[BloombergQ] Stocks Struggle to Keep Momentum; Crude Declines: Markets Wrap
[Reuters] Italy's bonds yields rise after new PM promises "radical change"
[Reuters] Turkish bonds fall, lira weakens as central bank meeting nears
[Reuters] U.S. services sector activity picks up; job openings at record high
[CNBC] US trade talks appear to be at 'a low' with China and allies
[Reuters] Trump considering separate trade deals with Canada, Mexico: Kudlow
[Reuters] Mexico slaps tariffs on U.S. steel, agricultural products
[BloombergQ] Why Trump's Trade War Isn't Worrying Most Economists, Yet
[CNBC] More than half of US housing markets were overvalued in April
[Reuters] Italy's Conte promises radical change in address to parliament
[CNBC] Bank chairman's apparent suicide brings attention to China's troubled lenders
[BloombergQ] Dollar Is Driving Some Carry-Trade Returns Despite Volatility
[BloombergQ] South African Assets Tumble as Ramaphosa's Growth Pledge Palls
[Reuters] Exclusive: At delicate moment, U.S. weighs warship passage through Taiwan Strait
[Reuters] White House says 'powerful' sanctions to remain on North Korea
[WSJ] Historic Rise in Lumber Costs Ripples Through Economy
[WSJ] Global Markets: A New, More Difficult Stage
[WSJ] A Decade Later, U.S. Stocks Behave Like Lehman Never Happened
[FT] Fed’s dilemma grows more acute after EM and Europe turmoil
[FT] Italy turmoil shows banking ‘doom loop’ still a powerful force
[FT] China’s debt collectors focus in on $200bn P2P arrears
[FT] Global property watch: the week that was
Monday, June 4, 2018
Sunday, June 3, 2018
Monday's News Links
[Reuters] Global shares shrug off trade tensions as U.S. data reassures
[BloombergQ] Trade Tensions Intensify With Trump, Allies Set for Showdown
[BloombergQ] It's Trump Against the World in Any Trade War
[Reuters] China says it regrets EU's WTO action over patent rights
[Reuters] Trump aide says Canada's Trudeau overreacting to trade dispute
[BloombergQ] PBOC's Collateral Move a Targeted Tweak, Not Major Easing Step
[BloombergQ] China Banks' Waning Demand Hints at More Bond Defaults Ahead
[Reuters] China's corporate debt challenges a key downside risk to growth: Fitch
[BloombergQ] Turkey Inflation Accelerates in May on Weak Currency
[BloombergQ] Another Euro Member Heads for Turmoil After Nationalist Win
[Reuters] U.S. urges China to come clean on Tiananmen anniversary
[WSJ] U.S. Weighs Expanding Military Role in Yemen War
[BloombergQ] Trade Tensions Intensify With Trump, Allies Set for Showdown
[BloombergQ] It's Trump Against the World in Any Trade War
[Reuters] China says it regrets EU's WTO action over patent rights
[Reuters] Trump aide says Canada's Trudeau overreacting to trade dispute
[BloombergQ] PBOC's Collateral Move a Targeted Tweak, Not Major Easing Step
[BloombergQ] China Banks' Waning Demand Hints at More Bond Defaults Ahead
[Reuters] China's corporate debt challenges a key downside risk to growth: Fitch
[BloombergQ] Turkey Inflation Accelerates in May on Weak Currency
[BloombergQ] Another Euro Member Heads for Turmoil After Nationalist Win
[Reuters] U.S. urges China to come clean on Tiananmen anniversary
[WSJ] U.S. Weighs Expanding Military Role in Yemen War
Sunday's News Links
[Reuters] Talks end with China warning trade benefits at risk if U.S. imposes tariffs
[Reuters] Moscovici 'not optimistic' trade row with U.S. will be resolved at G7
[Reuters] Italy's euroskeptics and their currency ideas take center-stage
[The Hill] When it comes to handling China, plenty of action but no clear plan
[BloombergQ] As U.S. Confronts China on Trade, Taiwan Tensions Quietly Build
[Reuters] U.S. weighs more South China Sea patrols to confront 'new reality' of China
[FT] US-China $100bn trade war nears as talks end without deal
[FT] Italy’s eclectic new cabinet raises eyebrows
[FT] Emerging markets face a dollar double whammy
[Reuters] Moscovici 'not optimistic' trade row with U.S. will be resolved at G7
[Reuters] Italy's euroskeptics and their currency ideas take center-stage
