We live in an Age of Uncertainty – The Era of Nebulous. Was Monday’s DeepSeek tech stock swoon the first crack – the beginning of the end – for the great AI mania? Or pretty much a lot about nothing – a mere bump in the road soon forgotten? Are financial conditions only “somewhat accommodative” and the system at a state of stability? Does the Fed have its eye on the ball? Do tariffs really not matter, as the stock market has signaled? Or is faith that President Trump won’t do anything to upset the markets further evidence of manic speculative Bubble irrationality?
Matt Egan from CNN: “Following up on [Axios Courtenay Brown’s] question from earlier about the stock market, how concerned are you, if at all, about a potential asset bubble brewing in financial markets? How do relatively high market valuations factor into considerations about potentially lowering interest rates further? Is that something that’s in the back of your mind?”
Chair Powell: “So we look from a financial stability perspective at asset prices generally, along with things like leverage in the household sector, leverage in the banking system, funding risk for banks, and things like that. But it’s just one of the four things, asset prices are. And yeah, I’d say they’re elevated by many metrics right now. A good part of that, of course, is this thing around tech and AI, but we look at that. But we also look at how resilient the households and businesses and the financial sector are to those things. So, we look at that mainly from our financial stability perspective and we think that there’s a lot of resilience out there. Banks have high capital, and households are actually overall, not all households but in the aggregate, households are in pretty good shape financially these days. So, that’s how we think about that. We also, we look at overall financial conditions, and you can’t just take equity prices, you’ve got to look at rates too, and that represents a tightening in conditions with higher rates. So, overall financial conditions are probably still somewhat accommodative, but it’s a mixed bag.”
“We think that there’s a lot of resilience out there.” I think there’s a lot of latent fragility. The Fed should at least pay lip service to speculative leverage. To completely avoid the subject – as if it doesn’t matter - raises a credibility issue. After all, hedge funds and derivatives leverage were instrumental in market crises in 1994, 1998, 2008 and 2020. The repo market was the epicenter of the 2008 market meltdown, while hedge fund “basis trade” deleveraging was instrumental in the eruption of pandemic crisis instability.
I have chronicled the ongoing historic inflation of “repo” and money market fund assets, while discussing the key role played by the proliferation of leveraged speculation. The Fed is seeing all the same data and more. Some new data points this week, courtesy of analysts at Barclays. Doozies.
January 29 – Bloomberg (Alexandra Harris): “Hedge funds’ long Treasury positions and repo borrowing grew in 2024, exceeding the peak reached in 2019… Barclays strategist Joseph Abate wrote... As of September, hedge funds’ long Treasury positions reached a record $2.1 trillion. Positions have increased 44% since 2023 and are about $800 billion larger than their 2019 peak. Similarly, repo borrowing increased by $900 billion, or 53%, since 2023. Barclays assumes most of this is against Treasury collateral, but the breakdown is unclear. About 40% of transactions were overnight. Top 10 funds with repo borrowings accounted for 62% of total repo, or about $1.55 trillion…”
Definitely worth pondering: Ten hedge funds with $1.55 TN of repo borrowings, likely most used for levered “basis trade” positions in the Treasury market. Hedge fund “repo” borrowings expanding 53% - apparently over nine months. Sounds like conditions have been much too loose, with the makings to trample “a lot of resilience.”
The past year has experienced historic monetary inflation. Monetary disorder was certainly spurred by the Fed signaling the end of rate hikes - and then stoked to precarious excess by 100 bps of rates cuts over three months. While the Fed asserted “significantly restrictive,” levered speculation and resulting liquidity excess ensured financial conditions went from loose to recklessly so. It was a blunder more consequential than “transitory.”
It will be interesting to see if history gets this right – the direct link between loose conditions, speculative leverage, liquidity overabundance, and the AI mania.
January 27 – Financial Times: “Technology stocks tumbled on Monday after Chinese artificial intelligence start-up DeepSeek stunned Silicon Valley with advances apparently achieved with far less computing power than US rivals. Shares… Nvidia, one of the biggest beneficiaries of spending on AI chips, plunged almost 17%, wiping out almost $600bn of market value, a record loss for any company. DeepSeek last week released its latest large language AI model, which achieved a comparable performance to that of US rival OpenAI, even though the company has previously claimed to use far fewer Nvidia chips. Venture capital investor Marc Andreessen called the new Chinese model ‘AI’s Sputnik moment’, drawing a comparison with the way the Soviet Union shocked the US by putting the first satellite into orbit. The results sent a shockwave through markets on Monday, as investors reassessed the likely future investment in AI hardware.”
January 30 – New York Times (Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch, Edmund Lee and Vivienne Walt): “Wall Street has been on tenterhooks about how Silicon Valley would respond to DeepSeek, the Chinese start-up whose low-cost artificial intelligence software threatens to undercut the pricey American approach to the technology. So far, the answer appears to be: full steam ahead. Meta and Microsoft… said they each planned to keep spending billions on A.I. And news reports about SoftBank’s talks to inject billions more into OpenAI suggest that deep-pocketed investors are still bullish on the ChatGPT creator. Continuing to spend heavily on A.I. will be a ‘strategic advantage over time,’ Mark Zuckerberg, Meta’s C.E.O., told analysts…, defending plans to invest up to $65 billion… And Amy Hood, Microsoft’s C.F.O., told analysts that her company — which plans to invest about $80 billion in A.I. this fiscal year — will grow such spending next year, though at a slower rate.”
I can’t claim to know much about AI. I have, however, analyzed my share of speculative Bubbles. The nineties tech Bubble was extraordinary, followed by a phenomenal mortgage finance and housing Bubbles. China’s apartment Bubble was nothing short of mind-blowing. But nothing compares to the AI Bubble for the potential for financial excess and resource misallocation.
Odds are reasonably high that Monday was the beginning of the end, reminiscent of the subprime mortgage eruption in June 2007. It’s worth noting that the stock market posted record highs that October. “Core” AAA MBS initially benefited from lower policy rates and flight away from the risky “Periphery” (subprime derivatives, ABS, and Alt-A mortgages).
Technology bulls take comfort from fortress “tech oligarchy” balance sheets, with more than sufficient resources available to pursue their spectacular AI investment programs. The good news for the tech boom is that Microsoft, Alphabet, Amazon, Apple, Meta Platforms, and Oracle, along with major global operators and scores of smaller players, have loads of cash to spend. The bad news is that this ensures epic over-investment and all the uncertainty that goes with it.
DeepSeek is important, providing compelling evidence of how completely detached this arms race became to economic reality. The oligarchs will each spend hundreds of billions and then compete fiercely against each other, the Chinese, myriad major global players, and a number of resourceful smaller players. Prospective economic returns to justify Trillions of investment dollars (including for energy infrastructure) this week seem even more illusory. How this all plays out is highly uncertain. DeepSeek is the first of what will be ongoing market surprises.
President Trump: “The release of DeepSeek, AI from a Chinese company, should be a wake-up call for our industries that we need to be laser-focused on competing to win.”
I don’t think “wake-up call” applies so much to the tech oligarchy. Pocket books flung wide open, they’re in it to win it – each and every one of them. It’s more that financial markets will wake from the dream. Markets have been in an exceptionally deep and enchanting sleep. The waking process will come in fits and starts – unless a nightmare sparks a panic attack.
The Credit market – especially “private Credit” and leveraged lending – is at this point so overheated it could take some time for reality to sink in. I expect the sophisticated levered players to appreciate that the game is now rapidly changing. But with so much at stake, there’s no reason to expect the tech bulls to easily roll over.
It’s interesting. I struggle to see the harmony between an IA Bubble and a populist movement. With all the talk of our economy needing to boost manufacturing and become more self-sufficient, wouldn’t it make common sense for some of the Trillions to be spent on and for AI to be more equitably allocated to other industries throughout the economy – especially to small town and working-class communities? It sure appears that the cost of our insatiable appetite for imported goods is about to inflate.
January 13 – Bloomberg (Jennifer A. Dlouhy): “President Donald Trump said he would impose tariffs on a wide range of imports, including oil and metals, in the coming months, expanding his plans to enact sweeping trade levies well beyond those set to hit China, Canada and Mexico on Saturday. ‘We’ll be doing pharmaceuticals and drugs, medicines, etc., all forms of medicine and pharmaceuticals. And we’ll be doing very importantly on steel and we’ll also be doing chips and things associated with chips,’ Trump said Friday from the Oval Office… ‘We’re going to put tariffs on chips. We’re going to put tariffs on oil and gas. That will happen very soon, I think about the 18th of February. And we’re going to put a lot of tariffs on steel,’ he added. Trump said there was nothing Canada, Mexico or China could do to forestall the more immediate levies… And Trump told reporters that the US would ‘be doing something very substantial’ with tariffs targeting the European Union.”
Markets may also need a wake-up call on tariffs. Speculative markets are notoriously capable of disregarding (for a while) developments at odds with the bullish narrative. Stocks are convinced President Trump won’t do anything that would put the great bull market at risk. He’s either bluffing on the tariffs, or more likely it’s just a negotiating ploy that will be quickly resolved when our trade partners cave.
Considering the backdrop, market composure was impressive. Nvidia’s 15.8% decline was a shock. But the unfolding bullish narrative has the market flowing into a beautiful rotation from “Mag Seven” to the broader market. That’s all well and good. But who’s going to buy all the over-owned tech stocks when The Crowd is unloading? And what about all the speculative leverage throughout big tech and related indices? There’s also the issue of derivatives market “insurance” that takes on a life of its own in a slumping market.
In my mind, a key issue is how much volatility can be tolerated – and for how long - before the market snaps. It was curious to see the market Monday pricing an almost eight bps lower December Fed funds rate (3.83%), as market rates begin to factor in probabilities of market instability triggering a response from the Fed.
Below is an excerpt from Thursday’s McAlvany Wealth Management Tactical Short Q4 recap conference call (with me and David McAlvany): “Historic ‘24 Excess Portends Precarious 2025.”
I struggle how best to put Q4 and 2024 excess into proper historical context. We’ve witnessed the extraordinary for so many years that it has become business as usual. My analytical framework generates maxims, including how, “things turn crazy at the end of cycles.” As noted in past calls, my macro analysis journey began in the eighties, witnessing market volatility and an equities bubble, the 1987 stock market crash, Greenspan’s liquidity assurances, and the reemergence of a more systematic bubble in credit, commercial real estate, junk bonds, LBOs, and various Wall Street excess. Post-bubble, this era was called the “decade of greed.”
Greater Fed reflationary measures stoked the nineties tech bubble. That faltering bubble provoked a stronger reflationary response – and a much greater mortgage finance bubble. A more powerful bubble deflation – and the so-called “great financial crisis” – provoked an historic reflationary response from the Bernanke Fed. But that period’s trillion-dollar QE “money-printing” operation was dwarfed by the Powell Fed’s $5 TN dollar pandemic response.
My fascination was piqued in the nineties, and I’ve spent more hours studying the “Roaring Twenties” period than I care to admit. The analytical framework and perspective I developed through my analysis of that most critical period in U.S. history are fundamental to how I view “Roaring Twenties 2.0.”
A critical debate arose after the “Roaring Twenties” boom ended with the 1929 crash and Great Depression: The conventional Milton Friedman/Ben Bernanke view - materializing decades later - holds the Fed directly responsible. More specifically, they target the Fed’s late decade tightening measures, along with their failure to print sufficient money as the boom faltered. Not coincidently, the Fed stops short of tightening financial conditions, while erring on the side of monetary inflation.
I’ve studied enough contemporaneous analysis from the twenties to take strong exception to revisionist dogma. It’s certainly comforting to believe that era’s prosperity – the so-called “golden age of capitalism” – was sound and sustainable, if not for unenlightened policymaking. We don’t hear central bankers, politicians, or even academics these days beckoning for tighter financial conditions necessary to restrain bubble excess. The key enduring lesson from the original “Roaring Twenties” period should have been how dangerously bubble inflations evolve over years of easy money and policy neglect. Risks to market, economic, social, and geopolitical stability are much too great to allow credit and speculative excess to run unchecked year after year.
Years ago, I incorporated elements of Austrian economics into my analytical framework. There’s no doubt in my mind that the 1929 crash and Great Depression were the consequences of a protracted cycle of egregious financial excess - the evolution of a deranged financial apparatus that promoted unprecedented resource misallocation, and resulting deep financial and economic structural maladjustment. Leveraged speculation – including broker call loans and highly leveraged investment trusts – was instrumental in years of systemic liquidity-overabundance. Monetary disorder stoked self-reinforcing asset inflation and speculative excess, spending distortions, and epic mal-investment.
At this point, there should be little debate: Today’s “Roaring Twenties” excesses are the most extreme since that fateful period a century ago. Critical long-forgotten lessons from America’s worst bubble experience are most germane: Unchecked asset inflation and speculation are pernicious. Spending and investment fueled by liquidity emanating from leveraged speculation are self-reinforcing, but unsustainable. Major bubbles create latent fragilities, and bubbles don’t work in reverse. There is no cure other than to ensure that bubbles aren’t allowed to inflate indefinitely.
And something else pertinent from my study of that period: manias are incredibly insidious and powerful. An astonishingly few in 1929 recognized how fragile the system had become late in the cycle – with speculators, investors, economists, Wall Street, bankers, central bankers, and government officials all captivated by markets in the throes of manic excess.
The two “Roaring Twenties” share key dynamics – both were extraordinarily protracted cycles characterized by rapid credit growth; prolonged speculative asset bubbles; far-reaching deviations in investment spending and momentous technological and financial innovation. I’ll add that historic bubble inflation has a prerequisite: the environment and prospects must appear exceptionally bright – demonstrably promising. Indeed, phenomenal technological innovation and development, along with deep-rooted optimism, are part and parcel to spectacular bubbles.
David and I have done many of these calls. I’ve delved deeply into my analytical framework and thesis. There’s part of my psyche that would almost prefer to say, “OK, I’m wrong on this history’s greatest bubble thesis - ready to get on with life.” The problem is the evidence of bubble excess is unequivocal and turns only more powerful by the quarter. From economic data to market behavior to social, political and geopolitical dynamics - from all directions come convincing thesis corroboration. After such a long cycle, everyone is numb. But the key takeaway from this call is that late-cycle excesses lurched to a more extreme, more precarious juncture. I’ll share some examples.
Global issuance of corporate bonds and leveraged loans last year surged 30%, from 2023’s level to $8 TN (LSEG). Total U.S. corporate debt issuance ballooned more than 30% to $1.96 TN. Companies borrowed $2.22 TN of risky leveraged loans, more than double 2023’s level. Municipal debt issuance surged 32% to a record $508 billion.
While data is scant, the historic boom in “private credit” turned increasingly manic. The lack of transparency is an issue for what is essentially lightly regulated risky “subprime” corporate credit – too much of it funneled into annuities and other popular retail insurance products.
And a sign of the times from Bloomberg: “The world’s 500 richest people got vastly richer in 2024, with Elon Musk, Mark Zuckerberg and Jensen Huang leading the group of billionaires to a new milestone: A combined $10 trillion net worth.” “The eight tech titans alone gained more than $600 billion…, 43% of the $1.5 trillion increase among the 500 richest…”
Signs of runaway speculation are everywhere: For a fifth straight year, the Chicago Board Options Exchange reported record trading volume across its four US options exchanges – last year reaching 3.8 billion contracts. Here, I’ll quote: “Trading in options expiring the same day averaged more than 1.5 million contracts a day in the last three months of 2024, accounting for 51% of the overall S&P 500 Index options volume…” Last year saw record trading in interest-rate and equities futures contracts. Another quote: “Trading volume for centralized crypto exchanges hit a record high of $11.3 trillion in December… The Bitcoin network completed more than $19 trillion in transactions last year, more than doubling… 2023.” (Bitcoin News)
Average daily corporate debt trading surged 21% y-o-y – and it was a record year for Treasury futures trading. Quoting from the WSJ: “Investors plowed more than $1 trillion into U.S.-based exchange-traded funds in 2024, shattering the previous record set three years ago… Total assets in U.S.-based ETFs reached a record $10.6 trillion at the end of November…”
Collapsing risk premiums also evidence extreme market risk embracement: Investment-grade yield spreads versus Treasuries narrowed to as little as 73 bps in Q4 – the lowest level all the way back to March 2005. High yield spreads narrowed to 253 bps – the low since June 2007. High yield spreads traded last week only three bps off those lows.
Money market fund assets – or MMFA – expanded $873 billion, or 14.6%, last year. Even more remarkable, MMFA ballooned at a blistering 27% pace during the final 22 weeks of the year, a period when the Fed aggressively loosened policy. MMFA expanded an incredible $2.29 TN, or 50%, since the Fed began “tightening” in March 2022 – and $3.21 TN, or 88%, since the start of the pandemic (February 2020). This unrelenting historic monetary inflation basically goes unreported – completely overlooked by Wall Street analysts, the economic community, and even the Federal Reserve. I have previously discussed the interplay between the proliferation of levered speculation and growth in money market assets.
