Friday, April 19, 2024

Weekly Commentary: World-Wide De-Risking/Deleveraging

Despite close calls Saturday night and again on Thursday night, we at least made it through the week avoiding “the start of WW3.” I’m afraid the same cannot be said for the beginning of WW2D (World-Wide De-Risking/Deleveraging).

Key speculative leverage epicenters were under notable pressure this week – global bond markets, EM currencies and bonds, and big tech.

Some Headlines: “Resurgent Dollar, Higher Yields Send EM Currencies to 2024 Lows”; “US Nods to ‘Serious’ Japan, S.Korea Concerns Over Slumping Currencies”; “Korea Discusses Currency Concerns with Japan, Ramps Up Jawboning”; “Indonesia's Plunging Rupiah Twists the Policy Plot”; “Indonesia Ramps Up Steps to Shield Economy From Strong Dollar”; “Philippine Peso’s Drop Past 57 Puts Pressure on Central Bank”; “Japan’s Yen Hits a Fresh Three-Decade Low of 154”; “China Pledges to Steady Yuan as Asian Currencies Come Under Pressure.”

Under the Friday Bloomberg (Marcus Wong) headline, “‘Super Peso’ Slides as Middle East Risk Threatens Carry Trade”: “The Mexican peso slumped the most in four years, as increasing conflict in the Middle East sapped demand for the currency that has been one of the favorite targets for carry trades. The peso tumbled more than 6% against the dollar as news began to filter through Friday of an Israel retaliatory strike on Iran, in what some in the market described as a ‘flash crash.’ The currency had climbed to the strongest in almost nine years last month, driven by relatively high local interest rates and low currency volatility.”

We can assume that global “carry trades” (borrow in cheap currencies to lever in higher-yielding instruments) have mushroomed over recent years to the Trillions, with speculative leverage seductively bolstering liquidity and asset prices virtually everywhere. Such massive speculative leverage has become untenable.

So-called “flash crashes” are anathema to leverage. And with the Mexican peso a major (and favored) EM currency, Thursday night’s market dislocation confirmed the backdrop has turned precarious for “carry trade” leveraged speculation.

April 19 – Bloomberg (Catherine Bosley and Matthew Burgess): “Central banks from Jakarta to Seoul intensified the defense of their currencies, as Asia’s struggle against a resurgent dollar faced a fresh challenge from reports of armed conflict in the Middle East. Bank Indonesia increased its interventions on Friday to support the rupiah and urged government-backed firms to avoid making huge dollar purchases. The State Bank of Vietnam’s deputy governor said it was ready to intervene in the foreign exchange market… With the won shy of a 17-month low against the greenback, South Korea pledged to respond immediately to excessive currency market volatility. Asian currencies have slid precipitously against the dollar as investors lose hope of imminent reduction to US borrowing costs.”

For the week, the Mexican peso declined 2.6%, the Indonesia rupiah 2.5%, the Philippine peso 1.9%, the Brazilian real 1.6%, the South African rand 1.3%, and the Colombian peso 1.3%.

It may be a bit early to declare a full-fledged global currency crisis, but things moved decisively in that direction this week. The situation becomes more serious when the Bank of Japan (BOJ) is forced to intervene, potentially unleashing disorderly currency trading and “flash crash” contagion across the “carry trade” universe. Major currency crisis dynamics will be at full force when Beijing loses control of its renminbi currency peg. It’s a challenge to envisage a more precarious environment to be locked into a dollar-peg currency regime.

April 16 – Bloomberg (Tania Chen and Iris Ouyang): “China’s second attempt in a month to loosen its grip on the yuan is opening up the door for the currency to test a psychological milestone that hasn’t been seen since November. The yuan will weaken to test 7.30 per dollar by the end of this quarter, according to 10 analysts polled… after Beijing moved to guide the managed currency weaker Tuesday.... While that is less than 1% from the yuan’s current level, the path leading to it will be paved with official pushback against sharp declines, they said.”

Losses are mounting throughout Asian currency markets. The Japanese yen has declined 8.8% y-t-d, the Thai baht 7.4%, the South Korean won 6.8%, the Taiwanese dollar 5.6%, the Indonesian rupiah 5.3%, the Malaysian ringgit 4.0%, and the Philippine peso 3.9%.

China’s vulnerable currency is today tethered to a surging dollar, while its struggling export sector confronts competitors benefiting from devalued currencies. Beijing would surely prefer to relax the peg and weaken the renminbi. Understandably, maintaining stability remains a top priority. So, officials are left to yearn for a gradual and smooth currency devaluation. Meanwhile, any indication that Beijing has decided to loosen the peg triggers trepidation for a disorderly devaluation.

Why would one wait to withdraw funds from China, with devaluation only a matter of time? With rising risks of disorderly devaluation and capital controls? Meanwhile, the currency derivatives time bomb ticks. Ongoing big bank renminbi support only exacerbates already heightened banking system risks, while market players are given additional time to accumulate currency hedges.

April 16 – Bloomberg: “A selloff in Chinese small-cap stocks extended Tuesday as tighter market oversight pledged by the cabinet sparked fears over the delisting of those with weak financial health. The CSI 2000 Index fell 7.2%, taking the decline this week to 11%. The CSI 300 Index, which tracks mostly blue-chip firms, outperformed. The benchmark slipped 1.1% after rallying more than 2% on Monday. Traders are reacting to a late Friday statement by the State Council, which vowed to strengthen stock listing criteria and urged companies to improve corporate governance and beef up dividend payouts.”

China’s small cap CSI partially recovered, reducing the week’s losses to 5.5%. The index is down 18.7% y-t-d. Recall that China’s small cap indices crashed to multi-year lows during the February hedge fund (“quant”) crackdown. This week’s disorderly trading points to intensifying speculator de-risking/deleveraging pressures.

It’s worth noting that Tuesday’s China small cap meltdown corresponded with equity market downdrafts throughout Asia. Japan’s Nikkei 225 slumped 1.9% in Tuesday trading, on its way to a 6.2% pounding for the week. South Korea’s Kospi fell 2.3% Tuesday (down 3.4% for the week), Taiwan’s TAIEX 2.7%, (down 5.8%), Thailand SET Index 4.5% (down 4.3%), Philippine’s PSEi Index 2.4% (down 3.2%), and Hong Kong’s Hang Seng Index 2.1% (down 3.0%).

Hedge funds and levered speculation have proliferated throughout Asia in recent years. Especially after this week’s drubbing, we can assume the levered players are reeling. And with the global leveraged speculating community a key transmission mechanism between markets and geographies, unfolding trouble at the “periphery” needs to be closely monitored.

Fragile EM bond markets remained under pressure this week. In dollar-denominated EM bonds, Indonesia yields rose 13 bps to 5.28% (one-month rise 39bps), Philippines eight bps to 5.39% (35bps), Panama 23 bps to 5.41% (50bps), Colombia six bps to 7.69% (52bps), and Brazil three bps to 6.73% (25bps). Over the past month, local currency bond yields were up 116 bps in Turkey, 66 bps in Colombia, 61 bps in Brazil, 58 bps in Mexico, 52 bps in Hungary, 50 bps in Peru, and 50 bps in the Philippines.

I would typically expect stress at the “periphery” to take some time to be transmitted to the “core.” Moreover, the “core” might even enjoy temporary liquidity benefits from “periphery” risk aversion. Not today. That the “core” today faces acute endogenous de-risking/deleveraging risk is an alarming aspect of the current environment.

Friday afternoon Bloomberg headlines: “‘Mag Seven’ Get Crushed to Lead Losses in Stocks” and “Tech Stocks’ Biggest Weekly Rout Since 2022 Roils Markets.” Friday trading action was the type that tends to foreshadow a panic. As one of history’s most over-owned stocks and Crowded Trades, Nvidia posted a one-session loss of 10%. Netflix sank 9.1%, Advanced Micro 5.4%, Micron 4.6%, and Meta Platforms 4.1%. The Semiconductors' 4.1% Friday slump pushed the week’s loss to 9.2% - the largest weekly decline since July 2022. The Nasdaq100’s (NDX) 5.4% weekly drop was the largest since November 2022. These stocks and indices are the favorites for the option-trading crowd.

I won’t delve deeply, but it’s a good time to emphasize that inflating fundamentals become a key facet of Bubbles. And I have never seen this dynamic play out as powerfully as it has throughout AI.