[The Hill] When it comes to handling China, plenty of action but no clear plan
[BloombergQ] As U.S. Confronts China on Trade, Taiwan Tensions Quietly Build
[Reuters] U.S. weighs more South China Sea patrols to confront 'new reality' of China
[FT] US-China $100bn trade war nears as talks end without deal
[FT] Italy’s eclectic new cabinet raises eyebrows
[FT] Emerging markets face a dollar double whammy
Saturday, June 2, 2018
Saturday's News Links
[Reuters] US isolated at G7 meeting as tariffs prompt retaliation
[BloombergQ] Japan's Aso `Feels Sorry' for Mnuchin Amid Outrage Over Tariffs
[Reuters] U.S. commerce secretary to press China to buy as allies seethe over tariffs
[BloombergQ] It’s 2007 Again for Commercial Mortgage Bonds, Moody’s Says
[CNN] Europe is on the verge of a big new crisis, just six years after the last one
[MarketWatch] Falling Deutsche Bank shares reignite ‘black swan’ worries
[Reuters] Catalan nationalists back in power, target secession in challenge to Sanchez
[Reuters] Mattis warns of Chinese 'intimidation'; says U.S. seeks 'results-oriented' ties
[NYT] Within Trump’s Trade Factions, Nations Look for a Friendly Face
[WSJ] Aftereffects of Eurozone Crisis Plague Europe’s South
[BloombergQ] Japan's Aso `Feels Sorry' for Mnuchin Amid Outrage Over Tariffs
[Reuters] U.S. commerce secretary to press China to buy as allies seethe over tariffs
[BloombergQ] It’s 2007 Again for Commercial Mortgage Bonds, Moody’s Says
[CNN] Europe is on the verge of a big new crisis, just six years after the last one
[MarketWatch] Falling Deutsche Bank shares reignite ‘black swan’ worries
[Reuters] Catalan nationalists back in power, target secession in challenge to Sanchez
[Reuters] Mattis warns of Chinese 'intimidation'; says U.S. seeks 'results-oriented' ties
[NYT] Within Trump’s Trade Factions, Nations Look for a Friendly Face
[WSJ] Aftereffects of Eurozone Crisis Plague Europe’s South
Friday, June 1, 2018
Weekly Commentary: Italian Drama
As I see it, cracks are opening in the greatest Bubble of all time. Serious fissures have developed in EM, Europe and China. Meanwhile, the stimulus-driven U.S. economic boom runs unabated. Global fragilities place downward pressure on U.S. market yields, while faltering Bubbles elsewhere stoke (self-reinforcing) outperformance - and speculative excess - within the U.S. equities market. The Fed faces a difficult challenge of weighing buoyant U.S. economic data and inflating asset prices against heightened global market fragilities.
Let's begin with U.S. data. May non-farm payrolls increased a stronger-than-expected 223,000. The Unemployment Rate declined a tenth to 3.8%, matching the low going all the way back to 1969. Average hourly earnings were up 0.3% in May and 2.7% y-o-y. The ISM Manufacturing Index increased 1.4 points to a stronger-than-expected 58.7. There have been only nine stronger monthly readings looking all the way back to August 2004. Prices Paid rose slightly to 79.5, the high since April 2011. ISM New Orders jumped 2.5 points to 63.7, the high since February. The Employment component rose 2.1 points to a solid 56.3. The Chicago Purchasing Managers index surged 5.1 points to 62.7, the high since January. The Dallas Manufacturing Outlook recovered five points to the high since February. A Friday afternoon CNBC (Jeff Cox) headline: "The US economy suddenly looks like it's unstoppable."
April Construction Spending was up a much stronger-than expected 1.8% (strongest since January), led by an 8.7% y-o-y increase in residential construction. This followed stronger-than-expected S&P CoreLogic house price inflation (up 6.79% y-o-y). May Conference Board Consumer Confidence gained 2.4 points to 128, just below February's 130, the strongest reading going all the way back to November 2000. The Conference Board Present Situation component jumped 4.2 points to 161.7, the high back to March 2001. Also indicative of boom time conditions, Personal Spending jumped 0.6% in April. May auto sales almost across the board surpassed expectations, with sales estimated up 5% from a year ago.