The highly levered Treasury “basis trade” reportedly surged to a record $1.15 TN (from Bloomberg) by early November – and I suspect rapid growth has been ongoing. Some major hedge funds finance levered Treasury holdings in the “repo” market, playing the tiny spread between cash bonds and their Treasury futures short positions. This expansion of “repo” borrowings generates new marketplace liquidity intermediated through the money market complex, resulting in an expansion of money fund assets.
Examining the data, total system “Repo” assets inflated $678 billion, or 30% annualized, during combined Q2 and Q3 - to $7.4 TN. Broker/Dealer Assets surged $341 billion, or 26% annualized, during Q3 to a record $5.53 TN – with one-year growth of 16.2%. Here’s a data point with huge ramifications: “Repo” assets inflated $2.58 TN, or 54%, over 19 quarters.
Powerful system-wide credit growth is unrelenting. Non-Financial Debt (NFD - from Fed Z.1 data) expanded $3.47 TN over the 12 months ended September 30th. For perspective, NFD expanded $2.53 TN in 2007 - an annual record that held all the way until the pandemic. Treasury issuance continues to dominate system credit growth. At Q3’s end, Treasuries had inflated $1.97 TN over the previous year; $3.97 TN over two years; and a reckless $10.96 TN, or 66%, over the past 19 quarters.
This historic expansion of money and credit is the fuel inflating a once-in-a-century securities bubble. Total Debt and Equities Securities inflated $24.5 TN, or 19.0%, over the previous year, and $58.7 TN, or 62%, over five years – to a record $153 TN. And one of my favorite bubble ratios: Total Securities ended Q3 at 522% of GDP, dwarfing cycle peaks of 375% from Q3 2007 and 357% during Q1 2000.
And to continue this chain of bubble analysis, Household Net Worth (Assets less Liabilities) inflated $17.2 TN, or 11.4%, in the 12 months ended September 30th - to a record $169 TN. Net Worth inflated $50 TN over 17 quarters, or 42%. Another illuminating bubble ratio: Household Net Worth ended September at 575% of GDP, eclipsing previous cycle peaks 488% in Q1 2007 and 444% during Q1 2000.
This flurry of numbers will have to suffice for “egregious ‘24 excess.” I refer often to the concept of “terminal phase” excess – and for good reason. Late-cycle blow-offs are self-destructive. For one, manic speculative excess is unsustainable. Fragility grows as the crowd pushes the limits of risk embracement – the bounds of exuberance and leverage. Meanwhile, system stability is compromised by a parabolic rise in systemic risk – with the expansion of ever-larger quantities of increasingly risky credit.
The ongoing boom in “private credit” deserves a mention. As an analyst who watched in disbelief as subprime loans and related derivatives ballooned during the mortgage finance bubble’s “terminal phase”, the current manic fervor throughout subprime corporate credit and leveraged lending is even more alarming. For too long, finance has remained readily available for unprofitable and financially suspect companies. As always, high risk lending appears almost miraculous, so long as companies enjoy unending market access to fund operations and roll over maturing obligations. But when the music stops, the system faces a deluge of negative cash-flow enterprises and painful debt and economic crises.
With this subprime corporate debt boom in mind, some thoughts on the historic AI bubble. This really is the embodiment of late-cycle overkill – more precisely, multi-decade super cycle “terminal” excess. We’re talking about an epic spending black hole – literally trillions for data centers, computer servers, energy and cooling infrastructure, software development, corporate AI implementation, and so on. And while artificial intelligence will surely have momentous positive impacts, prospects for profits sufficient to justify trillions of expenditures are anything but clear.
History informs us that these kinds of runaway manic speculation, borrowing and spending bubbles ensure a legacy of losses, insolvent companies, malinvestment, and deep structural maladjustment. Hundreds of Internet companies failed with the collapse of the late-nineties tech bubble. Most Internet IPOs from that period filed for bankruptcy. The proliferation of “Roaring Twenties”-era radio and communications companies suffered a similar fate.
It was a most pivotal election in November, and on the third day of President Trump’s term, he announced an AI joint venture with Softbank, OpenAI, and Oracle - with a $500 billion investment goal. I imagine Elon Musk and other industry heavyweights will redouble their AI efforts. Friday, Meta Platforms announced plans for $65 billion of AI-related spending this year, 27% ahead of what analysts expected – including a new data center “so large that it would cover a significant part of Manhattan.”
And then Monday markets were rocked by a small Chinese AI startup named DeepSeek – with its low-cost and impressive AI tool. Nvidia was slammed 17% - with the $560 billion evaporation of market capitalization the largest in history. The Semiconductor index sank 9%. Suddenly, key aspects of the bullish narrative look flimsy. Beyond tech - energy and utility stocks, which had been rising to the moon, abruptly headed back to earth. President Trump called it a “wake-up call.”
This historic late-cycle global arm’s race is led by an extremely well-capitalized tech oligarchy, scores of technology operators globally, increasingly by governments desperate not to be left behind, and overheated debt markets enamored by high-yielding credit.
Risks of overheating are rising. An economy that has been expanding at a 3% pace, with historically low unemployment, will now receive additional stimulus from the tech investment boom, weather catastrophe rebuilding in North Carolina, Florida, California and elsewhere, and a vigorous Trump 2.0 pro-growth agenda.
President Trump is determined to spur an economic boom. With lending and system credit growth already overheated, it’s a delicate juncture in the cycle for aggressive financial and economic deregulation.
Ten-year Treasury yields, at 3.65% the session before the Fed began cutting rates in September, ended the year 92 bps higher. Importantly, yields today are almost 100 bps higher in the face of the Fed’s 100 bps of rate cuts. This is definitely not what Wall Street and the Fed had anticipated – and I believe this unusual move portends bond market struggles ahead. It challenges the view that central bank rate cuts are always available to bolster markets in the event of instability.
Importantly, the surprising yield surge unleashed instability at the vulnerable global “periphery”. For the quarter, yield spikes included Panama’s 177 bps, Brazil’s 137 bps, and Mexico's 99 bps. Many EM bond yields surged to multiyear highs, with currencies also under pressure. Losses for the quarter included 18% for the Russian ruble, 12% for the Brazilian real, and 11% for the South Korean won. For the year, the Argentine peso declined 22%, the Brazilian real and Russian ruble 21%, and the Mexican peso 19%.
UK yields surged 56 bps during the quarter - and then spiked an additional 32 bps in early January to 4.89% - the high back to July 2008. Recall the UK “gilts” market suffered a bout of deleveraging back in Autumn ‘22. The bond market revolted against new UK Prime Minister Liz Truss’s budget – cancelling her term after only 49 days.
I draw attention to this event, viewing it as a key juncture for global markets: the reappearance of the long-lost “bond vigilantes” – traders taking things into their own hands – drawing a line and finally imposing discipline on spendthrift governments. We saw during Q4 and early in January discipline beginning to be imposed universally.
There is today elevated risk that the “vigilantes” turn their sights on U.S. Treasuries. The Fed committed a major error, slashing rates with quite loose financial conditions, economic resilience, and sticky inflation. Core CPI was at 3.2% in December, having declined only a tenth over the previous six months. Expected one-year inflation from the University of Michigan’s January survey jumped to 3.3% - matching the high since November ‘23.
The risk of bond market instability is high and rising. The Trump administration could enjoy a bit of a bond market honeymoon, especially if tariff directives are not as forceful and urgent as feared – or if equities falter. Speaker Johnson has announced an aggressive legislative schedule, with plans to pass “one big, beautiful bill” within three months. Congress will extend the Trump’s tax cuts while lowering the corporate tax rate. The President reiterated his pledge to exclude tip income from taxation. He also campaigned to eliminate taxes on overtime pay and social security. Discussions are ongoing to boost the state and local tax deduction. As GOP lawmakers jostle for constituent benefits, The Wall Street Journal ran with the headline, “Tax-Cut Wish List Grows for Trump’s ‘Big, Beautiful Bill.”
And, at this point, meaningful cost cutting is a work in progress. President Trump may move forward on an aggressive tariff regime, using prospective tariff revenues to partially offset new tax cuts. The bond market could take a dim view of the unfolding budget process.
There are unrecognized bond market vulnerabilities. I mentioned earlier the instability that erupted at the global “periphery” during Q4. There has been meaningful “carry trade” de-leveraging, especially in the emerging markets. “Carry trades” proliferated over recent years, expanding to become a major source of global liquidity. Speculators borrowed at low rates in developed markets, such as Japan, to lever in higher-yielding bonds from developing Latin America, Asia, and Eastern Europe.
Importantly, there is a “doom loop” dynamic associated with EM de-risking/deleveraging. The unwind of speculative leverage drives outflows, currency weakness, and EM central bank currency intervention, with forced selling of Treasuries, upward yield pressure, and more deleveraging. And deleveraging is a liquidity destroyer.
There are complexities and analytical nuance. Instability at the “periphery” typically has initial benefits for the “core.” The Dollar Index surged 7.6% during Q4, the largest quarterly advance since Q1 2015. Dollar strength supported international flows into U.S. markets, with Treasury inflows helping offset EM central bank liquidations.
Importantly, after short-lived benefits, deleveraging at the “periphery” elevates risk at the “core.” Contagion sees risk aversion and waning liquidity begin to gravitate toward “core” markets. Over recent years, initial bouts of “periphery” instability were reversed by a powerful combination of a booming “core,” declining global yields, and general liquidity overabundance. It’s not clear to me that “risk off” would today be mitigated by such constructive dynamics.
As noted earlier, the Fed slashed rates 100 bps, yet Treasury yields surprised with a 100 bps surge. This new dynamic raises serious issues with respect to the efficacy of Fed and central bank market backstops – with major ramifications for the risk vs. reward calculus throughout leveraged speculation. I’ll rephrase this important point: When sophisticated leveraged players begin to question whether central banks can maintain liquid and stable markets, some paring of risk and leverage will be forthcoming. This is especially pertinent for the highly levered Treasury “basis trade.” And with markets so overheated and over-levered, deleveraging at the margin is now more likely to trigger a systemic de-risking/deleveraging dynamic.
I doubt the booming “core” can continue to bail out the fragile “periphery.” At this point, intensifying “core” bubble excess poses clear and present inflation risks that will keep Treasuries on edge. The election sparked a meaningful boost to confidence, apparent in comments from corporate CEOs and the heads of financial institutions, along with the spike in small business optimism to a more than six-year high.
From the perspective of de-leveraging risks and heightened bond market vulnerability, this is a high-risk juncture for an aggressive pro-growth policy agenda. The second term of a most determined “disruptor” administration is replete with extraordinary uncertainties. While the course of tariff and trade policy is unclear, the risk of unfolding trade wars is high. I don’t see countries easily rolling over for what is viewed as Trump bullying.
For now, I lean on the view that the President will aggressively wield the tariff flamethrower; that our trade partners are poised to retaliate; and that higher import prices will be an issue. And keep in mind that goods price disinflation was instrumental in cooling CPI - offsetting sticky services and shelter inflation. There’s talk on Wall Street and within the economic community that tariffs are a one-time price issue with only marginal enduring inflationary impact. I’m skeptical of this sanguine view – sentiments I expect the bond market to share.
Considerable uncertainty exists regarding the scope of the administration’s immigration crackdown – with ramifications for already tight labor markets. Again, there are extraordinary facets to the current environment. Huge weather-related rebuilding challenges lie ahead – and we can presume more disasters will strike. Average hourly earnings increased about 4% over the past year. Until the pandemic, it had been decades since earnings inflated at such a pace.
Our system today is impacted by myriad of what I call “inflationary biases,” significantly raising the odds of inflation surprises. Much is outside administration and Federal Reserve control. Returning to President Trump’s announcement of a major AI initiative: This will only intensify China’s determination not to be outdone by U.S. efforts.
China’s 2025 prospects. Beijing has expended extraordinary stimulus to hold bubble deflation at bay, with mixed results. 2024 was another dismal year in China’s ongoing apartment bubble collapse. Yet enormous spending on myriad new technologies - electrified vehicles, clean energy tech, renewable energy infrastructure, and the like, offset weak apartment construction and consumption. While down from 2023, massive $4.5 TN system credit growth was instrumental in sustaining growth.
But it’s increasingly apparent that enormous export-focused investment spending is unsustainable, especially with the return of President Trump. Financial stress is mounting within both local government finance and China’s bloated banking system. Markets have been frustrated by Beijing’s hesitancy to call out the stimulus bazookas. But ballooning non-productive credit risks unleashing destabilizing currency instability. China’s renminbi traded to 16-year lows to begin the year.
This is a critical juncture for China – with risks including intensifying bubble deflation, economic depression, financial system fragility, and currency vulnerability. I’ll assume Beijing prioritizes expending whatever stimulus it takes to hold crisis dynamics at bay. And Xi Jinping will demand measures that give China the strongest position for heated trade negotiations.
The exportation of Chinese disinflation significantly contributed to weaker goods prices and lower inflation in the U.S. and globally. This important inflation dynamic is now at risk. Beijing will be compelled to adopt more consequential reflationary policies. And how much tariffs increase will depend on trade negotiations. President Trump will surely be tough, focusing on Beijing’s failure to honor past commitments. I expect Xi Jinping to be unwavering in his resolve not to be bullied. Trump’s team goes into trade talks confident they enjoy the upper hand over a weakened China. If the U.S. side overplays its hand, China could raise the issues of its Treasury holdings and Taiwan. Economically, China is in a weaker position. But Xi Jinping could play hardball, believing the booming U.S. has more to lose.
Generally, I see an unfolding clash from the extraordinary power President Trump enjoys domestically and his propensity to project such power internationally. I expect much of the world to convey a low threshold for being pushed around by an in your face “America first” administration. Trump is eager to brandish tariffs and sanctions, as we saw Sunday after Colombia refused to accommodate U.S. deportation flights. From the Financial Times: “Mexico and Canada forge united front in face of Donald Trump’s tariff threats.” I expect more nations to participate in an informal anti-American trade threat alliance. Much depends on whether President Trump backs down or doubles-down. Add trade war risk to an already hyper-risky geopolitical environment.
Exuberant U.S. risk markets are incredibly complacent in the face of myriad current and festering risks. Last year’s historic excesses – credit, speculation, speculative leverage, and the AI and crypto manias for starters – intensified latent fragilities. History informs us of the precarious nature of speculative blowoffs. They’re unsustainable and prone to abrupt and destabilizing reversals - with a propensity for triggering panic, dislocation, and market crashes. I remember clearly the backdrops for notable market blowups in 1987, 1994, 1997/98, 2002, 2008, 2012, and 2020.
Without a doubt, the current environment has risks that dwarf previous booms. So many things without precedent: Historic market speculation and public participation; millions trading stocks and options from their computers, tablets, and phones; $10 TN of ETFs; a $7 TN money market fund complex; approaching $8 TN of “repos”; unprecedented speculative leverage in stocks, Treasuries, and fixed-income; and hundreds of trillions of derivatives. Let there be no doubt, over indebtedness and myriad bubble fragilities pose clear threats to system stability.
I am not resorting to whackoism or histrionics. There has been nothing with comparable risks in almost a century. When I ponder the dichotomy between today’s near universal optimism and a lengthy list of things that could go terribly wrong, I think of a comment made just days ahead of the 1929 market crash from the eminent American economist Irving Fisher: “Stock prices have reached what looks like a permanently high plateau.”
I’ll conclude again with my simple wish: I hope I’m wrong.
For the Week:
The S&P500 declined 1.0% (up 2.7% y-t-d), while the Dow added 0.3% (up 4.7%). The Utilities fell 1.5% (up 3.5%). The Banks increased 0.6% (up 8.7%), and the Broker/Dealers rose 0.6% (up 12.0%). The Transports dropped 1.8% (up 2.6%). The S&P 400 Midcaps declined 1.1% (up 3.8%), and the small cap Russell 2000 slipped 0.9% (up 2.6%). The Nasdaq100 fell 1.4% (up 2.2%). The Semiconductors sank 6.1% (up 0.7%). The Biotechs gained 1.1% (up 9.1%). With bullion jumping $28, the HUI gold index rose 2.2% (up 13.5%).
Three-month Treasury bill rates ended the week at 4.18%. Two-year government yields declined seven bps to 4.20% (down 4bps y-t-d). Five-year T-note yields dropped 10 bps to 4.33% (down 5bps). Ten-year Treasury yields fell eight bps to 4.54% (down three bps). Long bond yields decline six bps to 4.80% (unchanged). Benchmark Fannie Mae MBS yields fell seven bps to 5.80% (down 4bps).
Italian 10-year yields dropped 10 bps to 3.55% (up 3bps y-t-d). Greek 10-year yields fell 10 bps to 3.32% (up 10bps). Spain's 10-year yields dropped 12 bps to 3.07% (up 1bp). German bund yields fell 11 bps to 2.46% (up 9bps). French yields declined 10 bps to 3.21% (up 1bp). The French to German 10-year bond spread widened one to 73 bps. U.K. 10-year gilt yields fell nine bps to 4.54% (down 3bps). U.K.'s FTSE equities index rallied 2.0% (up 6.1% y-t-d).
Japan's Nikkei 225 Equities Index declined 0.9% (down 0.8% y-t-d). Japanese 10-year "JGB" yields added one basis point to 1.25% (up 14bps y-t-d). France's CAC40 added 0.3% (up 7.7%). The German DAX equities index jumped 1.6% (up 9.2%). Spain's IBEX 35 equities index surged 3.2% (up 36.7%). Italy's FTSE MIB index gained 0.7% (up 6.7%). EM equities were mixed. Brazil's Bovespa index rallied 3.0% (up 4.9%), while Mexico's Bolsa index slipped 0.3% (up 3.4%). South Korea's Kospi declined 0.8% (up 4.9%). India's Sensex equities index recovered 1.7% (down 1.3%). China's Shanghai Exchange Index was unchanged (down 3.0%). Turkey's Borsa Istanbul National 100 index fell 1.0% (up 1.8%).
Federal Reserve Credit declined $8.0 billion last week to $6.780 TN. Fed Credit was down $2.109 TN from the June 22, 2022, peak. Over the past 281 weeks, Fed Credit expanded $3.054 TN, or 82%. Fed Credit inflated $3.969 TN, or 141%, over the past 638 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $9.6 billion last week to $3.268 TN. "Custody holdings" were down $76.2 billion y-o-y, or 2.3%.
Total money market fund assets declined $30.3 billion to $6.873 TN. Money funds were up $738 billion over 27 weeks (23% annualized) and $913 billion y-o-y (15%).
Total Commercial Paper surged $53.6 billion to $1.211 TN. CP was down $55 billion, or 4.3%, over the past year.
Freddie Mac 30-year fixed mortgage rates slipped a basis point this week to 6.95% (up 32bps y-o-y). Fifteen-year rates declined four bps to 6.12% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 7.02% (up 7bps).
Currency Watch:
For the week, the U.S. Dollar Index recovered 0.9% to 108.37 (down 0.1% y-t-d). For the week on the upside, the Brazilian real gained 1.2% and the Japanese yen increased 0.5%. On the downside, the Mexican peso declined 2.0%, the South Korean won 1.6%, the Swedish krona 1.6%, the Australian dollar 1.5%, the South African rand 1.4%, the Canadian dollar 1.4%, the Norwegian krone 1.3%, the New Zealand dollar 1.3%, the euro 1.3%, the Singapore dollar 0.8%, the British pound 0.7%, and the Swiss franc 0.6%. The Chinese (onshore) renminbi declined 0.05% (offshore down 1.06%) versus the dollar (up 0.76% y-t-d).
Commodities Watch:
January 29 – Financial Times (Leslie Hook): “A surge in gold shipments to the US has led to a shortage of bullion in London, as traders amass an $82bn stockpile in New York over fears of Trump administration tariffs. The wait to withdraw bullion stored in the Bank of England’s vaults has risen from a few days to between four and eight weeks, according to people familiar…, as the central bank struggles to keep up with demand. ‘People can’t get their hands on gold because so much has been shipped to New York, and the rest is stuck in the queue,’ said one industry executive. ‘Liquidity in the London market has been diminished.’”
January 30 – Bloomberg (Yongchang Chin): “Commodity markets are pricing in elevated odds that US President Donald Trump’s sanctions against Canadian imports will include raw materials like oil, according to Goldman Sachs…, which warned of higher gasoline prices in the Midwest if penalties cover crude flows. Differences in regional pricing for commodities including crude, copper and aluminum signal an 85% probability of a 10% tariff being applied, analysts… said... Lower probabilities were linked with higher eventual tariffs, they added. Raw materials markets from energy to metals are braced for a wave of disruption as Trump seeks to reshape global trade.”
The Bloomberg Commodities Index retreated 1.1% (up 3.6% y-t-d). Spot Gold rose 1.0% to $2,798 (up 6.6%). Silver jumped jumped 2.4% to $31.3047 (up 8.3%). WTI crude dropped $2.13, or 2.9%, to $72.53 (up 1%). Gasoline increased 0.5% (up 2%), while Natural Gas sank 24.4% to $3.04 (down 16%). Copper fell 1.0% (up 6%). Wheat jumped 2.8% (up 2%), while Corn dipped 0.9% (up 5%). Bitcoin dropped $7,770 or 1.7%, to $102,700 (up 9.6%).
Trump Administration Watch:
January 25 – Wall Street Journal (David Uberti): “Trade-war threats. Sweeping deportation plans. A declared ‘energy emergency.’ President Trump’s whirlwind return to office has brought into focus his vision for what he calls a new ‘Golden Age’ of America. A deluge of executive orders and directives in the administration’s first week shows a drive toward a more self-reliant economy that makes more products at home, pumps out more of its own oil and gas and employs more U.S. workers. A potentially leaner, meaner government at the center of it all is already throwing the country’s weight around—even against longtime allies—in the hope of bending global trade to America’s will. ‘We will be the envy of every nation,’ Trump said in his inaugural address... ‘And we will not allow ourselves to be taken advantage of any longer.’”
January 28 – New York Times (Ana Swanson and Alan Rappeport): “In his first week in office, President Trump tried to browbeat governments across the world into ending the flow of drugs into America, accepting planes full of deported migrants, halting wars and ceding territory to the United States. For all of them, he deployed a common threat: Countries that did not meet his demands would face stiff tariffs on products they send to American consumers. Mr. Trump has long wielded tariffs as a weapon to resolve trade concerns. But the president is now frequently using them to make gains on issues that have little to do with trade. It is a strategy rarely seen from other presidents, and never at this frequency.”
January 29 – Associated Press (Nicholas Riccardi): “Just a little over a week into his second term, President Donald Trump took steps to maximize his power, sparking chaos and what critics contend is a constitutional crisis as he challenges the separation of powers that have defined American government for more than 200 years. The new administration’s most provocative move came this week, as it announced it would temporarily halt federal payments to ensure they complied with Trump’s orders barring diversity programs. The technical-sounding directive had enormous immediate impact before it was blocked by a federal judge, potentially pulling trillions of dollars from police departments, domestic violence shelters, nutrition services and disaster relief programs that rely on federal grants. The administration on Wednesday rescinded the order.”
January 28 – Bloomberg (Viktoria Dendrinou and Daniel Flatley): “The US Senate confirmed Scott Bessent as the next secretary of the Treasury, becoming the chief economic spokesman for President Donald Trump and his sweeping agenda of tax cuts, deregulation and trade rebalancing… Once sworn in, the 62-year-old former colleague of billionaire George Soros will face an immediate challenge managing the US debt load. The federal debt limit kicked back in at the start of January, forcing the Treasury to deploy special accounting maneuvers to avoid breaching it. And on Feb. 5, the department is due to update its plans for the issuance of Treasuries at a time of historically wide budget deficits.”
January 30 – Wall Street Journal (Richard Rubin and Olivia Beavers): “President Trump wants Congress to pass ‘one big, beautiful bill’ that would extend expiring tax cuts and provide money for border enforcement. As House Republicans concluded a three-day meeting at a Trump resort in Florida, that legislation is nowhere near done. Lawmakers are wrestling with their slim majority and internal disputes over the size of spending cuts. House Speaker Mike Johnson was keeping any details close to his chest when asked… if House Republicans made final decisions on cuts, costs or savings. ‘We’re in the process of working through this,’ Johnson said, adding that he was aiming to have a blueprint for a budget soon and is sticking to his aggressive timeline to finish the bill within a few months.”
January 29 – Bloomberg (Jordan Fabian): “President Donald Trump is overwhelming the political system in his drive to bend the US government to his will, plunging broad swaths of the federal bureaucracy into chaos while leaving the opposition snowed under by the sheer scope of his efforts. The White House offered federal workers buyouts on Tuesday night for those who didn’t want to end their remote arrangements, while warning employees the new administration planned additional aggressive cuts to the federal workforce.”
January 29 – Bloomberg (Riley Griffin and Jordan Fabian): “The White House is considering challenging the constitutionality of a 50-year-old law limiting the president’s control over federal spending, easing the firing of civil servants, curbing pay and reining in independent agencies, according to a document seen by Bloomberg... The ideas, detailed in a slide presentation labeled ‘confidential,’ outline the ways President Donald Trump’s administration could try to overhaul the federal bureaucracy and its workforce — though it’s unclear whether the president has the legal authority to carry out the suggested actions.”
January 31 – Wall Street Journal (Natalie Andrews and Meridith McGraw): “President Trump’s handling of two crises this week—one, a bureaucratic mess and the other, a horrific tragedy—quickly shifted the White House from inaugural euphoria to the realities of governing. His defiant stand in the face of nationwide confusion and fear left some aides scrambling to fortify the image of a White House that could do no wrong. But he handled both problems with the same approach: deflecting blame and attacking Democrats, the media and his predecessors. His message was an amplified version of what he has tried to exude since taking office: He is in charge. The country also received its first live-action glimpse of a White House and cabinet that is being hastily assembled and crafting policies on the fly that in one case had to be quickly reversed.”
January 30 – Financial Times (David Pilling, Aanu Adeoye, Monica Mark, Joe Daniels and Christopher Miller): “With Colombian anti-narcotrafficking helicopters idle for want of fuel and news outlets in Ukraine threatened by closure, aid organisations and governments around the world are frantically trying to understand how the abrupt freeze of US foreign aid will affect their activities. The 90-day suspension of US aid and ‘stop-work’ requirement following the president’s executive order last week has exposed with lightning-like intensity the global reach of US assistance, whose diverse projects worldwide have been an essential part of American soft power.”
January 26 – Financial Times (Richard Milne): “US President Donald Trump has ridiculed Denmark’s attempts to defend Greenland with additional patrols including two extra dog sleds as he insisted America would take control of the strategically crucial Arctic island. Denmark’s defence minister has conceded that the Nordic country has not done enough to protect its autonomous territory of Greenland, but revealed plans to spend $1.5bn on two new inspection ships, two drones and two dog sled patrols... ‘I do believe Greenland, we’ll get — because it really has to do with freedom of the world. It has nothing to do with the United States, other than we’re the one that can provide the freedom. They [Denmark] can’t. They put two dog sleds there two weeks ago, they thought that was protection,’ Trump told reporters…”
January 26 – Bloomberg (Christian Wienberg): “Denmark’s prime minister said the US should remember that the Nordic country has lost troops fighting in US-led wars and always has supported its large partner, after President Donald Trump escalated his demands over Greenland. ‘I think it is important that everyone in the US remembers how good an ally Denmark has been,’ Mette Frederiksen said… ‘So Denmark has been a good ally, we are a good ally now, and we intend to continue to be one.’”
January 29 – Reuters (Mohamed Hendawy): “Egypt will not participate in the displacement of Palestinians, an ‘act of injustice’ that would threaten Egyptian security, President Abdel Fattah Al-Sisi said… in his first public response to U.S. President Donald Trump's call for Cairo to take in residents of the Gaza Strip… ‘Regarding what is being said about the displacement of Palestinians, it can never be tolerated or allowed because of its impact on Egyptian national security,’ Sisi said. ‘The deportation or displacement of the Palestinian people is an injustice in which we cannot participate.’”
January 27 – Bloomberg (Courtney McBride and Myles Miller): “President Donald Trump is preparing an executive order for a ‘next-generation’ defense shield to protect the US against ballistic missiles and other long-range attacks, taking on a goal that past administrations — including his own — struggled to reach. ‘The threat of attack by ballistic, cruise and hypersonic missiles remains a catastrophic threat facing the United States,’ according to a White House document… It says Trump will order the construction of an ‘Iron Dome’ shield, comparing it to Israel’s vaunted system…”
January 27 – Bloomberg (Jennifer A Dlouhy): “President Donald Trump is asserting more federal government control over water management decisions in California and ordering US officials to override local authorities, casting the steps as necessary to boost the state’s firefighting capabilities. The actions — enshrined in an executive order that was published Sunday but dated Friday — came as Trump visited California to examine devastation from the wildfires ravaging Los Angeles and after days of withering criticism of the state’s response to the blazes.”
Trade War Watch:
January 30 – Axios (Ben Berkowitz): “President Trump… reiterated that tariffs are coming against Canada and Mexico on Saturday, though he said the scope of those levies is still up in the air… ‘Mexico and Canada have never been good to us on trade. They’ve treated us very unfairly on trade… We don’t need what they have.’ The U.S., Mexico and Canada have been joint parties to free trade agreements for decades, first NAFTA and then the USMCA. The president left the door open to the possibility the tariffs would not be blanket levies on all imports; specifically, he said Canadian oil imports might be exempt.”
January 28 – Bloomberg (Stephanie Lai, Billy House and Josh Wingrove): “President Donald Trump said he wants to impose across-the-board tariffs that are ‘much bigger’ than 2.5%, the latest in a string of signals that he’s preparing widespread levies to reshape US supply chains. ‘I have it in my mind what it’s going to be but I won’t be setting it yet, but it’ll be enough to protect our country,’ Trump told reporters…”
January 28 – Associated Press (Josh Boak and Christopher Sherman): “Having already forced Colombia to accept deportees by threatening a 25% tariff, President Donald Trump is readying the same move against Canada and Mexico… But this time, the stakes are higher and many economists surveying the possible damage doubt Trump would be comfortable with what they say would be self-inflicted wounds from the tariffs. ‘The potential for such sizable economic impacts ought to act as enough of a deterrent that Trump will not end up implementing these higher tariffs,’ said Matthew Martin, senior U.S. economist at the consultancy Oxford Economics.”
January 28 – Bloomberg (Brian Platt and David Gura): “Canada can work with US President Donald Trump’s administration to reshape global trade and weaken China’s dominance of supply chains, according to Chrystia Freeland, the Canadian politician who’s vying to replace Justin Trudeau as prime minister… Freeland said she believes Trump is very smart… and is threatening to impose huge tariffs on Canada, Mexico and other allies in part to pave the way for tougher policies on China. ‘He has come to the conclusion that if he can show the rest of the world how mean and tough he can be with his closest partners and allies — how much he’s prepared to beat up on those really nice Canadians, who throughout history have been great partners for the US — how do you think that’s going to make the Chinese feel?’ she said…”
January 27 – Bloomberg (Mathieu Dion): “Mark Carney, the former central banker who’s running to lead Canada, said the government should be open to curbing electricity exports to the US if it needs to retaliate against tariffs from the Trump administration. ‘It’s not the first card” to play in a trade war, Carney said… But any negotiation with the US will be ‘very tough,’ he said…”
January 29 – Bloomberg (Carolina Millan and Maria Elena Vizcaino): “President Claudia Sheinbaum brushed off a question as to whether Mexico is expecting US President Donald Trump to announce 25% tariffs on Mexican goods Feb. 1. ‘We don’t expect it will happen,’ she said. ‘But if it does, we have our plan.’ She declined to elaborate on the plan for the tariffs, noting it would be announced ‘in due course.’”
January 27 – Financial Times (Michael Stott and Joe Daniels): “Latin American presidents will hold an emergency summit on Thursday to respond to President Donald Trump’s mass deportations of migrants as they reel from his aggressive tactics towards two of Washington’s traditional regional allies… ‘There is a lot of alarm among the Latin American embassies in Washington,’ said a senior regional diplomat in Washington. ‘We seem to have gone back to 1897 and the era of President [William] McKinley, who invaded Cuba and the Philippines.’”
January 30 – Reuters (Ismail Shakil): “President Donald Trump… warned off BRICS member countries from replacing the U.S. dollar as a reserve currency by repeating a 100%-tariffs threat he had made weeks after winning the November presidential elections. ‘We are going to require a commitment from these seemingly hostile Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs,’ Trump said on Truth Social…”
January 28 – Bloomberg (Joe Deaux): “Former US Commerce Secretary Wilbur Ross said President Donald Trump is ‘deadly serious’ about using tariffs throughout his second term to squeeze concessions from allies, but doesn’t think he’ll ultimately take a blanket approach… ‘He’s deadly serious, and I think to the degree that he doesn’t get what he wants in concessions from the other countries, I have no doubt he will go ahead… He talked about blanket tariffs in the last administration as well, but he never really did them.’”
Ukraine War Watch:
January 29 – Reuters (Anastasiia Malenko, Lidia Kelly, Lucy Papachristou and Mark Trevelyan): “Ukraine said… it had struck a big Russian oil refinery in an overnight drone attack, and a Russian official said an attempted Ukrainian drone strike on a nuclear power plant had been thwarted. The Ukrainian military said the strike on the refinery in Russia's Nizhny Novgorod region had caused a large fire.”
