Sunday, July 31, 2022

Monday's News Links

[Yahoo/Bloomberg] US Equity Futures Retreat Amid Hawkish Fed Talk: Markets Wrap

[Yahoo/Bloomberg] Oil Declines as China Slowdown Spurs Concern Over Demand Outlook

[Yahoo/Bloomberg] Gold Extends Gains as Investors Await US Economic Data This Week

[CNN] Pelosi expected to visit Taiwan, Taiwanese and US officials say

[CNBC] Home prices cooled at a record pace in June, according to housing data firm

[Reuters] Inflation begins to strain finances of young, low-income Americans

[Yahoo/Bloomberg] Ukraine Latest: First Grain Ship Since Start of War Leaves Odesa

[Reuters] "Relief for the world" as Ukraine grain ship leaves Odesa

[Yahoo/Bloomberg] Evergrande Debt Setback Drags China Developers to Five-Month Low

[Yahoo/Bloomberg] China’s Huge Trade Surplus Counteracts Outflow Pressure from Fed

[Yahoo/Bloomberg] Bank of England Set for Biggest Interest Rate Rise in 27 Years

[Reuters] Asia's factories squeezed by higher prices, weak demand

[Reuters] German retail sales post biggest year-on-year slump since 1994

[Yahoo/Bloomberg] Germany Has Three Months to Save Itself From a Winter Gas Crisis

[Yahoo/Bloomberg] Global Firms Halt Over $250 Billion in Financing Plans This Year

[WSJ] Market Mayhem Triggers Deal-Making Drought

[WSJ] Evergrande Told to Cough Up $1.1 Billion for Previously Undisclosed Guarantees

[FT] Venture capital’s silent crash: when the tech boom met reality

Weekly Commentary: Just the Facts - July 29, 2022

For the Week:

The S&P500 rallied 4.3% (down 13.3% y-t-d), and the Dow rose 3.0% (down 9.6%). The Utilities surged 6.4% (up 2.4%). The Banks gained 2.1% (down 18.0%), and the Broker/Dealers recovered 4.8% (down 11.0%). The Transports advanced 5.8% (down 11.3%). The S&P 400 Midcaps rose 4.8% (down 11.6%), and the small cap Russell 2000 jumped 4.3% (down 16.0%). The Nasdaq100 rallied 4.4% (down 20.7%). The Semiconductors jumped 4.4% (down 24.8%). The Biotechs gained 1.5% (down 13.3%). With bullion rallying $38, the HUI gold index recovered 3.0% (down 19.9%).

Three-month Treasury bill rates ended the week at 2.275%. Two-year government yields declined nine bps to 2.89% (up 215bps y-t-d). Five-year T-note yields fell 17 bps to 2.68% (up 141bps). Ten-year Treasury yields declined 10 bps to 2.65% (up 114bps). Long bond yields increased four bps to 3.01% (up 111bps). Benchmark Fannie Mae MBS yields sank 35 bps to 3.82% (up 175bps).

Greek 10-year yields sank 29 bps to 2.95% (up 163bps y-t-d). Ten-year Portuguese yields sank 35 bps to 1.84% (up 138bps). Italian 10-year yields fell 30 bps to 3.02% (up 185bps). Spain's 10-year yields sank 34 bps to 1.92% (up 136bps). German bund yields dropped 21 bps to 0.82% (up 100bps). French yields fell 24 bps to 1.38% (up 118bps). The French to German 10-year bond spread narrowed three to 56 bps. U.K. 10-year gilt yields declined eight bps to 1.86% (up 99bps). U.K.'s FTSE equities index gained 2.0% (up 0.5% y-t-d).

Japan's Nikkei Equities Index slipped 0.4% (down 3.4% y-t-d). Japanese 10-year "JGB" yields declined three bps to 0.19% (up 12bps y-t-d). France's CAC40 jumped 3.7% (down 9.8%). The German DAX equities index rose 1.7% (down 15.1%). Spain's IBEX 35 equities index increased 1.3% (down 6.4%). Italy's FTSE MIB index rallied 5.6% (down 18.1%). EM equities were strong. Brazil's Bovespa index jumped 4.3% (down 1.6%), and Mexico's Bolsa index rose 1.9% (down 9.6%). South Korea's Kospi index gained 2.4% (down 17.7%). India's Sensex equities index jumped 2.7% (down 1.2%). China's Shanghai Exchange Index declined 0.5% (down 10.6%). Turkey's Borsa Istanbul National 100 index added 3.0% (up 39.6%). Russia's MICEX equities index rallied 5.6% (down 41.5%).

Investment-grade bond funds posted outflows of $2.442 billion, while junk bond funds reported inflows of $4.828 billion (from Lipper).

Federal Reserve Credit last week declined $4.1bn to $8.866 TN. Fed Credit is down $34.8bn from the June 22nd peak. Over the past 150 weeks, Fed Credit expanded $5.139 TN, or 138%. Fed Credit inflated $6.055 Trillion, or 215%, over the past 507 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $6.4bn to $3.359 TN. "Custody holdings" were down $156bn, or 4.4%, y-o-y.

Total money market fund assets increased $7.5bn to $4.590 TN. Total money funds were up $88bn, or 2.0%, y-o-y.

Total Commercial Paper dropped $20.6bn to $1.150 TN. CP was up $11bn, or 0.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates sank 24 bps to a seven-week low 5.30% (up 219bps y-o-y). Fifteen-year rates fell 17 bps to 4.58% (up 225bps). Five-year hybrid ARM rates slipped two bps to 4.29% (up 188bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates sinking 39 bps to a 15-week low 5.21% (up 198bps).

Currency Watch:

July 25 – Bloomberg (Chester Yung): “A measure of Hong Kong’s interbank liquidity halved in the past two months, with analysts forecasting more cash drainage as the city’s de-facto central bank defends its currency. The Hong Kong Monetary Authority has bought a total HK$172 billion ($22bn) of local currency since May 11, shrinking the aggregate balance to about HK$165 billion. That has pushed up local interest rates, helping narrow the gap with the US to help the HKMA maintain its dollar peg. The intervention though is draining the city’s liquidity… That’s prompted the monetary authority to vehemently defend its currency policy last week.”

For the week, the U.S. Dollar Index declined 0.8% to 105.90 (up 10.7% y-t-d). For the week on the upside, the Brazilian real increased 6.3%, the Norwegian krone 2.7%, the Japanese yen 2.1%, the British pound 1.4%, the South African rand 1.2%, the Swiss franc 1.1%, the South Korean won 1.1%, the Canadian dollar 1.0%, the Australian dollar 0.8%, the Mexican peso 0.8%, the Swedish krona 0.7%, the Singapore dollar 0.6%, the New Zealand dollar 0.2% and the euro 0.1%. The Chinese (onshore) renminbi increased 0.10% versus the dollar (down 5.76% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index jumped 4.6% (up 22.8% y-t-d). Spot Gold jumped 2.2% to $1,766 (down 3.5%). Silver surged 9.5% to $20.36 (down 12.7%). WTI crude rose $3.92 to $98.62 (up 31%). Gasoline dropped 3.4% (up 40%), and Natural Gas declined 0.8% to $8.23. (up 121%). Copper surged 6.7% (down 20%). Wheat rallied 6.4% (up 5%), and Corn spiked 9.9% (up 5%). Bitcoin gained $1,048, or 4.6%, this week to $23,780 (down 49%).

Market Instability Watch:

July 25 – Wall Street Journal (Eric Wallerstein): “Companies with speculative-grade credit ratings have slowed their pace of borrowing, illustrating how rising interest rates have upended the pandemic-driven boom. Junk-rated companies have raised roughly $74 billion so far this year, just a quarter of the nearly $300 billion from the same period last year, according to Refinitiv. That has led to an $80 billion drop in the net supply of high-yield bonds, a figure that is expected to grow to $130 billion by the end of the year, according to Goldman Sachs Group Inc. Such a fall would mark the biggest annual decline on record.”

Ukraine War Watch:

July 28 – Washington Post (Liz Sly): “Russian advances in Ukraine have slowed almost to a standstill as newly delivered Western weapons help Ukrainian forces reclaim much of the advantage they had lost in recent months, opening a window of opportunity to turn the tide of the war in their favor again. Russian troops have made no significant territorial gains since the Ukrainian retreat on July 2 from the eastern city of Lysychansk under withering artillery fire. The retreat gave Russia full control over Luhansk, one of the two oblasts, or regions, that make up the broader eastern Donbas area, and it marked Russia’s only meaningful strategic success since its retreat from territory around Kyiv in April.”

July 28 – Bloomberg (Natalia Zinets): “Ukraine stepped up its drive to retake its Russian-controlled south by trying to bomb and isolate Russian troops in hard-to-resupply areas, but it said on Thursday it saw evidence that Moscow was redeploying its forces to defend the territory. In messages to mark the annual Day of Ukrainian Statehood, President Volodymyr Zelenskiy congratulated Ukrainians and sounded defiant. ‘We will not give up. We will not be intimidated. Ukraine is an independent, free, indivisible state. And it will always be so,’ he wrote on Telegram.”

U.S./Russia/China Watch:

July 27 – Reuters (Idrees Ali, David Brunnstrom and Michael Martina): “The United States… accused China of increased ‘provocations’ against rival claimants in the South China Sea and said its ‘aggressive and irresponsible behavior’ meant it was only a matter of time before a major incident or accident. Jung Pak, deputy assistant secretary for East Asia at the State Department, told a U.S. think tank there was ‘a clear and upward trend of PRC provocations against South China Sea claimants and other states lawfully operating in the region,’ referring to the People's Republic of China.”

July 24 – Financial Times (Demetri Sevastopulo): “The US military’s top officer said China had become more aggressive in intercepting military aircraft and undertaking unsafe aerial manoeuvres over the past five years. General Mark Milley, chairman of the US joint chiefs of staff, said China was conducting ‘dangerous intercepts’ against American military aircraft and ships and was also targeting Canada, Australia, Japan and Washington’s other allies. ‘The number of Chinese intercepts at sea and in the air has increased significantly over five years,’ Milley told the Financial Times and The Associated Press…”

July 24 - Associated Press (Eric Wallerstein): “The Chinese military has become significantly more aggressive and dangerous over the past five years, the top U.S. military officer said during a trip to the Indo-Pacific… U.S. Gen. Mark Milley, chairman of the Joint Chiefs of Staff, said the number of intercepts by Chinese aircraft and ships in the Pacific region with U.S. and other partner forces has increased significantly over that time… ‘The message is the Chinese military, in the air and at sea, have become significantly more and noticeably more aggressive in this particular region,’ said Milley, who recently asked his staff to compile details about interactions between China and the U.S. and others in the region.”

Economic War/Iron Curtain Watch:

July 27 – Associated Press (Christoph Steitz and Nina Chestney): “Russia delivered less gas to Europe on Wednesday in a further escalation of an energy stand-off between Moscow and the European Union that will make it harder, and costlier, for the bloc to fill up storage ahead of the winter heating season. The cut in supplies… has reduced the capacity of Nord Stream 1 pipeline - the major delivery route to Europe for Russian gas - to a mere fifth of its total capacity… On Tuesday, EU countries approved a weakened emergency plan to curb gas demand after striking compromise deals to limit cuts for some countries, hoping lower consumption will ease the impact in case Moscow stops supplies altogether. The plan highlights fears that countries will be unable to meet goals to refill storage and keep their citizens warm during the winter months and that Europe's fragile economic growth may take another hit if gas will have to be rationed.”

Inflation Watch:

July 26 – CNBC (Jessica Dickler): “Higher prices have taken a toll. In an economy that has produced the highest inflation rate since 1981, Americans are struggling to keep up with expenses and are putting less money aside for emergencies or long-term financial goals, several recent studies show. Nearly 40% of consumers cannot put any money at all into savings, according to a recent analysis… by the American Consumer Credit Counseling, while about 19% said they had to reduce their savings rate. As of the second quarter of 2022, 48% of consumers said the rising cost of basic necessities impacted their family’s lifestyle, a steep jump from 39% in the first quarter. ‘The pandemic, wars overseas and other world events have had unprecedented effects on our society when it comes to household finances,’ Allen Amadin, president and CEO of American Consumer Credit Counseling, said...”

Biden Administration Watch:

July 28 – Financial Times (Tom Mitchell, Edward White and Felicia Schwartz): “Xi Jinping warned Joe Biden not to ‘play with fire’ as the Chinese and US presidents spoke for the first time since Beijing was angered by news of a potential visit to Taiwan by… Nancy Pelosi. In a statement posted on the Chinese foreign ministry’s website after the leaders talked on Thursday, Xi… said his administration would ‘resolutely safeguard China’s national sovereignty and territorial integrity’. ‘Those who play with fire will perish by it. It is hoped that the US will be clear-eyed about this,’ China’s president added. China’s foreign ministry also quoted Biden as saying that Washington’s ‘one China’ policy had not changed and that his administration did not support independence for the self-ruled island, which Beijing claims as part of its territory.”