A late Friday CNBC headline: “Investors Are Hoping Big Tech Earnings Next Week Could Revive a Flagging Bull Market.” Stock prices ebb and flow, but I wouldn’t count on earnings to revive the Bubble. European semiconductor heavyweight ASLM missed earnings badly, while powerhouse Taiwan Semiconductor turned more cautious on the outlook.

Global financial conditions have tightened, and more significant tightening is likely. The AI Bubble is a creature sustained by loose conditions. Loose market conditions fueled self-reinforcing speculative excess that stoked only looser conditions and a historic mania. Loose conditions and melt-up dynamics fed the illusion of unlimited cheap finance to fund endless data centers (loaded with hardware) and AI spending plans around the globe. The tech industry is today all geared up for a massive AI build out that will now confront a problematic tightening of global conditions and crisis dynamics.

April 16 – Bloomberg (Craig Torres): “Federal Reserve Chair Jerome Powell signaled policymakers will wait longer than previously anticipated to cut interest rates following a series of surprisingly high inflation readings. Powell pointed to the lack of additional progress made on inflation…, noting it will likely take more time for officials to gain the necessary confidence that price growth is headed toward the Fed’s 2% goal before lower borrowing costs. If price pressures persist, he said, the Fed can keep rates steady for ‘as long as needed.’ ‘The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence,’ Powell said…”

It's late in the game for Powell, John Williams and other Fed officials to rethink their dovish pivot. The damage of signaling easier conditions in the throes of loose market conditions and Bubble excess has been done. And it’s not hyperbole to assert that this damage could prove catastrophic. Analysts clinging to forecasts of multiple 2024 rate cuts may yet be proven correct.

Money Market Fund Assets sank $112 billion last week, the second largest decline ever. It’s worth noting that this outflow exceeded the week of October 18th, when $98 billion exited the money fund complex. That big October outflow was the largest since $169 billion fled during the week (9/17/08) of the Lehman collapse.

Tax payments undoubtedly played a role in last week’s outflow (as they apparently did last October), but there’s more to the story. Last October’s big outflow also unfolded as financial conditions tightened. Yields were spiking higher (10-year Treasury yields traded to 5.0% on 10/19), CDS prices were surging (i.e., high yield CDS traded to 531bps on 10/20), and global currencies were faltering (i.e., yen and renminbi near multi-decade lows). Geopolitical risks were elevated following the October 7th Hamas terrorist attack and Israeli response. In short, financial conditions were tightening, and de-risking/deleveraging risks were rising. The Fed would soon be talking rate cuts.

As the dominant intermediator of “repo” securities finance, the money market complex is integral to leveraged speculation and marketplace liquidity. After October’s big outflow, Money Fund Assets would inflate half a Trillion to a recent record high of $6.112 TN (17-month gain of $1.5 TN, or 33%). I would not be surprised if last week’s big outflow marked an inflection point in both leveraged speculation and system liquidity excess.

Ten-year Treasury yields traded up to 4.69% intraday Tuesday, the high back to November 1st. MBS yields jumped to 6.22%, with a 13-session 65 bps surge. It’s ominous to see Treasury yields spike in the face of a fledgling global currency crisis and acute geopolitical risks.

A confluence of developments risks a highly destabilizing de-risking/deleveraging. Dollar strength and rising global yields are placing significant pressure on global “carry trades.” “Hot money” outflows and increasingly fragile currencies are forcing central bank interventions. The attendant liquidation of Treasury holdings fuels a self-reinforcing rise in global yields.

Here at home, rising Treasury, MBS, and corporate yields spur hedging-related sales and some deleveraging. Sinking tech stocks and related indices (i.e., NDX and SOX) trigger the unwind of margin debt, while forcing derivatives-related selling/deleveraging. Deleveraging in both fixed-income and equities marks a fundamental shift in the market liquidity backdrop.

But here’s where things get more interesting. I’ll assume Treasury and MBS “basis trade” (leveraged holdings of Treasuries/MBS matched against short futures contracts) leverage so far remains unaffected by rising yields. But highly levered “basis trades” are inherently vulnerable to unexpected bouts of market illiquidity and dislocation (i.e., March 2020’s market dislocation). The now unfolding global de-risking/deleveraging risks unleashing a cycle of waning liquidity, market dislocation and crisis. If “basis trade” deleveraging takes hold, crisis dynamics would immediately gain powerful momentum.

While bank stocks posted solid gains this week, bank CDS price moves were notably un-bullish. JPMorgan’s nine bps two-week CDS jump was the largest in almost a year, with Bank of America’s two-week nine bps gain the biggest since October.

My fears may come to fruition. For a while, I’ve been contemplating a scenario where the Fed would be forced to respond aggressively to de-risking/deleveraging despite elevated inflation and bond market vulnerability. I’ve asserted that more large-scale QE and major central bank balance sheet inflations are inevitable. There’s just an egregious amount of debt and speculative leverage overhanging global stability.

I see today’s currency instability and bursting tech Bubble as harbingers of impending market and central bank crises. Little wonder Gold has gained 15.9% y-t-d to $2,392 and Silver 20.6% to $28.69.

For the Week:

The S&P500 dropped 3.0% (up 4.1% y-t-d), while the Dow was little changed (up 0.8%). The Utilities rallied 2.0% (up 4.1%). The Banks recovered 2.0% (up 4.2%), while the Broker/Dealers dipped 0.8% (up 4.0%). The Transports fell 2.7% (down 5.1%). The S&P 400 Midcaps lost 2.2% (up 2.0%), and the small cap Russell 2000 fell 2.8% (down 3.9%). The Nasdaq100 sank 5.4% (up 1.3%). The Semiconductors were hit for 9.2% (up 3.1%). The Biotechs dropped 3.9% (down 10.2%). While bullion surged $48, the HUI gold index was little changed (up 8.0%).

Three-month Treasury bill rates ended the week at 5.2175%. Two-year government yields rose nine bps this week to 4.99% (up 74bps y-t-d). Five-year T-note yields jumped 11 bps to 4.67% (up 82bps). Ten-year Treasury yields gained 10 bps to 4.62% (up 74bps). Long bond yields increased eight bps to 4.74% (up 68bps). Benchmark Fannie Mae MBS yields jumped 13 bps (4-wk rise of 55bps) to 6.16% (up 88bps).

Italian yields surged 17 bps to 3.93% (up 23bps y-t-d). Greek 10-year yields rose 12 bps to 3.55% (up 50bps). Spain's 10-year yields gained 13 bps to 3.31% (up 32bps). German bund yields jumped 14 bps to 2.50% (up 48bps). French yields rose 15 bps to 3.01% (up 45bps). The French to German 10-year bond spread was little changed at 51 bps. U.K. 10-year gilt yields increased nine bps to 4.23% (up 69bps). U.K.'s FTSE equities index declined 1.2% (up 2.1% y-t-d).

Japan's Nikkei Equities Index sank 6.2% (up 10.8% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.85% (up 24bps y-t-d). France's CAC40 was about unchanged (up 6.4%). The German DAX equities index lost 1.1% (up 5.9%). Spain's IBEX 35 equities index increased 0.4% (up 6.2%). Italy's FTSE MIB index added 0.5% (up 11.8%). EM equities were mostly lower. Brazil's Bovespa index declined 0.7% (down 6.8%), and Mexico's Bolsa index lost 1.2% (down 2.7%). South Korea's Kospi index sank 3.4% (down 2.4%). India's Sensex equities index fell 1.6% (up 1.2%). China's Shanghai Exchange Index recovered 1.5% (up 3.0%). Turkey's Borsa Istanbul National 100 index fell 1.2% (up 29.8%). Russia's MICEX equities index increased 0.4% (up 12.0%).

Federal Reserve Credit declined $13.6bn last week to $7.388 TN. Fed Credit was down $1.501 TN from the June 22nd, 2022, peak. Over the past 240 weeks, Fed Credit expanded $3.661 TN, or 98%. Fed Credit inflated $4.577 TN, or 163%, over the past 597 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $10.1bn last week to $3.369 TN. "Custody holdings" were up $31.7 billion y-o-y, or 0.9%.

Total money market fund assets contracted $112bn to $5.968 TN. Money funds were up $691 billion, or 13.2%, y-o-y.

Total Commercial Paper dropped $18.6bn to $1.312 TN. CP was up $151bn, or 13.0%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 22 bps to a four-month high 7.10% (up 71bps y-o-y). Fifteen-year rates jumped 23 bps to a 20-week high 6.39% (up 67bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 7.47% (up 54bps).