In most backdrops, such robust data would have the markets fretting both a more diligent Federal Reserve and surging market yields. Yet 10-year Treasury yields traded as low as 2.76% during Tuesday's session, before closing the week down three bps to 2.90%. Interestingly - and reflective of rapidly shifting expectations for Fed policy - after beginning the week at 2.48%, two-year yields dropped to 2.29% on Tuesday before reversing course and ending the week little changed.
Global markets, of course, were buffeted this week by developments in Italy. Italian 10-year yields surged 47 bps Tuesday to a four-year high 3.13%. At that point, Italy's 10-year yields were up more than 100 bps in six sessions. The spike at the front end of the yield curve was even more dramatic. Italian two-year yields jumped an extraordinary 181 bps Tuesday to 2.64%, the highest level since the 2012 European crisis. Panic buying saw German 10-year yields drop to 18 bps, after trading as high as 58 bps on May 21. Incredibly, German two-year yields dropped to negative 82 bps after ending the previous week at negative 63 bps.
Tuesday's mayhem followed the Italian President's veto of the Five Star and League coalition government. With the rejection of the coalition's first choice for Finance Minister, it appeared Italian voters would be heading back to the polls in an election that could have evolved into a referendum on the EU and the euro. The crisis backdrop spurred political compromise. By week's end, a new - and seemingly less hostile to the euro - Finance Minister had been proposed and a new coalition populist government formed. In a big relief for the markets, the need to call a snap election had been averted.
May 29 - Bloomberg (Nikos Chrysoloras and Helene Fouquet): "A surging dollar and a capital flight from emerging markets may lead to another 'major' financial crisis, investor George Soros said, warning the European Union that it's facing an imminent existential threat. The 'termination' of the nuclear deal with Iran and the 'destruction' of the transatlantic alliance between the EU and the U.S. are 'bound to have a negative effect on the European economy and cause other dislocations,' including a devaluing of emerging-market currencies, Soros said in a speech… 'We may be heading for another major financial crisis.'"
May 31 - Bloomberg: "Morgan Stanley Chief Executive Officer James Gorman said that investor George Soros's contention another major global crisis may be in store is unrealistic, and that the Federal Reserve will probably hike interest rates three more times in 2018 despite recent volatility. 'Honestly I think that's ridiculous,' Gorman said in an interview… when asked about Soros's comments this week, which included a warning that the European Union is at risk of breaking up amid Italy's challenges. 'I don't think we're facing an existential threat at all,' Gorman said of the EU."
I regret that George Soros has become such a polarizing political figure. My analytical framework owes considerable debt to his analysis and philosophy with respect to Credit, the markets and finance more generally. Soros' decades of experience, analysis and success navigating global markets are unequaled. I would not dismiss his warnings.
I hold the view that the euro monetary experiment has been deeply flawed in both its structure and implementation. European nations sacrificed sovereignty for the considerable benefits provided by a common currency that would compete globally against the U.S. dollar. Sharing the euro with Germany and others dramatically lowered borrowing costs and loosened Credit Availability more generally. Regrettably, there was no mechanism to effectively regulate Credit expansion, especially for members at the "periphery" that rather suddenly enjoyed access to cheap global finance like never before.
The boom was spectacular; the subsequent bust is proving rather everlasting. Since 2012, Draghi's "whatever it takes" collapsed borrowing costs and market yields, while stoking asset inflation and economic recovery. Historic monetary inflation has not, however, changed economic structure, history or distinctive cultures. ECB policies, along with central bank reflationary policies globally, have only exacerbated wealth inequalities, economic maladjustment and financial Bubbles. This is an especially intractable problem for the eurozone.
In an interview on German television, the EU's budget chief made a headline-grabbing assertion about the prospects for another Italian election: "My concern and my expectation is that the coming weeks will show that markets, that government bonds, that Italy's economic development could be [affected in a manner so] drastic that this could be a possible signal to voters not to choose populists from the left and right."
