading since July 2008.”

April 6 – Reuters (Lucia Mutikani): “U.S. job openings rose to a two-year high in February while hiring picked up as strengthening domestic demand amid increased COVID-19 vaccinations and additional pandemic aid from the government boost companies’ needs for more workers. The Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS report, …was the latest indication that the labor market had turned the corner… Job openings, a measure of labor demand, increased 268,000 to 7.4 million as of the last day of February. That was the highest level since January 2019 and pushed job openings 5.1% above their pre-pandemic level.”

April 6 – Reuters (Hilary Russ): “Taco Bell wants to hire at least 5,000 employees in one day, it said…, and is adding benefits for some general managers to sweeten the pot as restaurants struggle to hire enough workers to keep up with a surge in sales amid a broader U.S. economic recovery… ‘It is no secret that the labor market is tight’ now, Kelly McCulloch, Taco Bell’s chief people officer, said… ‘Total nightmare’ is the way FAT Brands Inc CEO Andy Wiederhorn describes the staffing situation for franchisees of his company’s restaurants, which include Johnny Rockets and Fatburger.”

April 7 – Bloomberg (Vince Golle and Jordan Yadoo): “U.S. consumer borrowing surged in February by the most since late 2017 as a broader re-opening… helped spark an increase in credit-card balances. Total credit jumped $27.6 billion from the prior month, the largest gain since November 2017… On an annualized basis, borrowing rose 7.9% in February. The gain in February credit exceeded all estimates…”

April 5 – Wall Street Journal (AnnaMaria Andriotis and Ben Eisen): “A greater share of people with low credit scores has been falling behind on their car payments in recent months… Some 10.9% of subprime borrowers with outstanding auto loans or leases were more than 60 days past due in February, up from 10.7% in January and 8.7% a year prior, according to… TransUnion. It marked the sixth consecutive month-over-month increase and the highest level in monthly data going back to January 2019. More than 9% of subprime auto borrowers were more than 60 days past due in the fourth quarter, the highest quarterly figure in data going back to 2005.”

April 4 – Wall Street Journal (Ryan Dezember): “A bidding war broke out this winter at a new subdivision north of Houston. But the prize this time was the entire subdivision, not just a single suburban house, illustrating the rise of big investors as a potent new force in the U.S. housing market. D.R. Horton Inc. built 124 houses in Conroe, Texas, rented them out and then put the whole community, Amber Pines at Fosters Ridge, on the block. A Who’s Who of investors and home-rental firms flocked to the December sale. The winning $32 million bid came from an online property-investing platform, Fundrise LLC, which manages more than $1 billion on behalf of about 150,000 individuals. The country’s most prolific home builder booked roughly twice what it typically makes selling houses to the middle class…”

Fixed Income Watch:

April 5 – Bloomberg (Lisa Lee): “Wall Street buyout barons are rushing to the leveraged loan market to finance takeovers and dividends as they dial up risk-taking amid a brightening economic outlook. Loan launches that back mergers and leveraged buyouts spiked to $70 billion in the first quarter of 2021, the most since 2018 and a 60% jump from a year ago. Those that have a dividend component surged to $13.4 billion, the most since 2014…”

April 9 – Wall Street Journal (Matt Wirz): “No earnings? No problem. Investors are funneling money to unprofitable software companies through a new type of debt deal. Nonbank lenders like Golub Capital, AllianceBernstein Holdings LP and Owl Rock Capital Partners LP have issued asset-backed bonds to help finance about $2 billion of loans to such companies since November… Many of the loans are to fast-growing, but still unprofitable, software enterprises. The rash of recent deals is the latest indicator that large investors have resumed their hunt for high-yielding debt to offset low interest rates in safer government and corporate bonds. It also highlights the growing reach of private debt funds, which have replaced banks in many deals and weathered Covid-19 despite fears that they would suffer from a spike in loan defaults.”