Currency Watch:

April 18 – Bloomberg (Iris Ouyang): “China reiterated the need to prevent one-sided moves in the yuan, as a resurgent dollar and poor risk sentiment pressure currencies across Asia. The nation will ‘resolutely’ put the yuan back on track when traders place lopsided bets and it’ll also try to avoid excessive volatility, the People’s Bank of China said in a report…”

April 17 – Reuters: “Chinese businesses are hoarding dollars because they expect their own currency to weaken, and that in turn is exacerbating a slide in the yuan… This feedback loop has been playing out for months in mainland currency markets, spurred on by the dollar's rising yield. Foreign exchange deposits have climbed $53.7 billion since September to $832.6 billion… Analysts say one of two things needs to happen to end the downward spiral: the Federal Reserve needs to make deep rate cuts or the yuan needs to hit some form of a trough. Both seem distant.”

April 16 – Bloomberg (Hooyeon Kim and Yoshiaki Nohara): “South Korea discussed concerns about its currency with Japan after the won and yen slumped to multi-year lows this week amid a surge in the dollar that’s reverberating through global markets. The government released a statement outlining comments from Finance Minister Choi Sang-mok and his Japanese counterpart Shunichi Suzuki in which they expressed ‘serious concerns’ over the recent weakening of their currencies and warned of taking appropriate steps to counter any drastic volatility.”

April 17 – Reuters (Saqib Iqbal Ahmed): “The United States, Japan and South Korea agreed to ‘consult closely’ on foreign exchange markets in their first trilateral finance dialogue on Wednesday, acknowledging concerns from Tokyo and Seoul over their currencies' recent sharp declines. The rare warning from the three countries' finance chiefs came as receding expectations of a near-term U.S. interest rate cut pushed the yen to 34-year lows, keeping markets on alert on the chance of an intervention by Japan to prop up the currency.”

April 16 – Reuters (Rae Wee and Stefanno Sulaiman): “Indonesia's economy was primed for monetary easing later this year, but an unwelcome plunge in its currency is complicating matters for Bank Indonesia and could force it to grudgingly raise rates as early as next week. As Indonesian markets returned from a long Eid al-Fitr holiday this week, the rupiah sank to a four-year low against a dollar buoyed by expectations that a hot U.S. economy will force the Fed to keep rates higher for longer.”

April 16 – Bloomberg (Karl Lester M. Yap and Malavika Kaur Makol): “The Philippine peso weakened past the closely watched 57-per-dollar level for the first time since late 2022, putting pressure on the central bank to join emerging-market peers in supporting their beleaguered currencies.”

April 16 – Bloomberg (Maria Elena Vizcaino and Srinivasan Sivabalan): “Developing-world currencies sank as Federal Reserve Chair Jerome Powell signaled interest rates will likely stay high for longer, sending US yields surging and further souring the mood in global markets. The Brazilian real and Mexican peso were among the biggest decliners on Tuesday, dropping at least 1.8% versus the dollar each, with carry traders dumping positions amid spikes in volatility and a resurgent dollar.”

For the week, the U.S. Dollar Index increased slightly to 106.154 (up 4.8% y-t-d). For the week on the upside, the Swiss franc increased 0.4%, the Canadian dollar 0.2%, and the euro 0.1%. On the downside, the Mexican peso declined 2.6%, the Brazilian real 1.6%, the South African rand 1.3%, the Norwegian krone 1.1%, the New Zealand dollar 0.9%, the Japanese yen 0.9%, the Australian dollar 0.8%, the British pound 0.7%, the South Korean won 0.5%, and the Swedish krona 0.3%. The Chinese (onshore) renminbi slipped 0.03% versus the dollar (down 1.92% y-t-d).

Commodities Watch:

April 15 – Bloomberg (Sybilla Gross): “Gold is set to reach $3,000 an ounce over the next six to 18 months on increasing investor inflows amid expectations that the Federal Reserve will eventually cut interest rates, Citigroup Inc. said, adding to a roll call of Wall Street banks that have raised forecasts. Analysts led by Aakash Doshi upgraded their estimate for average prices in 2024 to $2,350 and made a ‘massive 40% upward revision’ in their 2025 prediction to $2,875. Trading will ‘regularly test and breach’ $2,500 in the second half…”

The Bloomberg Commodities Index was little changed (up 4.5% y-t-d). Spot Gold jumped 2.0% to $2,392 (up 15.9%). Silver rose 2.9% to $28.689 (up 20.6%). WTI crude dropped $2.52, or 2.9%, to $83.14 (up 16%). Gasoline slumped 3.3% (up 29%), and Natural Gas declined 1.0% to $1.75 (down 30%). Copper jumped 2.9% (up 21%). Wheat declined 1.0% (down 12%), and Corn dipped 0.5% (down 8%). Bitcoin sank $3,730, or 5.6%, to $63,220 (up 49%).

Middle East War Watch:

April 14 – Financial Times (Andrew England): “It was just before 2am when Israel launched its air defence interceptors to counter a barrage of Iranian drones and missiles. Sirens and explosions rang out across Jerusalem, the southern Negev and the northern border region. Israelis… scurried to safe rooms or bomb shelters. After more than four decades of hostility between the arch foes, Israel was for the first time under a direct attack from Iran. It puts the Middle East ever nearer the full-blown regional conflict that western and Arab leaders have feared since Hamas’s October 7 attack triggered Israel’s retaliatory war in Gaza. All eyes are now on how Israel — still enraged, traumatised and in full war-mode after the Hamas attack — will respond to the unprecedented assault on its territory.”

April 15 – Associated Press (Jon Gambrell): “Iran’s direct attack on Israel over the weekend upended decades of its shadowy warfare by proxy, something Tehran has used to manage international repercussions for its actions. But with both economic and political tensions at home boiling, the country’s Shiite theocracy chose a new path as changes loom for the Islamic Republic. Supreme Leader Ayatollah Ali Khamenei will mark his 85th birthday Friday, with no clear successor in sight and still serving as the final arbiter of every decision Iran makes. Coming to power in the wake of Iran’s devastating eight-year war with Iraq in the 1980s, Khamenei preached for years about ‘strategic patience’ in confronting his government’s main rivals, Israel and the United States, to avoid open combat.”

April 15 – Bloomberg (Fiona MacDonald, Jennifer Jacobs, Donato Paolo Mancini and Golnar Motevalli): “The huge salvo of missiles and drones launched from the arid plains of Iran toward Israel was the kind of direct conflict between the Middle East powers that the world had long feared would mark the explosion of a full-blown regional war. But behind the unprecedented nature of the attack was a dance of diplomatic signaling that allowed both sides to claim success, raising the risk of a broader conflict without making it a certainty. The Israeli military said 99% of the barrage was shot down and no Israelis were killed after Iran had signaled for days it was coming. Tehran said it had made its point, seeking to put the march toward a wider conflagration on hold. Israel’s backers in the US and Europe were also pressing to avoid any further escalation in calls on Sunday.”

April 17 – Wall Street Journal (Patricia Cohen): “For two decades, Iran stayed in the shadows and relied on militias that it funded around the Middle East in its deadly fight with Israel. Its direct attack on Israel last weekend marked a strategic shift, and a major gamble. Iran had long known it had a weaker conventional military compared with Israel and its top ally, the U.S. For most of its existence since the 1979 Islamic revolution, Tehran had few friends in foreign capitals to support a straight-on attack on a U.S. ally. Iran’s massive drone and missile strike on Israel… came after years of building stronger diplomatic ties with American rivals such as Russia and China, mending fences with neighbors such as Saudi Arabia and building up its economy through illicit oil sales. It marked a dramatic illustration of Tehran’s shift away from accommodation with the West and toward open confrontation with the U.S. and its allies.”

April 15 – Financial Times (The Editorial Board): “Iran’s missile and drone assault on Israel marks a dangerous turning point in the hostilities triggered by Hamas’s October 7 attack and Israel’s retaliatory offensive in Gaza. It has thrust the decades-old shadow war between the Islamic republic and the Jewish state into full view, and edged the Middle East ever closer to a full-blown regional conflict that would have catastrophic consequences for the region and beyond. Tehran took a reckless gamble with the first direct assault on Israel from Iranian soil… Both Israel and Iran are now seeking to restore their deterrence with increasingly risky escalation. They must be persuaded to stop. The old rules of the Middle East have been overturned since Hamas’s October 7 assault…”

April 17 – Associated Press (Julia Frankel and Tia Goldenberg): “Israeli Prime Minister Benjamin Netanyahu said… his country would be the one to decide whether and how to respond to Iran’s major air assault earlier this week, brushing off calls for restraint from close allies. Israel has vowed to respond to Iran’s unprecedented attack without saying when or how, leaving the region bracing for further escalation after months of unrest linked to the ongoing war in Gaza. Israel’s allies have been urging Israel since the attack to hold back on any response that could spiral… The diplomatic pressures came as Iran’s president warned that even the ‘tiniest’ invasion of its territory would bring a ‘massive and harsh’ response.”