Understandably, this type of rhetoric doesn't sit well in Italy or in other countries that see outside political bodies holding a gun to their heads. It is, however, a view held as the gospel in the markets. As financial markets have evolved to command the world, there are two unassailable truths: First, central banks will do whatever it takes to ensure strong markets and economic expansion. And, second, markets are prepared to dish out sufficiently brutal punishment to ensure that politicians and voters fall in line. The electorate may be disgruntled and openly hostile, but they're not suicidal.
Eventually, fed up electorates will refuse being held hostage by the securities markets. I expect the euro system will at some point badly falter, and I suspect this view is quietly shared within the marketplace. This helps explain why things can so abruptly go haywire in the markets. As I have posited in the past, I don't believe the Germans and Italians will share a common currency forever. As cultures, societies and governments, they grow only more discordant. So, there will come a time when savers, investors and speculators choose not to wait and see how the inevitable destabilizing transition plays out. The genie was almost out of the bottle back in 2012.
There are, as well, sophisticated market operators with plans to be among the first wave out, appreciating that ECB and Italian government support will go only so far in stabilizing a hopelessly unstable arrangement. Expect more attention to ECB "Target2" balances (assets/liabilities to the euro financial system created from surpluses/deficits in trade and financial flows). Italy's accumulated Target2 liabilities ended April at an astounding $426 billion, much of it owed to Germany. This obligation will likely expand rapidly as flows exit Italian banks for refuge elsewhere. Perhaps the latest Italian Drama will spur an upswell of German support for Bundesbank President Jens Weidmann taking the helm of the ECB when Draghi's term ends in November 2019.
I have long admired Bill Gross. His long-term performance speaks for itself. Mr. Gross is struggling in this market environment, not unlike other seasoned market operators. The appearance of markets operating normally is only superficial. I'm compelled to mention the extraordinary 3% loss experienced by Bill Gross' unconstrained bond fund in wild Tuesday trading. Many public funds of this ilk posted notably large losses Tuesday, and I'll assume there were scores of hedge funds that were hit as hard or harder.
For the almost four-year period June 2, 2014, to May 7, 2018, the Italian to German two-year sovereign yield spread averaged 49.5 bps. The high for this period was 98 bps briefly back in February 2017. This spread had averaged about 30 bps for 2018 through early-May. Well, the Italian to German two-year yield spread blew out to 353 bps in chaotic Tuesday trading. After trading last week as high as 58 bps, ten-year German yields sank Tuesday to as low as 18 bps. At Tuesday's highs, Italian 10-year yields were 288 bps higher than bund yields, widening 113 bps in a week. Derivatives and leveraged speculation run amuck.
Wild market gyrations were not limited to European bonds. Ten-year Treasury yields, after trading as high as 3.13% the previous week, sank to 2.76% in Tuesday trading. In just five sessions, two-year yields dropped 30 bps to Tuesday morning's low of 2.29%.
May 29 - Financial Times (Robert Smith): "Yields on Italian bank bonds surged dramatically on Tuesday, as increasing political turmoil in the eurozone's third-biggest economy put heavy selling pressure on the debt of the country's lenders. Riskier forms of bank debt that count towards financial institutions' capital ratios have seen the sharpest sell-off. These bonds are more exposed to losses when banks need to be rescued, as seen when Spanish lender Banco Popular's additional tier 1 and tier 2 bonds were wiped out last year. Monte dei Paschi di Siena's €750m 10-year tier 2 bond plummeted as much as seven cents to 81.5 cents on the euro… This equates to a yield of more than 9.5%, a sharp increase from the 5.375% the bond was originally sold at in January."
A semblance of calm returned to Italian (and periphery) markets with Friday's swearing in of political novice Giuseppe Conte as Italy's new prime minister. Meanwhile in Madrid, socialist Pedro Sanchez appears poised to replace Mariano Rajoy who suffered a humiliating vote of no confidence after members of his People Party were convicted in a widespread political corruption scandal. The immediate risk to the euro may have subsided, but the political instability that has erupted in the eurozone's periphery will overhang increasingly fragile European financial markets. A Friday evening Financial Times headline: "Italy's new government: Europe on edge after palace takeover."
If messy European politics weren't enough, there were the Trump Tariffs.