Federal Reserve Watch:

July 27 – Financial Times (Colby Smith): “Since the Federal Reserve in March embarked on what has become the fastest pace of interest rate rises since 1981, it has provided painstaking detail about its future plans to tighten monetary policy. On Wednesday, that changed, with chair Jay Powell announcing the US central bank would shy away from offering an official running commentary on its quest to stamp out soaring inflation. ‘It’s time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided,’ Powell said… after the Fed increased its main interest rate by 0.75 percentage points for the second month in a row.”

U.S. Bubble Watch:

July 28 – CNBC (Jeff Cox): “The U.S. economy contracted for the second straight quarter from April to June, hitting a widely accepted rule of thumb for a recession, the Bureau of Economic Analysis reported… Gross domestic product fell 0.9% at an annualized pace for the period, according to the advance estimate. That follows a 1.6% decline in the first quarter and was worse than the Dow Jones estimate for a gain of 0.3%.”

July 26 – Associated Press (Matt Ott): “U.S. consumer confidence slid again in July as higher prices for food, gas and just about everything else continued to weigh on Americans. The Conference Board said… its consumer confidence index fell to 95.7 in July from 98.4 in June, largely due to consumer anxiety over the current economic conditions, particularly four-decade high inflation. It’s the lowest reading since February of 2021. The business research group’s present situation index… fell from 147.2 to 141.3.”

July 29 – Bloomberg (Reade Pickert): “The drumbeat of recession grew louder after the US economy shrank for a second straight quarter, as decades-high inflation undercut consumer spending and Federal Reserve interest-rate hikes stymied businesses and housing. Gross domestic product fell at a 0.9% annualized rate after a 1.6% decline in the first three months of the year, the Commerce Department’s preliminary estimate showed... Personal consumption, the biggest part of the economy, rose at a 1% pace, a deceleration from the prior period.”

July 27 – CNBC (Diana Olick): “Mortgage demand edged lower for the fourth straight week.., even though interest rates have fallen from their recent highs… Applications for a loan to purchase a home fell 1% for the week but were 18% lower than the same week one year ago. More supply is coming onto the housing market, as competition cools among buyers. But prices and rates are still high, and inflation is weakening consumer confidence.”

July 26 – Bloomberg (Jordan Yadoo): “Sales of new US homes fell for the fifth time this year in June to a more than two-year low, as a mix of high prices and rising mortgage rates thwarted prospective buyers. Purchases of new single-family homes decreased 8.1% to 590,000 annualized pace from a downwardly revised 642,000 in May… Separate reports last week showed a slowdown in building activity and a two-year low in home resales amid intensifying affordability concerns. The new-home sales report… showed the median sales price of a new home rose 7.4% from a year earlier, to $402,400. It marked the smallest annual gain since November 2020. The number of homes sold in June and awaiting the start of construction -- a measure of backlogs -- rose from a month earlier to 184,000, the most since January…”

July 25 – Reuters (Cheng Leng in Hong Kong and Edward White): “Top U.S. retailer Walmart… slashed its profit forecast as surging prices for food and fuel prompted customers to cut back on discretionary purchases, and its shares slid 10% in trading after the bell. Shares of rivals including Target and also tanked after Walmart's warning, which signaled a ‘proverbial train wreck’ for retailers, Burt Flickinger, managing director at Strategic Resource Group, said.”

July 23 – Financial Times (Alexandra White, Colby Smith and Caitlin Gilbert): “In Eric Farmelant’s nearly decade-long career as a real estate broker in Miami, he had never witnessed renters engage in bidding wars over rental properties until the coronavirus pandemic fuelled scorching demand for beachfront housing in Florida. He can no longer show four or five listings to clients because many of the properties are being rented sight unseen. ‘You’re seeing renters putting down a year’s worth of rent up front to get their offer accepted,’ said Farmelant, who works for Ibis Realty Group. Rents, in turn, are up nearly 40% since January 2021, according to Apartment List, indicative of a broader trend that has gripped the country.”

July 24 – Wall Street Journal (Rachel Louise Ensign): “Wealthy people ramped up borrowing in the first half of the year despite rising rates and a stock-market rout that hit the value of their portfolios. The wealth-management units at Morgan Stanley and Bank of America posted double-digit loan growth in the second quarter. The increase came from well-heeled clients taking out mortgages and loans backed by assets like stock-and-bond portfolios, executives said. Morgan Stanley said mortgages rose 30% in its wealth unit from a year earlier to $50 billion, while securities-backed and other loans grew 23% to $93 billion. At Bank of America, wealth-management loans rose 12% from a year earlier to $222 billion, outpacing a 4% increase in the bank’s consumer division.”

Fixed-Income Bubble Watch:

July 27 – Bloomberg (Alexandra Harris, Liz Capo McCormick and Jack Pitcher): “Blue-chip companies that need to borrow in the US now are increasingly relying on commercial paper to avoid locking in longer-term borrowing costs in a market beset by turbulence… Corporate treasurers have instead been turning more to commercial paper, a type of unsecured debt that typically lasts 270 days or less. The total amount of these IOUs outstanding has mushroomed to nearly $1.2 trillion this year, up more than 20% from its lows in 2020, with computing giant Apple Inc. and pipeline-owner Kinder Morgan Inc. among those that have been dipping more into the market this year.”

China Watch:

July 29 – Bloomberg (Charlotte Yang): “Chinese stocks plunged Friday to cap a brutal month which marked the return of almost all the worries that have spooked investors for much of the past year. From signs of a renewed crackdown on the tech sector to an escalation of the crisis engulfing property developers and a rebound in Covid-19 cases, traders have had to contend with a lot of bad news in July. With little sign that authorities are planning to go big on policy support, doubts are rising once again about whether a bottom has yet to be seen for the market. The Hang Seng China Enterprises Index of stocks slumped 2.8% on Friday, taking its July loss to over 10% -- its worst monthly performance in a year.”

July 28 – Bloomberg: “China’s top leadership gave a downbeat assessment of economic growth but didn’t announce new stimulus policies at a key meeting, calling on officials to ensure that housing projects are completed following a wave of mortgage boycotts. The country should achieve ‘the best outcome’ possible for economic growth this year while sticking to a strict Covid Zero policy, according to a statement after a meeting of the Politburo… The leadership urged efforts be made to stabilize employment and prices to keep the economy running in a ‘reasonable range.’ There was no mention of the national economic goals as there was at the April meeting…”

July 28 – Bloomberg: “China’s top leadership is committing to ample liquidity as the nation contends with a slowdown. So far, a lot of that cash is sitting in the financial system instead of being transmitted to the real economy. Cash-rich lenders and funds have been using the money to buy policy bank bonds and high-grade corporate debt, as well as the dollar as the growing interest-rate differential between China and the US boosts the currency’s appeal… The cost to borrow overnight in the pledged repo market slid to the lowest since early 2021 this week, and the Politburo on Thursday pledged to maintain liquidity at ‘reasonably ample’ levels to support the economy.”

July 27 – Financial Times (Sun Yu and Cheng Leng): “Beijing is seeking to mobilise up to Rmb1tn ($148bn) of loans for millions of stalled property developments, in its most ambitious attempt to revive the debt-stricken sector and head off a backlash by homebuyers. In a bid to end a property downturn that played a big role in bringing year-on-year growth down to just 0.4% in the second quarter, the People’s Bank of China will initially issue about Rmb200bn of low-interest loans, charging about 1.75% a year, to state commercial banks… Under the plan, recently approved by China’s State Council, or cabinet, the banks will use the PBoC loans along with their own funds, lent at market rates, to refinance stalled real estate projects.”

July 24 – Bloomberg: “China’s deepening property bust is sending shock waves through the nation’s 400-million-strong middle class, upending the belief that real estate is a surefire way to build wealth. Now, as property developments stall across the country and house prices fall, many Chinese homeowners are slashing spending, postponing marriage and other life decisions, and, in a growing number of cases, withholding mortgage payments on unfinished homes. Peter, for one, has given up on starting his own business and buying a BMW 5 series after construction on his 2 million-yuan ($300,000) home in Zhengzhou, the capital of Henan province, was halted by China Aoyuan Group. He is now saddled with a mortgage that’s eating up 90% of his disposable income on a home he may never see.”

July 25 – Bloomberg: “China’s economic recovery gained momentum in July as business activities resumed and confidence improved, despite disruptions from sporadic Covid outbreaks across the country. That’s the outlook based on Bloomberg’s aggregate index of eight early indicators for this month. The overall gauge was 5, a level indicating the economy is heating up. That was unchanged from June… Small business confidence improved on stronger expectations and better credit conditions, according to Standard Chartered Plc., which surveys more than 500 smaller firms each month. Overall production remained robust, while construction activity picked up thanks to policy support… However, activity in July ‘failed to accelerate,’ with readings normalizing from the recovery in June…”

July 26 – Bloomberg (John Cheng and Lorretta Chen): “China’s biggest developer is pulling out all the stops to ensure it can service its debt, an indication that the industry’s year-long liquidity crunch is worsening even as policymakers pledge support. Country Garden Holdings Co. is selling stock at a 13% discount to raise HK$2.83 billion ($361 million). Some of the proceeds will be used to repay offshore debt, it said, helping spur gains in the company’s dollar bonds -- held by global investors such as BlackRock Inc. and Schroders Plc.”

July 26 – CNBC (Evelyn Cheng): “China’s property sales are set to plunge this year by more than they did during the 2008 financial crisis, according to new estimates from S&P Global Ratings. National property sales will likely drop by about 30% this year — nearly two times worse than their prior forecast, the ratings agency said, citing a growing number of Chinese homebuyers suspending their mortgage payments. Such a drop would be worse than in 2008 when sales fell by roughly 20%… Since late June, unofficial tallies show a rapid increase in Chinese homebuyers refusing to pay their mortgages across a few hundred uncompleted projects — until developers finish construction on the apartments. Most homes in China are sold before completion, generating an important source of cash flow for developers.”

July 29 – Bloomberg: “China is considering a plan to seize undeveloped land from distressed real estate companies, using it to help finance the completion of stalled housing projects that have sparked mortgage boycotts across the country… The proposal, which is still under discussion…, would take advantage of Chinese laws allowing local governments to wrest back control of land sold to real estate companies if it remains undeveloped after two years, without compensation. That would give authorities more leeway to direct funds toward uncompleted homes, potentially to the detriment of creditors who would lose claims on some of developers’ most valuable assets.”

July 27 – Bloomberg: “Chinese banks are rushing to boost capital as they prepare for a potential spike in bad loans due to the economic slowdown and spreading housing crisis. A record amount of fresh money has come from financial markets, with banks selling 29% more bonds in the first half of the year compared to last year to replenish capital and cover credit losses… In the year through July 27, lenders had sold a combined 568 billion yuan ($84bn) of Additional Tier 1 debt, which is among the first to absorb losses in times of stress, and Tier 2 bonds. China’s big-four state-owned banks are the major sellers of the bonds this year…”

July 26 – Reuters (Josh Horwitz): “Chinese smartphone sales in April-June fell 14.2% on year and volumes hit a decade low, Counterpoint Research said…, as China struggles to recover from the impact of COVID-19 lockdowns and the industry braces for more uncertainty. Quarterly sales volumes were 12.6% lower than those seen in the first quarter of 2020, when the pandemic hit China and sales were the worst since the fourth quarter of 2012, when the iPhone 5 was introduced...”

July 25 – Financial Times (Cheng Leng in Hong Kong and Edward White): “Two weeks after seasoned regulator Liu Rong arrived in the central province of Henan, plain-clothes security officials clashed with hundreds of protesters outside a local branch of the People’s Bank of China. The protesters were desperate to recover about Rmb40bn ($5.9bn) in frozen deposits from four rural banks. Beijing’s deployment of Liu, a veteran of Chinese bank regulation, suggested the central government wanted a speedy solution to the stand-off. A day after the rare outbreak of public dissent on July 10, Liu’s team doused the flames of unrest with a promise to reimburse funds the protesters had lost to fraud — but wider damage had already been done. The protests in Henan drew national attention, partly because local officials manipulated the personal health apps of more than 1,000 depositors to imply that they were at high risk of Covid-19 and prevent them from protesting.”

July 27 – Bloomberg: “Scorching temperatures across China are straining power grids as the country tries to ramp up industrial activity to support the economy, while farmers scramble to save crops such as rice and cotton from the impact of the searing heat. Several regions have already posted record power demand and have cut electricity to factories at peak hours to make sure there’s enough to keep air conditioners running. Rice crops and fruit and vegetables in southern China are at risk of being damaged by the heat, and melting glaciers are causing floods in the cotton-growing regions of Xinjiang. The heat is testing China’s ability to keep its factories running, from the eastern manufacturing center of Zhejiang that borders Shanghai to the technology hub of Shenzhen in the south.”