April 18 – Reuters: “Iran could review its ‘nuclear doctrine’ following Israeli threats, a senior Iranian Revolutionary Guards commander said…, raising concerns about Tehran's nuclear programme which it has always said was strictly for peaceful purposes. Israel has said it will retaliate against Iran's April 13 missile and drone attack, which Tehran says was carried out in response to a suspected Israeli strike on its embassy compound… ‘The threats of the Zionist regime (Israel) against Iran's nuclear facilities make it possible to review our nuclear doctrine and deviate from our previous considerations,’ Ahmad Haghtalab, the Guards commander in charge of nuclear security, was quoted as saying…”

April 17 – New York Times (Ronen Bergman, Farnaz Fassihi, Eric Schmitt, Adam Entous, and Richard Pérez-Peña): “Israel was mere moments away from an airstrike on April 1 that killed several senior Iranian commanders at Iran’s embassy complex in Syria when it told the United States what was about to happen. Israel’s closest ally had just been caught off guard. Aides quickly alerted Jake Sullivan, President Biden’s national security adviser; Jon Finer, the deputy national security adviser; Brett McGurk, Mr. Biden’s Middle East coordinator; and others, who saw that the strike could have serious consequences… Publicly, U.S. officials voiced support for Israel, but privately, they expressed anger that it would take such aggressive action against Iran without consulting Washington. The Israelis had badly miscalculated, thinking that Iran would not react strongly, according to multiple American officials…, a view shared by a senior Israeli official.”

April 17 – Bloomberg (Galit Altstein): “Israel and its allies won plaudits for mostly fending off Iran’s unprecedented attack on Saturday night. But the operation, lasting no more than several hours, came with a steep price tag, and points to the sheer expense of air defense as nations such as Iran improve their drone and missile capabilities. The efforts of Israel and the American, British, French and Jordanian militaries probably cost in the region of $1.1 billion, according to Reem Aminoach, a former brigadier general and chief financial adviser to the head of the Israeli military.”

April 16 – CNBC (Lori Ann LaRocco): “The containership MSC Aries seized by Iran over the weekend marked at least the sixth vessel hijacked by Iran and its proxies in response to the Israel-Gaza war, and it’s adding to the challenges to longstanding freedom of navigation principles that maritime shipping relies on… The latest development has shipping and energy experts bracing for a long-term timeline of uncertainty. ‘Iran is in this for the long haul,’ said Samir Madani, co-founder of, an independent online service that tracks and reports crude oil shipments…”

Ukraine War Watch:

April 12 – Bloomberg (Daryna Krasnolutska): “Russia and Ukraine may have struggled to shift things significantly on the battlefield for more than 16 months, but a new phase of the war is moving the needle in a way that’s having wider repercussions. Both sides are now targeting energy assets to hit their enemy’s economy, and the collateral damage is showing up in global markets. The International Energy Agency warned… Ukrainian drone attacks on Russian oil refineries risk disrupting trade in petroleum products like diesel. European gas prices jumped as much as 10% after Russia struck Ukraine’s gas and power infrastructure this week.”

Market Instability Watch:

April 14 – Wall Street Journal (Eric Wallerstein): “A series of weak auctions for U.S. Treasurys are stoking investors’ concerns that markets will struggle to absorb an incoming rush of government debt. A selloff sparked by a hotter-than-expected inflation report intensified this past week after lackluster demand for a $39 billion sale of 10-year Treasurys. Investors also showed tepid interest in auctions for three-year and 30-year Treasurys. Behind their caution lies a growing conviction that inflation isn’t fully tamed and that the Federal Reserve will leave interest rates at multidecade highs for months, if not years, to come… At the same time, the government is poised to sell another $386 billion or so of bonds in May—an onslaught that Wall Street expects to continue no matter who wins November’s presidential election.”

April 18 – Bloomberg (Piero Cingari): “The International Monetary Fund (IMF) has raised concerns about a small number of hedge funds that now hold significant control over the U.S. Treasury futures market. ‘A concentration of vulnerability has built up, as a handful of highly leveraged funds account for most of the short positions in Treasury futures,’ the IMF’s April 2024 Global Financial Stability (GFS) report states. This concentration of short positions by highly leveraged funds could pose systemic threats to the financial stability of not just the U.S., but the global economy… Essentially, the report suggests that certain funds have become so crucial to the Treasury and repo markets that they might now be considered too big to fail. Any significant liquidity problems they encounter could ripple through the broader financial system, causing widespread instability.”

April 16 – Bloomberg (Christopher Condon): “The International Monetary Fund leveled an unusually direct criticism at US policymakers…, saying the country’s recent standout performance among advanced economies was in part driven by an unsustainable fiscal policy. ‘The exceptional recent performance of the United States is certainly impressive and a major driver of global growth,’ the IMF said in its annual World Economic Outlook. ‘But it reflects strong demand factors as well, including a fiscal stance that is out of line with long-term fiscal sustainability.’”

April 17 – Bloomberg (Kamil Kowalcze): “German Finance Minister Christian Lindner warned his coalition partners against emulating the US Inflation Reduction Act, saying that contrary to its name it has failed to constrain consumer prices in the world’s biggest economy… Lindner referenced critics at home who have been pushing him to loosen controls on public spending to address are raft of problems from crumbling infrastructure to lackluster growth. And he also aimed a dig at President Joe Biden’s flagship economic policy. ‘Why do you dream of an inflation reduction act in Germany when the Inflation Reduction Act of the US fails to reduce inflation,’ Lindner said… ‘I don’t want to be impolite, but if we look at the economic development in the US, the inflation rate is higher again and this forces the Fed to react.’”

April 15 – Reuters (Carolina Mandl): “Trend-following hedge funds could sell between $20 billion and $42 billion in U.S. equities over the next month if the stock market continues to retreat, a Goldman Sachs note shows. Also known as CTAs (commodity trading advisers), trend-following hedge funds trade systematically to catch big trends in markets. Goldman Sachs said an S&P 500 below 5,135 points ‘would flip short-term trend from more positive to negative’ among trend-following hedge funds, triggering equity sales.”

April 17 – Reuters (Saqib Iqbal Ahmed): “Volatility-linked investment strategies are joining the nascent sell-off in U.S. stocks and could help accelerate declines if market gyrations keep increasing. Volatility control funds - systematic investment strategies that typically buy equities when markets are calm and sell when they grow turbulent - hoovered up stocks as the S&P 500 marched to record highs this year. With the S&P 500 now off more than 4% from those levels and the Cboe Volatility Index near its highest point since October, some of these funds are once again becoming sellers. Though the S&P 500 is still up about 5% year-to-date, further gyrations could trigger more selling from the funds: analysts at Nomura estimate the strategies could dump some $45 billion worth of stocks if the S&P 500 averages daily moves of 1% over the next two weeks.”

April 17 – Bloomberg (Edward Bolingbroke): “Traders in the interest-rate futures market are piling into a contrarian bet that would pay off in the event of aggressive Federal Reserve monetary easing this year. The wager is happening in futures on the Secured Overnight Financing Rate… and it involves buying the December 2024 contract while selling the contract due in December 2025. Scenarios in which the trade stands to gain include the Fed front-loading interest-rate cuts before the presidential election in November…”

Global Credit Bubble Watch:

April 16 – Financial Times (Robin Wigglesworth): “Private credit is now so big that the IMF dedicated an entire chapter in its latest Global Financial Stability Report to its ‘rise and risks’… The IMF estimates the size of the global private credit industry at just over $2tn, most of which is in the US, rivalling the high yield and leveraged loan markets… FT Alphaville took a belated look at a JPMorgan report from earlier this month that puts the true size at well over $3tn. Or $3.14tn to be precise.”