May 30 - Reuters (Jason Lange and Ingrid Melander): "Canada and Mexico retaliated on Thursday after Washington imposed tariffs on steel and aluminum imports while the European Union had its own reprisals ready to go, reviving investor fears of a global trade war. Germany's Economy Minister said early on Friday the EU might look to coordinate its response with Canada and Mexico. The tariffs, announced by Commerce Secretary Wilbur Ross, ended months of uncertainty about potential exemptions and suggested a hardening of the U.S. approach to trade negotiations. The measures, touted by President Donald Trump in March, drew condemnation from Republican lawmakers and the country's main business lobbying group and sent a chill through financial markets."
With the small caps ending the week at all-time highs, that's a rather balmy market chill. Believing strong equities remain presidential Priority One, markets now scoff at administration trade threats. Surely, tariffs are but a negotiating ploy to extract favorable trade concessions. But if markets don't take the administration's trade threats seriously, why would our trading partners/adversaries? And that we are negotiating trade terms with various parties concurrently, why wouldn't these countries be motivated to all covertly band together in a strategy to forcefully nip Trump's Tariffs in the bud. Reuters: "U.S. isolated at G7 meeting as tariffs prompt retaliation."
I understand market complacency with respect to steel and aluminum tariffs. It's the unfolding trade confrontation with China with the distinct potential to rattle markets. More than trade, it's a brewing battle royale pitting the world's lone superpower against the aspiring superpower. And as fissures continue to surface in Chinese Credit, I can envisage Beijing contriving scenarios where they will lay blame upon the U.S. and other foreigners. It's worth mentioning that the Shanghai Composite dropped 2.1% this week, trading Wednesday at a one-year low. China's currency declined 0.45% vs. the dollar to a four-month low.
Largely overlooked as attention turned to Italy, stress continued to mount in EM. The Brazilian real dropped 3.0% this week, pushing one-month losses to 6.9%. The Mexican peso fell 2.0%, and the Argentine peso declined 1.6%, with one-month losses of 5.0% and 17.8%. The South African rand lost 1.6% this week, with the Chilean peso down 1.2%. The beleaguered Turkish lira sank 2.6% in Friday trading, quickly wiping out much of the recovery from earlier in the week. Turkish 10-year dollar yields surged 20 bps this week to 6.73%. Brazil's dollar bond yields surged 39 bps to a two-year high 5.68%, and Mexico's dollar yields rose 16 bps to near multi-year highs at 4.53%. Local currency bond yields surged 25 bps in Brazil (11.45%) and 18 bps in Mexico (7.62%).
It was another week of important corroboration of the Global Bubble Thesis. Market historians might look back at Tuesday's Italian debt "flash crash" and sovereign bond dislocation as another warning of impending illiquidity and general market mayhem. How much leverage and systemic risk are embedded in perceived low-risk derivative trading strategies? Keep in mind that it's not unusual for U.S. equities to go on their merry way right into trouble. The S&P500 rallied to record highs after the subprime eruption in 2007. U.S. stocks advanced strongly right into July 1998 - only weeks from near Financial Armageddon. Q1 2000. 1987. 1929.
Let's begin with U.S. data. May non-farm payrolls increased a stronger-than-expected 223,000. The Unemployment Rate declined a tenth to 3.8%, matching the low going all the way back to 1969. Average hourly earnings were up 0.3% in May and 2.7% y-o-y. The ISM Manufacturing Index increased 1.4 points to a stronger-than-expected 58.7. There have been only nine stronger monthly readings looking all the way back to August 2004. Prices Paid rose slightly to 79.5, the high since April 2011. ISM New Orders jumped 2.5 points to 63.7, the high since February. The Employment component rose 2.1 points to a solid 56.3. The Chicago Purchasing Managers index surged 5.1 points to 62.7, the high since January. The Dallas Manufacturing Outlook recovered five points to the high since February. A Friday afternoon CNBC (Jeff Cox) headline: "The US economy suddenly looks like it's unstoppable."
April Construction Spending was up a much stronger-than expected 1.8% (strongest since January), led by an 8.7% y-o-y increase in residential construction. This followed stronger-than-expected S&P CoreLogic house price inflation (up 6.79% y-o-y). May Conference Board Consumer Confidence gained 2.4 points to 128, just below February's 130, the strongest reading going all the way back to November 2000. The Conference Board Present Situation component jumped 4.2 points to 161.7, the high back to March 2001. Also indicative of boom time conditions, Personal Spending jumped 0.6% in April. May auto sales almost across the board surpassed expectations, with sales estimated up 5% from a year ago.