China Watch:

April 6 – Bloomberg: “China’s central bank asked the nation’s major lenders to curtail loan growth for the rest of this year after a surge in the first two months stoked bubble risks, according to people familiar with the matter. At a meeting with the People’s Bank of China on March 22, banks were told to keep new advances in 2021 at roughly the same level as last year… Some foreign banks were also urged to rein in additional lending through so-called window guidance recently after ramping up their balance sheets in 2020… The comments give further detail to what the central bank stated publicly after the meeting, when it said it asked representatives of 24 major banks to keep loan growth stable and reasonable. In 2020, banks doled out a record 19.6 trillion yuan ($3 trillion) of credit…”

April 4 – Financial Times (Sun Yu): “China’s central bank has asked lenders to rein in credit supply, as the surge of lending that sustained the country’s debt-fuelled coronavirus recovery renewed concerns about asset bubbles and financial stability. New loan growth hit 16% in the first two months of the year. The People’s Bank of China responded in February by instructing domestic and foreign lenders operating in the country to keep new loans in the first quarter of the year at roughly the same level as last year, if not lower… The directive could translate into a considerable drop in bank lending, the largest source of financing for the world’s second-largest economy.”

April 8 – Bloomberg: “China’s government told smaller, local financial institutions to step up risk management and avoid ‘excessive’ growth, stepping up a campaign to clamp down on a build up in debt as the economy stabilizes. At a meeting of the Financial Stability and Development Committee on Thursday, Vice Premier Liu He called for ‘zero tolerance’ on illicit activities, telling regulators to strengthen supervision of shareholders and owners of financial institutions, risk concentration, connected transactions and data authenticity…”

April 5 – Reuters (Gabriel Crossley): “A recovery in China’s services sector picked up speed in March as firms hired more workers and business optimism surged, although inflationary pressures remained… The Caixin/Markit services Purchasing Managers’ Index (PMI) rose to 54.3, the highest since December, from 51.5 in February…”

April 9 – Bloomberg: “China Huarong Asset Management Co. is stepping up efforts to revive investor confidence after persistent questions about the bad-debt manager’s financial health sent its dollar bonds tumbling to record lows… While prices for several of China Huarong’s bonds have bounced from their lows on Thursday, the securities continue to trade at historically depressed levels as investors look for more clarity on the company’s finances and overhaul plan. The selloff, which has spilled over to some of China Huarong’s peers, has become the latest test of investor faith in China’s state-owned borrowers after a record-breaking surge in defaults last year.”

April 8 – Bloomberg: “Property developers are propelling a record wave of China corporate bond defaults this year, as Beijing moves to clamp down on borrowing in the debt-laded sector. Real estate firms made up 27% of last quarter’s record $15.1 billion of missed payments on onshore and offshore bonds… Chinese companies overall defaulted on 74.75 billion yuan ($11.4bn) of local notes during the first three months of 2021, more than double the old record set a year earlier, while defaults nearly tripled to $3.7 billion for offshore bonds.”

April 6 – Reuters (Samuel Shen and Andrew Galbraith): “China’s securities regulator announced penalties against a slew of underwriters and individual bankers on Tuesday, sending a clear warning regarding sloppy due diligence. Nearly 40 individuals and eight investment banks were punished for inadequate due diligence in the first quarter…”

Global Bubble Watch:

April 6 – Bloomberg (Eric Martin): “The International Monetary Fund upgraded its global economic growth forecast for the second time in three months, while warning about widening inequality and a divergence between advanced and lesser-developed economies. The global economy will expand 6% this year, up from the 5.5% pace estimated in January, the IMF said in its World Economic Outlook... That would be the most in four decades of data, coming after a 3.3% contraction last year that was the worst peacetime decline since the Great Depression.”

April 7 – Bloomberg (Alessandra Migliaccio, Yoshiaki Nohara and William Horobin): “The drive to overhaul global taxes for companies gathered more steam… after Group of 20 finance chiefs, encouraged by new U.S. proposals, pledged to reach a consensus on new rules by mid-year. The finance ministers and central bank governors said they’re committed to ‘reaching a global and consensus-based solution’ on a minimum global corporate rates and how to levy the profits of multinational technology giants. An agreement could have significant ramifications for the world, bolstering incomes for many governments as they try to rebuild their economies after the pandemic. Others may balk though, as Ireland signaled.”