April 18 – Bloomberg (John Sage): “Moody’s… this week gave private credit investors greater reason for concern about credit quality in the flourishing $1.7 trillion industry. The ratings company… reduced its outlook for direct lending funds managed respectively by BlackRock Inc., KKR & Co. alongside FS Investments and Oaktree Capital Management, lowering them to negative from stable. The three publicly traded business development companies, with a combined total of more than $20 billion in assets, each increased the number of loans on non-accrual status… For FS KKR Capital Corp. and Oaktree Specialty Lending Corp., the dollar amount of non-accrual loans more than doubled in the fourth quarter, to 6.4% and 4.5% of the portfolio respectively, well outside Moody’s median of about 0.4% for BDC peers at the end of 2023.”

April 18 – Bloomberg (Michael Tobin): “The US leveraged loan market, as yet unruffled by the shift to a higher-for-longer view on interest rates, may soon join in the pain being felt in other asset classes. The floating-rate investments, which typically lag behind other assets, have delivered returns of 2.69% so far this year. But some borrowers in the market, often highly leveraged companies owned by private equity firms, are likely to see a cooling in demand as forecasts for a Federal Reserve rate cut are pushed further into the future.”

April 16 – Reuters (Sara Rossi and Valentina Consiglio): “Investors who have snapped up high-yielding Italian bonds over the last year on the assumption they were protected from risk by the European Central Bank are now taking a close look at the ECB's rulebook to gauge whether their investment is safe. The central bank presented its Transmission Protection Instrument (TPI) in mid-2022 as a tool to counter any ‘unwarranted’ widening of bond spreads among the 20 euro zone countries. The scheme, by which the bank would step in to buy the bonds of a country under market attack, has never been used, but analysts say its presence as a backstop encouraged investors to favour high-debt Italy despite its wayward state accounts. Those public finance difficulties are now coming to a head, however, and they could make the euro zone's third largest economy ineligible for the TPI, with big implications for Italian bond buyers.”

April 18 – Bloomberg (Immanual John Milton): “Wall Street’s securitization engine is revving up with issuance touching record levels as borrowers rush to secure funding before any credit market disruptions caused by the US general election. In the first quarter, investors snatched up $95.6 billion of bonds backed by assets like auto loans, data centers and credit card debt. That’s the fastest pace of sales to start a year since at least 2010, according to… Bank of America Corp.”

April 17 – Bloomberg (Liz Capo McCormick): “China’s stockpile of US Treasuries slid in February to the lowest since October, with the total for all foreign holders increasing slightly. China’s stockpile… fell by $22.7 billion, to $775 billion… China saw an $8.3 billion valuation decline compared with January on its long-term Treasuries, which amounted to $755 billion in February. Japan saw its overall holdings increase in February by $16.4 billion, to $1.17 trillion.

Bubble and Mania Watch:

April 16 – Financial Times (John Plender): “Since the great financial crisis of 2007-08 regulators have engaged in the biggest push to de-risk the global financial system since the 1930s. Yet instability and flawed risk management have proved extraordinarily resistant to this regulatory onslaught… In a market that provides vital support for the collateral and hedging operations of global investors, there are fears that risky hedge fund trading strategies involving large borrowings pose a constant destabilising threat… Such destabilising activity is fostered by, among other things, marked growth in private markets and a shadow banking system that includes money market funds, hedge funds, high-speed electronic traders and others… The share of global financial assets held by these non-bank financial institutions has risen from 25% after the 2007-08 crisis to 47.2% in 2022, higher than the 39.7% of conventional banks.”

April 15 – Reuters (Saeed Azhar and Niket Nishant): “Goldman Sachs' profit beat Wall Street estimates, fueled by a recovery in underwriting, deals and bond trading in the first quarter that lifted its earnings per share to the highest since late 2021… Rivals JPMorgan… and Citigroup cited improving conditions for dealmaking on Friday when they reported profits that beat market expectations. But their executives also cautioned about risks to the economic outlook, including the uncertain path of U.S. interest rates. Goldman's profit rose 28% to $4.13 billion, or $11.58 per share, in the first quarter.”

April 18 – Wall Street Journal (Heather Gillers and Charley Grant): “Stock portfolios at large pension funds had a blockbuster run. Now, managers are cashing out. Corporate pension funds are shifting money into bonds. State and local government funds are swapping stocks for alternative investments. The nation’s largest public pension, the California Public Employees’ Retirement System, is planning to move close to $25 billion out of equities and into private equity and private debt. Like investors of all kinds, the funds are slowly adapting to a world of yield… That is rippling throughout markets… The combination is leading large retirement funds to rotate their positions. Goldman Sachs analysts estimate that pensions will unload $325 billion in stocks this year, up from $191 billion in 2023.”

April 17 – Bloomberg (Elijah Nicholson-Messmer and Ella Ceron): “As digital assets roar back into the mainstream after an extended period of price declines, experts are warning about the risks of financial predation baked into of the industry’s most analog expressions: machines that convert cash to Bitcoin. Bitcoin teller machines, or BTMs, are physical kiosks that offer customers access to crypto conversions and are commonly located at gas stations, liquor or convenience stores… The BTM industry surged during the pandemic: The number of installed units increased more than five-fold over four years to about 31,100 units nationwide… But a closer look into the BTM boom revealed that the machines are often disproportionately located in areas with a majority of Black and Latino residents, charging fees as high as 22% per transaction.”

Bank Watch:

April 15 – Bloomberg (Caleb Mutua): “Banks are getting an earnings boost from underwriting fees as companies sell debt in the US at a record pace. The issuance spree helped to generate $699 million of debt-underwriting revenue for Goldman Sachs… in the first quarter, a nearly 40% jump from a year earlier… Rival Citigroup Inc.’s profits… were fueled in part by the surge in corporate borrowing. JPMorgan Chase & Co.’s investment-banking fees jumped 21%, while Wells Fargo & Co.’s revenue topped estimates due to an increase in investment advisory fees and brokerage commissions.”

April 16 – Financial Times (Stephen Gandel): “The largest US banks lent billions of dollars less in the first quarter, in a sign that corporate borrowers are paying down debt as interest rates hover at historically high levels. Bank of America, the nation’s second-largest lender, said… that new loan growth stalled in the quarter… PNC… reported that lending dropped by $4bn or 1%. Other top banks Citigroup, JPMorgan Chase and Wells Fargo also recorded drops in lending in the first three months of the year as they revealed results late last week.”

April 17 – Wall Street Journal (Telis Demos): “Bankers’ advice for dealmaking clients who have been sidelined by the high cost of funding boils down to this: Get used to it. Wall Street investment banks in the first quarter have finally started to report a pickup in activity following a long slowdown. Revenue from arranging sales of stocks and debt, and for advising on mergers and acquisitions, was collectively up 27% at the five largest Wall Street banks from a year earlier, to the highest level since the first quarter of 2022, when the Federal Reserve began raising interest rates.”

U.S./Russia/China/Europe Watch:

April 15 – New York Times (David E. Sanger): “When Iran agreed to a deal in 2015 that would require it to surrender 97% of the uranium it could use to make nuclear bombs, Russia and China worked alongside the United States and Europe to get the pact done. The Russians even took Iran’s nuclear fuel, for a hefty fee, prompting celebratory declarations that President Vladimir V. Putin could cooperate with the West on critical security issues and help constrain a disruptive regime in a volatile region. A lot has changed in the subsequent nine years. China and Russia are now more aligned with Iran’s ‘Axis of Resistance’ to an American-led order, along with the likes of North Korea.”

April 15 – Bloomberg: “China’s top diplomat told Iran that the nations can work together across a range of areas in the future, signaling their ties remain solid following Tehran’s unprecedented attack on Israel. ‘China is ready to steadily advance practical cooperation in various fields with Iran and promote greater development of China-Iran relations,’ Foreign Minister Wang Yi told Iranian counterpart Hossein Amirabdollahian… Wang also said China noted Iran’s position that its military action was ‘limited’ and the country was ‘exercising its right of self-defense,’ according to… the Foreign Ministry in Beijing.”

April 12 – Financial Times (Demetri Sevastopulo, Guy Chazan and Sam Jones): “The US has accused China of providing Russia with cruise missile and drone engines and machine tools for ballistic missiles, as it urges Europe to step up diplomatic and economic pressure on Beijing to stop the sales. In disclosing previously classified intelligence, senior US officials said Chinese and Russian groups were working to jointly produce drones inside Russia. They said China had also supplied 90% of chips imported by Russia last year which were being used to make tanks, missiles and aircraft. The officials added China was also helping Russia to improve its satellite and other space-based capabilities to help prosecute its war in Ukraine, and Beijing was also providing satellite imagery.”