Central Banker Watch:

July 27 – Bloomberg (Francesco Canepa and Giselda Vagnoni): “The European Central Bank seems almost certain to face a test of its resolve to rein in excessive bond yields in coming weeks as the euro zone's biggest debtor, Italy, heads for elections that a rightist bloc with a eurosceptic past is expected to win. The ECB, in an attempt to cushion the impact of rising borrowing costs on Italy and other parts of the euro zone's south, said last week that it would intervene in support of countries whose debt comes under market pressure through no fault of their own. With the interest premium that creditors demand from Italy rising again and the country nursing a debt outlook downgrade from S&P, expectations of ECB action seem set to grow as the election campaign heats up and investors put a price on radical parties' economic promises.”

July 25 – Bloomberg (Aaron Eglitis, Carolynn Look, Alexander Weber and Jana Randow): “The European Central Bank may not be done with big increases in interest rates after surprising with an initial half-point hike last week, according to Governing Council member Martins Kazaks. ‘I would not say that this was the only front-loading,’ Kazaks, one of the ECB’s most-hawkish officials, said… ‘I would say that the rate increase in September also needs to be quite significant.’”

Global Bubble and Instability Watch:

July 26 – Reuters (Wayne Cole): “Australian inflation sped to a 21-year high last quarter and is likely to accelerate even further as food and energy costs explode, stoking speculation interest rates will need to more than double to bring the outbreak under control… Data from the Australian Bureau of Statistics showed the consumer price index (CPI) jumped 1.8% in the June quarter, just short of market forecasts of 1.9%. The annual rate picked up to 6.1% from 5.1%, the highest since 2001 and more than twice the pace of wage growth.”

July 28 – Reuters (Cynthia Kim): “South Korea's property market has abruptly gone from sizzling hot to floundering, piling pressure on some of the world's most debt-saddled consumers as the sector experiences the fastest interest rate hikes on record. Prices of Seoul apartments last week reported their sharpest decline in 26 months, while transaction volumes in the capital dropped 73% in June from a year earlier. The 2.6 quadrillion won ($1.97 trillion) debt tied to the property market faces a major test as borrowing costs rise, with a slump and higher mortgage repayments likely to result in weaker consumption.”

Europe Watch:

July 25 – Reuters (Rachel More and Miranda Murray): “German business morale fell more than expected in July, the Ifo business sentiment survey showed…, as the institute that compiles it said high energy prices and looming gas shortages had left Europe's largest economy on the cusp of recession. The Ifo institute's closely watched business climate index dropped to 88.6, its lowest in more than two years and below the 90.2 forecast... June's reading was marginally revised down to 92.2.”

July 28 – Reuters (Rachel More, Paul Carrel and Reinhard Becker): “German inflation edged up unexpectedly in July, driven by an energy supply crisis as a further reduction in gas flows from Russia prompted concerns about even higher energy bills. Consumer prices, harmonised to make them comparable with inflation data from other European Union countries (HICP), increased by 8.5% on the year… ‘The increase in HICP inflation is a warning sign for the European Central Bank,’ ING economist Carsten Brzeski.”

July 28 – Bloomberg (Laura Malsch): “Confidence in the euro-area economy fell to the weakest in almost 1 1/2 years as fears of energy shortages haunt consumers and businesses, and the European Central Bank’s first interest-rate increase in a more than decade feeds concerns that a recession is nearing. A gauge compiled by the European Commission dropped to 99 in July from 103.5 the previous month. That’s well below the level of 102 that economists had expected. Consumer confidence led the decline, slumping to its lowest level on record as households increasingly fret about the outlook.”

EM Crisis Watch:

July 27 – Bloomberg (Selcuk Gokoluk and Irene García Pérez): “Bondholders of emerging markets that may have to restructure debt are watching Sri Lanka’s unfolding credit crisis with a burning question: What will China do? Beijing is the largest official creditor to developing nations and investors say it’s unclear how lenient it’ll be in demanding repayment from distressed borrowers. They view Sri Lanka as a test case, and whether China demands repayment in full or accepts a haircut will determine how much private creditors including bondholders could recover in case of a default. A record 21 emerging market sovereigns’ dollar bonds are trading in distressed territory... Some of those may join Sri Lanka and Belarus who defaulted this year as the global economic slowdown and the war in Ukraine cut all but the highest-rated sovereign issuers off from international debt capital markets.”

July 28 – Bloomberg (Beril Akman, Kerim Karakaya and Burhan Yuksekkas): “Turkey’s central bank governor downplayed the inflation crisis plaguing his country, blaming external shocks and defending the ultra-loose policies he credits for forging the most recession-proof economy in Europe. Governor Sahap Kavcioglu said… consumer inflation will end the year almost 18 percentage points higher than the central bank’s last projections showed in April. It’s now set to reach 60.4%, about 12 times the official target, before slowing to 19.2% by the end of next year and 8.8% in 2024.”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 23 – Wall Street Journal (Patrick Thomas): “Intense heat and dry conditions are stressing U.S. agriculture, threatening corn, soybeans and other crops, as well as cattle herds. Scorching temperatures this past week have put swaths of the U.S., especially in the South and West, under excessive-heat warnings and advisories. The hot weather is hitting during an important period of the Midwest crop-growing season… The heat is also exacerbating longer-running drought conditions in parts of Kansas, Oklahoma, Texas and other states, risking harm to livestock, parching pastures and leading ranchers to spend more on supplemental feed for cattle.”

July 28 – Associated Press (Michael Biesecker and Helen Wieffering): “To the naked eye, the Mako Compressor Station outside the dusty West Texas crossroads of Lenorah appears unremarkable, similar to tens of thousands of oil and gas operations scattered throughout the oil-rich Permian Basin. What’s not visible through the chain-link fence is the plume of invisible gas, primarily methane, billowing from the gleaming white storage tanks up into the cloudless blue sky. The Mako station… was observed releasing an estimated 870 kilograms of methane – an extraordinarily potent greenhouse gas — into the atmosphere each hour. That’s the equivalent impact on the climate of burning seven tanker trucks full of gasoline every day. But Mako’s outsized emissions aren’t illegal, or even regulated. And it was only one of 533 methane ‘super emitters’ detected during a 2021 aerial survey of the Permian conducted by Carbon Mapper, a partnership of university researchers and NASA’s Jet Propulsion Laboratory.”

Levered Speculation Watch:

July 27 – Bloomberg (Lulu Yilun Chen and Bei Hu): “Benjamin Fuchs’s hedge fund firm BFAM Partners has seen assets shrink by about a third in the past year to just over $3 billion after being saddled with heavy losses on Chinese credit bets… The Hong Kong-based firm set up a ‘liquidating vehicle’ of ‘certain illiquid assets’ to help meet June requests for withdrawals from its Asian Opportunities Fund… Redemptions for the month amounted to less than 10% of assets, said the person, asking not to be named as the information is private.”

Geopolitical Watch:

July 28 – Reuters (Greg Torode): “A U.S. aircraft carrier and its strike group have returned to the South China Sea after a port call in Singapore, deploying in the disputed region as tensions with China rise over a possible visit to Taiwan by congressional leader Nancy Pelosi. Officials with the U.S. Navy's Seventh Fleet confirmed the deployment of the USS Ronald Reagan to the vital trade route but did not comment on questions about tensions over the trip by Pelosi… ‘USS Ronald Reagan and her strike group are underway, operating in the South China Sea following a successful port visit to Singapore,’ Commander Hayley Sims said…”

July 29 – Reuters (Stanley Widianto): “Some 4,000 soldiers mostly from Indonesia and the United States will conduct a joint military exercise next week that underscores ‘the importance we place on a free and open Indo-Pacific region,’ a senior U.S. military official said… The annual ‘Super Garuda Shield’ exercise, which the United States called ‘significantly larger in scope and scale than previous exercises’, comes against a backdrop of heightened tensions with China over the latter's growing assertiveness in the region.”

July 25 – Reuters (Yimou Lee, Fabian Hamacher and Ann Wang): “Roads emptied and people were ordered to stay indoors in parts of Taiwan, including its capital Taipei, on Monday for an air-raid exercise as the island steps up preparations in the event of a Chinese attack. Sirens sounded at 1:30 p.m. for the mandatory street evacuation drills, which effectively shut towns and cities across northern Taiwan for 30 minutes. A ‘missile alert’, asking people to evacuate to safety immediately, was sent via text message.”

July 28 – Associated Press (Hyung-Jin Kim): “North Korean leader Kim Jong Un warned he’s ready to use his nuclear weapons in potential military conflicts with the United States and South Korea…, as he unleashed fiery rhetoric against rivals he says are pushing the Korean Peninsula to the brink of war. Kim’s speech to war veterans on the 69th anniversary of the end of the 1950-53 Korean War was apparently meant to boost internal unity in the impoverished country amid pandemic-related economic difficulties… ‘Our armed forces are completely prepared to respond to any crisis, and our country’s nuclear war deterrent is also ready to mobilize its absolute power dutifully, exactly and swiftly in accordance with its mission,’ Kim said…”

Sunday Evening Links

[Yahoo/Bloomberg] US Futures Dip, Stocks Mixed on Fed, China Caution: Markets Wrap

[Yahoo/Bloomberg] Oil Drops as China Slowdown Stokes Concerns Over Demand Outlook

[AP] Western flames spread, California sees its largest 2022 fire

[Yahoo/Bloomberg] China Banks May Face $350 Billion in Losses From Property Crisis

[Yahoo/Bloomberg] China’s Rebound Remains Fragile as Manufacturing, Property Slump

[Reuters] Australia home prices slide, Sydney suffers worse month in 40 years

Sunday's News Links

[AP] Wildfires in West explode in size amid hot, windy conditions

[Yahoo/Bloomberg] Bank of England Set to Accelerate Its Inflation Fight: Eco Week 

[CNN] Mykolaiv in Ukraine hit with heavy shelling as Putin threatens 'lightning speed' response to interference

[Yahoo/Bloomberg] Ukraine Latest: Putin’s Naval Ambitions Include Zircon Missiles

[Reuters] Ukraine's Zelenskiy says harvest could be halved by war

[MSN/NYT] US Defense Department Official Says Russia’s War Effort Is Failing

[Reuters] China's factory activity contracts unexpectedly in July as COVID flares up

[Reuters] On navy day, Putin says United States is main threat to Russia

[WSJ] Silicon Valley Lurches Between Deep Cuts and Bold Spending

[WSJ] China Home Sales Plunge in July, as Mortgage Revolt Deters Buyers

[WSJ] Farm Giants Expect Continued Food-Supply Problems Despite Ukraine Grain Deal

[WSJ] How the Covid-19 Pandemic Changed Americans’ Health for the Worse

[FT] Emerging markets hit by record streak of withdrawals by foreign investors

[FT] Europe’s lenders prepare for life outside negative territory

[FT] China’s ‘dim sum’ bond sales surge on demand from domestic investors

Friday, July 29, 2022

Just the Facts Coming

 I plan on posting a "Just the Facts" for the week once I've had a chance to get the news stories and data together.  thank you, doug

Wednesday, July 27, 2022

Thursday's News Links

[Yahoo/Bloomberg] Stocks Hover Near Session Highs as Yields Tumble: Markets Wrap

[Yahoo/Bloomberg] Yen Roars Back as Hedge Funds Cut and Run From Big Macro Short

[Yahoo/Bloomberg] Oil Extends Gains With Support From Fed and Demand Outlook

[Yahoo/Bloomberg] Soybeans in Longest Run of Gains Since May; Wheat, Corn Rise

[CNBC] GDP fell 0.9% in the second quarter, the second straight decline and a strong recession signal

[Yahoo/Bloomberg] US Economy Shrinks for a Second Quarter, Raising Recession Odds

[MarketWatch] U.S. jobless claims retreat after hitting highest level in eight months

[Yahoo/Bloomberg] Wall Street Banks Are Divided Over Size of Fed’s Next Rate Hike

[AP] US not yet in recession and 4 other takeaways from the Fed

[Reuters] Fed jacks rates again, Powell vows no surrender in inflation battle

[Yahoo/Bloomberg] Ukraine Latest: US Eyes Prisoner Swap; UK Warns on Gas Costs

[Reuters] Russia captures power station, redeploys troops toward southern Ukraine

[Yahoo/Bloomberg] China’s Politburo Signals No Big Stimulus Despite Slowdown

[Yahoo/Bloomberg] China Decouples Further From US as Benchmark Rate Trails Fed

[Yahoo/Bloomberg] China Banks Rush to Raise Record Debt as Credit Losses Mount

[Reuters] German inflation rises unexpectedly after fall in Russian gas supply

[Yahoo/Bloomberg] Euro-Area Confidence Hits Weakest in 17 Months on Recession Fear

[Yahoo/Bloomberg] Turkish Inflation Crisis Rages But Central Banker Isn’t Blinking

[Reuters] Biden looks to tamp down Taiwan tension during China Xi call

[Reuters] U.S. carrier strike group returns to South China Sea amid Taiwan tensions

[AP] Kim threatens to use nukes amid tensions with US, S. Korea

[AP] Hidden Menace: Massive Methane Leaks Speed Up Climate Change

[Reuters] Former Republicans and Democrats form new third U.S. political party

[Bloomberg] Powell Signals More Hikes Coming, While Markets Detect Pivot

[NYT] They Flocked to China for Boom Times. Now They’re Thinking Twice.