April 5 – Financial Times (Joshua Oliver): “Europe’s markets for new government debt had a bustling start to the year… Bond syndication deals run by banks had their busiest first quarter ever, with the equivalent of $150bn raised by governments across Europe and the UK, the largest volume for that time of year on Refinitiv records going back to 2000. Overall bond issuance by major eurozone government borrowers, including auctions, was €373bn, according to… ING, 20% higher than last year.”

April 6 – Bloomberg (Ari Altstedter): “Toronto home values continued to swell in March, bringing annual average price gains to more than 20% and adding fuel to a raging debate about whether policy makers should try to cool the market. New listings were up 57% from March 2020, when the onset of the pandemic temporarily caused a freeze in… activity. But the new supply was not able to keep up with demand spurred by low borrowing costs and demand for bigger homes, especially in the suburbs…”

Central Banker Watch:

April 7 – Reuters (Francesco Canepa): “The European Central Bank sped up the pace of its emergency bond-buying programme by 22.7% in March despite a slowdown in the runup to Easter… The ECB bought 73.5 billion euros worth of bonds under its Pandemic Emergency Purchase Programme (PEPP) last month after pledging to raise buying volumes and cap a rise in borrowing costs that threatened to derail the euro zone’s recovery from a pandemic-induced recession.”

April 8 – Reuters (Balazs Koranyi): “European Central Bank policymakers at their meeting last month debated a smaller increase in bond purchases and agreed to front-load the buying this quarter on condition it could be cut later if conditions allow, the accounts of their meeting showed…”

April 7 – Bloomberg (Anirban Nag and Subhadip Sircar): “India’s central bank took a step toward formalizing quantitative easing, pledging to buy up to 1 trillion rupees ($14bn) of bonds this quarter to keep borrowing costs low and support the economy’s recovery. The debt purchases under the program in the secondary market will start from April 15…, after policy makers held the benchmark repurchase rate at a record low 4%... The rupee slid 1.3% against the dollar.”

Europe Watch:

April 9 – Bloomberg (Alessandra Migliaccio and Chiara Albanese): “Italian Prime Minister Mario Draghi is bringing forward plans for as much as 40 billion euros ($48bn) in new borrowing as the cost of keeping the economy afloat drains the state’s coffers and street protests heap pressure on the government… The government has spent over 130 billion euros so far to support the economy which has pushed public debt to 155.6% of gross domestic product.”

April 4 – Reuters (Sarah White): “France’s public deficit is expected to reach 9% of gross domestic product (GDP) in 2021, French Finance Minister Bruno Le Maire said…, up from a previous forecast of 8.5% as the country enters its third national coronavirus lockdown. The change follows a downward revision of France’s growth forecast from 6% to 5% for this year… Le Maire… said France’s public debt was set to reach 118% of GDP this year, up from its latest forecast of 115%.”

April 8 – Reuters (Leigh Thomas): “France plans to bring its public budget deficit back in line with an EU limit from 2027 and is prepared to write a firm spending cap into law to keep its deficit-reduction commitment on track, Finance Ministry sources said…”

EM Watch:

April 7 – Wall Street Journal (Mike Bird): “The U.S. economy is roaring ahead of its peers, with growth estimates still being upgraded by the International Monetary Fund. But a more rapid U.S. expansion will have inevitable knock-on effects for the burgeoning pile of U.S. dollar-denominated debt issued by foreign governments and companies in the last decade… Since the global financial crisis, overseas bond issuance is a story of two currency blocs—the dollar and everything else. International bond-market borrowing in all currencies except the dollar is basically flat compared with mid-2008 levels. In contrast, dollar bonds have become more popular: The outstanding amount issued by borrowers outside the U.S. runs to more than $10 trillion, more than twice the level from before the collapse of Lehman Brothers.”

April 5 – Reuters (Oben Mumcuoglu and Ezgi Erkoyun): “Turkey’s annual inflation climbed above 16% in March for the first time since mid-2019…, piling pressure on the central bank’s new chief to maintain tight policy after his surprise appointment sparked a lira selloff.”