In most backdrops, such robust data would have the markets fretting both a more diligent Federal Reserve and surging market yields. Yet 10-year Treasury yields traded as low as 2.76% during Tuesday's session, before closing the week down three bps to 2.90%. Interestingly - and reflective of rapidly shifting expectations for Fed policy - after beginning the week at 2.48%, two-year yields dropped to 2.29% on Tuesday before reversing course and ending the week little changed.
Global markets, of course, were buffeted this week by developments in Italy. Italian 10-year yields surged 47 bps Tuesday to a four-year high 3.13%. At that point, Italy's 10-year yields were up more than 100 bps in six sessions. The spike at the front end of the yield curve was even more dramatic. Italian two-year yields jumped an extraordinary 181 bps Tuesday to 2.64%, the highest level since the 2012 European crisis. Panic buying saw German 10-year yields drop to 18 bps, after trading as high as 58 bps on May 21. Incredibly, German two-year yields dropped to negative 82 bps after ending the previous week at negative 63 bps.
Tuesday's mayhem followed the Italian President's veto of the Five Star and League coalition government. With the rejection of the coalition's first choice for Finance Minister, it appeared Italian voters would be heading back to the polls in an election that could have evolved into a referendum on the EU and the euro. The crisis backdrop spurred political compromise. By week's end, a new - and seemingly less hostile to the euro - Finance Minister had been proposed and a new coalition populist government formed. In a big relief for the markets, the need to call a snap election had been averted.
May 29 - Bloomberg (Nikos Chrysoloras and Helene Fouquet): "A surging dollar and a capital flight from emerging markets may lead to another 'major' financial crisis, investor George Soros said, warning the European Union that it's facing an imminent existential threat. The 'termination' of the nuclear deal with Iran and the 'destruction' of the transatlantic alliance between the EU and the U.S. are 'bound to have a negative effect on the European economy and cause other dislocations,' including a devaluing of emerging-market currencies, Soros said in a speech… 'We may be heading for another major financial crisis.'"
May 31 - Bloomberg: "Morgan Stanley Chief Executive Officer James Gorman said that investor George Soros's contention another major global crisis may be in store is unrealistic, and that the Federal Reserve will probably hike interest rates three more times in 2018 despite recent volatility. 'Honestly I think that's ridiculous,' Gorman said in an interview… when asked about Soros's comments this week, which included a warning that the European Union is at risk of breaking up amid Italy's challenges. 'I don't think we're facing an existential threat at all,' Gorman said of the EU."
I regret that George Soros has become such a polarizing political figure. My analytical framework owes considerable debt to his analysis and philosophy with respect to Credit, the markets and finance more generally. Soros' decades of experience, analysis and success navigating global markets are unequaled. I would not dismiss his warnings.
I hold the view that the euro monetary experiment has been deeply flawed in both its structure and implementation. European nations sacrificed sovereignty for the considerable benefits provided by a common currency that would compete globally against the U.S. dollar. Sharing the euro with Germany and others dramatically lowered borrowing costs and loosened Credit Availability more generally. Regrettably, there was no mechanism to effectively regulate Credit expansion, especially for members at the "periphery" that rather suddenly enjoyed access to cheap global finance like never before.
The boom was spectacular; the subsequent bust is proving rather everlasting. Since 2012, Draghi's "whatever it takes" collapsed borrowing costs and market yields, while stoking asset inflation and economic recovery. Historic monetary inflation has not, however, changed economic structure, history or distinctive cultures. ECB policies, along with central bank reflationary policies globally, have only exacerbated wealth inequalities, economic maladjustment and financial Bubbles. This is an especially intractable problem for the eurozone.
In an interview on German television, the EU's budget chief made a headline-grabbing assertion about the prospects for another Italian election: "My concern and my expectation is that the coming weeks will show that markets, that government bonds, that Italy's economic development could be [affected in a manner so] drastic that this could be a possible signal to voters not to choose populists from the left and right."