April 16 – Bloomberg (Michael Nienaber): “Chancellor Olaf Scholz urged Chinese President Xi Jinping to use his influence to try to push Russia into ending what the German leader called its ‘insane’ war on Ukraine. ‘China’s word carries weight in Russia,’ Scholz told reporters after talks with Xi Tuesday in Beijing. ‘That’s why I’ve asked President Xi to exert pressure’ so that President Vladimir Putin ‘finally calls off his insane campaign, withdraws his troops and ends this terrible war,’ Scholz said.”

April 16 – Washington Post (Joby Warrick): “Last March, a Russian arms maker invited a delegation of Iranians to a VIP shopping tour of its weapons factories. The 17 visitors were treated to lunches and cultural shows and, on the final day, toured a plant that makes products long coveted by Tehran: advanced Russian air defense systems for shooting down enemy planes. The factory, NPP Start…, is under U.S. sanctions for supporting Russia's war against Ukraine. Among its wares are mobile launchers and other components for antiaircraft batteries — including Russia's S-400, which military analysts assess to be capable of detecting and destroying stealth fighter jets flown by Israel and the United States.”

De-globalization and Iron Curtain Watch:

April 18 – Bloomberg (Evelyn Yu): “China slammed a US plan to impose new restrictions on its steel and aluminum products, saying it will take action to protect the country’s interests. The US is ‘arbitrarily slapping tariffs on Chinese products,’ politicizing economic issues and undermining the security of the global supply chain, the Ministry of Commerce said… China urges US to stop increasing tariffs and pledges to take all necessary measures to defend its rights, it said. The new tariffs US President Joe Biden is pushing… would impose 25% levies on certain Chinese steel and aluminum products. They would be applied as part of an ongoing review, while the US also launches a formal probe into China’s shipbuilding industry.”

April 17 – Reuters (Leika Kihara): “Finance leaders from the United States, Japan and South Korea agreed to ‘consult closely’ on foreign exchange market developments in their first trilateral meeting... The finance leaders also acknowledged ‘serious concerns of Japan and the Republic of Korea about the recent sharp depreciation of the Japanese yen and the Korean won,’ according to a joint statement... The trilateral gathering was held on the sidelines of the International Monetary Fund and G20 finance leaders' meetings this week in Washington. ‘We affirm our commitment to utilize and coordinate our respective sanctions tools to impose costs on Russia for its war against Ukraine’ and target North Korea's weapons program, the joint statement said.”

Inflation Watch:

April 13 – Wall Street Journal (Will Parker): “The Federal Reserve wants to see cooler inflation before cutting interest rates. The rental market remains in the way. Rent growth has slowed from double-digit recent highs after pent-up demand caused by early pandemic lockdowns and record home prices sent rents soaring. Economists expect that decline will continue… But how quickly it falls to levels the Fed will find acceptable is an open question. ‘Housing inflation typically runs higher than general inflation,’ said Thomas LaSalvia, economist at Moody’s Analytics. ‘But it has to come down further than where it is right now.’ Shelter inflation, or what the government calls its measure of home and apartment rents, rose 5.7% in March compared with a year prior, well above the shelter inflation rate of about 3.3% from 2015 to 2019.”

April 16 – Axios (Emily Peck): “The cost of day care and preschool rose 4.4% in March from the year before — outpacing the overall inflation rate... Rising costs are putting stress on families, with some spending at a slower pace and dipping into savings and, there's even some evidence that parents are leaving the workforce entirely… Last year, the median weekly wage in the industry was $635 — or about $33,000 a year. That's a 27% increase from 2019, even after adjusting for inflation. And pay is still rising. Wages were up 4.8% for these workers in March over last year, according to analysis of pay in job listing data from the jobs site Indeed.”

April 16 – Bloomberg (Eliyahu Kamisher and Daniela Sirtori): “Michaela Mendelsohn, who owns six El Pollo Loco locations serving grilled chicken and tacos in California, recently found herself raising managers’ pay by over 10% to more than $83,000 a year. With the state’s new law mandating a $20 minimum wage for fast-food workers taking effect April 1, a separate rule requiring salaried staff to earn double the minimum wage has triggered a chain reaction. ‘They’ve gotten a big pay increase,’ Mendelsohn said of her Managers…”

Federal Reserve Watch:

April 18 – Bloomberg (Sydney Maki and Carter Johnson): “The US bond market’s recovery was cut short by a Federal Reserve official’s mere mention of the possibility of an interest-rate increase. In response to a question…, New York Fed President John Williams… said another rate hike isn’t his base case. But he also said that ‘if the data are telling us that we would need higher interest rates to achieve our goals, then we would obviously want to do that.’”

April 17 – Bloomberg (Catarina Saraiva and Craig Torres): “Federal Reserve Bank of Cleveland President Loretta Mester said monetary policy is in a good place, adding that the central bank shouldn’t be in a hurry to cut interest rates. Mester said she still expects inflation will fall further but that she wants to see more data to gain confidence it’s moving back toward the Fed’s 2% target… ‘I still am expecting inflation to come down but I do think that we need to be watching and gathering more information before we take an action,’ Mester said…”

April 15 – Reuters (Michael S. Derby): “A key Federal Reserve facility that takes in cash from money market funds and others saw inflows drop sharply on Monday. The U.S. central bank's reverse repo facility took in $327.1 billion, down $80.2 billion from Friday, marking the lowest level of inflows since the facility took in $293 billion on May 19, 2021.”

Biden Administration Watch:

April 17 – Associated Press (Chris Megerian and Will Weissert): “President Joe Biden is calling for a tripling of tariffs on Chinese steel and aluminum to protect American producers from a flood of cheap imports, and will pitch his election-year plan during a visit… with steelworkers in Pennsylvania… The move reflects the intersection of Biden’s international trade policy with his reelection effort. The White House insists the policy is more about shielding American manufacturing from unfair trade practices overseas than firing up a union audience. The current tariff rate is 7.5% for both steel and aluminum but could climb to 22.5%. The Biden administration also promised to pursue antidumping investigations against countries and importers that try to saturate existing markets with Chinese steel.”

April 17 – Reuters (David Lawder): “The U.S. must take ‘decisive’ action to protect electric vehicles (EVs) from subsidized Chinese competition, U.S. Trade Representative Katherine Tai said… as she completes a review of Trump-era China tariffs and considers President Joe Biden's call for higher tariffs on imports of Chinese steel. Tai told a U.S. Senate Finance Committee hearing that the U.S. needed to create a level playing field for U.S. workers and that Biden's call for higher ‘Section 301’ tariffs on Chinese steel imports means that ‘we are in very, very advanced stages of our interagency work, and I expect that we will come to conclusion very soon.’”

April 16 – Reuters (Andrea Shalal and David Lawder): “U.S. Treasury Secretary Janet Yellen… warned that the U.S. intends to hit Iran with new sanctions in coming days over its unprecedented attack on Israel, and these actions could seek to reduce Iran's capacity to export oil. ‘With respect to sanctions, I fully expect that we will take additional sanctions action against Iran in the coming days,’ Yellen said…”

April 17 – Reuters (Matt Spetalnick, Daphne Psaledakis and Marianna Parraga): “The Biden administration said it would not renew a license set to expire early on Thursday that had broadly eased Venezuela oil sanctions, moving to reimpose punitive measures in response to President Nicolas Maduro's failure to meet his election commitments.”

U.S. Economic Bubble Watch:

April 15 – CNBC (Jeff Cox): “Rising inflation in March didn’t deter consumers, who continued shopping at a more rapid pace than anticipated… Retail sales increased 0.7% for the month, considerably faster than the… consensus forecast for a 0.3% rise though below the upwardly revised 0.9% in February… Excluding auto-related receipts, retail sales jumped 1.1%, also well ahead of the estimate for a 0.5% advance. The core control group, which strips out several volatile measures and is in the formula to determine gross domestic product, also increased 1.1%.”

April 15 – Reuters (Lucia Mutikani): “U.S. retail sales increased more than expected in March amid a surge in receipts at online retailers, further evidence that the economy ended the first quarter on solid ground… Strong retail sales prompted economists at Goldman Sachs to boost their gross domestic product (GDP) growth estimate for the first quarter to a 3.1% annualized rate from a 2.5% pace. The economy grew at a 3.4% rate in the fourth quarter.”