April 7 – Bloomberg (Taylan Bilgic): “The Turkish government is determined to bring down interest rates and inflation to single digits, President Recep Tayyip Erdogan said, sounding more eager than his new central banker to lower borrowing costs… ‘We are determined to bring inflation, which has recently accelerated, down to single digits,’ Erdogan said… ‘We are also determined to reduce interest rates to single digits.’”

April 7 – Bloomberg (Anya Andrianova): “Russian inflation jumped to the highest level in more than four years in March, adding pressure on the central bank to keep raising interest rates. Annual inflation accelerated to 5.8% in March…, in line with forecasts but well above the central bank’s 4% target.”

Japan Watch:

April 6 – Bloomberg (Isabel Reynolds): “China urged Japan to steer clear of ‘internal issues’ including Hong Kong and Xinjiang as Japanese Prime Minister Yoshihide Suga prepares to meet U.S. President Joe Biden later this month. Chinese Foreign Minister Wang Yi told his counterpart Toshimitsu Motegi that he hoped Japan could treat China’s development from an ‘objective and rational’ perspective, rather than be led by the rhythm of countries that are biased against China…”

Leveraged Speculation Watch:

April 6 – CNBC (Hugh Son): “The night before the Archegos Capital story burst into public view late last month, the fund’s biggest prime broker quietly unloaded some of its risky positions to hedge funds, people with knowledge of the trades told CNBC. Morgan Stanley sold about $5 billion in shares from Archegos’ doomed bets on U.S. media and Chinese tech names to a small group of hedge funds late Thursday, March 25…”

April 5 – Financial Times (Laurence Fletcher): “Hedge funds are evaluating their banking relationships after a fire sale of assets by family office Archegos Capital Management forced billions of dollars of losses on Credit Suisse and Nomura. Executives are weighing up whether to switch lenders they use as their prime brokers — banks that offer a range of services including stock lending, leverage and trade execution. The head of one London-based hedge fund said the firm had ‘initiated an internal process’ to evaluate its prime broking relationships in the wake of the Archegos debacle.”

April 5 – Bloomberg (Ruth Carson and Chikako Mogi): “Hedge funds are the most bearish on the yen in more than two years as expectations for the world’s post-pandemic recovery mount. Futures and options speculators have added to yen shorts for three straight weeks after being long the Japanese currency as recently as a month ago… The speed of the reversal partly explains the yen’s slide last week, when it dropped beyond the level of 110 per dollar for the first time in a year.”

April 8 – Bloomberg (Erik Schatzker, Sridhar Natarajan, and Katherine Burton): “Before he lost it all—all $20 billion—Bill Hwang was the greatest trader you’d never heard of. Starting in 2013, he parlayed more than $200 million left over from his shuttered hedge fund into a mind-boggling fortune by betting on stocks. Had he folded his hand in early March and cashed in, Hwang, 57, would have stood out among the world’s billionaires. There are richer men and women, of course, but their money is mostly tied up in businesses, real estate, complex investments, sports teams, and artwork. Hwang’s $20 billion net worth was almost as liquid as a government stimulus check. And then, in two short days, it was gone.”

April 6 – Bloomberg (Patrick Winters and Marion Halftermeyer): “Credit Suisse… is leaning toward letting clients foot the bill for eventual losses in funds that the bank ran with former billionaire Lex Greensill’s company, according to a person familiar… The bank considers that the risks around Greensill were known and the funds were only marketed to investors able to assess such risks, the person said, declining to be identified discussing private matters. The… lender didn’t take any substantial loss due to Greensill in the first quarter.”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 6 – Reuters (Sheila Dang): “Forbes' annual world’s billionaires list includes a record-breaking 2,755 billionaires, with Inc founder Jeff Bezos topping it for the fourth consecutive year… The ranks of the ultra-wealthy are expanding after a year in which the coronavirus pandemic upended world economies and threatened the livelihoods of people across the globe. This year's billionaires are worth a combined $13.1 trillion, up from $8 trillion last year, Forbes said. ‘The very, very rich got very, very richer,’ said Forbes' Chief Content Officer Randall Lane…”