Taiwan Watch:
January 26 – Financial Times (Kathrin Hille in Taipei and Haohsiang Ko): “Taiwan has drawn up a blacklist of 52 Chinese-owned ships that use flags of convenience, which it will track and proactively inspect in an effort to regulate part of a rapidly growing ‘shadow fleet’ that is causing global security concerns… While international attention has focused on Russia’s use of this shadow fleet to export oil in circumvention of sanctions over its war on Ukraine, the ranks of such ships have swelled beyond tankers and pose increasing maritime and national security risks to coastal states.”
Market Instability Watch:
January 30 – Financial Times (Moritz Kraemer): “The US last year reached a critical point: the federal government had to spend more on interest payments than it did on defence… The current disarray of American public finances makes us imagine the previously unimaginable: the issuer of the world’s foremost reserve currency being overburdened by public debt. This debt is on track to surpass 160% of GDP by mid-century, according to… the Congressional Budget Office. In the next 10 years, State Street says $2tn annually of net issuance of Treasury debt is expected. Unlike in the 2010s, the Federal Reserve and other price-insensitive buyers, such as foreign central banks, may not be net buyers… As the era of close-to-zero interest rates is fading into history, the debt service burden will inexorably rise… Thankfully, there are institutions that warn investors of rising sovereign risk: the rating agencies. Or are there? It is fair to question whether the big three agencies… have become more coy about the risks of rich countries.”
January 29 – Bloomberg (Jan-Patrick Barnert and Neil Campling): “The warnings about Big Tech’s market dominance have gone largely unheeded by investors for years. And why not, when the Magnificent Seven rallied virtually nonstop, adding trillions in value. The words of caution took on a stark new contour Monday. Concern over DeepSeek slammed tech giants, dragging the broader market down — even as the majority of the S&P 500 advanced… The recent volatility among tech giants has been particularly worrisome for Wall Street, as the S&P 500’s leadership hasn’t been this concentrated in more than 20 years.”
January 27 – Reuters (Laila Kearney and Liz Hampton): “Shares of U.S. power, utility and natural gas companies sold off on Monday in some of the biggest recorded one-day drops, as new AI technology from Chinese start-up DeepSeek cast doubt on a projected surge in U.S. electricity demand and tech spending… Independent power provider Constellation Energy, whose shares had shot up about 100% in 2024 largely on its ability to sell nuclear and gas-fired power to U.S. data centers, sunk by about 20% in trading on Monday… Vistra was down 30% and rival Talen Energy Corp was down 22%.”
January 27 – Bloomberg (Vildana Hajric): “As levered-up US investors sustained eye-popping losses in tech stocks and related ETFs on Monday, they could take some comfort from the fact that another batch of speculative traders across the Atlantic had it even worse. Amid a bruising global rout sparked by anxiety over the rise of China’s DeepSeek AI model, the London-listed Leverage Shares 3x NVIDIA ETP slumped 52%, wiping out more than half of its $172 million in assets before trading was halted on Monday.”
January 29 – Bloomberg (Tom Rees, Irina Anghel, and Greg Ritchie): “Bank of England Governor Andrew Bailey said that ‘very big decisions’ will be needed to stop Britain’s public debt pile spiraling higher… Bailey told lawmakers… that climate change, an aging population and an end to the ‘post-Cold War dividend’ on defense spending are ‘very big structural headwinds’ facing the already-stretched public finances. ‘If we had any one of those three at any one time, we would have a substantial issue on our hands,’ he said… ‘Clearly very big decisions are going to have to be taken about it.’”
January 27 – Wall Street Journal (Hannah Erin Lang): “Stocks haven’t looked this unattractive, by at least one measure, since the aftermath of the dot-com era. Plenty of investors are piling in anyway. The equity risk premium, often defined as the gap between the S&P 500’s earnings yield and that of 10-year Treasurys, turned negative in late December for the first time since 2002 and sat last week at negative 0.15 percentage point. The metric is based on a calculation of how much stocks yield, which is derived by dividing the stock market’s expected earnings by its price. The earnings yield is then compared with the yield on government debt.”
January 26 – Bloomberg (Matthew Burgess and Prima Wirayani): “Emerging market investors are turning increasingly wary of carry trades as the threat of tariffs from the Donald Trump administration and the prospect of further dollar gains squeeze returns. Latin American currencies, often bought as part of such trades, face pressure from domestic fiscal issues along with the prospect of trade tensions with the US, according to Mackay Shields and Pictet Asset Management.”
Global Credit and Financial Bubble Watch:
January 28 – Bloomberg (James Crombie): “Hopes of favorable policies from the new US administration are galvanizing demand for a constrained supply of corporate debt, bringing credit markets to a boil while raising the odds of a blowup if the riskiest borrowers buckle under elevated yields. In global credit, America clearly comes first. Since last year’s decisive win by Republicans in US elections, dollar bonds — especially the riskiest — have led global gains. US bonds rated CCC are up 1.6% already this year…”
January 30 – Bloomberg (Eleanor Duncan, Claire Ruckin and Aaron Weinman): “Investment bankers who cater to private equity firms are offering to do deals for free as a global rally drives rampant demand for leveraged loans. They’re pitching a high volume of transactions simply to lower borrowing costs on existing leveraged loans, sometimes even volunteering to do them for nothing just to stay in the running for future deals, according to people familiar with the matter.”
January 25 – Financial Times (Mari Novik, Ian Smith and David Keohane): “Japanese investors have been selling Eurozone government debt at the fastest pace in more than a decade, with analysts warning that the move by one of the bloc’s cornerstone bondholders could lead to sharp market sell-offs. Net sales by Japanese investors rose to €41bn in the six months to November…”
AI Bubble Watch:
January 28 – Bloomberg (Michelle Ma and Mark Chediak): “It took just a single day's trading for Chinese artificial intelligence company DeepSeek to upend the US power market’s yearlong hot streak premised on a boom in electricity demand for artificial intelligence. AI’s energy needs have led companies such as OpenAI, Alphabet Inc. and Microsoft Corp. to seek new sources of power, such as shuttered nuclear plants. It has also complicated their ambitious climate goals. DeepSeek’s model appears to be more efficient and can achieve the same results for a fraction of the energy use…”
January 28 – Wall Street Journal (Ryan Dezember and David Ubert): “The emergence of Chinese AI upstart DeepSeek has Wall Street reconsidering one of the hottest trades of the past year: providing the energy to power the artificial-intelligence boom. DeepSeek’s claims that it has trained a sophisticated AI model far more efficiently than competitors called into question assumptions about the energy needed to power the new technology. Traders dumped shares of natural-gas producers, pipeline operators, power-plant owners, miners of coal and uranium, and even big land owners in the West Texas desert. The selloff even extended to natural-gas markets… The rout shows how tendrils of the AI trade have spread beyond chip makers and big technology companies to sectors that usually have little to do with fast-growing tech stocks, such as oil-and-gas and utilities.”
January 30 – Wall Street Journal (Miles Kruppa and Deepa Seetharaman): “Tech giants have spent billions of dollars on the premise that bigger is better in artificial intelligence. DeepSeek’s breakthrough shows smaller can be just as good. The Chinese company’s leap into the top ranks of AI makers has sparked heated discussions in Silicon Valley around a process DeepSeek used known as distillation, in which a new system learns from an existing one by asking it hundreds of thousands of questions and analyzing the answers. ‘It’s sort of like if you got a couple of hours to interview Einstein and you walk out being almost as knowledgeable as him in physics,’ said Ali Ghodsi, chief executive officer of… Databricks.”
January 28 – Financial Times (Eleanor Olcott): “Chinese artificial intelligence groups have been rushing out model updates before the lunar new year holiday, as the world wakes up to the sector’s major advances led by start-up DeepSeek... On Monday, the eve of China’s most important annual holiday, the Hangzhou-based company released a new open-source model for image generation, cementing its reputation as the disrupter-in-chief in a field previously dominated by US giants. It came hot on the heels of model releases from tech giant Alibaba and start-ups Moonshot and Zhipu… While DeepSeek’s achievement has prompted panic in the US about the advances Chinese labs are making on bootstrapped budgets, industry insiders say it is feeding into a newfound ‘confidence’ in China that will spur investment. ‘DeepSeek has made faster progress than the other Chinese model companies. But this is giving them confidence that they can catch up,’ said one AI investor in China.”
January 29 – Reuters (Eduardo Baptista): “Chinese tech company Alibaba released a new version of its Qwen 2.5 artificial intelligence model that it claimed surpassed the highly-acclaimed DeepSeek-V3. The unusual timing of the Qwen 2.5-Max's release, on the first day of the Lunar New Year when most Chinese people are off work and with their families, points to the pressure Chinese AI startup DeepSeek's meteoric rise in the past three weeks has placed on not just overseas rivals, but also its domestic competition.”
January 31 – Bloomberg (Brody Ford and Matt Day): “Amazon.com Inc. is expected to spend 60% more than previously announced on a massive data center project in Mississippi, underscoring the escalating costs for artificial intelligence infrastructure. The company will spend $16 billion to construct two data center campuses north of the state capital Jackson... When Amazon announced the project a year ago, the company put the price tag at $10 billion and called it ‘the single largest capital investment in Mississippi’s history.’”
January 30 – Financial Times (Rafe Uddin): “Microsoft shed $200bn in market value after its vast cloud unit posted slower growth than Wall Street forecast, as the tech group struggled to keep pace with demand for artificial intelligence-related services. The… software group… beat analysts’ expectations for revenue and net income in the quarter ending in December, but its cloud division — its biggest revenue driver, which includes its Azure cloud computing platform — narrowly missed expectations.”
January 30 – Financial Times (Antoine Gara): “Blackstone, the largest investor in the data centres needed to power the artificial intelligence boom, is examining how Chinese start-up DeepSeek’s low-cost model could affect demand for an area where the company has invested $80bn. Rising rents for data centres, amid breakneck spending by tech giants, have buoyed earnings for the alternative asset manager, which is building infrastructure for Big Tech groups such as Amazon, Microsoft and Alphabet.”
Bubble and Mania Watch:
January 29 – Bloomberg (Jack Sidders and Kriti Gupta): “Private markets are set for a ‘golden age’ even as investors adapt to a world of higher interest rates thanks to the vast pools of capital controlled by rich families that are set to pour into illiquid assets, according to Alisa Wood, the partner overseeing KKR & Co.’s private equity strategies... ‘The last five years is not going to look like the next five years,’ Wood said… ‘You need to close that return gap and I think we are entering what will be the golden age of private markets.’”
January 31 – Bloomberg (Swetha Gopinath): “Private markets are set to see trillions of dollars of inflows as wealthy individuals gain greater access to an industry once dominated by institutional investors, according to a senior managing director at Blackstone Inc. ‘For some time, people have been asking when the democratization of private markets will hit critical momentum. That time is now,’ Viral Patel, who oversees Blackstone’s private equity strategy for retail clients, said… ‘It’s not unrealistic to think that fund flow from individual investors into the asset class in the next 5-15 years could reach into the trillions.’”
January 25 – Bloomberg (Tim Smith): “Coinbase Global Inc.’s CEO said the company needs to rethink how it lists and evaluates the slew of new tokens getting created each week. ‘There are ~1m tokens a week being created now, and growing,’ Coinbase CEO Brian Armstrong said... ‘High quality problem to have, but evaluating each one by one is no longer feasible.’”
January 30 – Yahoo Finance (Ines Ferré): “Meme coins have gained attention this year, but some investors have been skeptical of the asset class at large and what it says about the current state of the investing environment. ‘These things have no intrinsic value. They’re just barometers of how much liquidity is out there, how much speculative frenzy is out there,’ Carson Block, founder… of Muddy Waters Capital, said… ‘Right now, all the signals are reading there’s a lot.’”
January 29 – Bloomberg (Isabelle Lee): “A popular ETF trade beloved by market speculators is fast turning into a billion-dollar revenue generator for nimble-footed financial firms. Traders have been diving into leveraged exchange-traded funds, a subset of a derivatives-enhanced products, offering to amp up the daily moves of the world’s most popular stocks and indexes. That’s enriched the firms behind the majority of these ETFs. They netted around $940 million in revenue in 2024… That’s a record 37% jump, beating last year’s all-time high.”
January 30 – Bloomberg (Denitsa Tsekova and Alexandra Semenova): “It’s another sign, if one were needed, of the perilous state of the short-selling industry right now: At an event featuring some of the most famous names in the game, there was hardly a bearish view among them. Porter Collins, Steve Eisman, Vincent Daniel and Danny Moses shot to fame thanks to The Big Short… This week, reuniting for a panel at an alternative investments conference in Miami, they made it clear they still like to go against consensus — only these days that mostly involves being long what other investors in the market avoid.”
U.S./Russia/China/Europe Watch:
January 30 – Financial Times (Demetri Sevastopulo, Joe Leahy, Ryan McMorrow, Kathrin Hille and Chris Cook): “China’s military is building a massive complex in western Beijing that US intelligence believes will serve as a wartime command centre far larger than the Pentagon… Satellite images… show a roughly 1,500-acre construction site 30km south-west of Beijing with deep holes that military experts assess will house large, hardened bunkers to protect Chinese military leaders during any conflict — including potentially a nuclear war. Several current and former US officials said the intelligence community is closely monitoring the site, which would be the world’s largest military command centre — and at least 10 times the size of the Pentagon.”
De-globalization Watch:
January 29 – Bloomberg (Mackenzie Hawkins and Jenny Leonard): “Trump administration officials are exploring additional curbs on the sale of Nvidia Corp. chips to China, according to people familiar with the matter, who emphasized that conversations are in very early stages as the new team works through policy priorities. Officials are focused on potentially expanding restrictions to cover Nvidia’s H20 chips…”
January 28 – Financial Times (Edward White and Haohsiang Ko): “China has built up control of critical minerals across the developing world over the course of two decades through a network of at least 26 state-backed financial institutions, according to a new report… Research… found that Chinese policy and commercial banks — working alongside private Chinese entities and some non-Chinese groups — issued loans worth nearly $57bn from 2000 to 2021 in 19 low- and middle-income countries for mining and processing copper, cobalt, nickel, lithium and rare earths, components critical to clean energy technologies such as electric vehicle batteries and solar panels.”
Inflation Watch:
January 31 – Associated Press (Christopher Rugaber): “An inflation gauge closely watched by the Federal Reserve rose slightly last month, while some underlying prices pressures showed signs of easing. The latest inflation figures arrive as President Donald Trump has threatened to impose big import taxes on goods from Canada and Mexico… Consumer prices rose 2.6% in December from a year earlier, up from a 2.4% annual pace in November and the third straight increase. Excluding the volatile food and energy categories, core prices increased 2.8% compared with a year ago…”
Federal Reserve Watch:
January 30 – Bloomberg (Catarina Saraiva): “Federal Reserve Chair Jerome Powell said officials are not in a rush to lower interest rates, adding the central bank is pausing to see further progress on inflation following a string of rate reductions last year. ‘We do not need to be in a hurry to adjust our policy stance,’ Powell said…, noting that the economy remains strong and interest rates are no longer restraining the economy as much as they had been… ‘The committee is very much in the mode of waiting to see what policies are enacted… We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be.’”
January 29 – Financial Times (Claire Jones and Harriet Clarfelt): “Donald Trump sharply criticised the Federal Reserve just hours after the US central bank defied the president’s calls for deep reductions in borrowing costs and left interest rates on hold… Trump railed against the central bank on his Truth Social messaging platform, saying, ‘If the Fed had spent less time on [diversity, equity and inclusion], gender ideology, ‘green’ energy, and fake climate change, inflation would never have been a problem.’ The Fed’s unanimous decision… to hold interest rates came just days after Trump insisted borrowing costs should fall ‘a lot’ and vowed to ‘let it be known’ if he disagreed with the central bank’s decision.”