[WSJ] How the Fed Could Lose Its Nerve

[FT] Fed’s Jay Powell calls time on running commentary for rate rises

[FT] China’s central bank seeks to mobilise $148bn bailout for developers

[FT] Trouble is coming for emerging markets beyond Sri Lanka

Tuesday, July 26, 2022

Wednesday's News Links

[Yahoo/Bloomberg] Stocks Rise on Earnings Amid Countdown to Fed: Markets Wrap

[Yahoo/Bloomberg] Oil Climbs as US Crude Stockpiles Shrink Ahead of Fed Decision

[Reuters] Fed to unveil another big rate hike as signs of economic slowdown grow

[CNBC] Mortgage demand declines further, even as interest rates drop a bit

[AP] Consumers confidence slides for third straight month in July

[AP] US economy sending mixed signals: Here’s what it all means

[Yahoo/Bloomberg] Corporate America Embraces Short-Term IOUs as Free Money Ends

[Reuters] Russia cuts gas flows further as Europe makes savings plea

[Yahoo/Bloomberg] Ukraine Latest: Gazprom Cuts Nord Stream Gas Supplies to Europe

[Reuters] Australian inflation speeds to 21-year high, peak still to come

[Reuters] China Q2 smartphone sales fall 14.2% y/y as consumers pull back

[CNBC] China’s property sales are set to plunge 30% — worse than in 2008, S&P says

[Reuters] China's Wuhan shuts some businesses, transport amid new COVID cases

[Yahoo/Bloomberg] China Question Looms Large as EM Distressed-Debt Club Grows

[Yahoo/Bloomberg] China’s Blistering Heat Strains Power Grids and Disrupts Farming

[Reuters] Analysis: ECB faces Italian debt test as politics intervenes

[Reuters] U.S. says Beijing's South China Sea 'provocations' risk major incident

[Yahoo/Bloomberg] Hedge Fund BFAM’s Redemptions Mount Amid 16% First-Half Loss

[Bloomberg] US New-Home Sales Fall More Than Forecast to Two-Year Low

[Bloomberg] Country Garden Sells Stock as Liquidity Worsens for Builders

Monday, July 25, 2022

Tuesday's News Links

[Yahoo/Bloomberg] Stocks Drop Before Fed; Energy Up as EU Cuts Deal: Markets Wrap

[Reuters] Oil rises for a second day on supply tightness concerns

[Yahoo/Bloomberg] Powell’s Bond Market Recession Indicator Is Sending a Warning

[CNBC] Nearly half of all Americans are falling deeper in debt as inflation continues to boost costs

[Reuters] Russian gas cut to Europe hits economic hopes after Ukraine grain deal

[Yahoo/Bloomberg] EU Faces Solidarity Test Over Forced Cuts in Russian Gas Fight

[Reuters] Analysis: Crisis of confidence stifles China's economic recovery

[Yahoo/Bloomberg] China’s Economy Strengthens in July Despite Housing, Covid Woes

[MSN/Bloomberg] China Covid Cases Rise as Shenzhen Flareup Snares Top Firms

[Yahoo/Bloomberg] Hong Kong Liquidity Shrinks 50% Since May Amid Currency Defense

[NYT] Fed Prepares Another Rate Increase as Wall Street Wonders What’s Next

[FT] Henan protests highlight concerns over China’s rural banking sector

Monday Evening Links

[CNBC] Stock futures fall after Walmart cuts forecast, says inflation hit consumer spending

[Reuters] Walmart 'train wreck' profit warning sends shares down 10%

[Reuters] S&P 500 ends choppy session nearly flat; investors eye Fed, earnings

[Reuters] Russia's Gazprom tightens squeeze on gas flow to Europe

[Yahoo/Bloomberg] Morgan Stanley Warns Stock Bulls Deluded by ‘Wishful Thinking’

Sunday, July 24, 2022

Monday's News Links

[Yahoo/Bloomberg] Stocks Rise as Investors Look to Earnings, Fed: Markets Wrap

[Reuters] Stocks climb as traders look to earnings to counter downturn fears

[Reuters] Oil rises in volatile trade, Fed hike weighs

[Yahoo/Bloomberg] China Property Stocks, Bonds Rally on Reported Fund Help

[Reuters] Fed's united front on interest rates may soon be tested

[USAT] 'Extremely oppressive' heat in Northeast turns deadly; Boston breaks record as other cities may follow

[Yahoo/Bloomberg] Ukraine Latest: Moscow Says Odesa Strike Won’t Affect Grain Plan

[Reuters] China plans real estate fund worth up to $44 billion for distressed sector, source says

[Reuters] Evergrande's debt revamp to provide roadmap on tackling China property crisis

[Yahoo/Bloomberg] Clock Ticks for Evergrande Restructuring Plan After Shakeup

[Yahoo/Bloomberg] ECB’s Kazaks Says Stronger Hikes May Not Be Over After Big Move

[Reuters] Germany on cusp of recession, says Ifo, as business sentiment sinks

[Reuters] Record number of COVID-hit Australians in hospital as Omicron surges

[Reuters] 'Missile alert': Taiwan holds air-raid exercise amid China tension

[WSJ] Borrowing Among Junk-Rated Firms Slows to a Trickle

[WSJ] Investors Bet Fed Will Need to Cut Interest Rates Next Year to Bolster the Economy

[WSJ] The Upper Middle Class Is Getting Squeezed

[FT] Fed to implement second 0.75 point rate rise amid uncertainty over next steps

Sunday Evening Links

[CNBC] Stock futures are little changed as Wall Street braces for a busy week of earnings, Fed meeting 

[Yahoo/Bloomberg] Oil Edges Higher as Traders Weigh Tight Market, Slowdown Fears

[Yahoo Finance] Fed, tech earnings, GDP data: What to know ahead of the busiest week of the year

[Reuters] European Central Bank will consider economic situation when deciding on rates -Holzmann

[Bloomberg] China’s Property Crisis Burns Middle Class Stuck With Huge Loans

Sunday's News Links

[Yahoo/Bloomberg] US Growth Is Looking Sickly as Fed Keeps Hiking Rates: Eco Week

[Reuters] Ukraine works to resume grain exports, flags Russian strikes as risk

[Yahoo/Bloomberg] Ukraine Latest: Lavrov Says UN Must Help Unstick Russian Exports

[Yahoo/Bloomberg] Bond Sales to Taper Ahead of Rate Hike: U.S. Credit Week Ahead

[Reuters] Odesa strike shows it will not be easy to export grain via ports - Ukraine

[Reuters] Explainer: What is behind the heat waves affecting the United States?

[Yahoo/Bloomberg] China on Alert for Evergrande Restructuring Plan After Shakeup

[Reuters] China probes banking inspector in Henan province after fraud case, protests

[AP] Milley: China more aggressive, dangerous to US, allies

[WSJ] Rich Americans Keep Borrowing, Defying Economic Gloom

[FT] The ECB turns the tables on panicky markets and policymakers

[FT] US military chief warns of ‘significant’ increase in Chinese aircraft intercepts

Friday, July 22, 2022

Weekly Commentary: Nowhere to Hide

First vacation in a while, so coverage will be spotty for the next week or so.  And I'll try to finish up this week's CBB news story extracts when I have a chance.

Comments from Thursday’s Tactical Short’s Q2 conference call, “Nowhere to Hide.”

We certainly recognize these are trying times. Few of us have been spared from what has been an all-encompassing market decline. I hope today to focus on our overarching mission of informing and educating.

This is such an extraordinary and confounding environment. My objective is to further expound an analytical framework that hopefully sheds light on such a complex macro backdrop. It is not a positive message, and I apologize for that. I would prefer not to be the messenger in such circumstances. With Q2 validating my analytical framework and thesis, my commitment to analytical integrity compels today’s cautionary message.

With that said, let’s cut to the chase: “Nowhere to Hide.” Stocks were hammered. Fixed-income fared only somewhat better. Treasuries, the iShares Treasury Bond ETF (TLT), to be more exact, returned negative 12.6% - and is down about 20% y-t-d. The iShares investment-grade corporate bond ETF (LQD) returned negative 8.40% for the quarter, and the iShares high-yield bond EFT (HYG) returned negative 9.48%.

Through mid-June, commodities had offered refuge from the pounding taken by financial assets. At its June high, the Bloomberg Commodities Index was sporting a 15.3% q-t-d gain. Crude traded up to almost $124, while natural gas surged to a 44% q-t-d gain. But commodities reversed sharply lower during the final couple weeks of the quarter. The Bloomberg Commodities Index ended Q2 with a 5.9% decline, with most of crude’s advance gone, and natural gas actually ending the quarter lower. Even safe havens gold and silver reversed sharply lower and posted Q2 losses.

And with global yields surging along with the dollar, losses continued to mount in EM currencies, stocks and bonds. Meanwhile, one of history’s great manias collapsed in spectacular fashion. Cryptocurrencies suffered catastrophic losses, with withdrawal suspensions, insolvencies, panic runs and general chaos engulfing the sector. Bitcoin sank 59% during Q2 to $18,731, with prices down 73% from November 2021 highs. Most other cryptos were hit with even larger losses.

In short, the so-called “everything Bubble” transitioned to Bubbles bursting everywhere. The backdrop beckons, at least in my eyes, for some Credit and Bubble analysis. Bubbles are a monetary phenomenon. There is invariably an underlying source of Credit expansion driving a “self-reinforcing but inevitably unsustainable inflation” – my Bubble definition. As I am fond of explaining, a Bubble fueled by junk bonds might turn a little crazy, but it would not be expected to pose major systemic risk. Because of the elevated riskiness of the underlying Credit, a junk bond issuance boom will reach a point where apprehensive buyers say, “No more junk, I’ve got enough!” – and this point of risk aversion ensures the Bubble doesn’t inflate year upon year, thereby inflicting deep structural damage.

A Bubble fueled by “money” – Credit instruments perceived as safe liquid stores of value - is a completely different animal. Unlike junk bonds, “money” enjoys insatiable demand – we literally can never get enough of it. Bubbles fueled by money-like instruments can inflate for years, in the process imparting deep structural maladjustment to market, financial and economic structures.

For real life examples, think of the late-90’s “” Bubble, which was fueled by a boom in telecom and corporate debt, along with speculative leverage. It was certainly spectacular, but excess for the most part was contained within the technology arena. It’s bursting caused ample market pain and some economic hardship. But not being systemic, aggressive Federal Reserve stimulus rather quickly reflated the system – certainly boosted by the strong inflationary biases that had developed in housing.

The mortgage finance Bubble here in the U.S. was significantly more systemic. Fueled by “AAA” money-like mortgage securities, this more prolonged Bubble went to gross excess with associated major structural maladjustment. Accordingly, the bursting episode was much more destabilizing - for the markets, financial system and overall economy – the so-called “Great Financial Crisis” (GFC). And even with an unprecedented $1 TN of QE, it took years for even radical monetary inflation to generate system-wide reflation.

With that theoretical backdrop, let’s delve into the “everything Bubble”. Appraising the Fed’s post-bubble analytical and policy framework, I began warning of the potential for the “global government finance Bubble” – the “Granddaddy of All Bubbles” - back in 2009. With the introduction of QE in conjunction with massive fiscal deficits, the expansive Bubble had finally reached the foundation of finance – central bank Credit and government debt. From my analytical perspective, it was the worst-case scenario: The Bubble was being fueled by an egregious inflation of “money” - and it all was enveloping the world.

I also introduced the concept of “moneyness of risk assets” – an expansion of my “moneyness of Credit” tenet from the mortgage finance Bubble era. Basically, the Bernanke Fed used zero rates and inflated market prices to coerce savers into stocks and bonds. Then, aggressive monetary stimulus was employed to backstop the markets, promoting the perception of safety and liquidity. “Stocks always go up”. It was all reckless inflationism that was clearly fueling dangerous asset and speculative Bubbles.