Understandably, this type of rhetoric doesn't sit well in Italy or in other countries that see outside political bodies holding a gun to their heads. It is, however, a view held as the gospel in the markets. As financial markets have evolved to command the world, there are two unassailable truths: First, central banks will do whatever it takes to ensure strong markets and economic expansion. And, second, markets are prepared to dish out sufficiently brutal punishment to ensure that politicians and voters fall in line. The electorate may be disgruntled and openly hostile, but they're not suicidal.
Eventually, fed up electorates will refuse being held hostage by the securities markets. I expect the euro system will at some point badly falter, and I suspect this view is quietly shared within the marketplace. This helps explain why things can so abruptly go haywire in the markets. As I have posited in the past, I don't believe the Germans and Italians will share a common currency forever. As cultures, societies and governments, they grow only more discordant. So, there will come a time when savers, investors and speculators choose not to wait and see how the inevitable destabilizing transition plays out. The genie was almost out of the bottle back in 2012.
There are, as well, sophisticated market operators with plans to be among the first wave out, appreciating that ECB and Italian government support will go only so far in stabilizing a hopelessly unstable arrangement. Expect more attention to ECB "Target2" balances (assets/liabilities to the euro financial system created from surpluses/deficits in trade and financial flows). Italy's accumulated Target2 liabilities ended April at an astounding $426 billion, much of it owed to Germany. This obligation will likely expand rapidly as flows exit Italian banks for refuge elsewhere. Perhaps the latest Italian Drama will spur an upswell of German support for Bundesbank President Jens Weidmann taking the helm of the ECB when Draghi's term ends in November 2019.
I have long admired Bill Gross. His long-term performance speaks for itself. Mr. Gross is struggling in this market environment, not unlike other seasoned market operators. The appearance of markets operating normally is only superficial. I'm compelled to mention the extraordinary 3% loss experienced by Bill Gross' unconstrained bond fund in wild Tuesday trading. Many public funds of this ilk posted notably large losses Tuesday, and I'll assume there were scores of hedge funds that were hit as hard or harder.
For the almost four-year period June 2, 2014, to May 7, 2018, the Italian to German two-year sovereign yield spread averaged 49.5 bps. The high for this period was 98 bps briefly back in February 2017. This spread had averaged about 30 bps for 2018 through early-May. Well, the Italian to German two-year yield spread blew out to 353 bps in chaotic Tuesday trading. After trading last week as high as 58 bps, ten-year German yields sank Tuesday to as low as 18 bps. At Tuesday's highs, Italian 10-year yields were 288 bps higher than bund yields, widening 113 bps in a week. Derivatives and leveraged speculation run amuck.
Wild market gyrations were not limited to European bonds. Ten-year Treasury yields, after trading as high as 3.13% the previous week, sank to 2.76% in Tuesday trading. In just five sessions, two-year yields dropped 30 bps to Tuesday morning's low of 2.29%.
May 29 - Financial Times (Robert Smith): "Yields on Italian bank bonds surged dramatically on Tuesday, as increasing political turmoil in the eurozone's third-biggest economy put heavy selling pressure on the debt of the country's lenders. Riskier forms of bank debt that count towards financial institutions' capital ratios have seen the sharpest sell-off. These bonds are more exposed to losses when banks need to be rescued, as seen when Spanish lender Banco Popular's additional tier 1 and tier 2 bonds were wiped out last year. Monte dei Paschi di Siena's €750m 10-year tier 2 bond plummeted as much as seven cents to 81.5 cents on the euro… This equates to a yield of more than 9.5%, a sharp increase from the 5.375% the bond was originally sold at in January."
A semblance of calm returned to Italian (and periphery) markets with Friday's swearing in of political novice Giuseppe Conte as Italy's new prime minister. Meanwhile in Madrid, socialist Pedro Sanchez appears poised to replace Mariano Rajoy who suffered a humiliating vote of no confidence after members of his People Party were convicted in a widespread political corruption scandal. The immediate risk to the euro may have subsided, but the political instability that has erupted in the eurozone's periphery will overhang increasingly fragile European financial markets. A Friday evening Financial Times headline: "Italy's new government: Europe on edge after palace takeover."
If messy European politics weren't enough, there were the Trump Tariffs.