January 30 – Wall Street Journal (Nick Timiraos): “President Trump picked right up where he left off during his first term, badgering a favorite nemesis—the Federal Reserve and its chair, Jerome Powell—over its recent performance managing inflation and interest rates. ‘Because Jay Powell and the Fed failed to stop the problem they created with inflation, I will do it,’ Trump said in a post… At the news conference, Powell leaned heavily on the keep-your-head-down demeanor he honed during his first rodeo with Trump... ‘I’m not going to have any response or comment whatsoever to what the president said. It’s not appropriate for me to do so,’ Powell said…”
January 29 – Bloomberg (Jordan Fabian): “President Donald Trump assailed the Federal Reserve’s approach to bank regulation and accused Chair Jay Powell of fumbling the fight against inflation, while refraining from directly commenting on interest rates. ‘The Fed has done a terrible job on Bank Regulation. Treasury is going to lead the effort to cut unnecessary Regulation, and will unleash lending for all American people and businesses,’ Trump posted…”
January 31 – New York Times (Colby Smith): “High inflation is stoking fresh debate about how the Federal Reserve should respond to President Trump’s sweeping plans to reorder the world economy through tariffs, leading to questions about whether old playbooks still apply. On Saturday, Mr. Trump is poised to impose 25% tariffs on imports from Mexico and Canada as well as an additional 10% tariff on Chinese goods. That move comes on the heels of threats to impose hefty tariffs on Colombia, which were rescinded after its government complied with Mr. Trump’s demands… Howard Lutnick, Mr. Trump’s nominee to oversee the Commerce Department and trade, said at a confirmation hearing… he favored ‘across-the-board’ tariffs that would hit entire countries. The volume of trade policy proposals is making the Fed’s already tricky job even more difficult and sowing uncertainty about what to expect from the central bank…”
January 31 – Reuters (Howard Schneider): “Federal Reserve Governor Michelle Bowman said… she still expects declining inflation to allow further interest rate cuts this year, but feels rising wages, buoyant financial markets, geopolitical risks, and upcoming administration policies could slow the process and keep price pressures elevated. ‘Core inflation remains elevated, but my expectation is that it will moderate further this year. Even with this outlook, I continue to see upside risks to inflation… I would prefer that future adjustments to the policy rate be gradual. We should take time to carefully assess the progress in achieving our inflation and employment goals’…”
U.S. Economic Bubble Watch:
January 29 – Reuters (Lucia Mutikani): “The U.S. trade deficit in goods widened to a record high in December, likely as businesses front-loaded imports of industrial supplies and consumer goods in anticipation of broad tariffs from President Donald Trump's new administration… The goods trade gap increased 18.0% to $122.1 billion last month, the largest since the government started tracking the series in 1992… Goods imports increased $10.8 billion, or 3.9%, to $289.6 billion. Exports fell $7.8 billion, or 4.5% to $167.5 billion.”
January 30 – Associated Press (Paul Wiseman): “A humming American economy ended 2024 on a solid note with consumer spending continuing to drive growth… Gross domestic product… expanded at a 2.3% annual rate from October through December. For the full year, the economy grew a healthy 2.8%, compared with 2.9% in 2023… Consumer spending grew at a 4.2% pace, fastest since January-March 2023 and up from 3.7% in July-September last year. But business investment tumbled as investment in equipment plunged after two straight strong quarters.”
January 30 – Associated Press (Matt Ott): “The number of Americans filing for jobless benefits fell last week in a sign that the labor market remains strong. Applications for jobless benefits fell by 16,000 to 207,000 for the week ending January 25… Analysts were expecting 225,000 new applications… The total number of Americans receiving unemployment benefits for the week of January 18 fell by 42,000 to 1.86 million.”
January 28 – Reuters (Lucia Mutikani): “U.S. consumer confidence weakened for a second straight month in January amid renewed concerns about the labor market and inflation. The Conference Board said… its consumer confidence index fell to 104.1 this month from an upwardly revised 109.5 in December.”
January 29 – CNBC (Diana Olick): “Applications for a mortgage to purchase a home fell 0.4% from one week earlier and were 7% lower than the same week one year ago. ‘Purchase activity decreased slightly, but applications for FHA purchase loans were a bright spot, increasing by 2%,’ said Joel Kan, vice president and deputy chief economist at the MBA.”
January 28 – Wall Street Journal (Ed Frankl): “U.S. home prices accelerated in November last year…, though the housing market could slow ahead in 2025 as mortgage rates creep higher. The S&P CoreLogic Case-Shiller National Home Price Index… rose 3.8% on year in November 2024, up from 3.6% in October 2024… The Case-Shiller index, which measures repeat-sales data, reports on a two-month delay and reflects a three-month moving average.”
January 27 – Bloomberg (Michael Sasso): “Sales of new US homes ended 2024 on a high note in December as customers took advantage of incentives from builders, leading to a second straight year of increased purchases. The annual pace of new single-family home sales accelerated 3.6% to 698,000 last month, reflecting a sharp advance in the West… For the full year, customers purchased 683,000 homes, up about 2.5% from 2023’s total… Of 750,000 single-family permits issued through October, a fifth occurred in five metropolitan areas: Houston, Dallas, Phoenix, Atlanta and Charlotte, North Carolina… The supply on the market rose to 494,000 in December, the most in 17 years.”
January 29 – Reuters (Isla Binnie): “Chief executives of global companies left their jobs in record numbers last year, pushed by intense scrutiny from investors and pressure to keep up with change, according to leadership advisory firm Russell Reynolds Associates. Some 202 CEOs left their posts in 2024, surpassing the six-year average of 186 and a 13% increase over the previous year…”
China Watch:
January 27 – Bloomberg: “China’s central bank injected a record amount of cash into the financial system via a new tool in January, delaying more high-profile policy easing as it prioritizes stabilizing the yuan. The People’s Bank of China conducted 1.7 trillion yuan ($234bn) of so-called outright reverse repurchase agreements using three- and six-month contracts to keep liquidity ample…”
January 26 – Bloomberg: “China’s economic activity unexpectedly faltered to start the year, breaking the momentum of a recovery sparked by stimulus measures and underlining the need for Beijing to do more to prevent another slowdown. Factory activity shrank in January after three months of expansion, with the manufacturing purchasing managers’ index falling to 49.1, the lowest since August. The non-manufacturing gauge for construction and services dropped to 50.2, just above the 50-mark that separates growth and contraction.”
January 31 – Bloomberg: “China’s residential sales resumed falling in January… The value of new-home sales from the 100 biggest real estate companies dropped 3.2% from a year earlier to 227.6 billion yuan ($31.4bn), after being flat in December… Beijing is struggling to revive the property market amid weak domestic demand and a worsening job situation. While the housing sector has picked up modestly on the back of government support, improvements have mostly been in the second-hand market as buyers remain concerned about developers’ ability to finish projects on time.”
January 27 – Financial Times (Thomas Hale and Chan Ho-him): “Leading Chinese property developer Vanke has forecast a $6.2bn annual loss and announced the sudden resignation of its top leadership, reigniting concerns over funding and confidence across China’s economically critical real estate sector. The developer, partly owned by local authorities in Shenzhen, is the latest focal point of a cash crunch that began with the collapse of peer Evergrande in 2021 and has since engulfed a host of other developers including Country Garden. After weeks of swirling concerns over the health of Vanke, the company said… chair Yu Liang had resigned for ‘work adjustment reasons’. It said chief executive Zhu Jiusheng had departed for ‘health reasons’. The ‘sudden and simultaneous’ resignations were ‘unprecedented in recent memory’ for a big participant such as Vanke, said Foreky Wong, founding partner at Hong Kong advisory company Fortune Ark Restructuring.”
January 28 – Bloomberg: “China Vanke Co. has been thrown a lifeline by state authorities, a rare show of support that signals the developer may be too big to fail even after dozens of property firms defaulted amid China’s punishing housing slump. As part of an overhaul unveiled late Monday, Vanke’s two top veteran executives stepped down after the company warned of a record $6.2 billion loss. An official from Shenzhen Metro Group Co., its largest state shareholder, will take over as chair.”
Central Bank Watch:
January 30 – Financial Times (Olaf Storbeck, Sam Fleming and Ian Smith): “The European Central Bank has warned of ‘headwinds’ to the Eurozone’s stagnating economy as it cut its benchmark interest rate by a quarter-point to 2.75%. Thursday’s unanimous decision… came hours after Eurostat reported that the Eurozone economy had not grown at all in the fourth quarter of 2024. ECB president Christine Lagarde cautioned that the economy was ‘set to remain weak in the near term’, adding that surveys pointed to a continued contraction in manufacturing even as services grow. ‘Consumer confidence is fragile,’ she said.”
January 29 – Bloomberg (Erik Hertzberg and Randy Thanthong-Knight): “The Bank of Canada cut interest rates by a quarter percentage point and stopped giving guidance on any further adjustments to borrowing costs as the threat of tariffs from the Trump administration clouds the outlook. Policymakers… lowered the benchmark overnight rate to 3% on Wednesday, the sixth consecutive cut.”
January 29 – Bloomberg (Ott Ummelas and Jonas Ekblom): “Sweden’s central bank lowered borrowing costs by a quarter point and signaled its easing campaign may be finished for now as officials assess the impact of their actions so far. The Riksbank cut the key rate to 2.25%, the lowest level in more than two years…”
Europe Watch:
January 29 – Bloomberg (Arne Delfs, William Wilkes, Christina Kyriasoglou, and Michael Nienaber): “Elon Musk’s planned revolution in Germany may already be under way. The Tesla Inc. and SpaceX chief executive’s enthusiastic endorsement of the far-right Alternative for Germany party… are stirring up the campaign for next month’s federal election. The results of Musk’s meddling won’t be known for sure until the ballots are counted on Feb. 23, and the chances that he can engineer an upset in Europe’s largest economy are distant. But the disruptive power of a multibillionaire who has US President Donald Trump’s ear is unsettling Germany’s establishment at a time when the country is already vulnerable economically and politically.”
Japan Watch:
January 29 – Bloomberg (Erica Yokoyama): “The Bank of Japan made a significant step toward shrinking its massive balance sheet last week, while market watchers were fixated on the biggest interest rate increase from the central bank in 18 years. The BOJ decided… to offer no new lending from July under its fund-provisioning program to stimulate bank lending. The program’s outstanding loans stood at ¥77 trillion ($496bn)…, accounting for around 10.4% of the central bank’s overall balance sheet… The phasing out of the loan program underscores BOJ Governor Kazuo Ueda’s determination to slowly but steadily proceed with the normalization of policy after more than a decade of radical monetary easing.”
January 29 – Bloomberg (Erica Yokoyama): “The Japanese government expects its annual debt-servicing costs to rise to almost $230 billion over the next four years as the central bank’s campaign to gradually raise interest rates drives up financing costs. Under the more optimistic of two projected growth scenarios, debt-servicing costs are seen rising to ¥35.3 trillion ($229bn) in the year starting April 2028… This marks a 25% increase from projected costs in the coming fiscal year. Servicing Japan’s oversized debt is already expected to chew up close to a quarter of the annual budget for the year starting in April. The latest projection underscores the growing financial strain Japan will likely face amid anticipated additional rate hikes by the central bank.”
January 30 – Bloomberg (Toru Fujioka and Yoshiaki Nohara): “The pace of price growth in Tokyo picked up… Consumer prices excluding fresh food in the capital climbed 2.5% in January from a year earlier, the fastest pace since last February… Overall price gains also sped up to 3.4%, the fastest clip in nearly two years, as the cost of fresh food jumped.”
Emerging Markets Watch:
January 29 – Reuters (Marcela Ayres): “Brazil's central bank raised its benchmark interest rate by 100 bps for the second straight meeting… and signaled another hike of that size in March, leaving the door open for subsequent moves amid mounting inflationary pressures. The bank's rate-setting committee… lifted the Selic policy rate to 13.25%... - the first under the new central bank chief Gabriel Galipolo… ‘Beyond the next meeting, the committee reinforces that the total magnitude of the tightening cycle will be determined by the firm commitment of reaching the inflation target,’ said the bank’s statement.”
January 30 – Bloomberg (Maya Averbuch): “Mexico’s economy posted the first quarterly contraction since 2021, shrinking much more than expected on weaker domestic demand and uncertainty over tariffs by the US, the country’s top trade partner. Gross domestic product fell 0.6% in the fourth quarter… For full-year 2024, GDP rose 1.5%. Mexico’s Deputy Finance Minister Edgar Amador Zamora… attributed much of the last-quarter downturn to drought and climate change…”
January 28 – Bloomberg (Subhadip Sircar and Anup Roy): “Indian bonds and stocks gained after the central bank’s cash-infusion plan fueled hopes of an interest-rate cut as early as next week. The Reserve Bank of India… said it will infuse $18 billion to address the worst cash crunch in over a decade. Ample banking system liquidity is seen as a necessary condition for smooth transmission of rate cuts when easing starts.”
Leveraged Speculation Watch:
January 28 – Reuters (Nell Mackenzie): “Hedge fund stock-pickers lost billions of dollars on Monday in a rout in global technology shares sparked by the emergence of a low-cost Chinese artificial intelligence model, according to a Goldman Sachs… Hedge funds that pick stocks based on company fundamentals rather than using algorithms to trade systematically were down 1.1% Monday, as markets sank…”
January 30 – Financial Times (Costas Mourselas): “The Trump administration’s embrace of cryptocurrencies is helping fuel a speculative mania that could cause ‘havoc’ when prices collapse, the hedge fund Elliott Management has warned. The $70bn-in-assets firm took aim at the US government’s apparent enthusiasm for assets that have soared in price but have ‘no substance’, and also at politicians who are supportive of cryptocurrencies that could eventually become a rival to the US dollar… The fund ‘has never seen a market like this’, wrote Elliott, referring to the speculative investor frenzy it believes is gripping financial markets. It pointed to the artificial intelligence boom and high equity market valuations as signs of investors ‘acting like a crowd of sports bettors’.”
Social, Political, Environmental, Cybersecurity Instability Watch:
January 29 – Bloomberg (Erin Hudson): “US fourth- and eighth-grade students are struggling with reading comprehension with last year’s nationwide testing showing the worst results in over two decades. Average reading scores deteriorated among students who took the Congressionally-mandated assessment in 2024… ‘This is a major concern,’ said Peggy Carr, commissioner of the National Center for Education Statistics, which administers the test… ‘Our nation is facing complex challenges in reading.’”
January 30 – Bloomberg (Eric Roston and Lauren Rosenthal): “Climate scientists are acutely aware of the devastation that a warming world can wreak on communities. But when disaster shows up at their doorstep, it hits in a completely different way. ‘This event, for me, has destroyed any boundary between my work as a climate scientist and the rest of my life, my family, my friends,’ Benjamin Hamlington, a research scientist at NASA’s Jet Propulsion Lab, wrote… after his home in Altadena burned… He’s not alone. More than 200 staff at JPL lost their homes in the blazes that razed swaths of LA. It was the second time in less than six months that climate experts were displaced by a weather disaster… In September, Hurricane Helene-induced floods that ravaged Asheville, North Carolina, uprooted researchers who work for a federal climate data hub based in the city.”
January 27 – Financial Times (Michael Albertus): “As the world’s climate changes, scientists observe that the southern Californian rainy season is starting later and ending earlier, lining up the peak of the dry season closely with the period of Santa Ana winds… At the same time, global warming is melting ice and opening up the Arctic in unprecedented ways. Arctic shipping has increased 37% over the past decade, and the US, Russia and China are all eyeing new northern shipping routes that pass alongside Greenland. The geostrategic considerations and future mining opportunities are driving US President Donald Trump’s interest in acquiring the territory. These two disparate trends show the push and pull of a coming global land reshuffle.”
January 26 – Bloomberg: “China’s electricity demand is becoming a key focal point in the global fight against climate change. As the world’s largest polluter, China holds outsized sway over whether emissions can be reduced fast enough to avoid the worst impacts of global warming. The country’s breakneck adoption of clean energy technology has created hope… But that hasn’t happened so far, in large part because the nation’s energy demand is growing unprecedentedly fast, requiring ever more coal to be burned. Electricity use grew 6.8% last year, outpacing overall economic growth at the highest clip in at least 15 years.”
Geopolitical Watch:
January 26 – Financial Times (Richard Milne): “An underwater data cable between Sweden and Latvia was damaged early on Sunday, in at least the fourth episode of potential sabotage in the Baltic Sea that has caused concern in Nato about the vulnerability of critical infrastructure. Latvian Prime Minister Evika Siliņa said damage to the cable… was significant and thus was probably caused by an external force.”
January 25 – Bloomberg (Selcan Hacaoglu): “With Donald Trump threatening to upend American foreign policy again, one old acquaintance is aiming to benefit from a new era of American dealmaking in the Middle East. Turkish President Recep Tayyip Erdogan wants to capitalize on the demise of the Assad regime in neighboring Syria and the ceasefire in Gaza. Should the dominos fall the right way, there could be hundreds of billions of dollars of rebuilding contracts and new trade as well as geopolitical influence.”
The S&P500 declined 1.0% (up 2.7% y-t-d), while the Dow added 0.3% (up 4.7%). The Utilities fell 1.5% (up 3.5%). The Banks increased 0.6% (up 8.7%), and the Broker/Dealers rose 0.6% (up 12.0%). The Transports dropped 1.8% (up 2.6%). The S&P 400 Midcaps declined 1.1% (up 3.8%), and the small cap Russell 2000 slipped 0.9% (up 2.6%). The Nasdaq100 fell 1.4% (up 2.2%). The Semiconductors sank 6.1% (up 0.7%). The Biotechs gained 1.1% (up 9.1%). With bullion jumping $28, the HUI gold index rose 2.2% (up 13.5%).
Three-month Treasury bill rates ended the week at 4.18%. Two-year government yields declined seven bps to 4.20% (down 4bps y-t-d). Five-year T-note yields dropped 10 bps to 4.33% (down 5bps). Ten-year Treasury yields fell eight bps to 4.54% (down three bps). Long bond yields decline six bps to 4.80% (unchanged). Benchmark Fannie Mae MBS yields fell seven bps to 5.80% (down 4bps).
Italian 10-year yields dropped 10 bps to 3.55% (up 3bps y-t-d). Greek 10-year yields fell 10 bps to 3.32% (up 10bps). Spain's 10-year yields dropped 12 bps to 3.07% (up 1bp). German bund yields fell 11 bps to 2.46% (up 9bps). French yields declined 10 bps to 3.21% (up 1bp). The French to German 10-year bond spread widened one to 73 bps. U.K. 10-year gilt yields fell nine bps to 4.54% (down 3bps). U.K.'s FTSE equities index rallied 2.0% (up 6.1% y-t-d).
Japan's Nikkei 225 Equities Index declined 0.9% (down 0.8% y-t-d). Japanese 10-year "JGB" yields added one basis point to 1.25% (up 14bps y-t-d). France's CAC40 added 0.3% (up 7.7%). The German DAX equities index jumped 1.6% (up 9.2%). Spain's IBEX 35 equities index surged 3.2% (up 36.7%). Italy's FTSE MIB index gained 0.7% (up 6.7%). EM equities were mixed. Brazil's Bovespa index rallied 3.0% (up 4.9%), while Mexico's Bolsa index slipped 0.3% (up 3.4%). South Korea's Kospi declined 0.8% (up 4.9%). India's Sensex equities index recovered 1.7% (down 1.3%). China's Shanghai Exchange Index was unchanged (down 3.0%). Turkey's Borsa Istanbul National 100 index fell 1.0% (up 1.8%).
Federal Reserve Credit declined $8.0 billion last week to $6.780 TN. Fed Credit was down $2.109 TN from the June 22, 2022, peak. Over the past 281 weeks, Fed Credit expanded $3.054 TN, or 82%. Fed Credit inflated $3.969 TN, or 141%, over the past 638 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $9.6 billion last week to $3.268 TN. "Custody holdings" were down $76.2 billion y-o-y, or 2.3%.
Total money market fund assets declined $30.3 billion to $6.873 TN. Money funds were up $738 billion over 27 weeks (23% annualized) and $913 billion y-o-y (15%).
Total Commercial Paper surged $53.6 billion to $1.211 TN. CP was down $55 billion, or 4.3%, over the past year.
Freddie Mac 30-year fixed mortgage rates slipped a basis point this week to 6.95% (up 32bps y-o-y). Fifteen-year rates declined four bps to 6.12% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 7.02% (up 7bps).
Currency Watch:
For the week, the U.S. Dollar Index recovered 0.9% to 108.37 (down 0.1% y-t-d). For the week on the upside, the Brazilian real gained 1.2% and the Japanese yen increased 0.5%. On the downside, the Mexican peso declined 2.0%, the South Korean won 1.6%, the Swedish krona 1.6%, the Australian dollar 1.5%, the South African rand 1.4%, the Canadian dollar 1.4%, the Norwegian krone 1.3%, the New Zealand dollar 1.3%, the euro 1.3%, the Singapore dollar 0.8%, the British pound 0.7%, and the Swiss franc 0.6%. The Chinese (onshore) renminbi declined 0.05% (offshore down 1.06%) versus the dollar (up 0.76% y-t-d).
Commodities Watch:
January 29 – Financial Times (Leslie Hook): “A surge in gold shipments to the US has led to a shortage of bullion in London, as traders amass an $82bn stockpile in New York over fears of Trump administration tariffs. The wait to withdraw bullion stored in the Bank of England’s vaults has risen from a few days to between four and eight weeks, according to people familiar…, as the central bank struggles to keep up with demand. ‘People can’t get their hands on gold because so much has been shipped to New York, and the rest is stuck in the queue,’ said one industry executive. ‘Liquidity in the London market has been diminished.’”
January 30 – Bloomberg (Yongchang Chin): “Commodity markets are pricing in elevated odds that US President Donald Trump’s sanctions against Canadian imports will include raw materials like oil, according to Goldman Sachs…, which warned of higher gasoline prices in the Midwest if penalties cover crude flows. Differences in regional pricing for commodities including crude, copper and aluminum signal an 85% probability of a 10% tariff being applied, analysts… said... Lower probabilities were linked with higher eventual tariffs, they added. Raw materials markets from energy to metals are braced for a wave of disruption as Trump seeks to reshape global trade.”
The Bloomberg Commodities Index retreated 1.1% (up 3.6% y-t-d). Spot Gold rose 1.0% to $2,798 (up 6.6%). Silver jumped jumped 2.4% to $31.3047 (up 8.3%). WTI crude dropped $2.13, or 2.9%, to $72.53 (up 1%). Gasoline increased 0.5% (up 2%), while Natural Gas sank 24.4% to $3.04 (down 16%). Copper fell 1.0% (up 6%). Wheat jumped 2.8% (up 2%), while Corn dipped 0.9% (up 5%). Bitcoin dropped $7,770 or 1.7%, to $102,700 (up 9.6%).
Trump Administration Watch:
January 25 – Wall Street Journal (David Uberti): “Trade-war threats. Sweeping deportation plans. A declared ‘energy emergency.’ President Trump’s whirlwind return to office has brought into focus his vision for what he calls a new ‘Golden Age’ of America. A deluge of executive orders and directives in the administration’s first week shows a drive toward a more self-reliant economy that makes more products at home, pumps out more of its own oil and gas and employs more U.S. workers. A potentially leaner, meaner government at the center of it all is already throwing the country’s weight around—even against longtime allies—in the hope of bending global trade to America’s will. ‘We will be the envy of every nation,’ Trump said in his inaugural address... ‘And we will not allow ourselves to be taken advantage of any longer.’”
January 28 – New York Times (Ana Swanson and Alan Rappeport): “In his first week in office, President Trump tried to browbeat governments across the world into ending the flow of drugs into America, accepting planes full of deported migrants, halting wars and ceding territory to the United States. For all of them, he deployed a common threat: Countries that did not meet his demands would face stiff tariffs on products they send to American consumers. Mr. Trump has long wielded tariffs as a weapon to resolve trade concerns. But the president is now frequently using them to make gains on issues that have little to do with trade. It is a strategy rarely seen from other presidents, and never at this frequency.”
January 29 – Associated Press (Nicholas Riccardi): “Just a little over a week into his second term, President Donald Trump took steps to maximize his power, sparking chaos and what critics contend is a constitutional crisis as he challenges the separation of powers that have defined American government for more than 200 years. The new administration’s most provocative move came this week, as it announced it would temporarily halt federal payments to ensure they complied with Trump’s orders barring diversity programs. The technical-sounding directive had enormous immediate impact before it was blocked by a federal judge, potentially pulling trillions of dollars from police departments, domestic violence shelters, nutrition services and disaster relief programs that rely on federal grants. The administration on Wednesday rescinded the order.”
January 28 – Bloomberg (Viktoria Dendrinou and Daniel Flatley): “The US Senate confirmed Scott Bessent as the next secretary of the Treasury, becoming the chief economic spokesman for President Donald Trump and his sweeping agenda of tax cuts, deregulation and trade rebalancing… Once sworn in, the 62-year-old former colleague of billionaire George Soros will face an immediate challenge managing the US debt load. The federal debt limit kicked back in at the start of January, forcing the Treasury to deploy special accounting maneuvers to avoid breaching it. And on Feb. 5, the department is due to update its plans for the issuance of Treasuries at a time of historically wide budget deficits.”
January 30 – Wall Street Journal (Richard Rubin and Olivia Beavers): “President Trump wants Congress to pass ‘one big, beautiful bill’ that would extend expiring tax cuts and provide money for border enforcement. As House Republicans concluded a three-day meeting at a Trump resort in Florida, that legislation is nowhere near done. Lawmakers are wrestling with their slim majority and internal disputes over the size of spending cuts. House Speaker Mike Johnson was keeping any details close to his chest when asked… if House Republicans made final decisions on cuts, costs or savings. ‘We’re in the process of working through this,’ Johnson said, adding that he was aiming to have a blueprint for a budget soon and is sticking to his aggressive timeline to finish the bill within a few months.”
January 29 – Bloomberg (Jordan Fabian): “President Donald Trump is overwhelming the political system in his drive to bend the US government to his will, plunging broad swaths of the federal bureaucracy into chaos while leaving the opposition snowed under by the sheer scope of his efforts. The White House offered federal workers buyouts on Tuesday night for those who didn’t want to end their remote arrangements, while warning employees the new administration planned additional aggressive cuts to the federal workforce.”
January 29 – Bloomberg (Riley Griffin and Jordan Fabian): “The White House is considering challenging the constitutionality of a 50-year-old law limiting the president’s control over federal spending, easing the firing of civil servants, curbing pay and reining in independent agencies, according to a document seen by Bloomberg... The ideas, detailed in a slide presentation labeled ‘confidential,’ outline the ways President Donald Trump’s administration could try to overhaul the federal bureaucracy and its workforce — though it’s unclear whether the president has the legal authority to carry out the suggested actions.”
January 31 – Wall Street Journal (Natalie Andrews and Meridith McGraw): “President Trump’s handling of two crises this week—one, a bureaucratic mess and the other, a horrific tragedy—quickly shifted the White House from inaugural euphoria to the realities of governing. His defiant stand in the face of nationwide confusion and fear left some aides scrambling to fortify the image of a White House that could do no wrong. But he handled both problems with the same approach: deflecting blame and attacking Democrats, the media and his predecessors. His message was an amplified version of what he has tried to exude since taking office: He is in charge. The country also received its first live-action glimpse of a White House and cabinet that is being hastily assembled and crafting policies on the fly that in one case had to be quickly reversed.”
January 30 – Financial Times (David Pilling, Aanu Adeoye, Monica Mark, Joe Daniels and Christopher Miller): “With Colombian anti-narcotrafficking helicopters idle for want of fuel and news outlets in Ukraine threatened by closure, aid organisations and governments around the world are frantically trying to understand how the abrupt freeze of US foreign aid will affect their activities. The 90-day suspension of US aid and ‘stop-work’ requirement following the president’s executive order last week has exposed with lightning-like intensity the global reach of US assistance, whose diverse projects worldwide have been an essential part of American soft power.”
January 26 – Financial Times (Richard Milne): “US President Donald Trump has ridiculed Denmark’s attempts to defend Greenland with additional patrols including two extra dog sleds as he insisted America would take control of the strategically crucial Arctic island. Denmark’s defence minister has conceded that the Nordic country has not done enough to protect its autonomous territory of Greenland, but revealed plans to spend $1.5bn on two new inspection ships, two drones and two dog sled patrols... ‘I do believe Greenland, we’ll get — because it really has to do with freedom of the world. It has nothing to do with the United States, other than we’re the one that can provide the freedom. They [Denmark] can’t. They put two dog sleds there two weeks ago, they thought that was protection,’ Trump told reporters…”
January 26 – Bloomberg (Christian Wienberg): “Denmark’s prime minister said the US should remember that the Nordic country has lost troops fighting in US-led wars and always has supported its large partner, after President Donald Trump escalated his demands over Greenland. ‘I think it is important that everyone in the US remembers how good an ally Denmark has been,’ Mette Frederiksen said… ‘So Denmark has been a good ally, we are a good ally now, and we intend to continue to be one.’”
January 29 – Reuters (Mohamed Hendawy): “Egypt will not participate in the displacement of Palestinians, an ‘act of injustice’ that would threaten Egyptian security, President Abdel Fattah Al-Sisi said… in his first public response to U.S. President Donald Trump's call for Cairo to take in residents of the Gaza Strip… ‘Regarding what is being said about the displacement of Palestinians, it can never be tolerated or allowed because of its impact on Egyptian national security,’ Sisi said. ‘The deportation or displacement of the Palestinian people is an injustice in which we cannot participate.’”
January 27 – Bloomberg (Courtney McBride and Myles Miller): “President Donald Trump is preparing an executive order for a ‘next-generation’ defense shield to protect the US against ballistic missiles and other long-range attacks, taking on a goal that past administrations — including his own — struggled to reach. ‘The threat of attack by ballistic, cruise and hypersonic missiles remains a catastrophic threat facing the United States,’ according to a White House document… It says Trump will order the construction of an ‘Iron Dome’ shield, comparing it to Israel’s vaunted system…”
January 27 – Bloomberg (Jennifer A Dlouhy): “President Donald Trump is asserting more federal government control over water management decisions in California and ordering US officials to override local authorities, casting the steps as necessary to boost the state’s firefighting capabilities. The actions — enshrined in an executive order that was published Sunday but dated Friday — came as Trump visited California to examine devastation from the wildfires ravaging Los Angeles and after days of withering criticism of the state’s response to the blazes.”
Trade War Watch:
January 30 – Axios (Ben Berkowitz): “President Trump… reiterated that tariffs are coming against Canada and Mexico on Saturday, though he said the scope of those levies is still up in the air… ‘Mexico and Canada have never been good to us on trade. They’ve treated us very unfairly on trade… We don’t need what they have.’ The U.S., Mexico and Canada have been joint parties to free trade agreements for decades, first NAFTA and then the USMCA. The president left the door open to the possibility the tariffs would not be blanket levies on all imports; specifically, he said Canadian oil imports might be exempt.”
January 28 – Bloomberg (Stephanie Lai, Billy House and Josh Wingrove): “President Donald Trump said he wants to impose across-the-board tariffs that are ‘much bigger’ than 2.5%, the latest in a string of signals that he’s preparing widespread levies to reshape US supply chains. ‘I have it in my mind what it’s going to be but I won’t be setting it yet, but it’ll be enough to protect our country,’ Trump told reporters…”
January 28 – Associated Press (Josh Boak and Christopher Sherman): “Having already forced Colombia to accept deportees by threatening a 25% tariff, President Donald Trump is readying the same move against Canada and Mexico… But this time, the stakes are higher and many economists surveying the possible damage doubt Trump would be comfortable with what they say would be self-inflicted wounds from the tariffs. ‘The potential for such sizable economic impacts ought to act as enough of a deterrent that Trump will not end up implementing these higher tariffs,’ said Matthew Martin, senior U.S. economist at the consultancy Oxford Economics.”
January 28 – Bloomberg (Brian Platt and David Gura): “Canada can work with US President Donald Trump’s administration to reshape global trade and weaken China’s dominance of supply chains, according to Chrystia Freeland, the Canadian politician who’s vying to replace Justin Trudeau as prime minister… Freeland said she believes Trump is very smart… and is threatening to impose huge tariffs on Canada, Mexico and other allies in part to pave the way for tougher policies on China. ‘He has come to the conclusion that if he can show the rest of the world how mean and tough he can be with his closest partners and allies — how much he’s prepared to beat up on those really nice Canadians, who throughout history have been great partners for the US — how do you think that’s going to make the Chinese feel?’ she said…”
January 27 – Bloomberg (Mathieu Dion): “Mark Carney, the former central banker who’s running to lead Canada, said the government should be open to curbing electricity exports to the US if it needs to retaliate against tariffs from the Trump administration. ‘It’s not the first card” to play in a trade war, Carney said… But any negotiation with the US will be ‘very tough,’ he said…”
January 29 – Bloomberg (Carolina Millan and Maria Elena Vizcaino): “President Claudia Sheinbaum brushed off a question as to whether Mexico is expecting US President Donald Trump to announce 25% tariffs on Mexican goods Feb. 1. ‘We don’t expect it will happen,’ she said. ‘But if it does, we have our plan.’ She declined to elaborate on the plan for the tariffs, noting it would be announced ‘in due course.’”
January 27 – Financial Times (Michael Stott and Joe Daniels): “Latin American presidents will hold an emergency summit on Thursday to respond to President Donald Trump’s mass deportations of migrants as they reel from his aggressive tactics towards two of Washington’s traditional regional allies… ‘There is a lot of alarm among the Latin American embassies in Washington,’ said a senior regional diplomat in Washington. ‘We seem to have gone back to 1897 and the era of President [William] McKinley, who invaded Cuba and the Philippines.’”
January 30 – Reuters (Ismail Shakil): “President Donald Trump… warned off BRICS member countries from replacing the U.S. dollar as a reserve currency by repeating a 100%-tariffs threat he had made weeks after winning the November presidential elections. ‘We are going to require a commitment from these seemingly hostile Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs,’ Trump said on Truth Social…”
January 28 – Bloomberg (Joe Deaux): “Former US Commerce Secretary Wilbur Ross said President Donald Trump is ‘deadly serious’ about using tariffs throughout his second term to squeeze concessions from allies, but doesn’t think he’ll ultimately take a blanket approach… ‘He’s deadly serious, and I think to the degree that he doesn’t get what he wants in concessions from the other countries, I have no doubt he will go ahead… He talked about blanket tariffs in the last administration as well, but he never really did them.’”