There were some serious bouts of instability along the way – 2012, 2013, 2018, 2019 and March 2020. And, in each instance, the Fed and global central bank community adopted the ever increasing radical monetary inflation necessary to sustain Bubbles. It culminated during the pandemic, with $5 TN from the Fed and similar amounts from the ECB and BOJ. There were Trillions more from central banks everywhere.

It was monetary and fiscal stimulus – inflationism - on a global basis, the likes of which the world had never experienced. And, importantly, the Bubble inflated for an incredible 13 years. History teaches that things can get crazy at the end of cycles, and we witnessed some of the craziest things ever. Readers far into the future will ponder this era, as we do the tulip bulb mania and John Law’s Mississippi Bubble. And, most unfortunately, it’s all coming home to roost now.

Last quarter, I discussed the unfolding new cycle. We believe inflation dynamics have fundamentally changed. I doubt inflation will stay above 9% for long, but I do believe the Fed will be challenged to get – and keep - inflation under control. There were some anomalies that played major roles in keeping consumer price inflation relatively contained throughout the previous cycle – technological innovation, globalization, and the historic development in China and the emerging markets, to name the most obvious. I don’t see any of these factors playing the same role in the new cycle. Also, and this is a key point, financial assets have lost the huge advantage they enjoyed over real assets throughout the previous financial boom cycle.

Now, with consumer prices unleashed and inflation psychology altered, a chastened Fed and central bank community have begun to adjust their doctrines to stress resolve in containing inflation. This is a secular sea-change. During the previous cycle, relatively benign consumer inflation nurtured monetary policy drift to a securities market focus. This created a self-reinforcing dynamic, where liquidity injected during QE operations specifically gravitated to financial assets – stoking speculative Bubbles while having limited inflationary effect on general consumer prices.

Liquidity will inherently flow in the direction of the strongest inflationary biases. During the previous cycle that was financial assets. We don’t expect this dynamic to hold sway going forward.

We can’t overstate the significance of the so-called “Fed put” during the previous cycle. This liquidity backstop – that morphed over time into “whatever it takes” zero rates and Trillions of QE – created the perception of “moneyness” throughout the financial markets. Stocks became a can’t lose, corporate debt the same, and even the cryptocurrencies. The same can be said for derivatives and Wall Street structured finance. Private equity and venture capital were a can’t lose. And you couldn’t lose with hedge funds and leveraged speculation. This central bank-induced “moneyness of everything” stoked a historic period of myriad synchronized Bubbles across the globe. History offers nothing remotely comparable.

But the game has changed, and this lies at the heart of the unfolding new cycle. The central bank liquidity backstop has turned problematic and ambiguous. In the end, I believe central banks will have no alternative than to use QE to counter the forces of bursting asset and Credit Bubbles. But inflation’s resurgence suggests the halcyon “money” free-for-all days are behind us.

We’ll return to this new cycle theme, but let’s address a few of these bursting Bubbles. I find the “Periphery and Core” instability analytical framework particularly helpful in these kinds of environments. As a cycle begins to turn, risk aversion takes hold first out at the periphery – with the more fringe regions, countries, markets, sectors and companies. When finance is loose, it’s the fringe, offering enticing speculative opportunities, that sees the greatest impact from risk embracement and liquidity excess. But when the cycle inevitably turns, the maladjusted “Periphery” is vulnerable to even subtle shifts in risk tolerance and financial conditions. Losses, de-risking/deleveraging, and waning liquidity gain momentum, leading to contagion effects that over time gravitate from the “Periphery” to the “Core.”

This dynamic attained robust momentum during Q2. Powerful de-risking/deleveraging took hold throughout the emerging markets, with currencies and bond markets under heavy liquidation. The unwind of levered EM “carry trades” fueled a self-reinforcing dynamic of dollar strength, waning liquidity and intensifying de-risking/deleveraging. To support their faltering currencies, EM central banks resorted to aggressive rate hikes, along with sales of Treasuries and other international reserve holdings. It all fed a dramatic tightening of global financial conditions for a world that until recently had the semblance of endless liquidity abundance.

China’s international reserves dropped $116bn during Q2, suggesting significant capital flight. China’s currency lost 5.4% versus the dollar. China’s bubble collapse has recently taken a turn for the worse – perhaps a decisive turn. Recall that China faced heightened instability late in Q1. Its developer bond market crisis had jumped from the “Periphery” to the “Core”, with Country Garden, China’s largest developer, seeing bond yields spike from 6.5% to surpass 30%.

Predictably, Beijing moved forward with a series of aggressive stimulus measures that temporarily calmed the developer bond market while spurring a decent stock market rally. There were Covid outbreaks, including an extended crippling lockdown in Shanghai. Beijing announced more stimulus measures, including plans for massive infrastructure spending.

Then something very important transpired. Despite all of Beijing’s measures, developer bond yields began rising again. The crisis deepened. China’s apartment bubble is one of history’s greatest bubbles. Its collapse has significant ramifications – for China’s economy and financial system, along with the global economy and the global financial system. There are clear geopolitical repercussions. Crisis dynamics often move at a glacial pace – only to suddenly accelerate at seemingly lighting speed. And crisis dynamics can appear manageable for some time - only to reach a point where fear takes hold that they might be uncontainable. China’s crisis is on such a trajectory.

Last week, a movement caught fire, where owners of uncompleted apartment units decided to stop making mortgage payments. Within a few days, developments in 100 cities were impacted. We might look back at last week and see it as a critical juncture in the crisis – a point where crisis dynamics began to turn systemic.

Keep in mind this is new territory for China’s households, developers, banks, regulators and Beijing officials, all experiencing their first housing/mortgage finance bust. It’s worth noting that Consumer - chiefly mortgage - borrowings almost doubled over the past five years – and were up four-fold in 10 years - to almost $11 TN. Chinese Bank Assets – which, by the way, were up a record $1.95 TN just during Q1 - surged 50% over the past five years – and 200% in 10 years - to an astronomical $53 TN.

Country Garden saw its bond yields surge a full 11.5 percentage points last week to a record 41%. These bonds yielded 3.25% in September. Another top five developer, Lonfor bond yields have spiked 23 percentage points in eight sessions to 126%. Sunac yields jumped to 117% and Evergrande yields to 141%. Vanke, another top five developer, is worth special attention. It is considered the financially strongest of the major private sector developers. Its bonds yielded 3.0% in September, with its credit default swaps priced at 100 bps.

Vanke yields have surged to almost 10%, with its CDS surpassing 650 bps. The market is saying China’s apartment Bubble has made it to the strongest – to the “Core”. If Vanke is in trouble, I believe China’s Bubble collapse is quickly approaching the point of no return. And we’re talking about an industry with Trillions of liabilities.

Corroborating the thesis that China’s crisis has turned systemic, Chinese bank stocks sank almost 8% last week, as Chinese bank CDS spiked higher – blowing past highs from the March instability period. Notably, China Construction Bank CDS jumped 25 bps last week to 123 bps, surpassing the March 2020 pandemic crisis spike. With over $4 TN of assets, China Construction Bank is one of the largest banks in the world. Of China’s other “Big Four,” Bank of China CDS surged to the high back to 2014. China Development Bank and Industrial and Commercial Bank CDS rose to highs back to 2017.

We can call it the “Beijing put”. China’s historic Credit and apartment Bubbles are unmitigated disasters. Yet markets have been content to look the other way, while renewing their faith in the almighty Beijing meritocracy. No issue was too big to be resolved by Communist leadership. No amount of debt too excessive. No Bubble too big. No degree of structural maladjustment too deep for Beijing stimulus. And, apparently, there’s no economic downturn that won’t be countered by boundless Beijing-directed lending and spending.

I remember the mantra in mid-1998: “The West will never allow Russia to collapse.” And then in 2006/2007, “Washington will never allow a housing bust.” Today, it’s “Beijing won’t allow financial and economic crisis – it won’t tolerate fallout from bursting Bubbles – not with its global superpower status on the line.”

And this is precisely the mindset that sets the stage for destabilizing crisis. First, faith in government control underpins sustained Credit and speculative excess and associated maladjustment. Bouts of instability resolved by government actions over the course of a cycle only embolden risk-taking. With everyone well-conditioned, confidence is sustained for a while, even as Bubbles begin to deflate.

Importantly, however, there reaches a critical juncture where speculative de-risking/deleveraging attains certain momentum, where instability forces markets to begin questioning whether policymakers actually have things under control. I refer to a “holy crap moment” – in 1998, this dynamic revealed egregious leverage at Long-Term Capital Management and elsewhere. In 2008, it was with Lehman and Wall Street finance.

The unraveling process commenced last week in China. The movement to halt mortgage payments was on the heels of some protests by depositors of failed banks. I believe there’s growing recognition that the Chinese people are being pushed to their breaking point. A most protracted Bubble period inflated many things, including expectations. The Chinese have been willing to tolerate increasingly brazen government repression because of confidence that a highly effective Beijing would continue to improve standards of living. This trust is being shattered. There is heightened recognition that Beijing has seriously mismanaged economic development. Zero-Covid is seen by many as terribly misguided government overreach. And I would imagine there are many questioning China’s “partner without limits” alliance with Putin’s Russia.

If not already, the bloom is at least coming off the rose for Beijing. Inflating Bubbles create genius, while Bubble deflation spawns blunders and incompetence. From my perspective, a crisis of confidence is unavoidable. The degree of mismanagement – especially in regard to Credit and speculative excess, its banking system – has been shocking. And with Beijing now forcing aggressive crisis lending – including to insolvent developers – how long can confidence be maintained in China’s bloated banking system?

But here’s what has me really worried. It’s not just Beijing that faces a crisis of confidence. Right now, emerging markets face sinking currencies, de-risking/deleveraging, “hot money” outflows, and a dramatic tightening of financial conditions. And it’s anything but clear what reverses these dynamics. I’ve witnessed a number of EM crises during my career, but never has there been a setup like today’s dominoes all lined up across the globe.

In Europe, the ECB raised rates 50 bps today for the first hike in 11 years. And even with its main policy rate not yet even positive, the troubled European periphery is already under acute stress. Highly indebted and dysfunctional Italy is in the crosshairs. Mario Draghi resigned earlier today, the Italian parliament was dissolved, and there will be at least two months of uncertainty, with elections now scheduled for September 25th. Crisis dynamics engulfed European periphery bonds last month, with destabilizing yield spikes in Italy and Greece.

The ECB responded with a pledge to create a so-called “anti-fragmentation” tool, which essentially means more QE directed at Italian and periphery bonds to thwart bond market collapse. A vague outline of this program was announced today. Not surprisingly, the Germans, Austrians and others are opposed to printing more money to support fiscally irresponsible governments. After all, the ECB’s balance sheet has inflated $5 TN over recent years, and now Europe faces a serious inflation problem, along with an energy crisis and economic stagnation.

It should be obvious by now that money printing will not resolve Europe’s issues. I’ve argued that, at the end of the day, I don't expect the Germans and Italians to share a common currency. And that’s why the ECB and global markets turn so anxious when European periphery yields spike. It poses nothing short of an existential threat to European monetary integration.

The ECB faces a crisis of confidence. They are concocting a liquidity backstop mechanism for the eurozone’s periphery that, truth be told, they really hope they won’t have to use. When they are forced to employ bond support operations and its efficacy is questioned, they will then face the real prospect of a serious run on periphery bond markets and even the euro currency.

And speaking of runs on bond markets, I fear the Bank of Japan is also facing a crisis of confidence. The Bank of Japan has been creating and spending hundreds of billions to maintain its 25 bps ceiling on Japanese 10-year yields. This was a crazy bad idea to begin with, and these days, with spiking global inflation and yields, it has become untenable. The yen has sunk to 20-year lows versus the dollar, and confidence in the yen and monetary management has taken a big hit. When their misguided yield peg breaks, there will be serious risk of a major bond market dislocation and currency turmoil.

Let’s now turn our focus homeward – away from the “Periphery” and more to the “Core”. Inflation surpassing 9%, bursting Bubbles, a sour public mood, economic fragility, and a central bank facing a serious crisis of confidence of its own.

Contemplating the extraordinary backdrop, it’s critical to think secular rather than cyclical. Unfolding financial and economic crises are decades in the making. JPMorgan’s Jamie Dimon has warned of a potential “hurricane.” A Pimco manager last week said he expects more of a “shower.” I am reminded of a passage from a book I read years ago analyzing the late-twenties: It said, “Everyone was prepared to hold their ground, but the ground gave way.”

There is incredible complacency these days, especially considering the environment. Ominous developments at the global “Periphery” are easily disregarded. This is typical. The dollar is exceptionally strong, commodities prices have reversed sharply lower, bond yields are lower, and some see the Fed winding down its tightening cycle in the not too distant future – and all this supports the narrative that peak inflation has passed, and market lows have been established.

Meanwhile, global de-risking/deleveraging, illiquidity and contagion are bearing down on the “Core”. And we’ve already witnessed serious stress unfold at our own “Periphery”. The crypto Bubble is collapsing, revealing a lot of leverage and shenanigans. The corporate debt market has also taken a hit. The junk bond market has been largely shut to new issuance for weeks, and even the investment-grade marketplace has experienced a dramatic change in the liquidity backdrop.

This equates to a destabilizing tightening of financial conditions at our “Periphery” after years of the loosest Credit conditions imaginable. And this is a major structural issue for an economy driven by a proliferation of negative cash-flow and uneconomic businesses. The shakeout has begun, with some of the clearest evidence of this dynamic unfolding in the technology arena. We’ve seen some layoffs, but we’re really early. Before this is over, I expect massive restructurings and bankruptcies. This will be a quite arduous adjustment to new market, policy, financial and economic realities.

Markets are extraordinarily vulnerable here – stocks, bonds, housing, private equity, commercial real estate, and so on. We’re so early in the adjustment process. There are two interrelated critical dynamics at play in the markets. Financial conditions have tightened meaningfully, which will imperil the solvency of many companies, while pressuring household and business spending.

Meanwhile, it’s a critical issue that the “Fed put” has turned ambiguous. Market faith in the Fed liquidity backstop has crystallized for over three decades, becoming deeply embedded in market perceptions, prices and speculative dynamics. In the eyes of the markets, it has been the most consequential facet of contemporary monetary policy doctrine. The Fed liquidity backstop has been integral to Trillions flowing into perceived safe and liquid ETF shares. It has been key to Trillions of hedge fund and speculator leverage. It has been crucial for risk-taking more generally. It has been absolutely fundamental to a multi-hundreds of trillions derivatives complex. And there is today uncertainty as to how the Federal Reserve will now respond to crisis dynamics.

I’m on record forecasting a much larger Fed balance sheet. There is no alternative to central bank liquidity in the event of serious de-risking/deleveraging. I also believe newfound inflation persistence will prevent the Fed from their singular focus on market stability. I expect another round of QE – but it seems likely that this liquidity comes later and in narrower scope than markets have grown accustomed to. And later and smaller will not suffice.

Recall the portentous dynamic from March 2020. The Fed hastily responded to de-risking/deleveraging and market dislocation by announcing a major QE program. Yet market dislocations only worsened. An increasingly desperate Fed repeatedly boosted its crisis policy response until the prospect of Trillions of QE finally reversed de-risking/deleveraging and halted the run on some ETFs.

The Fed’s most recent $5 TN QE onslaught pushed leverage and speculative excess to unprecedented extremes. When serious de-risking takes hold at the “Core”, it would take Trillions of additional liquidity to rejuvenate risk-taking and leveraged speculation. And, at this point, with inflation raging and bond markets fragile, such a massive QE program would pose great risk to inflation and bond market stability, not to mention Federal Reserve credibility.

Fundamentally altered inflation dynamics are a prominent aspect of the new cycle. The era of endless cheap imports from China and Asia has largely run their course. And Russia’s invasion of Ukraine and the new Iron Curtain solidified the end of a multi-decade period of integration and globalization. And while commodity prices have retreated over recent weeks, we believe the new cycle will be an era of hard asset outperformance versus financial assets. And this dynamic will change so many things, including raising the risk that QE injections feed directly into higher commodities prices and general inflation. The job of a central banker has become incredibly more challenging.

Markets can no longer take for granted that the Fed is willing and able to ensure the perpetual bull market. Late and limited QE will not thwart financial crisis, and this new dynamic implies significantly higher market and economic uncertainty. Markets are riskier. Speculation is riskier. Leverage is riskier. The cost of market protection is higher.

And let me summarize some key aspects of the new cycle that will profoundly impact the markets. Consumer prices will have a stronger and sustained inflationary bias. Central banks will be forced back to a traditional inflation focus, rather than the experimental market-centric approach of the past cycle. Policy rates will be higher, and QE will be relegated to a crisis-fighting tool. Financial conditions will be significantly tighter on a more sustained basis. The liquidity and policymaking backdrops will be much less conducive to leveraged speculation, and risk-taking more generally. The so-called “Fed put” will remain nebulous, with QE employed more unpredictably and sparingly.

I believe we’re early in the process of markets adjusting to new cycle realities. Markets are highly volatile at cycle inflection points, and we’ve been experiencing this phenomenon. I expect even more volatility. The fundamental tightening of financial conditions is currently having its greatest impact at the “Periphery”. And while our markets have retreated, the “Core” is currently benefiting from the strong dollar and generally low market yields. This creates a mirage of liquid and sound markets. There has been meaningful tightening at the “Core’s” periphery, with waning liquidity and market losses in U.S. corporate debt markets.

But a much more perilous storm is approaching, and we need to ponder the possibility that there will be nowhere to hide – that the unfolding crisis is global, deeply systemic and uncontrollable for the global central bank community. I worry about a crisis of confidence in policymaking, in the markets and finance more generally. As I’ve said many times, contemporary finance appears almost miraculous so long as it’s expanding – as it did in historic fashion over the previous cycle. It’s unclear to me how existing market and financial structures continue to operate effectively in the new cycle. How does contemporary finance expand with financial conditions much tighter, with the central bank community’s newfound stinginess with liquidity, with significantly reduced leveraged speculation and much less faith in forever rising securities prices?

And in closing, I fear there is nowhere to hide from escalating geopolitical risk. And I’ll again underscore a most pertinent cycle dynamic. During the up-cycle boom, the economic pie is perceived as robust and expansive. Cooperation, integration and strong alliances are viewed as beneficial - both individually and collectively. But as the cycle ages, strains mount, and insecurity increasingly takes hold. Eventually, the backdrop is viewed more in terms of a shrinking pie - with a newfound zero-sum game calculus. The downside of the cycle heralds a period of fragmentation, animus and conflict.

We’re now five months into the tragic war in Ukraine. The West is determined that Russia cannot be allowed to win. Putin seems as determined as ever to ensure Russia doesn’t lose. And the more munitions arriving from the West, the more it appears Putin is adopting a scorched earth strategy of destruction in the south and terrorizing missile strikes in population centers across Ukraine.

At this point, a return to the previous world order appears impossible. From this perspective, the world appears well into the transition to a perilous down cycle dynamic. Last week, Putin referred to the Ukraine conflict as “the beginning of a radical breakdown of the American world order… the beginning of the transition from liberal-globalist American egocentrism to a truly multipolar world.”

And there’s little doubt that China has aligned with Putin’s Russia to form an anti-U.S. alliance. An altered and much less hospitable world order is fundamental to the new cycle. I fear a scenario where the West has to significantly ramp up support to preserve Ukraine as an independent nation. I’ve worried for a while now that bursting Chinese Bubbles could spur a Beijing move on Taiwan. U.S./Chinese tensions are on a troubling trajectory. It’s difficult to imagine a backdrop with greater uncertainty and greater risk – market, policy, economic, political and geopolitical. I’m a broken record on this, but it’s time to hunker down and prepare for tumultuous times. I sincerely hope my analysis proves way too pessimistic.

For the Week:

The S&P500 rallied 2.5% (down 16.9% y-t-d), and the Dow rose 2.0% (down 12.2%). The Utilities slipped 0.6% (down 3.8%). The Banks gained 2.1% (down 19.7%), and the Broker/Dealers surged 4.1% (down 15.1%). The Transports advanced 4.5% (down 16.2%). The S&P 400 Midcaps recovered 4.0% (down 15.7%), and the small cap Russell 2000 rallied 3.6% (down 19.5%). The Nasdaq100 rallied 3.4% (down 24.0%). The Semiconductors jumped 5.5% (down 28.0%). The Biotechs declined 1.3% (down 14.6%). While bullion rallied $19, the HUI gold index fell 1.1% (down 22.3%).

Three-month Treasury bill rates ended the week at 2.3325%. Two-year government yields fell 15 bps to 2.97% (up 224bps y-t-d). Five-year T-note yields sank 17 bps to 2.84% (up 158bps). Ten-year Treasury yields dropped 17 bps to 2.75% (up 124bps). Long bond yields declined 11 bps to 2.975% (up 107bps). Benchmark Fannie Mae MBS yields sank 23 bps to 4.165% (up 210bps).

Greek 10-year yields sank 27 bps to 3.23% (up 192bps y-t-d). Ten-year Portuguese yields fell 12 bps to 2.19% (up 173bps). Italian 10-year yields rose four bps to 3.32% (up 215bps). Spain's 10-year yields declined four bps to 2.26% (up 169bps). German bund yields dropped 10 bps to 1.03% (up 121bps). French yields fell 13 bps to 1.62% (up 142bps). The French to German 10-year bond spread narrowed three to 59 bps. U.K. 10-year gilt yields dropped 15 bps to 1.94% (up 97bps). U.K.'s FTSE equities index rallied 1.6% (down 1.5% y-t-d).

Japan's Nikkei Equities Index surged 4.2% (down 3.0% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.215% (up 14bps y-t-d). France's CAC40 rose 3.0% (down 13.1%). The German DAX equities index recovered 3.0% (down 16.6%). Spain's IBEX 35 equities index gained 1.3% (down 7.6%). Italy's FTSE MIB index rose 1.3% (down 22.4%). EM equities were mostly higher. Brazil's Bovespa index rallied 2.5% (down 5.6%), and Mexico's Bolsa index increased 0.4% (down 11.3%). South Korea's Kospi index jumped 2.7% (down 19.6%). India's Sensex equities index rallied 4.3% (down 3.7%). China's Shanghai Exchange Index increased 1.3% (down 10.2%). Turkey's Borsa Istanbul National 100 index recovered 5.6% (up 35.5%). Russia's MICEX equities index dipped 0.6% (down 44.6%).

Investment-grade bond funds posted outflows of $3.309 billion, and junk bond funds reported negative flows of $885 million (from Lipper).

Federal Reserve Credit last week expanded $11.2bn to $8.870 TN. Fed Credit is down $30.7bn from the June 22nd peak. Over the past 149 weeks, Fed Credit expanded $5.143 TN, or 138%. Fed Credit inflated $6.059 Trillion, or 216%, over the past 506 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped another $13.4bn to a 26-month low $3.352 TN. "Custody holdings" were down $174bn, or 4.9%, y-o-y.

Total money market fund assets rose $9.0bn to $4.583 TN. Total money funds were up $96bn, or 2.1%, y-o-y.

Total Commercial Paper was little changed at $1.170 TN. CP was up $38bn, or 3.3%, over the past year.

Freddie Mac 30-year fixed mortgage rates added three bps to 5.54% (up 243bps y-o-y). Fifteen-year rates rose eight bps to 4.75% (up 242bps). Five-year hybrid ARM rates declined four bps to 4.31% (up 190bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 17 bps to 5.60% (up 237bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 1.2% to 106.73 (up 11.6% y-t-d). For the week on the upside, the Swedish krona increased 2.6%, the Norwegian krone 2.4%, the Australian dollar 2.0%, the Japanese yen 1.8%, the New Zealand dollar 1.6%, the Swiss franc 1.5%, the South African rand 1.5%, the euro 1.3%, the British pound 1.2%, the South Korean won 1.0%, the Canadian dollar 0.9%, and the Singapore dollar 0.9%. On the downside, the Brazilian real declined 1.7%. The Chinese (onshore) renminbi increased 0.08% versus the dollar (down 5.86% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rallied 2.7% (up 17.5% y-t-d). Spot Gold recovered 1.1% to $1,728 (down 5.6%). Silver slipped 0.6% to $18.60 (down 20.2%). WTI crude dropped $2.89 to $94.70 (up 25.9%). Gasoline increased 0.3% (up 45%), and Natural Gas surged 18.3% to $8.30 (up 123%). Copper rallied 3.6% (down 25%). Wheat fell 2.3% (down 2%), and Corn sank 6.5% (down 5%). Bitcoin surged $1,872, or 9.0%, this week to $22,732 (down 51%).

Market Instability Watch:

July 21 – Bloomberg (Wei Zhou and Dorothy Ma): “China’s credit market is now showing stress on an almost daily basis, as a worsening property crisis shatters assumptions about safe borrowers and even Chinese investors turn against troubled debtors. The country’s junk dollar bonds were on the brink of record lows Thursday, as a state-backed developer sought payment delays on $1.6 billion of dollar notes. In other signs of stress, the debt of a private builder deemed healthy just months ago sank, while creditors spurned a restructuring plan by the parent of BMW AG’s China partner. Taken together, the incidents point to a credit market in a new phase of turmoil as stress spreads from cash-starved private developers to those with government backing and companies outside the housing sector. Chinese investors pushing back on debt reprieves or unfavorable restructuring plans also suggest dwindling confidence in Beijing’s ability to pull off a fast economic turnaround.”