April 7 – Bloomberg (Shawn Donnan, Vrishti Beniwal, Marisa Wanzeller, Shannon Sims, Prinesha Naidoo, Randy Thanthong-Knight): “One of the most economically significant trends of the past few decades has been the emergence of a global middle class. The expectation that this cohort of consumers would continue to grow relentlessly, as rising incomes in developing countries lifted millions out of poverty each year, has been a central assumption in multinationals’ business plans and the portfolio strategies of professional investors. You can now add that to the list of economic truths that have been upended by this pandemic. For the first time since the 1990s, the global ­middle class shrank last year, according to a recent Pew Research Center estimate. About 150 million people… tumbled down the socioeconomic ladder in 2020, with South Asia and sub-Saharan Africa seeing the biggest declines.”

April 8 – Bloomberg (Peter Coy): “Since the Declaration of Independence in 1776, the population of the U.S. has dropped only once, in 1918, when more people died from the Spanish flu than from war wounds on the battlefields of Europe. The second lowest year for population growth? Probably this year, 2021. An April 7 research briefing from Oxford Economics estimates that the U.S. population will grow just 0.2% this year, after growth of just 0.4% last year.”

April 8 – New York Times (Raymond Zhong and Amy Chang Chien): “Chuang Cheng-deng’s modest rice farm is a stone’s throw from the nerve center of Taiwan’s computer chip industry, whose products power a huge share of the world’s iPhones and other gadgets. This year, Mr. Chuang is paying the price for his high-tech neighbors’ economic importance. Gripped by drought and scrambling to save water for homes and factories, Taiwan has shut off irrigation across tens of thousands of acres of farmland. The authorities are compensating growers for the lost income.”

Geopolitical Watch:

April 7 – Associated Press (Vladimir Isachenkov and Ken Moritsugu): “They’re not leaders for life — not technically, at least. But in political reality, the powerful tenures of China’s Xi Jinping and, as of this week, Russia’s Vladimir Putin are looking as if they will extend much deeper into the 21st century — even as the two superpowers whose destinies they steer gather more clout with each passing year. What’s more, as they consolidate political control at home, sometimes with harsh measures, they’re working together more substantively than ever in a growing challenge to the West and the world’s other superpower, the United States, which elects its leader every four years… Putin and Xi have developed strong personal ties to bolster a ‘strategic partnership’ between the two former Communist rivals as they vie with the West for influence. And even though Moscow and Beijing in the past rejected the possibility of forging a military alliance, Putin said last fall that such a prospect can’t be ruled out entirely.”

April 7 – Associated Press (Robert Burns): “The American military is warning that China is probably accelerating its timetable for capturing control of Taiwan, the island democracy that has been the chief source of tension between Washington and Beijing for decades and is widely seen as the most likely trigger for a potentially catastrophic U.S.-China war. The worry about Taiwan comes as China wields new strength from years of military buildup. It has become more aggressive with Taiwan and more assertive in sovereignty disputes in the South China Sea. Beijing also has become more confrontational with Washington; senior Chinese officials traded sharp and unusually public barbs with Secretary of State Antony Blinken in talks in Alaska last month.”

April 6 – Reuters (Ben Blanchard and Yimou Lee): “China sent more fighter jets into Taiwan’s air defence zone on Wednesday in a stepped up show of force around the island Beijing claims as its own, and Taiwan’s foreign minister said it would fight to the end if China attacks… Taiwan’s Defence Ministry said 15 Chinese aircraft including 12 fighters entered its air defence identification zone, with an anti-submarine aircraft flying to the south through the Bashi Channel… ‘We are willing to defend ourselves without any questions and we will fight the war if we need to fight the war. And if we need to defend ourselves to the very last day we will defend ourselves to the very last day.’”

April 8 – Reuters (Gabriel Crossley): “Beijing blamed the United States… for tensions over Taiwan after a U.S. warship sailed close to the Chinese-claimed island, asking rhetorically whether China would sail in the Gulf of Mexico as a ‘show of strength’. On Monday, China said an aircraft carrier group was exercising close to the island, and on Wednesday a U.S. warship sailed through the sensitive Taiwan Strait… Chinese Foreign Ministry spokesman Zhao Lijian said U.S. ships engaging in ‘provocations’ ‘send a seriously wrong signal to the forces of Taiwan independence, threatening peace and stability in the Taiwan Strait’. ‘Would a Chinese warship go to the Gulf of Mexico to make a show of strength?’ he added.”