May 30 - Reuters (Jason Lange and Ingrid Melander): "Canada and Mexico retaliated on Thursday after Washington imposed tariffs on steel and aluminum imports while the European Union had its own reprisals ready to go, reviving investor fears of a global trade war. Germany's Economy Minister said early on Friday the EU might look to coordinate its response with Canada and Mexico. The tariffs, announced by Commerce Secretary Wilbur Ross, ended months of uncertainty about potential exemptions and suggested a hardening of the U.S. approach to trade negotiations. The measures, touted by President Donald Trump in March, drew condemnation from Republican lawmakers and the country's main business lobbying group and sent a chill through financial markets."
With the small caps ending the week at all-time highs, that's a rather balmy market chill. Believing strong equities remain presidential Priority One, markets now scoff at administration trade threats. Surely, tariffs are but a negotiating ploy to extract favorable trade concessions. But if markets don't take the administration's trade threats seriously, why would our trading partners/adversaries? And that we are negotiating trade terms with various parties concurrently, why wouldn't these countries be motivated to all covertly band together in a strategy to forcefully nip Trump's Tariffs in the bud. Reuters: "U.S. isolated at G7 meeting as tariffs prompt retaliation."
I understand market complacency with respect to steel and aluminum tariffs. It's the unfolding trade confrontation with China with the distinct potential to rattle markets. More than trade, it's a brewing battle royale pitting the world's lone superpower against the aspiring superpower. And as fissures continue to surface in Chinese Credit, I can envisage Beijing contriving scenarios where they will lay blame upon the U.S. and other foreigners. It's worth mentioning that the Shanghai Composite dropped 2.1% this week, trading Wednesday at a one-year low. China's currency declined 0.45% vs. the dollar to a four-month low.
Largely overlooked as attention turned to Italy, stress continued to mount in EM. The Brazilian real dropped 3.0% this week, pushing one-month losses to 6.9%. The Mexican peso fell 2.0%, and the Argentine peso declined 1.6%, with one-month losses of 5.0% and 17.8%. The South African rand lost 1.6% this week, with the Chilean peso down 1.2%. The beleaguered Turkish lira sank 2.6% in Friday trading, quickly wiping out much of the recovery from earlier in the week. Turkish 10-year dollar yields surged 20 bps this week to 6.73%. Brazil's dollar bond yields surged 39 bps to a two-year high 5.68%, and Mexico's dollar yields rose 16 bps to near multi-year highs at 4.53%. Local currency bond yields surged 25 bps in Brazil (11.45%) and 18 bps in Mexico (7.62%).
It was another week of important corroboration of the Global Bubble Thesis. Market historians might look back at Tuesday's Italian debt "flash crash" and sovereign bond dislocation as another warning of impending illiquidity and general market mayhem. How much leverage and systemic risk are embedded in perceived low-risk derivative trading strategies? Keep in mind that it's not unusual for U.S. equities to go on their merry way right into trouble. The S&P500 rallied to record highs after the subprime eruption in 2007. U.S. stocks advanced strongly right into July 1998 - only weeks from near Financial Armageddon. Q1 2000. 1987. 1929.
For the Week:
The S&P500 increased 0.5% (up 2.3% y-t-d), while the Dow declined 0.5% (down 0.3%). The Utilities slipped 0.6% (down 5.5%). The Banks fell 1.3% (up 0.7%), and the Broker/Dealers lost 1.3% (up 9.4%). The Transports were little changed (up 2.7%). The S&P 400 Midcaps added 0.6% (up 3.0%), and the small cap Russell 2000 jumped 1.3% (up 7.3%). The Nasdaq100 advanced 1.8% (up 10.7%).The Semiconductors rose 1.5% (up 12.6%). The Biotechs surged 3.0% (up 14.2%). With bullion down $8, the HUI gold index dipped 0.6% (down 6.8%).
Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields were little changed at 2.47% (up 59bps y-t-d). Five-year T-note yields slipped two bps to 2.75% (up 54bps). Ten-year Treasury yields declined three bps to 2.90% (up 50bps). Long bond yields fell four bps to 3.05% (up 31bps). Benchmark Fannie Mae MBS yields dipped two bps to 3.62% (up 62bps).
Greek 10-year yields jumped 10 bps to 4.47% (up 39bps y-t-d). Ten-year Portuguese yields fell seven bps to 1.88% (down 6bps). