Saturday, March 27, 2021

Sunday's News Links

[Yahoo/Bloomberg] Treasuries’ Worst Quarter Since 2016 Ends With Questions Aplenty

[Reuters] Tugs, dredgers still struggle to free ship blocking Suez Canal

[Yahoo/Bloomberg] Ship’s Front Was Damaged; 350 Vessels Waiting: Suez Update

[Yahoo/Bloomberg] ‘Unprecedented’: Wall Street Ponders Goldman’s Block-Trade Spree

[AP] Paris doctors warn of catastrophic overload of virus cases

[Reuters] Philippines sends fighter aircraft over Chinese vessels in South China Sea

[NYT] The Swift Collapse of a Company Built on Debt

[WSJ] New Trade Representative Says U.S. Isn’t Ready to Lift China Tariffs

[WSJ] U.S. Farmers Vie for Land as a Grain Rally Sparks Shopping Spree

[WSJ] House Prices Are Inflating Around the World

[FT] Democrats confident they can pass $3tn infrastructure bill

Saturday's News Links

[AP] Big Tech’s outsized influence draws state-level pushback

[Reuters] Salvager hopes to free ship blocking Suez Canal by start of next week

[Yahoo/Bloomberg] How a Desert Wind Blew $10 Billion of Global Trade Off Course

[Reuters] China sanctions U.S. and Canadian bodies over Xinjiang

[Reuters] China's Jan-Feb industrial profits surge in boost to economic recovery

[Reuters] ECB must remain euro zone's stabiliser: chief economist Lane

[AP] As daily deaths near 4,000, worst may lie ahead for Brazil

[Yahoo/Bloomberg] Crypto Shadow Banking Explained and Why 12% Yields Are Common

[Politico] Iran, China sign strategic long-term cooperation agreement

[Yahoo/Bloomberg] China Signs 25-Year Deal With Iran in Challenge to the U.S.

[NBC] China's growing firepower casts doubt on whether U.S. could defend Taiwan

[Reuters] More than 90 killed in Myanmar in one of bloodiest days of protests

[Bloomberg] Summers Warns U.S. Risks Rising Inflation Amid Massive Stimulus

[FT] Investors left shocked after Erdogan upends Turkey’s markets

[FT] Inflation bogeyman unsettles markets

[FT] Chip crisis highlights supply chain new order as carmakers lose out

[FT] US fears China is flirting with seizing control of Taiwan

Weekly Commentary: Double Trouble

March 1 - Daily Sabah: “Turkey’s economy grew a less-than-expected but still robust 5.9% in the fourth quarter of 2020 and 1.8% in the year as a whole…, emerging as one of only a few globally to skirt a contraction amid the coronavirus pandemic… The Central Bank of the Republic of Turkey (CBRT), which has repeatedly said it would target inflation more strongly under new Governor Naci Ağbal, has raised its policy rate by 675 bps to 17% since November to cool inflation… Inflation is expected to have risen to more than 15% last month… Ensuring price stability is Turkey’s main priority in 2021, Minister Elvan said. ‘Our policies fighting inflation will pave the way for more qualified and sustainable investment, production and growth,’ he stated.”

What a difference a few weeks makes. President Erdogan last weekend sacked central bank governor Ağbal after only four months, replacing him with an academic economist critical of rate increases. The lira immediately collapsed almost 15%, with a tepid recovery cutting losses for the week to 11%. Ten-year lira bond yields surged 420 bps to 17.88%, with dollar-denominated yields up 125 bps to 7.22%. One-month deposit rates doubled to 35.5%. Turkey’s sovereign CDS surged 160 bps to 466 bps, while the BIST 100 equites index sank 9.6%.

March 23 – Financial Times (Adam Samson, Ayla Jean Yackley and Joshua Oliver): “Turkey’s money market showed signs of stress on Tuesday, a day after the president’s firing of a respected central bank chief rattled investors and sparked heavy selling in the country’s assets. The offshore overnight swap rate, the cost to investors of exchanging foreign currency for lira over a set period, soared to an annualised 1,400% on Tuesday… It had eased to a still-elevated 500% by 3pm in Istanbul. Analysts said the big increase was a sign it was becoming more difficult for foreign investors to hedge their exposure to lira assets, unwind their bullish positions or bet against the currency… ‘Foreign investors are trying to liquidate long lira positions in a rush this week following the unexpected development over the weekend of the dismissal of the [central bank] governor,’ said Onur Ilgen, head of treasury at MUFG Bank Turkey. He said this had triggered a ‘significant liquidity squeeze in the offshore lira swap market’.”

A key to Turkey’s current predicament was buried in Q4 GDP data: “Financial sector activity drove growth in 2020, surging 21.4%, the TurkStat data showed.” Crisis Dynamics have been festering in Turkey for a while now. Turkish yields spiked in the second half of 2018 as global liquidity tightened, then again under similar circumstances in the summer of 2019 and during the March 2020 pandemic global market dislocation. Yet each episode was followed by a further easing of monetary policies by the world’s leading central banks, which spurred outsized EM speculative inflows and a loosening of financial conditions in Turkey and EM generally.

Recall that EM received record inflows last November ($107bn), followed by huge flows in January ($53.5bn) and February ($31.2bn). With consumer price inflation reaching almost 15% in December and the lira under pressure, Turkey’s new central bank chief hiked rates to almost 17%. Such enticing overnight funding rates in a world of scant yields and over-liquefied global markets attracted major speculative “hot money” flows into Turkey’s Bubble.

A glance at Turkey’s debt data is illustrative. According to Q4 data from the Institute of International Finance (IIF), Turkey’s debt load in 2020 surged from 138% of GDP to 174%, one of the more pronounced Credit splurges in the EM universe. Financial Sector debt jumped from 23.6% of GDP to 32.5% in a year, with Government Sector borrowings surging from 34.2% to 47.3%. Ominously, much of this debt is denominated in foreign currencies. Of Financial Sector borrowings, 79% are foreign currency denominated, with 56% of Government debt non-lira. Of Turkey’s $354 billion of non-financial corporate borrowings, a troubling 45% is in foreign currency debt. The weaker the lira, the more unmanageable the debt burden.

Turkey is said to have $140 billion of debt coming due over the next year, of which 44% is dollar-denominated. Though according to MUFG’s Ehsan Khoman (quoted by Reuters), Turkey’s total 2021 external financing requirements exceed $200 billion (in excess of 20% of GDP). Meanwhile, Turkey holds only $54 billion of international reserves, down from $81 billion at the end of 2019 and a peak of $113 billion back in 2014.

March 24 – Financial Times (Ayla Jean Yackley): “President Recep Tayyip Erdogan has called on Turks to cash in their gold and invest their savings to shore up financial markets roiled by his abrupt decision to sack the central bank chief… ‘I want my citizens to invest foreign currency and gold kept at home, which is our national wealth, in various financial instruments to benefit our economy and production,’ Erdogan said. Financial institutions that comply with Islamic tenets in particular provide customers with favourable returns, he added.”

Erdogan’s desperate call for Turks to “cash in their gold and invest their savings to shore up financial markets” is reminiscent of the devastating 1997 “Asian Tiger” Bubble collapse. Turkey would today appear to have all the characteristics of acutely fragile financial and economy structures vulnerable to a currency/debt crisis of confidence.

Sure, Turkey has repeatedly dodged bullets over recent years, bailed out by the loosest global financial conditions and associated yield-searching “hot money” EM flows imaginable. But will global markets once again prove so accommodative? I have serious doubts.

My thoughts returned this week to 2014 and an exceptional research report from Merrill’s Ajay Kapur, Ritesh Samadhiya and Umesha de Silva’s: “Pig in the Python – the EM Carry Trade Unwind.” “Since 3Q2008, the US Federal Reserve QE has unleashed a massive $2 TN debt-driven carry trade into emerging markets, disproportionately increasing their forex reserves (by $2.7 TN from end-3Q2008), their monetary bases (by $3.2 TN), their credit and monetary aggregates (M2 up by $14.9 TN)…”

The premise of the report was that, with Fed QE winding down, EM economies were at heightened vulnerability to a tightening of global financial conditions. More specifically, EM asset markets and economies had been inflated by an unprecedented surge in debt, too much of it denominated in foreign currencies and financed through levered “carry trades.”

Was the “Pig in the Python” analysis flawed, or is it more a case of the global Bubble somehow stretching out for another six years? To be sure, massive post-2008 EM “carry trade” leverage did not unwind. And while the Fed put QE on hold for a few years, the FOMC was loath to actually tighten financial conditions. Meanwhile, the Chinese Credit boom went to unimaginable extremes. Since the end of 2014, China’s banking system assets surged $23 TN, or 86%, to an astounding $50 TN. The big “Pig in the Python” has since 2014 been cultivated to carouse and replicate. In rough terms, six years and Double the Trouble.

Overall global debt (from the IIF) ended 2020 at $281 TN, having increased $24 TN, or 9.3% for the year. This was up from about $215 TN to end 2014. As a percentage of GDP, total global debt jumped to a record 355% from 2019’s 320%. And from the IIF, “EM debt/GDP topped 250% in 2020, up from 220% in 2019.” EM ended 2020 with a staggering $8.6 TN of foreign denominated debt. It’s worth noting, as well, that key EM countries ran quite large fiscal deficits in 2020, including South Africa at almost 12% of GDP along with Turkey, Indonesia, Nigeria and Brazil all near 6%.

Brazil’s local currency 10-year yields surged 46 bps this week to 9.19%. Yields are up 234 bps so far in 2021 to the highest level since December 2018. Brazil CDS jumped 30 this week to a five-month high 222 bps. The Brazilian real sank 4.6% this week, increasing 2021 losses to 9.7%. Colombian yields jumped 22 bps to 6.90% (up 151bps y-t-d), with the peso down 3.2% for the week (down 6.5% y-t-d). Chilean yields jumped 23 bps this week to 3.49% - to highs since March 2020, with the Chilean peso down 1.8%. Despite Friday’s 15 bps drop, Mexico’s local bond yields rose another nine bps this week to 6.77% (up 125bps y-t-d), with the peso’s marginal decline pushing y-t-d losses to 3.3%. The Russian ruble declined 2.1% this week, with the South African rand falling 1.8%.

And while EM bonds and currencies have been under significant pressure, there is generally little concern at this point for a systemic emerging market crisis. Indeed, this week’s eruption of instability in Turkey coincided with a rally to record highs for the major U.S. equities indices. There were some incipient indications of fledgling risk aversion early in the week (i.e. higher corporate and bank CDS prices), along with a drop in energy prices. At Thursday's lows, the small cap Russell 2000 Index was down 8.2% for the week (a late rally cut losses to only 2.9%).

Yet, for the most part, heightened instability at the “Periphery” underpinned the “Core.” The dollar index gained 0.9% to a four-month-high. Importantly, after trading as high as 1.75% last Friday, 10-year Treasury yields were down to 1.59% by Wednesday – as safe haven bids developed for Treasuries, bunds and JGBs. Instead of inflation trepidation and nightmares of a “behind the curve” Fed impelled to “slam on the brakes,” holders of Treasuries could again daydream of global EM instability, another round of disinflation and QE forever.

The analysis is exceptionally challenging. Fundamentals are in place for a major EM crisis, and I see reasonable probabilities of an unfolding crisis in Turkey providing the catalyst. We’re seeing significant weakness in key EM bonds and currencies, as I would expect preceding an acceleration of Crisis Dynamics.

Meanwhile, complacency in “developed” markets remains formidable. Is systemic crisis even possible while the major central banks are running full speed ahead with zero rates and QE?

Especially after 2020's mind-blowing crisis response, it’s not irrational for markets to assume “whatever it takes” central banking has everything well under control. I am, however, reminded of the summer of 1998. The IMF, Federal Reserve and global central bank community had pulled the global system back from the 1997 (Asian/EM) crisis precipice. At July 1998 highs, the S&P500 was up 22% y-t-d, with U.S. Bank stocks gaining better than 25%. Indications of fledgling global instability were easily disregarded: “The West will never allow Russia to collapse.” But only weeks following record highs, markets were caught incredibly unprepared for the Russia/Long-Term Capital Management debacle. In less than three months, the S&P500 dropped more than 20%, and the Banks sank (at their lows) 40%.

I’ll briefly outline why I believe markets are much too complacent regarding unfolding EM instability. Despite ongoing QE, global financial conditions have begun to tighten. China has commenced a process of tightening system liquidity and curbing excessive Credit growth. While this has been initiated with understandable cautiousness, I expect the strength of China’s economic recovery to provide Beijing the confidence necessary for a determined effort to impose restraint.

Inflationary pressures are mounting globally. Turkey, Brazil, and Russia have all recently moved to raise rates to counter a significant jump in inflation. Mexico and others will likely follow. I expect central banks in both the developing and developed worlds to be compelled to pull back some excess liquidity while attempting to restrain overheated Credit systems. While the Fed, ECB and BOJ have for now firmly dug in their heels, heightened inflationary pressures have begun to impinge upon central bank flexibility.

After such a historic year of monetary inflation, efforts to pull back will expose myriad fragilities. Unparalleled debt and speculative leverage in a backdrop of rising inflation risk and more cautious central bankers create a high-risk backdrop. Toss in an epic speculative mania in equities, derivatives trading, cryptocurrencies and the like, and it’s difficult to envisage an environment fraught with greater risk. All eyes on the global leveraged speculating community.

I believe a major de-risking/deleveraging cycle has begun. In particular, various hedge fund strategies have suffered losses and been forced to pare some risk and leverage. Long/short strategies have been hurt by out of control speculation, market dislocation, and a resulting phenomenal short squeeze. Various factor “quant” strategies have also suffered at the hand of anomalous market behavior. Surging Treasury yields have hurt "risk parity" and myriad levered strategies. Now popular EM and “carry trade” strategies are taking body blows.

And despite Trillions of QE, there remain deep-seated liquidity issues. The Treasury market, the ETF universe, corporate Credit and derivatives are all liquidity accidents in the making – and all have been providing inklings of serious issues. And that gets to the heart of the problem with contemporary Bubble Finance: it works almost miraculously on the upside, though will quickly succumb to illiquidity, dislocation and crisis on the downside.

Turkey’s crisis has pushed EM Crisis Dynamics forward. De-risking/deleveraging in Turkish instruments will marginally reduce global liquidity while stirring risk aversion. There was notable contagion this week, most visibly with vulnerable Brazil. Vulnerability is systemic – for EM and the entire world.

The week also indicated the worst-case scenario is anything but a long shot. Instability at the “Periphery” feeds “Terminal Phase Excess” at the “Core.” A faltering EM stokes speculative flows to booming U.S. and “developed” currencies, equities market manias, and corporate Credit. The Manic “Core” douses fuel on the burning “Periphery” – Double Trouble. Things turn really crazy at the end of cycles. Monetary Disorder, Manias and Market Dysfunction. The parallels to 1929 turn only more compelling and ominous.

For the Week:

The S&P500 gained 1.6% (up 5.8% y-t-d), and the Dow rose 1.4% (up 8.1%). The Utilities jumped 3.0% (up 0.8%). The Banks added 0.3% (up 24.3%), while the Broker/Dealers fell 1.7% (up 17.6%). The Transports surged 3.0% (up 16.8%). The S&P 400 Midcaps added 0.5% (up 13.9%), while the small cap Russell 2000 fell 2.9% (up 12.5%). The Nasdaq100 advanced 0.9% (up 0.7%). The Semiconductors jumped 3.2% (up 11.1%). The Biotechs dropped 1.9% (down 4.7%). With bullion down $13, the HUI gold index sank 4.0% (down 10.5%).

Three-month Treasury bill rates ended the week at 0.015%. Two-year government yields slipped a basis point to 0.14% (up 2bps y-t-d). Five-year T-note yields declined two bps to 0.87% (up 50bps). Ten-year Treasury yields fell five bps to 1.68% (up 76bps). Long bond yields dropped six bps to 2.38% (up 74bps). Benchmark Fannie Mae MBS yields sank nine bps to 2.01% (up 67bps).

Greek 10-year yields fell six bps to 0.86% (up 24bps y-t-d). Ten-year Portuguese yields dropped six bps to 0.17% (up 14bps). Italian 10-year yields declined five bps to 0.62% (up 8bps). Spain's 10-year yields fell six bps to 0.29% (up 24bps). German bund yields declined five bps to negative 0.35% (up 22bps). French yields dropped six bps to negative 0.10% (up 24bps). The French to German 10-year bond spread narrowed one to 25 bps. U.K. 10-year gilt yields dropped eight bps to 0.76% (up 56bps). U.K.'s FTSE equities index increased 0.5% (up 4.3% y-t-d).

Japan's Nikkei Equities Index fell 2.1% (up 6.3% y-t-d). Japanese 10-year "JGB" yields declined three bps to 0.08% (up 6bps y-t-d). France's CAC40 slipped 0.2% (up 7.9%). The German DAX equities index gained 0.9% (up 7.5%). Spain's IBEX 35 equities index was little changed (up 5.3%). Italy's FTSE MIB index rose 0.8% (up 9.7%). EM equities were mixed. Brazil's Bovespa index fell 1.2% (down 3.6%), while Mexico's Bolsa gained 0.7% (up 7.5%). South Korea's Kospi index was unchanged (up 5.8%). India's Sensex equities index dropped 1.7% (up 2.6%). China's Shanghai Exchange rallied 0.4% (down 1.6%). Turkey's Borsa Istanbul National 100 index sank 9.6% (down 6.4%). Russia's MICEX equities index increased 0.4% (up 6.1%).

Investment-grade bond funds saw inflows of $3.262 billion, while junk bond funds posted outflows of $1.378 billion (from Lipper).

Federal Reserve Credit last week surged $48.9bn to a record $7.685 TN. Over the past 80 weeks, Fed Credit expanded $3.959 TN, or 106%. Fed Credit inflated $4.874 Trillion, or 173%, over the past 437 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $9.5bn to $3.567 TN. "Custody holdings" were up $211bn, or 6.3%, y-o-y.

Total money market fund assets jumped $62.1bn to $4.448 TN. Total money funds surged $226bn y-o-y, or 5.4%.

Total Commercial Paper jumped $17.5bn to $1.134 TN. CP was down $21.9bn, or 2.0%, year-over-year.

Freddie Mac 30-year fixed mortgage rates jumped nine bps to a nine-month high 3.17% (down 33bps y-o-y). Fifteen-year rates gained five bps to 2.45% (down 45bps). Five-year hybrid ARM rates rose five bps to 2.84% (down 50bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.25% (down 59bps).

Currency Watch:

For the week, the U.S. dollar index gained 0.9% to 92.766 (up 3.2% y-t-d). For the week on the upside, the South Korean won increased 0.2%. For the week on the downside, the Brazilian real declined 4.6%, the New Zealand dollar 2.3%, the South African rand 1.8%, the Australian dollar 1.4%, the Swedish krona 1.1%, the Swiss franc 1.1%, the euro 0.9%, the Japanese yen 0.7%, the Canadian dollar 0.6%, the British pound 0.6%, the Norwegian krone 0.4%, the Mexican peso 0.4%, and the Singapore dollar 0.3%. The Chinese renminbi declined 0.49% versus the dollar this week (down 0.21% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 0.5% (up 7.8% y-t-d). Spot Gold slipped 0.7% to $1,733 (down 8.8%). Silver sank 4.5% to $25.0605 (down 5.1%). WTI crude slipped 45 cents to $60.97 (up 26%). Gasoline gained 1.2% (up 40%), and Natural Gas rose 0.9% (up 1%). Copper fell 1.1% (up 16%). Wheat dropped 2.2% (down 4%). Corn declined 0.9% (up 14%). Bitcoin sank $4,408, or 7.5%, this week to $54,002 (up 86%).

Coronavirus Watch:

March 25 – Bloomberg (Nic Querolo and Emma Court): “Covid cases in the U.S. are rising again, reversing course after months of decline and threatening another setback in the return to normality. The seven-day average of new cases jumped to 57,695 Wednesday, 9.5% above the prior week, marking the biggest increase since Jan. 12, according to Johns Hopkins University… While that’s a fraction of the mid-January peak, the change in direction is worrisome as states fling open their economies, variant cases multiply and the country races to vaccinate as many people as possible to stave off another wave.”

March 24 – Financial Times (Clive Cookson): “Most patients treated in hospital for Covid-19 are still suffering a wide range of symptoms five months after discharge — and middle-aged women are even more likely to have long Covid than other groups — according to two UK studies… The larger study, led by the University of Leicester and called Phosp-Covid, analysed 1,077 people discharged from hospitals across the UK and found that only 29% were fully recovered. The remainder had an average of nine persistent symptoms each.”

March 23 – Reuters (Anthony Boadle): “The coronavirus is surging ‘dangerously’ across Brazil, the World Health Organization’s (WHO) regional director for the Americas, Carissa Etienne, warned… ‘Unfortunately, the dire situation in Brazil is also affecting neighboring countries,’ Etienne, director of the Pan American Health Organization (PAHO), said…”

March 24 – Reuters (Sachin Ravikumar and Neha Arora): “India has detected a ‘double mutant variant’ of the novel coronavirus in 206 samples in the worst-hit western state of Maharashtra, a senior government official said… The new variant was also detected in nine samples in the capital New Delhi…”

Market Mania Watch:

March 22 – Associated Press (Stan Choe): “It was one year ago that the terrifying free fall for the stock market suddenly ended, ushering in one of its greatest runs… In all, the index dropped nearly 34% in about a month, wiping out three years’ worth of gains for the market… Massive amounts of support for the economy from the Federal Reserve and Congress limited how far stocks would fall. The market recovered all its losses by August… It all led to a 76.1% surge for the S&P 500 and a shocking return to record heights. This run looks to be one of the, if not the, best 365-day stretches for the S&P 500 since before World War II. Based on month-end figures, the last time the S&P 500 rose this much in a 12-month stretch was in 1936…”

March 22 – Financial Times (Naomi Rovnick and Adam Samson): “Investors have poured almost $170bn into equity funds over the past month… Funds that buy shares recorded $68.3bn in net inflows in the week to last Wednesday, the largest amount on record, according to… EPFR. This brought the total over the past four weeks to $168bn… The surge last week, which was the most pronounced in US stocks, came as the US government began distributing the stimulus payments that were part of Joe Biden’s $1.9tn relief package.”

March 23 – Bloomberg (Claire Ballentine and Katie Greifeld): “A surge in options trading fueled the biggest inflow in two decades for one of the world’s largest exchange-traded funds. The $155 billion Invesco QQQ Trust Series 1 (QQQ), which tracks the Nasdaq 100, had a $4.9 billion infusion on Monday… That’s the largest one-day intake for the ETF since 2000. The inflow was related to quadruple witching on Friday, a person familiar with the matter said… More than 17 billion shares changed hands on U.S. exchanges that day -- roughly 20% above the three-month average. Many expired options are then replaced, forcing dealers to hedge anew by buying the underlying shares. This quarter was particularly dramatic for QQQ: the ETF’s combined call and put open interest clocked in at nearly 11 million contracts at the end of last week, the highest since 2007.”

March 26 – Bloomberg (Elena Popina): “To see just how wild animal spirits are running across Wall Street, look no further than the IPO market. Seldom in history have market conditions been more welcoming for companies willing to go public. And rarely were firms in this much hurry to take advantage of those conditions. Some 102 companies have priced their IPOs in the U.S. so far this year in the busiest quarter since 2000, data compiled by Renaissance Capital LLC show -- and that’s excluding direct listings and red-hot SPACs. The newly public companies have raised $40.3 billion between them…, the most proceeds ever in a first quarter.”

March 25 – Bloomberg (Paula Seligson and Caleb Mutua): “U.S. high-yield debt sales set a new quarterly record as companies take advantage of low funding costs before potential inflation causes rates to rise further. Carvana Co. launched $600 million of notes…, which pushed issuance over the mark to $139.6 billion for the first quarter. That surpasses the previous high of about $139 billion set in the second quarter of 2020, when businesses rushed to raise liquidity at the start of the Covid-19 pandemic… In 2020, annual sales zoomed past the previous record by over $100 billion, ending at nearly $432 billion.”

March 24 – Wall Street Journal (Julia Carpenter): “Everything old is new again in the markets, even popular exchange-traded funds. Take QQQ, the giant tech-focused ETF run by investment manager Invesco Ltd. Launched 22 years ago at the height of the dot-com boom, the fund has in recent months grabbed the attention of a new generation of investors via Reddit’s Wall Street Bets and other online investing communities. The fund’s concentration in the high-growth stocks billed as ‘innovative’ and ‘disruptive’ in the lingo of the day—it tracks the Nasdaq-100—has made it a favorite of those looking to capitalize on the accelerated shift to working from home. The shares have surged 90% over the past year, and assets in the fund have soared to a recent $150 billion, making it one of the largest ETFs anywhere.”

March 22 – New York Times (Matt Phillips): “Abraham Sanchez knew exactly how he wanted to spend his stimulus check. Like millions of Americans, he had begun dabbling in the stock market during the pandemic. So, soon after $1,400 from the federal government landed in his bank account last week, Mr. Sanchez, a 28-year-old trumpet player in Sacramento, moved all but $200 of it into his Robinhood online trading account. He then used most of it to buy 80 shares of AMC Entertainment, the struggling movie theater chain. ‘I was like: ‘You know what? Whatever. I’ll give it a shot,’ he said.”

March 21 – Wall Street Journal (Nicole Friedman): “The red-hot housing market has achieved a number of milestones this past year. Perhaps the most telling is this: There are more real-estate agents than homes for sale in the U.S. This phenomenon reflects both the extremely tight supply of homes on the market and how surging prices are persuading tens of thousands more Americans to try their hands at selling real estate.”

March 24 – Bloomberg (Justina Lee): “From bullish options to basketball trading cards, the multibillion-dollar retail frenzy is showing signs of fading. Just as $1,400 stimulus checks arrive all across the U.S., day-trader favorites are losing steam, stirring speculation that the army of individual investors who disrupted markets over the past year have opted to spend the cash on plane tickets and restaurants rather than their trading apps. Volumes in bullish options favored by members of Reddit’s WallStreetBets forum are down. Blank-check stocks are falling. Even Robinhood Markets Inc.’s ranking in Apple’s App Store has slipped below the top 100. For now, these are just dents in millennial traders’ yearlong remaking of financial markets…”

Market Instability Watch:

March 24 – Financial Times (David Gardner): “Early last Saturday morning, Recep Tayyip Erdogan, Turkey’s imperious president, had a Donald Trump moment. Instead of one of the former US president’s Twitter tantrums, Erdogan issued decrees. The first, firing the central bank governor, could amount to economic suicide. The second, withdrawing from a treaty to prevent violence against women that Turkey was the first to sign a decade ago, threatens to bury the remnants of the country’s reputation as a democracy that protects all its citizens… Reverting to eccentric monetary policies carries huge risks. Turkey is low on foreign exchange reserves, relying on complicated swap deals with local banks where half of deposits are in dollars. It needs to refinance roughly $180bn in foreign borrowings this year. Rows with its European and US allies over maritime borders in the Mediterranean and, as a Nato member, buying Russian missiles and busting sanctions on Iran, leave it vulnerable to punitive measures.”

March 23 – Bloomberg (Alex Nicholson): “International investors fleeing Turkish assets have created a massive bottleneck in the market for liras. As funds scramble to unwind their positions, they’re driving the cost of borrowing the local currency to extreme levels. At one point on Tuesday, the overnight rate reached as high as 1,400%... Foreign investors poured around $19 billion into Turkish assets since November, with the vast majority of these inflows going into lira swaps, securities that pay a juicy yield but lock traders into a risky currency position for a fixed term.”

March 25 – Reuters (Karin Strohecker): “A sharp spike in borrowing costs following the sacking of Turkey’s central bank chief has raised risks for local banks which face a wall of maturing foreign currency debt in the coming months… Foreign currency bonds of Turkish banks have fallen in price, pushing up yields… Dollar bonds maturing in 2026 issued by state-run VakifBank and Ziraat Bank now yield nearly 8%, up from about 5% in February, while commercial lender Isbank’s 2028 bond yield has soared to over 11% from 6%. Capital Economics estimates Turkish banks must repay $89 billion of external debt in the next 12 months -- equivalent to 12.5% of Turkey’s GDP -- including more than $7 billion in April and May.”

March 23 – Financial Times (Jonathan Wheatley): “Recep Tayyip Erdogan’s shock dismissal of Turkey’s central bank chief has eroded investor confidence in the country’s economic leadership that had just begun to rebound after successive waves of financial market tumult. The decision by President Erdogan at the weekend to dismiss Naci Agbal after just four months in the job during which he engineered a strong rebound in the lira is the latest in a long series of decisions that have worried investors in one of the world’s biggest emerging markets.”

March 24 – Bloomberg (Áine Quinn and Colleen Goko): “A canceled bond sale in Russia and the worst demand at a South African debt auction this year are some of the early signs emerging markets are getting sideswiped by turmoil in Turkey. President Recep Tayyip Erdogan punctured risk sentiment by firing his central bank governor over the weekend… Turkey’s market ructions are by no means the sole driver of volatility in the biggest developing nations, whose other challenges include a fresh wave of concern over the pandemic and the recent spike in U.S. yields, as well as the threat of tougher sanctions for Russia.”

March 22 – Bloomberg (Mohamed A. El-Erian): “Last week’s movement in U.S. financial markets confronts investors with three tricky questions. The answers are far from certain; the implications for positioning investment portfolios, on the other hand, are consequential. Question 1: Is the Federal Reserve losing control of the bond market?... Question 2: How vulnerable is the liquidity paradigm to bond market volatility?... Question 3: How vulnerable is the economy to potential adverse spillovers from volatile markets?”

Inflation Watch:

March 24 – Reuters (Lucia Mutikani): “U.S. factory activity picked up in early March amid strong growth in new orders, but supply chain disruptions because of the COVID-19 pandemic continued to exert cost pressures for manufacturers, which could keep inflation fears in focus… The IHS Markit survey’s measure of prices paid by manufacturers raced to a 10-year high early this month, amid what the data firm said was the ‘most severe supply chain disruption on record.’ It said firms ‘commonly reported slower output growth’ due to raw materials shortages.”

March 21 – Associated Press (Joyce M. Rosenberg): “A trade bottleneck born of the COVID-19 outbreak has U.S. businesses anxiously awaiting goods from Asia — while off the coast of California, dozens of container ships sit anchored, unable to unload their cargo. The pandemic has wreaked havoc with the supply chain since early 2020, when it forced the closure of factories throughout China. The seeds of the current problems were sown last March, when Americans stayed home and dramatically changed their buying habits — instead of clothes, they bought electronics, fitness equipment and home improvement products. U.S. companies responded by flooding reopened Asian factories with orders, leading to a chain reaction of congestion and snags at ports and freight hubs across the country as the goods began arriving.”

March 24 – Wall Street Journal (Paul Hannon and Gwynn Guilford): “Resurgent economies, led by the U.S., and a burst of demand for consumer goods are heaping pressure on already strained supply chains, with a series of acute disruptions—including this week’s blockage of the Suez Canal—set to worsen shortages and further push up prices. The shortages have been most pressing in the automobile industry, where manufacturers have been forced to cut back production in response to limited supplies of semiconductors. But difficulties in securing raw materials and other inputs have recently been worsened by a series of significant disruptions.”

March 24 – Financial Times (Justin Jacobs and Harry Dempsey): “Texas petrochemical plants hit by last month’s Arctic blast have still not returned to full capacity, threatening months of disruptions to the global supply chain for chemical raw materials critical to everything from cars to medical equipment to nappies. The outages… are disrupting manufacturing operations from the American south to the UK and raising prices for vital plastic inputs around the world, fuelling worries about inflation. Last month’s winter storm in Texas knocked as much as 80% of the state’s chemicals output offline, disrupting the vast majority of US production of the world’s three most widely used plastic polymers — polyethylene, polypropylene, and polyvinyl chloride (PVC).”

March 24 – Financial Times (Claire Jones): “From chip shortages shuttering car plants for weeks to shipping delays and soaring costs, the pandemic has shone a spotlight on global supply chain deficiencies… While container shipping prices are expected to remain higher than before the crisis, they are unlikely to stay at their current levels. It now costs about $4,000 for a container between East Asia and the US west coast, up from $1,500 at the start of 2020.”

March 24 – Wall Street Journal (Joe Wallace): “The prospect of summer drivers crowding U.S. highways is powering steep gains in the price of gasoline… Lifted by oil’s recovery and growing consumer demand, gasoline prices at pumps in the U.S. hit an average of $2.88 a gallon over the past week… That is up about one-third over this time last year…”

March 23 – CNBC (Evelyn Cheng): “Growing demand for electric car batteries will cause prices of the main materials to surge, Goldman Sachs analysts said… That in turn will drive prices of batteries higher by about 18%, affecting the total profit of electric car makers since the battery accounts for about 20% to 40% of the vehicle cost, the Goldman analysts said.”

March 24 – CNBC (Michael Wayland): “General Motors will suspend production of its midsize pickup trucks due to a global semiconductor chip shortage. It’s the latest shutdown as the automaker prioritizes production of its larger, more profitable full-size pickups and SUVs.”

March 23 – Bloomberg (Marvin G. Perez, Fabiana Batista and Manisha Jha): “Coffee supplies in the U.S. are shrinking and wholesale prices are surging… Coffee stockpiles have sunk to a six-year low in the U.S. even with Brazil’s record crop, and a large drop in output after a drought in the South American country is expected to shift the world balance to a deficit in coming months just as demand rebounds. ‘Everybody is feeling the pinch,’ said Christian Wolthers, the president of Wolthers Douque, an importer… who estimates that shipping costs have more than doubled from Latin America. ‘These bottlenecks are turning into a container nightmare.’”

Biden Administration Watch:

March 24 – Reuters (Jarrett Renshaw): “U.S. President Joe Biden next week will travel to Pittsburgh, where he kicked off his presidential campaign in 2019, to unveil a multitrillion-dollar plan to rebuild America’s infrastructure, choosing a backdrop of an American city with a long union history. Biden is expected to push for a ‘Build Back Better’ plan that could have a price tag as high as $4 trillion to pay for traditional roads and bridges while also tackling climate change and domestic policy issues like income equality.”

March 22 – Reuters (Steve Holland and Jarrett Renshaw): “President Joe Biden will be briefed by advisers this week on infrastructure, climate and jobs proposals being considered by the White House that could collectively cost as much as $4 trillion, according to people familiar… Biden advisers are weighing a price tag of between $3 trillion and $4 trillion for new legislative action, including repairing the country’s crumbling infrastructure and tackling climate change, one source said.”

March 22 – Wall Street Journal (Ken Thomas and Andrew Duehren): “Administration officials are crafting a plan for a multipart infrastructure and economic package that could cost as much as $3 trillion and fulfill key elements of President Biden’s campaign agenda... The first proposal would center on roads, bridges and other infrastructure projects and include many of the climate-change initiatives Mr. Biden outlined in the ‘Build Back Better’ plan he released during the 2020 campaign. That package would be followed by measures focusing on education and other priorities, including extending the newly expanded child tax credit scheduled to expire at the end of the year and providing for universal prekindergarten and tuition-free community college…”

March 23 – Financial Times (James Politi): “Janet Yellen, the US Treasury secretary, said tax increases would be required to fund the next stages of the Biden administration’s economic agenda involving roughly $3tn in new spending on infrastructure, clean energy and education. In testimony before the House financial services committee on Tuesday, Yellen faced criticism from Republican lawmakers who objected to raising taxes on corporations and wealthy households to pay for the large-scale spending. The Treasury secretary defended the need for tax increases, but pledged that the Biden administration would not do anything to ‘hurt’ small businesses or lower- and middle-income Americans.”

March 23 – Financial Times (Howard Schneider): “Treasury Secretary Janet Yellen said… the U.S. economy remains in crisis from the pandemic even as she defended developing plans for future tax increases to pay for new public investments… The immediate hole remains deep, Yellen said, with ‘a huge problem of joblessness’ following the loss of employment due to the pandemic. ‘But once the economy is strong again President Biden is likely to propose that we engage in long-term plans to address longstanding investment infrastructure, investment to address climate risk, investments in people, R&D, manufacturing,’ she said. ‘It is necessary to pay for them.’”

March 24 – Yahoo Finance (Brian Cheung): “Treasury Secretary Janet Yellen pushed back against concerns over possible U.S. contributions to an International Monetary Fund (IMF) pool of reserves, aimed in part at helping developing countries struggling with the pandemic. ‘It is especially important to channel resources to the world’s poorest countries,’ Yellen told the House Financial Services Committee… The IMF hopes to allocate $650 billion in new Special Drawing Rights, which are international reserve assets that derive their value based on a basket of five currencies (U.S. dollar, Euro, Chinese yuan, Japanese yen, and British pound sterling).”

Federal Reserve Watch:

March 21 – Wall Street Journal (James Mackintosh): “It has taken four decades, but the Federal Reserve has finally shaken off its fear of inflation. The markets are only just waking up to the implications of the shift. The outlines of the turnaround have been developing for a while as the Fed’s focus has moved from its inflation mandate to a constant emphasis on its goal of full employment. Meanwhile, its measure of rising prices has moved to an average target, allowing inflation to overshoot a 2% goal to make up for past misses… The shift should prompt a re-evaluation of the dominant market narrative.”

March 25 – Reuters (Howard Schneider): “The Federal Reserve will not raise interest rates until a nearly complete recovery from the pandemic’s economic damage, Fed chair Jerome Powell said…, a process likely only relevant ‘in the longer run.’ Powell reiterated the Fed’s plan to reduce its $120 billion in monthly bond purchases after the U.S. makes ‘substantial further progress toward our goals’ of maximum employment and inflation anchored securely at the Fed’s 2% target.”

March 22 – Bloomberg (Rich Miller): “The economy seems to be gathering steam, though it is still far from fully recovering from the damage wrought by the pandemic, Federal Reserve Chairman Jerome Powell said. ‘The recovery has progressed more quickly than generally expected and looks to be strengthening,’ Powell said… ‘But the recovery is far from complete, so, at the Fed, we will continue to provide the economy the support that it needs for as long as it takes.’”

March 23 – Bloomberg (Rich Miller): “Federal Reserve Chairman Jerome Powell said prices would rise this year as the pandemic recedes and Americans are able to go out and spend, but he played down the risk that this would spur unwanted inflation. ‘We do expect that inflation will move up over the course of this year,’ Powell told the House Financial Services Committee…, citing pent-up demand, supply-chain bottlenecks and the comparison with very weak price pressures last year. ‘Our best view is that the effect on inflation will be neither particularly large nor persistent.’”

March 25 – Yahoo Finance (Brian Cheung): “Federal Reserve Chairman Jerome Powell said that he hopes history will be kind to the central bank for the actions it took in the midst of the COVID-19 pandemic last year. ‘I liken it to Dunkirk, when it was time to get in the boats and get the people — not to check the inspection records and things like that. Just get in the boats and go, and that’s what we did. I think overall it was a very successful program,’ Powell told NPR’s Morning Edition…”

March 23 – Reuters (Howard Schneider): “The U.S. Federal Reserve will show ‘resolute patience’ in waiting to meet its employment and inflation goals before pulling back on support for an economy still healing from the pandemic, Fed Governor Lael Brainard said… Rather than using ‘preemptive’ moves when unemployment falls and inflation show signs of rekindling, Brainard said any Fed action to tighten monetary policy is now ‘conditioned on employment and inflation outcomes.’ ‘This approach implies resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes,’ the Fed has set for itself, Brainard said.”

March 25 – Reuters (Ann Saphir): “Chicago Federal Reserve President Charles Evans on Thursday said he is nervous about too-low inflation. A burst of inflation for six months ‘is not nearly enough... patience is something we are going to have to grapple with, probably,’ Evans told reporters… ‘We should be comfortable with a sustainable 2.5% inflation rate for a year; I don’t really get nervous until it starts creeping up to 3%, and even then, I’d like to know how that’s being achieved.’”

March 23 – Reuters (Howard Schneider): “Inflation will hit 2.5% this year and not fall much in 2022, which the Federal Reserve should welcome as a way to reaffirm the central bank’s inflation target, St. Louis Federal Reserve Bank President James Bullard said… ‘I am not seeing the inflation rate come down very much in 2022 ... maybe just slightly,’ Bullard said… ‘Part of the goal is to take the increase in inflation that we have this year penciled in and allow some of that to move through to inflation expectations,’ and keep them cemented at the Fed’s 2% inflation target.”

March 24 – Reuters (Sarah Morland): “Atlanta Federal Reserve president Raphael Bostic expects the U.S. central bank will be able to start lifting its interest rates in 2023, the Wall Street Journal reported… Bostic said the Fed would need to see a sustained period of ‘strong and robust’ inflation for it to lift its rates. ‘I just don’t have a lot of certainty that we’re going to see that very quickly,’ he was quoted as saying.”

U.S. Bubble Watch:

March 23 – Reuters: “The U.S. current account deficit raced to a 12-year high in 2020 as the COVID-19 pandemic severely disrupted the flow of goods and services. The… current account deficit, which measures the flow of goods, services and investments into and out of the country, surged 34.8% to $647.2 billion last year. That was the largest shortfall since 2008. The current account gap represented 3.1% of gross domestic product last year, also the largest share since 2008 and up from 2.2% in 2019.”

March 22 – Bloomberg (Andrew Davis): “Former Treasury Secretary Lawrence Summers warned that the U.S. is suffering from the ‘least responsible’ macroeconomic policy in four decades, pointing the finger at both Democrats and Republicans for creating ‘enormous’ risks. In his latest attack on the recent rush of stimulus, Summers told… ‘Wall Street Week’ that ‘what was kindling, is now igniting’ given the recovery from Covid will stoke demand pressure at the same time as fiscal policy has been aggressively eased and the Federal Reserve has ‘stuck to its guns’ in committing to loose monetary policy. ‘These are the least responsible fiscal macroeconomic policy we’ve have had for the last 40 years,’ Summers said. ‘It’s fundamentally driven by intransigence on the Democratic left and intransigence and the completely irresponsible behavior in the whole of the Republican Party.’”

March 25 – Associated Press (Christopher Rugaber): “The number of people seeking unemployment benefits fell sharply last week to 684,000, the fewest since the pandemic erupted a year ago and a sign that the economy is improving. Thursday’s report… showed that jobless claims fell from 781,000 the week before. It is the first time that weekly applications for jobless aid have fallen below 700,000 since mid-March of last year.”

March 24 – CNBC (Diana Olick): “Higher mortgage rates do not appear to be dampening demand for home purchases but are crimping refinance volume. Mortgage applications to purchase a home rose 3% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. That is the fourth straight week of gains.”

March 23 – CNBC (Diana Olick): “Sales of newly built homes fell more than expected in February, as builders faced higher costs and persistent delays, and, consequently, raised their prices… ‘Though buyer traffic remains strong, some home building activity is being delayed due to material shortages,’ said Chuck Fowke, chairman of the National Association of Home Builders and a builder from Tampa… ‘This is forcing builders and buyers to grapple with rising affordability issues, as soaring lumber prices have added more than $24,000 to the price of a new home.’”

March 24 – Bloomberg (Reade Pickert): “Orders for U.S. durable goods unexpectedly declined in February for the first time in nearly a year, indicating a pause in the months-long manufacturing rebound. Bookings for durable goods -- or items meant to last at least three years -- decreased 1.1% from the prior month, the first drop since April, after an upwardly revised 3.5% gain in January…”

March 21 – Bloomberg (Shahien Nasiripour): “U.S. bank lending fell to a new low this month, Federal Reserve data show, as a cash-rich banking system continues its cautious approach to making new loans… Total loans and leases dropped to 62.8% of bank deposits in the week ended March 10... Total assets at U.S. banks climbed 0.7% to $21 trillion… Loans and leases slipped to 49.7% of total assets, the lowest reading in data going back to 1973.”

March 22 – Wall Street Journal (Nicole Friedman): “The record-low number of homes on the market is limiting purchases heading into the spring selling season… There were 1.03 million homes for sale in the U.S. at the end of February, unchanged from the revised January level, which was the lowest in data going back to 1982, the National Association of Realtors said... The level was down 29.5% from February 2020, a record annual decline…”

March 23 – Bloomberg (Jeremy Hill): “U.S. bankruptcy courts welcomed a familiar cast of characters last week as two oil drillers, a Texas electricity provider and a real estate developer sought protection from creditors. Already this month 15 firms with at least $50 million of liabilities have filed for bankruptcy, compared with 16 in all of March 2020… That’s more than the average of 12 for the third month of the year over the last decade and on pace to exceed the 21 filings of March 2018, which was the most since 2009. Last week’s five large filings pushed the year’s haul to 41 through March 21, neck-and-neck with the 2020 pace…”

March 24 – Bloomberg (Sabrina Willmer): “Health-care companies are taking on more debt to pay dividends to their private equity owners… At least five U.S. health-care firms have borrowed heavily in part to fund hundreds of millions of dollars of such payouts in the first quarter, according to… the nonprofit Private Equity Stakeholder Project. The practice, known as dividend recapitalization, is gaining steam as investors hunt for yield with interest rates near historic lows… Health-care firms have already borrowed about $3.7 billion in 2021… ‘Investor demand for leveraged loans is outpacing supply so far this year, sending prices in the secondary market soaring,’ said Marina Lukatsky, a senior director at S&P.”

Fixed Income Watch:

March 23 – Bloomberg (Finbarr Flynn and Stephen Spratt): “Government and corporate bonds around the world have tumbled in their worst start to a year this century, as markets spooked by the prospect of resurgent inflation turn increasingly volatile. The notes have lost about 3.7% so far in 2021…, according a Bloomberg Barclays index of investment-grade securities across currencies going back to 1999. That’s worse than for similar periods in previous years. An unprecedented confluence of events has triggered concerns that faster inflation will increasingly eat into fixed-income returns.”

March 22 – Wall Street Journal (Sebastian Pellejero): “The bond-market rout is dealing a particular blow to investors’ bets on the safest U.S. companies, dragging returns on investment-grade corporate debt to their second-worst start on record. Bonds from highly rated companies have lost 5.3% this year… through March 19. That is their second-worst start in data going back to 1996, the worst being last year’s pandemic-fueled selling… That compares with a minus 0.05% return for high-yield bonds and a 1.7% gain in corporate loans to highly indebted borrowers.”

March 25 – Bloomberg (Fola Akinnibi and Anastasia Bergeron): “As far as Wall Street bond traders are concerned, President Joe Biden’s rescue has effectively erased the fiscal problems of America’s states. The nearly $200 billion of direct aid coming to states from Washington is promising to make up for the fiscal hit of the pandemic, with the amount for some poised to be more than enough to close their budget shortfalls. The coming influx of cash has eased some of the credit concerns for states that were looking for ways to cover revenue losses and right their finances at the height of the pandemic. That means investors aren’t pricing in a lot of risk when it comes to states, leaving the yields on most of the state bonds tracked by Bloomberg hovering within basis points of each other.”

March 22 – Financial Times (Joe Rennison and Derek Brower): “Lowly rated US energy companies that struggled for survival last year are finding renewed optimism among investors after a surge in oil prices, helping them raise a record amount of debt to fend off bankruptcy. Energy and power companies tracked by Refinitiv have raised more than $20bn in the high-yield bond market so far this year, an all-time record for data going back to 1996.”

China Watch:

March 23 – Bloomberg: “China hasn’t been this meager in its cash offerings to banks in nearly a year. The People’s Bank of China has avoided net injections of short-term liquidity into the financial system since late last month, increasing worry among traders that near-term conditions will stay tight to curb the buildup in leverage since last year. Gauges of interbank borrowing costs remain elevated as a result, with both the benchmark seven-day and overnight repurchase rates above their one-year averages. While China’s sovereign bonds have been resilient as foreign investors boost their holdings to benefit from the nation’s high yield, the real test for the debt market may come next month.”

March 25 – CNBC (Evelyn Cheng): “Data for the year so far show signs that China is starting to crack down on debt. A first-quarter survey by the China Beige Book… found that borrowing by state-owned enterprises dropped to the lowest in the study’s roughly 10-year history. Overall borrowing fell to its lowest in three years, while that of large firms hit a five-year low, the report said. Given ties to the state, the government-linked companies are the ‘best signal’ on authorities’ policy intent, China Beige Book Managing Director Shehzad Qazi said…”

March 21 – Bloomberg (Sofia Horta e Costa): “Divining the targets of Beijing’s latest de-risking campaign is becoming an essential trading strategy. Those who failed to take heed of warnings about asset bubbles by officials were steamrolled by a $1.3 trillion rout in Chinese equities, with the most popular stocks bearing the brunt of the selloff. That came shortly after Beijing stunned millions of would-be investors by canning Ant Group Co.’s $35 billion listing at the 11th hour... In another sign of complacency, Tencent Holdings Ltd. neared $1 trillion in value even as the fintech industry came under attack, only for the stock to then suffer its worst week since 2011. Quick reversals in asset prices show how the Communist Party remains an outsized influence on China’s financial markets…”

March 24 – Bloomberg: “China’s local governments had 14.8 trillion yuan ($2.3 trillion) of hidden debt last year, and the figure could climb even further this year, according to a government-linked think tank. Local governments were under pressure to increase infrastructure investment and shore up growth through the pandemic, leading to a 6% rise in off-budget borrowing from a recent low of 13.9 billion yuan in the third quarter of 2019… The hidden debt is comprised of funds raised by government-related entities for infrastructure and other public projects that carry an implicit official guarantee of repayment. Bonds sold by local government financing vehicles, or LGFVs, are one way provincial authorities raise money to increase spending without including it on their official balance sheets.”

March 22 – Bloomberg: “China’s $18 trillion bond market has proved remarkably stable in the face of rising yields around the world. A flood of issuance from the country’s local governments from April is about to put that resilience to the test. Regional authorities are expected to expedite sales of new special local debt, just as short-term loans and corporate tax submissions are due. The brunt of the pressure -- with a record 7.1 trillion yuan ($1.1 trillion) of such debt expected this year according to official figures and data compiled by Bloomberg -- will fall on Chinese banks, asked to ensure growth while facing calls to cut leverage.”

March 23 – Wall Street Journal (Xie Yu): “China’s internet lenders are facing another setback, with potential curbs on fee-based business that could push them to take more risk with their own balance sheets. Regulators are considering stricter rules on what is known as loan facilitation… In this system, internet-lending platforms assess borrowers, connect them with lenders and sometimes help with risk management for outstanding loans but don’t put any capital at risk. The potential changes would be on top of restrictions on the industry’s other main model, co-lending in partnership with banks.”

March 24 – Reuters (Katanga Johnson and Scott Murdoch): “Shares in dual-listed Chinese companies fell sharply… after the U.S. securities regulator adopted measures that would kick foreign companies off American stock exchanges if they do not comply with U.S. auditing standards. The move by the Securities and Exchange Commission (SEC) adds to the unprecedented regulatory crackdown in China on domestic technology companies… The Holding Foreign Companies Accountable Act, signed into law by then-President Donald Trump in December, is aimed at removing Chinese companies from U.S. exchanges if they fail to comply with American auditing standards for three years in a row.”

March 24 – Bloomberg (Lulu Yilun Chen): “China’s government has proposed establishing a joint venture with local technology giants that would oversee the lucrative data they collect from hundreds of millions of consumers, according to people familiar with the matter. The preliminary plan…, would mark a significant escalation in regulators’ attempts to tighten their grip over the country’s internet sector. It envisions the creation of a government-backed entity along with some of China’s biggest e-commerce and payments platforms…”

Global Bubble Watch:

March 24 – Reuters (Brenna Hughes Neghaiwi and Simon Jessop): “In 2020, as the world convulsed under COVID-19 and the global economy faced its worst recession since World War II, billionaires saw their riches reach new heights. Now some are talking to their wealth managers about how to keep a hold of and consolidate their fortunes amid the global debris of the pandemic. Others are discussing how to preempt and navigate demands from governments, and the wider public, to pick up their share of the recovery costs.”

March 24 – Wall Street Journal (Paul Vieira): “The U.S. may be experiencing its biggest housing boom in decades, but one country has been outpacing its peers in home-price growth: Canada. Just like in the U.S., the U.K., Australia and elsewhere, Canada is experiencing a housing craze… Yet Canada has seen a more dramatic price run-up than all Group of Seven countries. …Nominal house prices in Canada rose at an annual rate of about 16% in the fourth quarter from the previous three-month period, outpacing the U.S., the U.K. and elsewhere.”

March 22 – Bloomberg (Matthew Brockett): “New Zealand’s government took aim at property speculators with a suite of new measures to tackle runaway house prices and prevent the formation of a ‘dangerous’ bubble. The government will remove tax incentives for investors to make speculation less lucrative and unlock more land to increase housing supply… The moves come as surging house prices keep first-time buyers and people on lower incomes out of the market, raising concerns about growing societal inequality.”

March 24 – Wall Street Journal (Duncan Mavin and Julie Steinberg): “The founder of Greensill Capital spoke frequently about disrupting big banks. But before the financial startup collapsed this month, it relied on the apparatus of Wall Street to fuel its expansion. Greensill’s closest Wall Street relationship was with Credit Suisse Group which provided it financing through $10 billion of investment funds. But a clutch of other big players—including Citigroup Inc., Morgan Stanley, Ernst & Young, and Moody’s… —played key roles in Greensill’s rise. Citigroup expanded its business with Greensill despite repeated warnings internally not to do so because of reputational issues…”

March 25 – Associated Press (Jon Gambrell and Samy Magdy): “A skyscraper-sized cargo ship wedged across Egypt’s Suez Canal further imperiled global shipping… as at least 150 other vessels needing to pass through the crucial waterway idled waiting for the obstruction to clear… The Ever Given, a… ship that carries cargo between Asia and Europe, ran aground Tuesday in the narrow, man-made canal dividing continental Africa from the Sinai Peninsula. In the time since, efforts to free the ship using dredgers, digging and the aid of high tides have yet to push the container vessel aside — affecting billions of dollars’ worth of cargo.”

Central Bank Watch:

March 25 – Bloomberg (Max de Haldevang): “Mexico’s central bank unanimously voted to hold its key interest rate at its lowest in almost five years amid surging inflation, though analysts are split on whether its easing cycle is over. Banco de Mexico… kept borrowing costs at 4% on Thursday, after price increases sped beyond its target ceiling in early March. Seventeen of the 24 economists surveyed… predicted the hold. The remaining seven expected a quarter-point cut, with several analysts revising their reduction calls after the surprise 4.12% inflation data….”

March 26 – Bloomberg (Aline Oyamada): “It took just over a week for Brazil’s traders to look past the central bank’s guidance and ask for even more rate hikes. Despite the larger-than-expected increase in the last meeting, the market is already pricing in a full-point hike for May, ignoring an already hawkish pledge from the bank to raise rates by another 75 bps. The worsening of the pandemic, investors say, may lead the government to spend more, weighing on inflation and forcing officials to be more aggressive.”

EM Watch:

March 24 – Reuters (Marc Jones): “Fitch has warned that it could cut Turkey’s sovereign credit rating if the country’s new central bank governor swiftly reverts to cutting interest rates and reignites turmoil in its currency and bond markets. The lira has plunged more than 9% this week after President Tayyip Erdogan replaced hawkish former central bank chief Naci Agbal with Sahap Kavcioglu, who, like Erdogan, has been critical of raising interest rates. Fitch said… the move had damaged the central bank’s credibility.”

March 24 – Bloomberg (Yuko Takeo and Emi Urabe): “The Asian Development Bank warned that rising U.S. yields could trigger currency and debt crises across Asia like past shocks that rocked emerging markets. Developing Asia has loaded up on dollar-denominated debt to pay for the fight against Covid-19. That’s raised the risk of capital flight and loan defaults should further gains in U.S. yields cause local currencies to plunge, according to ADB President Masatsugu Asakawa.”

March 24 – Bloomberg (Juan Pablo Spinetto): “Argentina is unable to repay its $45 billion debt with the International Monetary Fund, influential Vice President Cristina Fernandez de Kirchner said Wednesday, diminishing the possibility of an agreement with the country’s largest creditor. ‘We can’t pay because we don’t have the money to pay,’ Fernandez de Kirchner said…, adding that the terms and conditions are ‘unacceptable.’”

Japan Watch:

March 21 – Reuters (Tetsushi Kajimoto): “Bank of Japan Governor Haruhiko Kuroda said… the central bank would not stop buying exchange-traded funds (ETFs) or sell them as it tries to make its easing tools more flexible and sustainable under its yield curb control policy.”

Leveraged Speculation Watch:

March 22 – Bloomberg (Ruth Carson and Masaki Kondo): “Hedge funds have capitulated on their short-dollar bets after surging Treasury yields upended a favorite global macro strategy. Leveraged funds flipped to become net buyers of the world’s reserve currency during the week to March 16 -- a tumultuous period that saw Treasury yields breaching key levels on feverish inflation fears. They added bearish bets on the yen and euro, and switched from bullish positions on the New Zealand dollar, data from Commodity Futures Trading Commission show.”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 23 – Financial Times (June Yoon): “As the price of bitcoin has surged, the hidden costs of the cryptocurrency boom are becoming clearer. Awareness of the environmental consequences of using a vast array of computer equipment to produce bitcoins has been rising… Much less discussed, and yet perhaps more immediate, is mining’s impact on costs of chips — which go into everything from smartphones and TVs to cars. Bitcoin is created by bitcoin miners, who are issued with the cryptocurrency in return for completing massive volumes of computations to verify transactions. This requires a high energy input. But miners also require increasingly powerful computer equipment, or rigs, for the process.”

March 21 – Reuters (Jill Gralow and Renju Jose): “Australia was set… to evacuate thousands more people from suburbs in Sydney’s west, battered by the worst flooding in 60 years, with torrential rains expected to continue for another day or two.”

March 24 – Reuters (Ben Blanchard and Yimou Lee): “Taiwan will from next month ration water for more than one million households in the centre of the island because of a drought but the technology hub of Hsinchu will not be affected, Economy Minister Wang Mei-hua said… Sub-tropical Taiwan is experiencing its worst drought in half a century, after rain-soaking typhoons failed to make landfall last year… Wang told reporters that from April 4, water supplies in parts of Taichung and Miaoli would be cut for two days every week, with water tankers being sent out to supply residents as needed.”

Geopolitical Watch:

March 25 – Reuters (Jarrett Renshaw, Michael Martina, Alexandra Alper and Matt Spetalnick): “U.S. President Joe Biden… said he would prevent China from passing the United States to become the most powerful country in the world, vowing to invest heavily to ensure America prevails in the race between the world’s two largest economies. Biden said he had spent ‘hours upon hours’ with Xi Jinping when he served as vice president under former President Barack Obama, and was convinced the Chinese president believed autocracy - not democracy - held the key to the future. The Democratic president said he had made it clear to Xi that the United States was not looking for confrontation, but would insist that China abide by international rules for fair competition and fair trade and respect for human rights. ‘China has an overall goal ... to become the leading country in the world, the wealthiest country in the world, and the most powerful country in the world,’ he told reporters… ‘That’s not going to happen on my watch because the United States is going to continue to grow.’”

March 24 – Reuters (Amanda Macias): “Secretary of State Antony Blinken issued a strong rebuke… of China’s sweeping use of coercive measures and urged NATO allies to work with the U.S. in order to mount pushback on Beijing. Blinken, in an address at NATO headquarters in Brussels, said the U.S. wouldn’t force its European allies into an ‘us or them choice.’ However, he made clear that Washington views China as an economic and security threat, particularly in the realm of technology, to NATO allies in Europe. ‘There’s no question that Beijing’s coercive behavior threatens our collective security and prosperity and that it is actively working to undercut the rules of the international system and the values we and our allies share,’ Blinken said…”

March 25 – Reuters (Ben Blanchard): “Taiwan and the United States have signed their first agreement under the Biden administration, establishing a Coast Guard Working Group to coordinate policy, following China’s passing of a law that allows its coast guard to fire on foreign vessels. The new government of U.S. President Joe Biden has moved to reassure Chinese-claimed Taiwan that its commitment to the island is rock solid.”

March 24 – CNN (Brad Lendon): “China is quickly amassing weapons and systems to militarily overwhelm Taiwan, an action it could be poised to take within the next six years, the admiral chosen to be the next commander of US forces in the Pacific warned… ‘My opinion is this problem is much closer to us than most think,’ Adm. John Aquilino said before the Senate Armed Services Committee… China considers establishing full control over Taiwan to be its ‘number one priority,’ added Aquilino.”

March 19 – Reuters (Humeyra Pamuk, Michael Martina, David Brunnstrom, Simon Lewis and Mohammad Zargham): “U.S. and Chinese officials concluded on Friday what Washington called ‘tough and direct’ talks in Alaska, which laid bare the depth of tensions between the world’s two largest economies at the outset of the Biden administration. The two days of meetings, the first high-level in-person talks since President Joe Biden took office, wrapped up after a rare and fiery kickoff… when the two sides publicly skewered each others’ policies in front of TV cameras. The talks appeared to yield no diplomatic breakthroughs - as expected - but the bitter rivalry on display suggested the two countries had little common ground to reset relations that have sunk to the lowest level in decades.”

March 23 – Financial Times (Demetri Sevastopulo and Michael Peel): “The US and EU are poised to reboot a joint effort on how to handle an increasingly assertive China, days after working with the UK and Canada to impose sanctions on officials over human rights abuses in Xinjiang. Antony Blinken, US secretary of state, will relaunch the US-EU China dialogue with Josep Borrell, EU foreign policy chief…”

March 21 – Reuters (Robin Emmott and David Brunnstrom): “The United States, the European Union, Britain and Canada imposed sanctions on Chinese officials… for human rights abuses in Xinjiang, the first such coordinated Western action against Beijing under new U.S. President Joe Biden. Beijing hit back immediately with punitive measures against the EU that appeared broader, including European lawmakers, diplomats, institutes and families, and banning their businesses from trading with China.”

March 24 – Reuters (Ben Blanchard): “The United States and Taiwan are natural partners when it comes to semiconductors and promoting this cooperation is a U.S. priority, the de facto U.S. ambassador in Taiwan said… Washington has increasingly viewed tech-powerhouse and democratically ruled Taiwan as a key part of its strategy to shift global supply chains away from China, especially when it comes to technology and chip companies.”

March 21 – Reuters (Enrico Dela Cruz): “The Philippines urged China… to recall more than 200 Chinese boats it said had been spotted at a reef in the South China Sea, saying the presence of the vessels violated its maritime rights as it claims ownership of the area.”

March 22 – Associated Press (James Laporta): “Iran has made threats against Fort McNair, an Army post in the U.S. capital, and against the Army’s vice chief of staff, two senior U.S. intelligence officials said. They said communications intercepted by the National Security Agency in January showed that Iran’s Revolutionary Guard discussed mounting ‘USS Cole-style attacks’ against the Army post…”

March 20 – Bloomberg (Abbas Al Lawati): “Missiles used in the attacks on Saudi Aramco facilities, for which Yemen’s Tehran-backed Houthi group has claimed responsibility, were made in Iran, a Saudi minister said. ‘All of the missiles and drones that came into Saudi are Iranian-manufactured or Iranian-supplied,” Adel Al-Jubeir… said… ‘Several of them, as we’ve said, came from the north; several came from the sea.’”