April 17 – Bloomberg (Vince Golle): “US mortgage rates climbed to a four-month high last week, potentially signaling a bumpier recovery for the residential real estate market. The contract rate on a 30-year fixed mortgage rose 12 basis points to 7.13% in the week ended April 12… The effective rate, which includes fees and compound interest, increased to 7.32%.”

April 18 – CNBC (Diana Olick): “Sales of previously owned homes dropped 4.3% in March compared with February, to a seasonally adjusted annualized rate of 4.19 million units… Sales were 3.7% lower than in March 2023. This came after a big jump in sales in February… This sales count is based on closings from contracts likely signed in January and February… Regionally, sales fell everywhere except in the Northeast, where they rose 4.2% month to month. Sales dropped hardest in the West, down 8.2%. Prices are highest in the West. Inventory did improve slightly, rising 4.7% month to month to 1.11 million homes for sale at the end of March. That’s a 3.2-month supply at the current sales pace. Inventory is now 14.4% higher than March of last year.”

April 16 – Bloomberg (Michael Sasso): “New home construction in the US slowed last month as a leveling off in interest rates has given way to a lull in housing demand and caution among builders. Residential starts decreased 14.7% in March to a 1.32 million annualized rate, the lowest since August… The figure was weaker than all estimates… Building permits… fell to a 1.46 million rate in March. Both starts and permits were revised higher in February. Single-family home construction dropped by the most in about three years, while the pace of multifamily starts sank to lowest since the onset of the pandemic. Permits for both also fell. After ramping up construction in recent months, builders may be taking a breather. The inventory of new homes for sale is near the highest since 2008.”

April 15 – Reuters (Dan Burns): “U.S. homebuilder confidence held steady in April at the highest since last July, snapping four months of gains with uncertainty about interest rates keeping potential home buyers hesitant… The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index was unchanged this month at 51. Measures of current sales and prospective buyer traffic both ticked up to their highest levels since August while the survey's measure of sales in the next six months slipped.”

April 14 – New York Times (Emily Badger and Francesca Paris): “Something deeply unusual has happened in the American housing market over the last two years, as mortgage rates have risen to around 7%. Rates that high are not, by themselves, historically remarkable. The trouble is that the average American household with a mortgage is sitting on a fixed rate that’s a whopping three points lower. The gap that has jumped open between these two lines has created a nationwide lock-in effect — paralyzing people in homes they may wish to leave — on a scale not seen in decades… Indeed, according to new research from… the Federal Housing Finance Agency, this lock-in effect is responsible for about 1.3 million fewer home sales in America during the run-up in rates from the spring of 2022 through the end of 2023. That’s a startling number in a nation where around five million homes sell annually in more normal times…”

April 15 – Bloomberg (David Wethe and Devika Krishna Kumar): “Shale explorers are drilling wells faster than they’re fracking them, a signal that US oil-production growth is slowing. Oil companies added to the number of drilled-but-uncompleted wells, known as the fracklog, last month for the first time in more than a year, according to… the US Energy Information Administration... The tally is a key indicator of near-term crude flows from US shale fields because fracking is one of the final steps in the process of bringing new wells online.”

Fixed Income Watch:

April 18 – Bloomberg (Samantha Stewart and Josyana Joshua): “Funds that invest in US corporate high-yield notes saw the biggest outflow in more than a year as the Federal Reserve’s hawkish approach to inflation makes investors wary. Investors withdrew $3.75 billion from junk bond funds in the week ending April 17, according to… LSEG Lipper, the most in 14 months.”

China Watch:

April 16 – Wall Street Journal (Sherry Qin): “Fitch Ratings has downgraded the outlook for six Chinese state-owned banks amid concerns about the government’s ability to support the sector in the event of stress. The move comes after the rating agency cut its outlook for China’s sovereign credit rating last week. Fitch… downgraded the outlook for the credit rating of six Chinese banks to negative from stable, including Industrial & Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, Bank of Communications and Postal Savings Bank of China. Last week, the rating agency cut its outlook for China’s long-term foreign debt to negative from stable, citing risks to China’s public finances…”

April 14 – Bloomberg (Tania Chen and Iris Ouyang): “China withdrew cash from the banking system for a second consecutive month, signaling its caution toward monetary easing as currency depreciation pressures mount. The People’s Bank of China drained a net 70 billion yuan ($9.7bn) of cash via its medium-term lending facility, while holding the interest rate on its one-year policy loans at 2.5%... Officials also reduced liquidity in March via the MLF for the first time since late 2022.”

April 14 – Financial Times (Thomas Hale): “Activity on China’s equity capital markets on the mainland and beyond has slumped to multi-decade lows… Chinese companies have raised just $6.4bn in mainland IPOs, follow-on and convertible share offerings this year — the lowest level on record… Their fundraising in offshore markets including Hong Kong is $1.6bn, the lowest year to date since 2003. China’s outbound M&A of $2.5bn is the lowest recorded amount over the same period since 2005. On international bond markets, Chinese companies, banks and government borrowers have issued $26bn this year, slightly above last year’s $24bn but otherwise the lowest level since 2016. On the mainland, borrowing of $246bn is up 17% on last year. ‘In terms of global investor interest in China, it’s definitely the worst I’ve seen in my career,’ said Wang Qi, chief investment officer at UOB KayHian…, who began working in finance in the 1990s.”

April 15 – Bloomberg: “China Vanke Co., the Chinese state-backed developer that’s become the latest flashpoint in the nation’s property crisis, is preparing an asset package totaling about 130 billion yuan ($18bn) to use as collateral as it seeks new bank loans, people familiar with the matter said… Vanke is seeking to assuage concern about its ability to stave off default after a market selloff last week added to alarm.”

April 15 – Reuters (Ella Cao, Liangping Gao and Ryan Woo): “New home prices in China fell at their fastest pace in more than eight years in March as the debt woes of major property developers continued to drag on demand and the economic outlook… New home prices in March dropped 2.2% from a year earlier, marking the biggest decline since August 2015, and worse than a 1.4% fall in February… Prices fell 0.3% month-on-month, matching February's drop.”

April 16 – Bloomberg (Lorretta Chen and Krystal Chia): “Distressed Chinese developers trying to sell luxury apartments at a new complex in Hong Kong have begun slashing prices by almost half amid mounting debt repayment pressure and intensifying competition in the city’s property market. Prices of some units at the first tower of The Corniche have been reduced to around HK$25,000 ($3,200) per square foot… That represents a more than 40% discount from the original asking price…”Central Banker Watch:

April 16 – Reuters (Joe Cash and Kevin Yao): “China's economy grew faster than expected in the first quarter… However, several March indicators released alongside the gross domestic product data - including property investment, retail sales and industrial output - showed that demand at home remains frail… The world's second-largest economy grew 5.3% in January-March from the year earlier… Disappointing factory output and retail sales… also underlined the persistent weakness in domestic demand. Industrial output in March grew 4.5% from a year earlier, below the 6.0% forecast and a gain of 7.0% for the January-February period. Retail sales rose 3.1% year-on-year in March, missing the 4.6% growth forecast and slowing from a 5.5% gain in the January-February period.”

April 17 – Wall Street Journal (Russell Napier): “The world’s second-largest economy is about to move to monetary independence and in so doing it will destroy the current international monetary system. China needs to not just reflate its economy but to inflate away its debts. The country has one of the highest total non-financial debt-to-GDP ratios of any major economy, at 311% of gross domestic product. While the debt burdens of most countries are shrinking relative to output… China continues to report rising debt-to-GDP. On the eve of the global financial crisis in December 2007, China’s total non-financial debts amounted to just 142% of GDP. The exchange rate targeting regime, by restricting the growth in money relative to the growth in total debt, pushed China to ever-higher debt-to-GDP levels that have finally brought it to the verge of a debt deflation.”

April 17 – Wall Street Journal (Brian Spegele): “Qin Huangsheng once imagined a better life in the city when she left her home village to become a factory worker at age 16. Now, in her early 40s, she has $40,000 in personal debt and a base salary of $400 a month. Debt collectors are hounding her. She is blocked from buying tickets on China’s high-speed rail, just one of the penalties the government is increasingly imposing on people who don’t pay their bills. On the aging slow trains she is left to ride, Qin sometimes looks at the other passengers and thinks: ‘I wonder if they’re all bad debtors like me.’ People across China are being weighed down by their debts and a system that penalizes them for not paying the money back.”

Central Banker Watch:

April 17 – Reuters (Suban Abdulla and William Schomberg): “Britain's inflation rate slowed by less than expected in March…, adding to signs that a first interest rate cut by the Bank of England could be further off than previously thought. British consumer prices rose by an annual 3.2%, down from a 3.4% increase in February and its lowest in two and a half years... But the BoE - which has an inflation target of 2% - and economists… had forecast 3.1%. Investors reduced their bets on BoE rate cuts and sterling rose.”

Global Bubble Watch:

April 17 – Bloomberg (Christopher Condon): “The world’s two great economic rivals, China and the US, will drive much of the increase in global public debt over the next five years, with US spending creating trouble for many other countries by keeping interest rates high, officials at the International Monetary Fund said... ‘In both economies, public debt is projected under current policies to nearly double by 2053,’ the IMF said in its Fiscal Monitor… ‘How these two economies manage their fiscal policies could therefore have profound effects on the global economy and pose significant risks for baseline fiscal projections in other economies.’”

Europe Watch:

April 16 – Financial Times (Stephanie Stacey, A. Anantha Lakshmi, Chris Kay and Song Jung-a): “European stock markets suffered their worst day in nine months as a sell-off sparked by receding hopes for rapid US interest rate cuts spread around the world… The region-wide Stoxx Europe 600 fell 1.5% in its biggest one-day drop since last July.”

April 17 – New York Times (Patricia Cohen): “Meeting outside Paris last week, top officials from France, Germany and Italy pledged to pursue a coordinated economic policy to counter stepped-up efforts by Washington and Beijing to protect their own homegrown businesses. The three European countries have joined the parade of others that are enthusiastically embracing industrial policies — the catchall term for a variety of measures like targeted subsidies, tax incentives, regulations and trade restrictions — meant to steer an economy. More than 2,500 industrial policies were introduced last year, roughly three times the number in 2019… And most were imposed by the richest, most advanced economies — many of which could previously be counted on to criticize such tactics.”

Japan Watch:

April 17 – Wall Street Journal (Megumi Fujikawa): “The Bank of Japan should proceed carefully with further monetary policy changes, as domestic inflation still isn’t very strong, board member Asahi Noguchi said. ‘The pace of adjustments in our policy interest rate is expected to be incomparably slower than recent examples of other major central banks, ‘ Noguchi said… He said it would take some more time before underlying inflation reaches and stays around the central bank’s 2% target.”

EM Watch:

April 16 – Bloomberg (Marcus Wong and Karl Lester M. Yap): “The resurgent dollar cut a swath through global emerging-market currencies Tuesday, weakening many through closely watched levels that forced some officials to step in to stem the losses. China’s move to weaken its daily reference rate for the yuan added to the selling pressure, with the Indonesian rupiah, Indian rupee and the South Korean won among the hardest hit. But the dollar impact was broader, with a global gauge of emerging-market currencies falling to fresh lows for the year… The dollar’s strength forced Bank Indonesia to step in to support the rupiah after the currency weakened past 16,000 per dollar for the first time in four years…”

Leveraged Speculation Watch:

April 17 – Bloomberg (Hema Parmar): “Pensions and endowments are borrowing from the playbook of giant multimanager hedge funds — and giving it a go themselves. University of Texas Investment Management Co. and the State of Wisconsin Investment Board — with a combined $230 billion of assets — are among institutions investing in hedge funds in a way that mimics how multimanagers use individual pods of traders to wager on a variety of strategies. Each hedge fund essentially becomes a kind of pod. By using customized sleeves… institutional investors can tailor their trading exposures, save on execution costs and impose their own risk limits. ‘Sophisticated allocators want to invest more like multimanager hedge funds,’ said Michael Jordan, chief executive officer of Walleye Capital’s Dockside Platforms…”

April 17 – Bloomberg (Paula Seligson and Katherine Doherty): “Jane Street… generated $10.6 billion in net trading revenue last year, as the proprietary-trading firm continues to cement its presence as a dominant market-maker. The trading haul was roughly flat compared with the $10.7 billion the company notched in 2022… The figures… showed Jane Street earned about $7.4 billion in adjusted earnings in 2023, down from $7.9 billion in the prior year.”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 15 – Wall Street Journal (The Editorial Board): “Summer is two months away, yet the Texas power grid is already swooning. On Friday the Electric Reliability Council of Texas (Ercot) asked power generators to postpone scheduled maintenance early this week ‘to help alleviate potential tight conditions’ as temperatures rise into the not-so-sizzling 80s. The grid typically has excess power-generating capacity in the spring owing to mild weather. There’s also an abundance of solar and wind power. This is why plants go off-line for repairs in the spring to prepare for the summer when electricity use surges... Yet merely warm spring weather is now enough to push the Texas grid to the brink.”

April 14 – CNBC (Sam Sabin): “Nearly a year after the U.S. government first named and shamed an ongoing Chinese hacking campaign against American infrastructure, top cybersecurity leaders say the threat is still as palpable as ever. Why it matters: China's Volt Typhoon group has displayed a persistence that's rare among nation-state hackers, experts say. This has put insecure U.S. infrastructure, such as water systems and shipping ports, in the crosshairs of foreign adversaries… ‘Am I alarmed and do I have heartburn over what Volt Typhoon and what other Chinese actors are capable of doing? Yes, absolutely,’ Kemba Walden, the former acting national cyber director, said… ‘They're motivated, they're creative,’ she added. ‘It tells me that we need to continue to focus on the basics.’”

April 14 – CNBC (Dylan Butts): “The world added more coal power capacity last year than any year since 2016, with China driving most growth and future planned capacity, according to new research. A report by Global Energy Monitor… found that net annual coal capacity grew by 48.4 GW, representing a 2% year-over-year increase. China alone accounted for about two-thirds of new coal plant capacity. Other countries that brought new coal plants online included Indonesia, India, Vietnam, Japan, Bangladesh, Pakistan, South Korea, Greece and Zimbabwe. Meanwhile, other countries such as the U.S. and U.K., slowed their rate of plant closures, with only about 22.1 GW retired last year — the smallest amount since 2011.”

April 16 – Reuters (Carolyn Cohn): “Global property and casualty insurers showed ‘alarming’ underwriting losses in 2022 as natural catastrophes increased and risk models failed to keep up, a report from consultants Capgemini said… Global insured losses from natural catastrophes have been surpassing $100 billion annually in recent years... Industry sources see climate change and increased building in exposed areas as contributing to the losses. The insurers' global combined ratio, a measure of claims and expenses against premium revenue, was 103% in 2022, Capgemini said. A level above 100 indicates an underwriting loss. Property insurers have suffered three years of underwriting losses in the past four years…”

Geopolitical Watch:

April 13 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “A vessel from China’s coastguard has blocked two Philippine government ships for hours a short distance from the south-east Asian country’s coast, in a further escalation of tensions between the two nations in the disputed South China Sea. The operation… took place just 35 nautical miles from the Philippines’ coastline, and comes as Beijing pushes back against Washington’s high-profile moves this week to bolster Manila, its ally, against China.”April 14 – Financial Times (Andrew England): “It was just before 2am when Israel launched its air defence interceptors to counter a barrage of Iranian drones and missiles. Sirens and explosions rang out across Jerusalem, the southern Negev and the northern border region. Israelis… scurried to safe rooms or bomb shelters. After more than four decades of hostility between the arch foes, Israel was for the first time under a direct attack from Iran. It puts the Middle East ever nearer the full-blown regional conflict that western and Arab leaders have feared since Hamas’s October 7 attack triggered Israel’s retaliatory war in Gaza. All eyes are now on how Israel — still enraged, traumatised and in full war-mode after the Hamas attack — will respond to the unprecedented assault on its territory.”

April 17 – Financial Times (Richard Milne and Ben Hall): “Diggers and cement mixers will soon roll into Estonia’s fields to give Nato’s eastern border with Russia a significant military upgrade. Hundreds of reinforced bunkers will be built as part of a new defensive line to protect the Baltic states — and by extension the entire western defence alliance — from a Russian attack. Further south, Lithuania is opening more than a dozen so-called counter-mobility parks, stores for equipment such as the anti-tank obstacles, barbed wire and concrete blocks that are all designed to slow down potential invaders. Latvia, like the other two Baltic states, and Finland have also put up fences on their borders with Russia or Belarus. The works are a visible sign of how security in Nato’s frontline states is now determined by Russia’s war in Ukraine.”