April 5 – Reuters (Andrew Galbraith and Ben Blanchard): “A Chinese carrier group is exercising near Taiwan and such drills will become regular, China’s navy said… in a further escalation of tensions near the island that Beijing claims as its sovereign territory… The aim is to ‘enhance its capability to safeguard national sovereignty, safety and development interests’, it said. ‘Similar exercises will be conducted on a regular basis in the future,’ the navy added, without elaborating.”

April 7 – Reuters (Ben Blanchard): “The guided missile destroyer USS John S. McCain conducted a ‘routine’ transit of the Taiwan Strait on Wednesday, the U.S. Navy said, as China sent more fighter jets into Taiwan’s air defence zone and a Chinese carrier group drilled near Taiwan. ‘The ship’s transit through the Taiwan Strait demonstrates the U.S. commitment to a free and open Indo-Pacific. The United States military will continue to fly, sail, and operate anywhere international law allows,’ the U.S. Navy said…”

April 6 – Bloomberg (Henry Meyer, Daryna Krasnolutska and Kateryna Choursina): “Russia announced the start of mass military drills, ratcheting up tensions with neighboring Ukraine amid Western concerns about the risk of renewed fighting. More than 4,000 training exercises will be held in military districts across Russia in April, Defense Minister Sergei Shoigu said…”

April 8 – Reuters (Katya Golubkova): “Russia’s Defence Ministry said… it was moving more than 10 navy vessels, including landing boats and artillery warships, from the Caspian Sea to the Black Sea to take part in exercises, Interfax news agency reported.”

April 7 – Reuters: “The Kremlin said… Russia would keep military forces near its border with Ukraine for as long as it saw fit and a high-ranking Moscow security official added it could take ‘measures’ if necessary… Russia’s Security Council secretary, Nikolai Patrushev, said Russia had no plans to intervene in the conflict. ‘We don’t have such plans, no. However, we are closely watching the situation. Concrete measures will be taken depending on how it develops,’ Patrushev said…”

April 6 – Reuters (Gertrude Chavez-Dreyfuss): “President Volodymyr Zelenskiy called on NATO… to lay out a path for Ukraine to join the Western military alliance, after days in which Russia has massed troops near the conflict-hit Donbass region. Zelenskiy’s comments drew an immediate rebuke from Moscow, which said Kyiv’s approach to NATO could further inflame the situation in Donbass, where violence has increased in recent days.”

April 6 – Reuters (Trevor Hunnicutt and Nandita Bose): “White House Press Secretary Jen Psaki said… Ukraine has long aspired to join NATO as a member and that the Biden administration has been discussing that aspiration with the country. ‘We are strong supporters of them, we are engaged with them… but that is a decision for NATO to make,’ Psaki said.”

April 8 – Bloomberg (Nick Wadhams and Jennifer Jacobs): “Biden administration officials have completed an intelligence review of alleged Russian misdeeds such as election interference and the SolarWinds hack, setting the stage for the U.S to announce retaliatory actions soon, according to three people… Possible moves could involve sanctions and the expulsion of Russian intelligence officers in the U.S. under diplomatic Cover…”

April 4 – Reuters (Enrico Dela Cruz): “The Philippines’ defence chief said… China was looking to occupy more areas in the South China Sea, citing the continued presence of Chinese vessels that Manila believes are manned by militias in disputed parts of the strategic waterway. ‘The continued presence of Chinese maritime militias in the area reveals their intent to further occupy (areas) in the West Philippine Sea,’ Defence Secretary Delfin Lorenzana said…, using the local name for the South China Sea.”

April 8 – Reuters: “Anti-coup demonstrators in Myanmar fought back with handmade guns and firebombs against a crackdown by security forces in a town in the northwest but at least 11 of the protesters were killed, domestic media reported…”