July 21 – Financial Times (Amy Kazmin and Silvia Sciorilli Borrelli): “Mario Draghi has resigned as Italy’s prime minister, triggering the dissolution of parliament and pushing the country into snap elections in September. Draghi quit as prime minister… a day after the three large parties in parliament boycotted a confidence vote in his leadership following a rancorous parliamentary debate. President Sergio Mattarella… noted that the early dissolution of parliament — whose term was due to expire next year — was supposed to be a ‘last resort’ but that the political situation left him with no alternative. He also expressed concern about Italy’s ability to meet ‘pivotal deadlines’ for access to its next instalments of the €200bn in EU coronavirus recovery funds. The election will take place on September 25.”

July 21 – Reuters (Dhara Ranasinghe and Yoruk Bahceli): “Debt-laden Italy finds itself in markets' crosshairs again, as a collapse in its national unity government coincides with the European Central Bank preparing to deliver its first interest rate rise in 11 years. Like other indebted euro zone countries, Italy has spent the past few years when cash was cheap and plentiful trying to reduce its vulnerability to rising rates and market panic. But it is more exposed to increasing borrowing costs than it might appear, according to a Reuters review of its debt profile. For sure, Italy has extended its debt maturities, but by less than Southern European peers and outright debt is higher than it was during the euro zone debt crisis.”

July 21 – Financial Times (Ian Johnston and Kate Duguid): “Italy’s debt sold off on Thursday after prime minister Mario Draghi resigned and the European Central Bank sharply raised interest rates in its effort to tame blistering inflation. The yield on Italy’s 10-year government bond rose as much as 0.27 percentage points to almost 3.7% as Draghi’s national unity coalition unravelled and the ECB lifted its deposit rate… The decline in Italian bond prices took the gap between Italian and German benchmark 10-year yields… to 2.38 percentage points, reflecting a widening of more than 0.3 percentage points in just two days. The pressure on Italian debt eased slightly later in the session…”

July 21 – Bloomberg (Greg Ritchie): “The collapse of Italy’s government is awakening a dormant threat in European bond markets. Credit-default swaps suggest investors are starting to worry about a future administration pulling or crashing the nation out of the euro. They are buying newer swaps, which offer more protection against such an event, driving up their premium to older swaps to the highest since 2018 on Thursday. That came after Italian bonds slid in the wake of Prime Minister Mario Draghi resigning, which opens the door to snap elections that could bring in a more euroskeptic or less fiscally responsible government. The debt sold off further after the European Central Bank hiked borrowing costs more than expected, with a new tool to stop unwarranted yield spikes failing to stop the rout.”

July 22 – Bloomberg: “China’s bond market is becoming the locus for global capital outflows and there are signs the government is growing concerned about the $30 billion exodus as it delays data and seeks to manage investor expectations. Foreign funds offloaded 55.9 billion yuan ($8.3bn) of the nation’s debt in June, a fifth month of net sales that swelled the total outflows this year to 200 billion yuan. That’s an abrupt reversal for a market that had seen global participation grow every year since 2014…”

July 19 – South China Morning Post (Frank Tang): “China's holdings of US Treasuries fell from US$1.003 trillion in April to US$980.8 billion in May, the lowest since 2010… A desire by Beijing to avoid ‘the risk of possible conflict’ with Washington could have contributed to China cutting its holding of US government debt to below US$1 trillion for the first time in over 12 years, analysts said. China's holdings of US Treasuries fell from US$1.003 trillion in April to US$980.8 billion in May…, representing the lowest point since May 2010 when its holdings stood at US$843.7 billion.”

Bursting Bubble/Mania Watch:

July 20 – Financial Times (Chris Flood): “New business for exchange traded fund providers dropped by almost 30% in the first six months of the year as equity and bond markets both fell sharply in response to soaring inflation and rising interest rates. Global net inflows into ETFs reached $463.8bn in the first half of 2022, down 29.6% from the same period last year, according to ETFGI… Declines in stocks and bonds this year overshadowed inflows, pushing global ETF assets to $8.6tn, down from $10.3tn at the end of December.”

July 19 – Bloomberg (Jill R. Shah and Davide Scigliuzzo): “Chasing leveraged buyout financing business cost the biggest US banks at least $1.3 billion in the second quarter, and more such losses are likely on the way from their European counterparts. Six banks including JPMorgan…, Goldman Sachs... and Citigroup Inc. recorded the paper losses on loans, mostly made to fund leveraged buyouts. Bank of America Corp. led the pack with a $320 million writedown, while Morgan Stanley reported $282 million in losses… The pain stems from loans that banks agreed to make months ago to fund LBOs, before credit markets were hit by fears of a recession. Lenders have about $38.1 billion of committed loan financing left to sell to investors, plus around $31.3 billion of junk bond funding, according to a Deutsche Bank…”

July 21 – Bloomberg (Lisa Lee and Kiel Porter): “The giants of private credit -- the only game in town lately for big-ticket leveraged buyouts -- are dialing back on risk, in a turning point that threatens to reduce crucial financing for mega deals. Blackstone Inc., Apollo Global Management Inc., Ares Management Corp., KKR & Co., Antares Capital LP and the asset management arm of Goldman Sachs… are cutting the amount of debt they’re providing per deal as recession risk rises, according to people with knowledge of the matter who aren’t authorized to speak publicly. They’re also asking for, and getting, higher yields on financing packages with less leverage, while commanding stronger investor protections in case corporate borrowers go under, the people said.”

July 20 – Bloomberg (Janet Lorin, Hema Parmar and Dawn Lim): “Princeton, Harvard and Yale generated robust returns for their endowments in recent years, fueled in part by billions of dollars of investments in private equity and venture capital. That golden era appears to be over, at least for now. College endowments across the US are likely to report losses for the fiscal year ended June 30 as valuations for startups and other closely held companies deflate, following a sharp decline in public markets and the end of cheap leverage. ‘The magnitude of the drawdown in venture companies and public markets is so much greater than it has been going back to the financial crisis,’ said Jay Ripley, co-head of investments at Global Endowment Management…”

July 20 – Wall Street Journal (Miriam Gottfried): “Blackstone Inc. posted a loss in the second quarter as the broader market tumbled and the value of its private-equity portfolio fell. The… firm reported a net loss of $29.4 million, or 4 cents a share, compared with a profit of $1.31 billion, or $1.82, during the same period last year. Blackstone said the value of its corporate private-equity portfolio fell by 6.7% in the quarter. The decline was smaller than that of the S&P 500, which slumped by 16.5%. Still, it was a far cry from a 13.8% increase a year earlier.”

July 22 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global equity funds recorded their biggest weekly outflow in five weeks in the week to July 20… According to Refinitiv Lipper, investors offloaded a net $13.79 billion worth of global equity funds, marking the biggest weekly outflow since June 15.”

July 22 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “U.S. equity funds witnessed their biggest weekly outflow in five weeks in the week to July 20… According to Refinitiv Lipper data, U.S. equity funds recorded $8.45 billion worth of net selling, which was the biggest weekly outflow since June 15… U.S. growth funds booked outflows of $3.46 billion after small purchases in the week before, while investors exited value funds worth $1.62 billion in a fourth subsequent week of net selling.”

Economic War/Iron Curtain Watch:

July 21 – Reuters (Vitalii Hnidyi and Jonathan Spicer): “Russia and Ukraine will sign a deal on Friday to reopen Ukraine's Black Sea ports, Turkey said, a potential breakthrough that could ease the threat of hunger facing millions around the world as a consequence of Russia's invasion… Although Russia's ports have not been shut, Moscow had complained that its shipments were hurt by Western sanctions. The United States and the European Union have both adjusted their sanctions recently to spell out more clearly exceptions for Russian food and fertiliser exports.”

Inflation Watch:

July 20 – Associated Press (Cathy Bussewitz): “When long-haul trucker Deb LaBree sets out on the road to deliver pharmaceuticals, she has strategies to hold down costs. She avoids the West Coast and the Northeast, where diesel prices are highest. She organizes her delivery route to minimize ‘deadheading’ — driving an empty truck in between deliveries. And if a customer’s load is too far away or they can’t pay more for fuel? She turns the job down… The price of diesel fuel has skyrocketed in recent months — much more even than regular gasoline — especially after Russia invaded Ukraine in February.”

July 21 – Wall Street Journal (Leslie Scism): “Big car, home and business insurer Travelers Cos. posted a 41% decline in second-quarter net income, as inflation has continued to drive up costs, including to repair and replace automobiles and pay for medical care of injured people. Allstate Corp., meanwhile, said inflation would worsen its coming second-quarter quarter results… Both insurers said more premium-rate increases lie ahead in an effort to improve their bottom lines.”

July 22 – CNBC (Jeff Cox): “Goldman Sachs CEO David Solomon set the tone early this earnings season when he said inflation is ‘deeply entrenched’ in the U.S. economy and impacting conditions on a multitude of fronts. Since then, company leader after company leader has expressed similar sentiments. Most say they’ve managed to navigate difficult times spurred by inflationary pressures at their highest level in more than 40 years. They report cutting costs, raising prices and generally trying to adapt models to the uncertainty of what’s ahead.”

U.S. Bubble Watch:

July 21 – CNBC (Jeff Cox): “Initial jobless claims hit their highest level since mid-November last week, the latest sign that a historically tight labor market is beginning to slow… Claims totaled 251,000 for the week ended July 16, up 7,000 from the week before and above the 240,000 Dow Jones estimate.”

July 20 – CNBC (Diana Olick): “Sales of previously owned homes in June fell 5.4% from May…, as prices set records and rates surged. The sales count declined to a seasonally adjusted annualized rate of 5.12 million units last month, the group said. Sales were 14.2% lower compared with June 2021 This is the slowest sales pace since the same month in 2020… These numbers are based on home closings, so the contracts were likely signed in April and May, before the average rate on the 30-year fixed mortgage shot above 6%... There were 1.26 million homes for sales at the end of June. That is an increase of 2.4% from the previous June, and the first year-over-year gain in three years. At the current sales pace, inventory now stands at a three-month supply… The still-tight supply, however, is keeping the heat under home prices. The median price of an existing home sold in June set yet another record at $416,000, an increase of 13.4% year over year.”

July 19 – CNBC (Diana Olick): “The pain in the mortgage market is only getting worse as higher interest rates and inflation hammer American consumers. Mortgage demand fell more than 6% last week compared with the previous week, hitting the lowest level since 2000, according to the Mortgage Bankers Association’s seasonally adjusted index. Applications for a mortgage to purchase a home dropped 7% for the week and were 19% lower than the same week in 2021. Buyers have been contending with high prices all year, but with rates almost double what they were in January, they’ve lost considerable purchasing power.”

July 21 – Financial Times (Richard Waters): “After a period of breakneck expansion, Big Tech is hitting the pause button. A round of internal announcements in recent days has revealed the sudden wave of caution sweeping through the tech companies’ top ranks. Last year, as Big Tech accelerated out of the pandemic, the brakes came off on hiring. Now, facing more difficult year-over-year comparisons and an uncertain economy, the mood has turned quickly. Google, after warning last week that it would target its hiring more carefully in the coming months, followed up this week with a two-week pause on all new job offers… Microsoft also confirmed it was working through a business-by-business review to decide how to focus investments more narrowly.”

Fixed-Income Bubble Watch:

July 20 – Bloomberg (Caleb Mutua): “Wall Street banks were supposed to be done with much of their borrowing in bond markets for the year. Then this week, they sold another $27.5 billion of notes. About $10 billion came from Bank of America Corp. on Tuesday. JPMorgan…, Wells Fargo & Co. and Morgan Stanley sold a combined $17.5 billion on Monday. And Goldman Sachs… may bring the total still higher. The sales are far more than many had expected: JPMorgan strategists had forecast somewhere between $14 billion and $16 billion from the big banks.”

July 20 – Wall Street Journal (Matt Wirz and Heather Gillers): “Paradise, Calif., the town destroyed by the 2018 Camp Fire, says it is close to a debt default, heightening municipal bond investors’ concerns over how a warming planet is adding risk to their $4 trillion market… S&P Global Ratings slashed the bonds’ rating by six notches to triple-C in June, pushing it deeper into junk territory. Municipalities have long suffered from weather-related destruction. Many investors are growing more concerned that climate change is intensifying wildfires, even while critical infrastructure is unprepared and underfunded.”