Ukraine War Watch:
January 29 – Reuters (Anastasiia Malenko, Lidia Kelly, Lucy Papachristou and Mark Trevelyan): “Ukraine said… it had struck a big Russian oil refinery in an overnight drone attack, and a Russian official said an attempted Ukrainian drone strike on a nuclear power plant had been thwarted. The Ukrainian military said the strike on the refinery in Russia's Nizhny Novgorod region had caused a large fire.”
Taiwan Watch:
January 26 – Financial Times (Kathrin Hille in Taipei and Haohsiang Ko): “Taiwan has drawn up a blacklist of 52 Chinese-owned ships that use flags of convenience, which it will track and proactively inspect in an effort to regulate part of a rapidly growing ‘shadow fleet’ that is causing global security concerns… While international attention has focused on Russia’s use of this shadow fleet to export oil in circumvention of sanctions over its war on Ukraine, the ranks of such ships have swelled beyond tankers and pose increasing maritime and national security risks to coastal states.”
Market Instability Watch:
January 30 – Financial Times (Moritz Kraemer): “The US last year reached a critical point: the federal government had to spend more on interest payments than it did on defence… The current disarray of American public finances makes us imagine the previously unimaginable: the issuer of the world’s foremost reserve currency being overburdened by public debt. This debt is on track to surpass 160% of GDP by mid-century, according to… the Congressional Budget Office. In the next 10 years, State Street says $2tn annually of net issuance of Treasury debt is expected. Unlike in the 2010s, the Federal Reserve and other price-insensitive buyers, such as foreign central banks, may not be net buyers… As the era of close-to-zero interest rates is fading into history, the debt service burden will inexorably rise… Thankfully, there are institutions that warn investors of rising sovereign risk: the rating agencies. Or are there? It is fair to question whether the big three agencies… have become more coy about the risks of rich countries.”
January 29 – Bloomberg (Jan-Patrick Barnert and Neil Campling): “The warnings about Big Tech’s market dominance have gone largely unheeded by investors for years. And why not, when the Magnificent Seven rallied virtually nonstop, adding trillions in value. The words of caution took on a stark new contour Monday. Concern over DeepSeek slammed tech giants, dragging the broader market down — even as the majority of the S&P 500 advanced… The recent volatility among tech giants has been particularly worrisome for Wall Street, as the S&P 500’s leadership hasn’t been this concentrated in more than 20 years.”
January 27 – Reuters (Laila Kearney and Liz Hampton): “Shares of U.S. power, utility and natural gas companies sold off on Monday in some of the biggest recorded one-day drops, as new AI technology from Chinese start-up DeepSeek cast doubt on a projected surge in U.S. electricity demand and tech spending… Independent power provider Constellation Energy, whose shares had shot up about 100% in 2024 largely on its ability to sell nuclear and gas-fired power to U.S. data centers, sunk by about 20% in trading on Monday… Vistra was down 30% and rival Talen Energy Corp was down 22%.”
January 27 – Bloomberg (Vildana Hajric): “As levered-up US investors sustained eye-popping losses in tech stocks and related ETFs on Monday, they could take some comfort from the fact that another batch of speculative traders across the Atlantic had it even worse. Amid a bruising global rout sparked by anxiety over the rise of China’s DeepSeek AI model, the London-listed Leverage Shares 3x NVIDIA ETP slumped 52%, wiping out more than half of its $172 million in assets before trading was halted on Monday.”
January 29 – Bloomberg (Tom Rees, Irina Anghel, and Greg Ritchie): “Bank of England Governor Andrew Bailey said that ‘very big decisions’ will be needed to stop Britain’s public debt pile spiraling higher… Bailey told lawmakers… that climate change, an aging population and an end to the ‘post-Cold War dividend’ on defense spending are ‘very big structural headwinds’ facing the already-stretched public finances. ‘If we had any one of those three at any one time, we would have a substantial issue on our hands,’ he said… ‘Clearly very big decisions are going to have to be taken about it.’”
January 27 – Wall Street Journal (Hannah Erin Lang): “Stocks haven’t looked this unattractive, by at least one measure, since the aftermath of the dot-com era. Plenty of investors are piling in anyway. The equity risk premium, often defined as the gap between the S&P 500’s earnings yield and that of 10-year Treasurys, turned negative in late December for the first time since 2002 and sat last week at negative 0.15 percentage point. The metric is based on a calculation of how much stocks yield, which is derived by dividing the stock market’s expected earnings by its price. The earnings yield is then compared with the yield on government debt.”
January 26 – Bloomberg (Matthew Burgess and Prima Wirayani): “Emerging market investors are turning increasingly wary of carry trades as the threat of tariffs from the Donald Trump administration and the prospect of further dollar gains squeeze returns. Latin American currencies, often bought as part of such trades, face pressure from domestic fiscal issues along with the prospect of trade tensions with the US, according to Mackay Shields and Pictet Asset Management.”
Global Credit and Financial Bubble Watch:
January 28 – Bloomberg (James Crombie): “Hopes of favorable policies from the new US administration are galvanizing demand for a constrained supply of corporate debt, bringing credit markets to a boil while raising the odds of a blowup if the riskiest borrowers buckle under elevated yields. In global credit, America clearly comes first. Since last year’s decisive win by Republicans in US elections, dollar bonds — especially the riskiest — have led global gains. US bonds rated CCC are up 1.6% already this year…”
January 30 – Bloomberg (Eleanor Duncan, Claire Ruckin and Aaron Weinman): “Investment bankers who cater to private equity firms are offering to do deals for free as a global rally drives rampant demand for leveraged loans. They’re pitching a high volume of transactions simply to lower borrowing costs on existing leveraged loans, sometimes even volunteering to do them for nothing just to stay in the running for future deals, according to people familiar with the matter.”
January 25 – Financial Times (Mari Novik, Ian Smith and David Keohane): “Japanese investors have been selling Eurozone government debt at the fastest pace in more than a decade, with analysts warning that the move by one of the bloc’s cornerstone bondholders could lead to sharp market sell-offs. Net sales by Japanese investors rose to €41bn in the six months to November…”
AI Bubble Watch:
January 28 – Bloomberg (Michelle Ma and Mark Chediak): “It took just a single day's trading for Chinese artificial intelligence company DeepSeek to upend the US power market’s yearlong hot streak premised on a boom in electricity demand for artificial intelligence. AI’s energy needs have led companies such as OpenAI, Alphabet Inc. and Microsoft Corp. to seek new sources of power, such as shuttered nuclear plants. It has also complicated their ambitious climate goals. DeepSeek’s model appears to be more efficient and can achieve the same results for a fraction of the energy use…”
January 28 – Wall Street Journal (Ryan Dezember and David Ubert): “The emergence of Chinese AI upstart DeepSeek has Wall Street reconsidering one of the hottest trades of the past year: providing the energy to power the artificial-intelligence boom. DeepSeek’s claims that it has trained a sophisticated AI model far more efficiently than competitors called into question assumptions about the energy needed to power the new technology. Traders dumped shares of natural-gas producers, pipeline operators, power-plant owners, miners of coal and uranium, and even big land owners in the West Texas desert. The selloff even extended to natural-gas markets… The rout shows how tendrils of the AI trade have spread beyond chip makers and big technology companies to sectors that usually have little to do with fast-growing tech stocks, such as oil-and-gas and utilities.”
January 30 – Wall Street Journal (Miles Kruppa and Deepa Seetharaman): “Tech giants have spent billions of dollars on the premise that bigger is better in artificial intelligence. DeepSeek’s breakthrough shows smaller can be just as good. The Chinese company’s leap into the top ranks of AI makers has sparked heated discussions in Silicon Valley around a process DeepSeek used known as distillation, in which a new system learns from an existing one by asking it hundreds of thousands of questions and analyzing the answers. ‘It’s sort of like if you got a couple of hours to interview Einstein and you walk out being almost as knowledgeable as him in physics,’ said Ali Ghodsi, chief executive officer of… Databricks.”
January 28 – Financial Times (Eleanor Olcott): “Chinese artificial intelligence groups have been rushing out model updates before the lunar new year holiday, as the world wakes up to the sector’s major advances led by start-up DeepSeek... On Monday, the eve of China’s most important annual holiday, the Hangzhou-based company released a new open-source model for image generation, cementing its reputation as the disrupter-in-chief in a field previously dominated by US giants. It came hot on the heels of model releases from tech giant Alibaba and start-ups Moonshot and Zhipu… While DeepSeek’s achievement has prompted panic in the US about the advances Chinese labs are making on bootstrapped budgets, industry insiders say it is feeding into a newfound ‘confidence’ in China that will spur investment. ‘DeepSeek has made faster progress than the other Chinese model companies. But this is giving them confidence that they can catch up,’ said one AI investor in China.”
January 29 – Reuters (Eduardo Baptista): “Chinese tech company Alibaba released a new version of its Qwen 2.5 artificial intelligence model that it claimed surpassed the highly-acclaimed DeepSeek-V3. The unusual timing of the Qwen 2.5-Max's release, on the first day of the Lunar New Year when most Chinese people are off work and with their families, points to the pressure Chinese AI startup DeepSeek's meteoric rise in the past three weeks has placed on not just overseas rivals, but also its domestic competition.”
January 31 – Bloomberg (Brody Ford and Matt Day): “Amazon.com Inc. is expected to spend 60% more than previously announced on a massive data center project in Mississippi, underscoring the escalating costs for artificial intelligence infrastructure. The company will spend $16 billion to construct two data center campuses north of the state capital Jackson... When Amazon announced the project a year ago, the company put the price tag at $10 billion and called it ‘the single largest capital investment in Mississippi’s history.’”
January 30 – Financial Times (Rafe Uddin): “Microsoft shed $200bn in market value after its vast cloud unit posted slower growth than Wall Street forecast, as the tech group struggled to keep pace with demand for artificial intelligence-related services. The… software group… beat analysts’ expectations for revenue and net income in the quarter ending in December, but its cloud division — its biggest revenue driver, which includes its Azure cloud computing platform — narrowly missed expectations.”
January 30 – Financial Times (Antoine Gara): “Blackstone, the largest investor in the data centres needed to power the artificial intelligence boom, is examining how Chinese start-up DeepSeek’s low-cost model could affect demand for an area where the company has invested $80bn. Rising rents for data centres, amid breakneck spending by tech giants, have buoyed earnings for the alternative asset manager, which is building infrastructure for Big Tech groups such as Amazon, Microsoft and Alphabet.”
Bubble and Mania Watch:
January 29 – Bloomberg (Jack Sidders and Kriti Gupta): “Private markets are set for a ‘golden age’ even as investors adapt to a world of higher interest rates thanks to the vast pools of capital controlled by rich families that are set to pour into illiquid assets, according to Alisa Wood, the partner overseeing KKR & Co.’s private equity strategies... ‘The last five years is not going to look like the next five years,’ Wood said… ‘You need to close that return gap and I think we are entering what will be the golden age of private markets.’”
January 31 – Bloomberg (Swetha Gopinath): “Private markets are set to see trillions of dollars of inflows as wealthy individuals gain greater access to an industry once dominated by institutional investors, according to a senior managing director at Blackstone Inc. ‘For some time, people have been asking when the democratization of private markets will hit critical momentum. That time is now,’ Viral Patel, who oversees Blackstone’s private equity strategy for retail clients, said… ‘It’s not unrealistic to think that fund flow from individual investors into the asset class in the next 5-15 years could reach into the trillions.’”
January 25 – Bloomberg (Tim Smith): “Coinbase Global Inc.’s CEO said the company needs to rethink how it lists and evaluates the slew of new tokens getting created each week. ‘There are ~1m tokens a week being created now, and growing,’ Coinbase CEO Brian Armstrong said... ‘High quality problem to have, but evaluating each one by one is no longer feasible.’”
January 30 – Yahoo Finance (Ines Ferré): “Meme coins have gained attention this year, but some investors have been skeptical of the asset class at large and what it says about the current state of the investing environment. ‘These things have no intrinsic value. They’re just barometers of how much liquidity is out there, how much speculative frenzy is out there,’ Carson Block, founder… of Muddy Waters Capital, said… ‘Right now, all the signals are reading there’s a lot.’”
January 29 – Bloomberg (Isabelle Lee): “A popular ETF trade beloved by market speculators is fast turning into a billion-dollar revenue generator for nimble-footed financial firms. Traders have been diving into leveraged exchange-traded funds, a subset of a derivatives-enhanced products, offering to amp up the daily moves of the world’s most popular stocks and indexes. That’s enriched the firms behind the majority of these ETFs. They netted around $940 million in revenue in 2024… That’s a record 37% jump, beating last year’s all-time high.”
January 30 – Bloomberg (Denitsa Tsekova and Alexandra Semenova): “It’s another sign, if one were needed, of the perilous state of the short-selling industry right now: At an event featuring some of the most famous names in the game, there was hardly a bearish view among them. Porter Collins, Steve Eisman, Vincent Daniel and Danny Moses shot to fame thanks to The Big Short… This week, reuniting for a panel at an alternative investments conference in Miami, they made it clear they still like to go against consensus — only these days that mostly involves being long what other investors in the market avoid.”
U.S./Russia/China/Europe Watch:
January 30 – Financial Times (Demetri Sevastopulo, Joe Leahy, Ryan McMorrow, Kathrin Hille and Chris Cook): “China’s military is building a massive complex in western Beijing that US intelligence believes will serve as a wartime command centre far larger than the Pentagon… Satellite images… show a roughly 1,500-acre construction site 30km south-west of Beijing with deep holes that military experts assess will house large, hardened bunkers to protect Chinese military leaders during any conflict — including potentially a nuclear war. Several current and former US officials said the intelligence community is closely monitoring the site, which would be the world’s largest military command centre — and at least 10 times the size of the Pentagon.”
De-globalization Watch:
January 29 – Bloomberg (Mackenzie Hawkins and Jenny Leonard): “Trump administration officials are exploring additional curbs on the sale of Nvidia Corp. chips to China, according to people familiar with the matter, who emphasized that conversations are in very early stages as the new team works through policy priorities. Officials are focused on potentially expanding restrictions to cover Nvidia’s H20 chips…”
January 28 – Financial Times (Edward White and Haohsiang Ko): “China has built up control of critical minerals across the developing world over the course of two decades through a network of at least 26 state-backed financial institutions, according to a new report… Research… found that Chinese policy and commercial banks — working alongside private Chinese entities and some non-Chinese groups — issued loans worth nearly $57bn from 2000 to 2021 in 19 low- and middle-income countries for mining and processing copper, cobalt, nickel, lithium and rare earths, components critical to clean energy technologies such as electric vehicle batteries and solar panels.”
Inflation Watch:
January 31 – Associated Press (Christopher Rugaber): “An inflation gauge closely watched by the Federal Reserve rose slightly last month, while some underlying prices pressures showed signs of easing. The latest inflation figures arrive as President Donald Trump has threatened to impose big import taxes on goods from Canada and Mexico… Consumer prices rose 2.6% in December from a year earlier, up from a 2.4% annual pace in November and the third straight increase. Excluding the volatile food and energy categories, core prices increased 2.8% compared with a year ago…”
Federal Reserve Watch:
January 30 – Bloomberg (Catarina Saraiva): “Federal Reserve Chair Jerome Powell said officials are not in a rush to lower interest rates, adding the central bank is pausing to see further progress on inflation following a string of rate reductions last year. ‘We do not need to be in a hurry to adjust our policy stance,’ Powell said…, noting that the economy remains strong and interest rates are no longer restraining the economy as much as they had been… ‘The committee is very much in the mode of waiting to see what policies are enacted… We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be.’”
January 29 – Financial Times (Claire Jones and Harriet Clarfelt): “Donald Trump sharply criticised the Federal Reserve just hours after the US central bank defied the president’s calls for deep reductions in borrowing costs and left interest rates on hold… Trump railed against the central bank on his Truth Social messaging platform, saying, ‘If the Fed had spent less time on [diversity, equity and inclusion], gender ideology, ‘green’ energy, and fake climate change, inflation would never have been a problem.’ The Fed’s unanimous decision… to hold interest rates came just days after Trump insisted borrowing costs should fall ‘a lot’ and vowed to ‘let it be known’ if he disagreed with the central bank’s decision.”
January 30 – Wall Street Journal (Nick Timiraos): “President Trump picked right up where he left off during his first term, badgering a favorite nemesis—the Federal Reserve and its chair, Jerome Powell—over its recent performance managing inflation and interest rates. ‘Because Jay Powell and the Fed failed to stop the problem they created with inflation, I will do it,’ Trump said in a post… At the news conference, Powell leaned heavily on the keep-your-head-down demeanor he honed during his first rodeo with Trump... ‘I’m not going to have any response or comment whatsoever to what the president said. It’s not appropriate for me to do so,’ Powell said…”
January 29 – Bloomberg (Jordan Fabian): “President Donald Trump assailed the Federal Reserve’s approach to bank regulation and accused Chair Jay Powell of fumbling the fight against inflation, while refraining from directly commenting on interest rates. ‘The Fed has done a terrible job on Bank Regulation. Treasury is going to lead the effort to cut unnecessary Regulation, and will unleash lending for all American people and businesses,’ Trump posted…”
January 31 – New York Times (Colby Smith): “High inflation is stoking fresh debate about how the Federal Reserve should respond to President Trump’s sweeping plans to reorder the world economy through tariffs, leading to questions about whether old playbooks still apply. On Saturday, Mr. Trump is poised to impose 25% tariffs on imports from Mexico and Canada as well as an additional 10% tariff on Chinese goods. That move comes on the heels of threats to impose hefty tariffs on Colombia, which were rescinded after its government complied with Mr. Trump’s demands… Howard Lutnick, Mr. Trump’s nominee to oversee the Commerce Department and trade, said at a confirmation hearing… he favored ‘across-the-board’ tariffs that would hit entire countries. The volume of trade policy proposals is making the Fed’s already tricky job even more difficult and sowing uncertainty about what to expect from the central bank…”
January 31 – Reuters (Howard Schneider): “Federal Reserve Governor Michelle Bowman said… she still expects declining inflation to allow further interest rate cuts this year, but feels rising wages, buoyant financial markets, geopolitical risks, and upcoming administration policies could slow the process and keep price pressures elevated. ‘Core inflation remains elevated, but my expectation is that it will moderate further this year. Even with this outlook, I continue to see upside risks to inflation… I would prefer that future adjustments to the policy rate be gradual. We should take time to carefully assess the progress in achieving our inflation and employment goals’…”
U.S. Economic Bubble Watch:
January 29 – Reuters (Lucia Mutikani): “The U.S. trade deficit in goods widened to a record high in December, likely as businesses front-loaded imports of industrial supplies and consumer goods in anticipation of broad tariffs from President Donald Trump's new administration… The goods trade gap increased 18.0% to $122.1 billion last month, the largest since the government started tracking the series in 1992… Goods imports increased $10.8 billion, or 3.9%, to $289.6 billion. Exports fell $7.8 billion, or 4.5% to $167.5 billion.”
January 30 – Associated Press (Paul Wiseman): “A humming American economy ended 2024 on a solid note with consumer spending continuing to drive growth… Gross domestic product… expanded at a 2.3% annual rate from October through December. For the full year, the economy grew a healthy 2.8%, compared with 2.9% in 2023… Consumer spending grew at a 4.2% pace, fastest since January-March 2023 and up from 3.7% in July-September last year. But business investment tumbled as investment in equipment plunged after two straight strong quarters.”
January 30 – Associated Press (Matt Ott): “The number of Americans filing for jobless benefits fell last week in a sign that the labor market remains strong. Applications for jobless benefits fell by 16,000 to 207,000 for the week ending January 25… Analysts were expecting 225,000 new applications… The total number of Americans receiving unemployment benefits for the week of January 18 fell by 42,000 to 1.86 million.”
January 28 – Reuters (Lucia Mutikani): “U.S. consumer confidence weakened for a second straight month in January amid renewed concerns about the labor market and inflation. The Conference Board said… its consumer confidence index fell to 104.1 this month from an upwardly revised 109.5 in December.”
January 29 – CNBC (Diana Olick): “Applications for a mortgage to purchase a home fell 0.4% from one week earlier and were 7% lower than the same week one year ago. ‘Purchase activity decreased slightly, but applications for FHA purchase loans were a bright spot, increasing by 2%,’ said Joel Kan, vice president and deputy chief economist at the MBA.”
January 28 – Wall Street Journal (Ed Frankl): “U.S. home prices accelerated in November last year…, though the housing market could slow ahead in 2025 as mortgage rates creep higher. The S&P CoreLogic Case-Shiller National Home Price Index… rose 3.8% on year in November 2024, up from 3.6% in October 2024… The Case-Shiller index, which measures repeat-sales data, reports on a two-month delay and reflects a three-month moving average.”
January 27 – Bloomberg (Michael Sasso): “Sales of new US homes ended 2024 on a high note in December as customers took advantage of incentives from builders, leading to a second straight year of increased purchases. The annual pace of new single-family home sales accelerated 3.6% to 698,000 last month, reflecting a sharp advance in the West… For the full year, customers purchased 683,000 homes, up about 2.5% from 2023’s total… Of 750,000 single-family permits issued through October, a fifth occurred in five metropolitan areas: Houston, Dallas, Phoenix, Atlanta and Charlotte, North Carolina… The supply on the market rose to 494,000 in December, the most in 17 years.”
January 29 – Reuters (Isla Binnie): “Chief executives of global companies left their jobs in record numbers last year, pushed by intense scrutiny from investors and pressure to keep up with change, according to leadership advisory firm Russell Reynolds Associates. Some 202 CEOs left their posts in 2024, surpassing the six-year average of 186 and a 13% increase over the previous year…”
China Watch:
January 27 – Bloomberg: “China’s central bank injected a record amount of cash into the financial system via a new tool in January, delaying more high-profile policy easing as it prioritizes stabilizing the yuan. The People’s Bank of China conducted 1.7 trillion yuan ($234bn) of so-called outright reverse repurchase agreements using three- and six-month contracts to keep liquidity ample…”
January 26 – Bloomberg: “China’s economic activity unexpectedly faltered to start the year, breaking the momentum of a recovery sparked by stimulus measures and underlining the need for Beijing to do more to prevent another slowdown. Factory activity shrank in January after three months of expansion, with the manufacturing purchasing managers’ index falling to 49.1, the lowest since August. The non-manufacturing gauge for construction and services dropped to 50.2, just above the 50-mark that separates growth and contraction.”
January 31 – Bloomberg: “China’s residential sales resumed falling in January… The value of new-home sales from the 100 biggest real estate companies dropped 3.2% from a year earlier to 227.6 billion yuan ($31.4bn), after being flat in December… Beijing is struggling to revive the property market amid weak domestic demand and a worsening job situation. While the housing sector has picked up modestly on the back of government support, improvements have mostly been in the second-hand market as buyers remain concerned about developers’ ability to finish projects on time.”
January 27 – Financial Times (Thomas Hale and Chan Ho-him): “Leading Chinese property developer Vanke has forecast a $6.2bn annual loss and announced the sudden resignation of its top leadership, reigniting concerns over funding and confidence across China’s economically critical real estate sector. The developer, partly owned by local authorities in Shenzhen, is the latest focal point of a cash crunch that began with the collapse of peer Evergrande in 2021 and has since engulfed a host of other developers including Country Garden. After weeks of swirling concerns over the health of Vanke, the company said… chair Yu Liang had resigned for ‘work adjustment reasons’. It said chief executive Zhu Jiusheng had departed for ‘health reasons’. The ‘sudden and simultaneous’ resignations were ‘unprecedented in recent memory’ for a big participant such as Vanke, said Foreky Wong, founding partner at Hong Kong advisory company Fortune Ark Restructuring.”
January 28 – Bloomberg: “China Vanke Co. has been thrown a lifeline by state authorities, a rare show of support that signals the developer may be too big to fail even after dozens of property firms defaulted amid China’s punishing housing slump. As part of an overhaul unveiled late Monday, Vanke’s two top veteran executives stepped down after the company warned of a record $6.2 billion loss. An official from Shenzhen Metro Group Co., its largest state shareholder, will take over as chair.”
Central Bank Watch:
January 30 – Financial Times (Olaf Storbeck, Sam Fleming and Ian Smith): “The European Central Bank has warned of ‘headwinds’ to the Eurozone’s stagnating economy as it cut its benchmark interest rate by a quarter-point to 2.75%. Thursday’s unanimous decision… came hours after Eurostat reported that the Eurozone economy had not grown at all in the fourth quarter of 2024. ECB president Christine Lagarde cautioned that the economy was ‘set to remain weak in the near term’, adding that surveys pointed to a continued contraction in manufacturing even as services grow. ‘Consumer confidence is fragile,’ she said.”
January 29 – Bloomberg (Erik Hertzberg and Randy Thanthong-Knight): “The Bank of Canada cut interest rates by a quarter percentage point and stopped giving guidance on any further adjustments to borrowing costs as the threat of tariffs from the Trump administration clouds the outlook. Policymakers… lowered the benchmark overnight rate to 3% on Wednesday, the sixth consecutive cut.”
January 29 – Bloomberg (Ott Ummelas and Jonas Ekblom): “Sweden’s central bank lowered borrowing costs by a quarter point and signaled its easing campaign may be finished for now as officials assess the impact of their actions so far. The Riksbank cut the key rate to 2.25%, the lowest level in more than two years…”
Europe Watch:
January 29 – Bloomberg (Arne Delfs, William Wilkes, Christina Kyriasoglou, and Michael Nienaber): “Elon Musk’s planned revolution in Germany may already be under way. The Tesla Inc. and SpaceX chief executive’s enthusiastic endorsement of the far-right Alternative for Germany party… are stirring up the campaign for next month’s federal election. The results of Musk’s meddling won’t be known for sure until the ballots are counted on Feb. 23, and the chances that he can engineer an upset in Europe’s largest economy are distant. But the disruptive power of a multibillionaire who has US President Donald Trump’s ear is unsettling Germany’s establishment at a time when the country is already vulnerable economically and politically.”
Japan Watch:
January 29 – Bloomberg (Erica Yokoyama): “The Bank of Japan made a significant step toward shrinking its massive balance sheet last week, while market watchers were fixated on the biggest interest rate increase from the central bank in 18 years. The BOJ decided… to offer no new lending from July under its fund-provisioning program to stimulate bank lending. The program’s outstanding loans stood at ¥77 trillion ($496bn)…, accounting for around 10.4% of the central bank’s overall balance sheet… The phasing out of the loan program underscores BOJ Governor Kazuo Ueda’s determination to slowly but steadily proceed with the normalization of policy after more than a decade of radical monetary easing.”
January 29 – Bloomberg (Erica Yokoyama): “The Japanese government expects its annual debt-servicing costs to rise to almost $230 billion over the next four years as the central bank’s campaign to gradually raise interest rates drives up financing costs. Under the more optimistic of two projected growth scenarios, debt-servicing costs are seen rising to ¥35.3 trillion ($229bn) in the year starting April 2028… This marks a 25% increase from projected costs in the coming fiscal year. Servicing Japan’s oversized debt is already expected to chew up close to a quarter of the annual budget for the year starting in April. The latest projection underscores the growing financial strain Japan will likely face amid anticipated additional rate hikes by the central bank.”
January 30 – Bloomberg (Toru Fujioka and Yoshiaki Nohara): “The pace of price growth in Tokyo picked up… Consumer prices excluding fresh food in the capital climbed 2.5% in January from a year earlier, the fastest pace since last February… Overall price gains also sped up to 3.4%, the fastest clip in nearly two years, as the cost of fresh food jumped.”
Emerging Markets Watch:
January 29 – Reuters (Marcela Ayres): “Brazil's central bank raised its benchmark interest rate by 100 bps for the second straight meeting… and signaled another hike of that size in March, leaving the door open for subsequent moves amid mounting inflationary pressures. The bank's rate-setting committee… lifted the Selic policy rate to 13.25%... - the first under the new central bank chief Gabriel Galipolo… ‘Beyond the next meeting, the committee reinforces that the total magnitude of the tightening cycle will be determined by the firm commitment of reaching the inflation target,’ said the bank’s statement.”
January 30 – Bloomberg (Maya Averbuch): “Mexico’s economy posted the first quarterly contraction since 2021, shrinking much more than expected on weaker domestic demand and uncertainty over tariffs by the US, the country’s top trade partner. Gross domestic product fell 0.6% in the fourth quarter… For full-year 2024, GDP rose 1.5%. Mexico’s Deputy Finance Minister Edgar Amador Zamora… attributed much of the last-quarter downturn to drought and climate change…”
January 28 – Bloomberg (Subhadip Sircar and Anup Roy): “Indian bonds and stocks gained after the central bank’s cash-infusion plan fueled hopes of an interest-rate cut as early as next week. The Reserve Bank of India… said it will infuse $18 billion to address the worst cash crunch in over a decade. Ample banking system liquidity is seen as a necessary condition for smooth transmission of rate cuts when easing starts.”
Leveraged Speculation Watch:
January 28 – Reuters (Nell Mackenzie): “Hedge fund stock-pickers lost billions of dollars on Monday in a rout in global technology shares sparked by the emergence of a low-cost Chinese artificial intelligence model, according to a Goldman Sachs… Hedge funds that pick stocks based on company fundamentals rather than using algorithms to trade systematically were down 1.1% Monday, as markets sank…”
January 30 – Financial Times (Costas Mourselas): “The Trump administration’s embrace of cryptocurrencies is helping fuel a speculative mania that could cause ‘havoc’ when prices collapse, the hedge fund Elliott Management has warned. The $70bn-in-assets firm took aim at the US government’s apparent enthusiasm for assets that have soared in price but have ‘no substance’, and also at politicians who are supportive of cryptocurrencies that could eventually become a rival to the US dollar… The fund ‘has never seen a market like this’, wrote Elliott, referring to the speculative investor frenzy it believes is gripping financial markets. It pointed to the artificial intelligence boom and high equity market valuations as signs of investors ‘acting like a crowd of sports bettors’.”
Social, Political, Environmental, Cybersecurity Instability Watch:
January 29 – Bloomberg (Erin Hudson): “US fourth- and eighth-grade students are struggling with reading comprehension with last year’s nationwide testing showing the worst results in over two decades. Average reading scores deteriorated among students who took the Congressionally-mandated assessment in 2024… ‘This is a major concern,’ said Peggy Carr, commissioner of the National Center for Education Statistics, which administers the test… ‘Our nation is facing complex challenges in reading.’”
January 30 – Bloomberg (Eric Roston and Lauren Rosenthal): “Climate scientists are acutely aware of the devastation that a warming world can wreak on communities. But when disaster shows up at their doorstep, it hits in a completely different way. ‘This event, for me, has destroyed any boundary between my work as a climate scientist and the rest of my life, my family, my friends,’ Benjamin Hamlington, a research scientist at NASA’s Jet Propulsion Lab, wrote… after his home in Altadena burned… He’s not alone. More than 200 staff at JPL lost their homes in the blazes that razed swaths of LA. It was the second time in less than six months that climate experts were displaced by a weather disaster… In September, Hurricane Helene-induced floods that ravaged Asheville, North Carolina, uprooted researchers who work for a federal climate data hub based in the city.”
January 27 – Financial Times (Michael Albertus): “As the world’s climate changes, scientists observe that the southern Californian rainy season is starting later and ending earlier, lining up the peak of the dry season closely with the period of Santa Ana winds… At the same time, global warming is melting ice and opening up the Arctic in unprecedented ways. Arctic shipping has increased 37% over the past decade, and the US, Russia and China are all eyeing new northern shipping routes that pass alongside Greenland. The geostrategic considerations and future mining opportunities are driving US President Donald Trump’s interest in acquiring the territory. These two disparate trends show the push and pull of a coming global land reshuffle.”
January 26 – Bloomberg: “China’s electricity demand is becoming a key focal point in the global fight against climate change. As the world’s largest polluter, China holds outsized sway over whether emissions can be reduced fast enough to avoid the worst impacts of global warming. The country’s breakneck adoption of clean energy technology has created hope… But that hasn’t happened so far, in large part because the nation’s energy demand is growing unprecedentedly fast, requiring ever more coal to be burned. Electricity use grew 6.8% last year, outpacing overall economic growth at the highest clip in at least 15 years.”
Geopolitical Watch:
January 26 – Financial Times (Richard Milne): “An underwater data cable between Sweden and Latvia was damaged early on Sunday, in at least the fourth episode of potential sabotage in the Baltic Sea that has caused concern in Nato about the vulnerability of critical infrastructure. Latvian Prime Minister Evika Siliņa said damage to the cable… was significant and thus was probably caused by an external force.”
January 25 – Bloomberg (Selcan Hacaoglu): “With Donald Trump threatening to upend American foreign policy again, one old acquaintance is aiming to benefit from a new era of American dealmaking in the Middle East. Turkish President Recep Tayyip Erdogan wants to capitalize on the demise of the Assad regime in neighboring Syria and the ceasefire in Gaza. Should the dominos fall the right way, there could be hundreds of billions of dollars of rebuilding contracts and new trade as well as geopolitical influence.”