China Watch:

July 20 – Bloomberg: “Chinese Premier Li Keqiang signaled flexibility on the growth target and reiterated caution on excessive stimulus, as the economy shows initial signs of recovery from Covid outbreaks. The most important thing is to keep employment and prices stable, and slightly higher or lower growth rates were acceptable as long as employment is relatively sufficient, household income grows and prices are stable, Li told global business leaders hosted by the World Economic Forum... ‘China won’t roll out massive stimulus, issue an excessive amount of money or overdraw the future for an overly high growth target,’ Li was quoted as saying…”

July 19 – Bloomberg (Rebecca Choong Wilkins): “Over the past few years, President Xi Jinping has reined in China’s biggest tech companies, stamped out democracy in Hong Kong and locked down 26 million people in Shanghai to eliminate Covid cases. Yet he now faces a surprise challenge from middle-class homeowners who are watching their family wealth slip away with a sustained slide in the property market, which makes up a fifth of China’s economic activity. Some 70% of household wealth in China is tied up in property, far more than in the US, making it one of the most sensitive political issues for the Communist Party. For months Xi has stood firm in reining in over-leveraged Chinese developers, spurring a record wave of defaults that spooked global investors and brought at least 24 leading property companies to the brink of collapse. In the process, more than $80 billion has been wiped from its offshore bond market.”

July 19 – Guardian (Martin Farrer): “Chinese banks have been told to bail out struggling property developers to help them complete unfinished housing projects and head off the growing mortgage strike that threatens to seriously damage the economy. With thousands of homebuyers banding together to refuse to keep up with mortgage instalments on unfinished apartments bought off the plan, regulators have stepped up efforts to encourage lenders to extend loans… The China Banking and Insurance Regulatory Commission (CBIRC) told the official industry newspaper… that banks should meet developers’ financing needs where reasonable. The CBIRC expressed confidence that with concerted efforts, ‘all the difficulties and problems will be properly solved’, the China Banking and Insurance News reported.”

July 21 – Bloomberg: “China’s banking regulator vowed to ensure developers complete construction for pre-sold homes, an attempt to alleviate homebuyer concern as more people threaten to boycott mortgage payments. The China Banking and Insurance Regulatory Commission will work with the central bank, the housing ministry and local governments to ensure home delivery and social stability, Liu Zhongrui, an official with the regulator’s statistics department, said… The authorities will also keep property financing ‘stable and orderly’ while supporting the industry, Liu said. Regulators are seeking to defuse a growing consumer boycott of mortgage payments that risks spreading the real estate crisis to the banking system. The CBIRC earlier urged banks to increase lending to developers so they can complete unfinished housing projects…”

July 18 – Bloomberg (Wei Zhou and Tim Smith): “Chinese developers’ liquidity stress will evolve into insolvency risk if a property-sales recovery stalls, with at least one-fifth of rated builders facing such prospects, according to S&P Global Ratings. Developers can’t exchange and extend their defaulted bonds forever, as investors will lose patience if home sales do not soon improve, said a report from analysts including Chang Li. ‘We assume debt extensions only serve to buy time, and do not fundamentally resolve developers’ excess leverage.’ Amid a record wave of offshore delinquencies, distressed Chinese builders also have been forcing a growing number of debt extensions on investors in a bid to buy time… The stress is now starting to move from developers to banks, as some homebuyers in China refuse to pay mortgages on stalled projects.”

July 19 – Bloomberg: “Some suppliers to Chinese real estate developers are refusing to repay bank loans because of unpaid bills owed to them, a sign that the loan boycott that started with homebuyers is starting to spread. Hundreds of contractors to the property industry complained that they can no longer afford to pay their own bills because developers including China Evergrande Group still owe them money, Caixin reported… One group of small businesses and suppliers circulated a letter online saying they will stop repaying debts after Evergrande’s cash crisis left them out of pocket. ‘We decided to stop paying all loans and arrears, and advise our peers to decline any requests to be paid on credit or commercial bill,’ the group said… ‘Evergrande should be held responsible for any consequence that follows because of the chain reaction of the supply-chain crisis.’”

July 19 – CNBC (Evelyn Cheng): “China’s real estate market desperately needs a boost in confidence, analysts said, after reports of homebuyers halting mortgage payments rocked bank stocks and raised worries of a systemic crisis. The size of the mortgages isn’t as worrisome as the impact of the latest events on demand and prices for one of the biggest financial assets in China: residential housing. ‘It is critical for policymakers to restore confidence in the market quickly and to circuit-break a potential negative feedback loop,’ Goldman Sachs chief China economist Hui Shan and a team said…”

July 21 – Reuters (Liangping Gao and Ryan Woo): “China's largest policy bank said on Friday that it had disbursed 181.5 billion yuan ($27bn) in loans for urban development projects in the first half of the year, and pledged to maintain an accelerated pace of lending to fund infrastructure. The China Development Bank (CDB) has supplied 650 million yuan in loans to fund the renewal of an economic zone in the eastern city of Yantai, including the renovation of industrial facilities, it said.”

July 21 – Reuters: “China reported 1,011 new coronavirus cases for July 21, of which 175 were symptomatic and 836 were asymptomatic, the National Health Commission said on Friday. That compared with 943 new cases a day earlier - 200 symptomatic and 743 asymptomatic infections, which China counts separately.”

July 20 – Financial Times (James Kynge, Kathrin Hille, Ben Parkin and Jonathan Wheatley): “The 350m Lotus Tower that looms over the skyline in Sri Lanka’s capital Colombo is one of the tallest buildings in South Asia. Funded by a Chinese state bank and designed to look like a giant lotus bud about to burst into flower, it was intended to be a metaphor for the flourishing of Sri Lanka’s economy and the ‘brilliant future’ of the bilateral co-operation between Beijing and Colombo. Instead, the tower has become a symbol of the mounting problems facing China’s overseas lending scheme, the ‘Belt and Road Initiative’. The construction suffered from lengthy delays and an allegation of corruption levelled by Sri Lanka’s then-president Maithripala Sirisena against one of the Chinese contractors. Now, three years after its official launch, the tower’s amenities including a shopping mall, a conference centre and several restaurants stand either unfinished or largely unused while outside on the streets outrage over Sri Lanka’s financial mismanagement has boiled over into popular protests.”

July 21 – Economic Times: “In a grim reminder of the 1989 Tiananmen Square Massacre, armoured tanks were seen deployed on the streets of China amidst large-scale protests by people demanding the release of their savings frozen by banks. The country's Henan province has been for the past several weeks witnessing clashes between police and depositors with the latter saying they have been prevented from withdrawing their savings from banks since April this year. Fresh videos have surfaced online in which Chinese Peoples Liberation Army (PLA's) tanks can be seen deployed on the streets to scare protestors. Large-scale protests are being held in the province by bank depositors over the release of their frozen funds.”

Central Banker Watch:

July 21 – Financial Times (Martin Arnold and Ian Johnston): “The European Central Bank has raised interest rates by half a percentage point, pledging to prevent surging borrowing costs from sparking a eurozone debt crisis amid political turmoil in Italy and the resignation of prime minister Mario Draghi. It was the first ECB rate rise for more than a decade and twice the size of the increase mooted by the bank only last month. The move ends eight years of negative rates and raises the ECB’s deposit rate to zero. ECB president Christine Lagarde said it was ‘time to deliver’ after eurozone inflation hit a record high of 8.6% in the year to June, more than four times the central bank’s target of 2%.”

July 21 – Bloomberg (Alice Gledhill): “When a central bank sets a red line, the market will start looking for ways to test it. And now that the European Central Bank has unveiled the initial details of its anti-fragmentation tool, traders say the next step is to figure out what it takes to set it in motion. They’re asking: How wide do European spreads need to be? What are the conditions for policymakers to start supporting bond markets, and to what extent does Italy’s own political chaos prevent the ECB from taking action? ‘We would anticipate the market will test the ECB’s resolve,’ said David Zahn, the head of European fixed income at Franklin Templeton. ‘The market is interested in when or at what level the ECB would step in to help restrict government spreads widening.’”

Global Bubble and Instability Watch:

July 22 – Bloomberg (Chikako Mogi): “Japanese investors cut holdings of overseas bonds for a record eighth week as Federal Reserve interest-rate hikes and accelerating global inflation sap their demand for foreign debt. Funds in the Asian nation offloaded a net 919.6 billion yen ($6.7bn) of overseas fixed-income securities in the week through July 15… The latest figures extend weekly sales to the longest since Bloomberg started collecting the data in 2005. ‘Wariness over a further drop in Treasury prices remains deep-rooted amid concern over US inflation, and that is deterring appetite to buy overseas bonds,’ said Tsuyoshi Ueno, a senior economist at NLI Research Institute... ‘There may also be a move to cut losses.’”

Europe Watch:

July 21 – Financial Times (Amy Kazmin): “After Italian prime minister Mario Draghi’s second and conclusive resignation this week, the conservative Il Tempo newspaper’s front page carried the headline: ‘Draghi’s suicide’. But rival title La Stampa depicted him as the victim of political murder, declaring his government had been ‘drowned’. Just who is responsible for the fall of the highly respected former European Central Bank chief, feted for his role in saving the single currency in the eurozone crisis of 2012, is the subject of bitter debate among Italy’s politicians as they seek to deflect a wave of public anger over the collapse of the ruling coalition. Opinion polls last week showed Italians overwhelmingly wanted Draghi to stay in office to steer Italy through its economic and geopolitical challenges rather than going to the polls early.”

July 21 – Financial Times (Tony Barber): “In ancient times the senators of Rome begged Cincinnatus to come out of retirement and save the republic. His mission accomplished, he returned to his farm, becoming a revered symbol of selfless virtue for centuries to come. Like Cincinnatus, Mario Draghi was called upon to be the saviour of Italy at a moment of national peril during the pandemic almost 18 months ago. As prime minister he, too, rose to the occasion. But his reward is to lose the reins of power just when new, even graver emergencies are unfolding in Italy and around Europe. Many Italians can barely contain their despair at the machinations of the professional politicians that have contributed to their hero’s exit. ‘And now there is nothing left to us but to cry: poor Italy, poor us,’ tweeted one admirer of Draghi.”

July 22 – Bloomberg (Carolynn Look): “Private-sector activity in the euro area unexpectedly shrank for the first time since the pandemic lockdowns of early 2021, adding to signs that a recession might be on the horizon. A survey of purchasing managers by S&P Global dropped to a 17-month low in July, dipping beneath the level that signals contraction… ‘A steep loss of new orders, falling backlogs of work and gloomier business expectations all point to the rate of decline gathering further momentum,’ said Chris Williamson, an economist at S&P Global. ‘Of greatest concern is the plight of manufacturing, where producers are reporting that weaker-than-expected sales have led to an unprecedented rise in unsold stock.’”

July 20 – Reuters (Elizabeth Piper and Andrew Macaskill): “Former finance minister Rishi Sunak and foreign secretary Liz Truss will battle it out to become Britain's next prime minister after they won the final lawmaker vote, setting up the last stage of the contest to replace Boris Johnson. Sunak has led in all rounds of the voting among Conservative lawmakers, but it is Truss who seems to have gained the advantage so far among the 200,000 members of the governing party who will ultimately choose the winner. The final stretch of a weeks-long contest will pit Sunak, a former Goldman Sachs banker who has raised the tax burden towards the highest level since the 1950s, against Truss, a convert to Brexit who has pledged to cut taxes and regulation.”

EM Crisis Watch:

July 22 – Bloomberg: “Russia’s central bank brought interest rates below their level before the invasion of Ukraine, seizing on steep slowdown in inflation to ease monetary policy more than forecast. Policy makers lowered their benchmark to 8% from 9.5% on Friday and signaled they will consider further reductions in the second half of the year. The fifth straight cut was bigger than predicted…”

Japan Watch:

July 21 – Reuters (Leika Kihara): “The Bank of Japan projected inflation would exceed its target this year in fresh forecasts issued on Thursday, but maintained ultra-low interest rates and signalled its resolve to remain an outlier in a wave of global central banks'policy tightening. BOJ Governor Haruhiko Kuroda brushed aside the chance of near-term policy tightening, saying he had ‘absolutely no plan’ to raise interest rates or hike an implicit 0.25% cap set for the bank's 10-year bond yield target.”

July 21 – Bloomberg (Yuko Takeo and Yoshiaki Nohara): “Japan’s key inflation gauge rose further above the Bank of Japan’s target level of 2%, a result that will likely keep speculation smoldering over possible policy adjustments at the central bank despite Governor Haruhiko Kuroda’s continued commitment to ultra-low rates. Consumer prices excluding fresh food climbed at a faster pace of 2.2% in June from a year earlier, with energy costs amplified by a weaker yen and higher processed food prices the main contributors…”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 21 – Wall Street Journal (Talal Ansari and Alyssa Lukpat): “More than 100 million Americans were in the path of a dangerous heat wave Wednesday, from the West to the Northeast, officials said. Temperatures in the triple digits were recorded from Arizona to Louisiana, according to the National Weather Service. Forecasters warned the roughly one-third of Americans that were under heat alerts to drink fluids and stay out of the sun…”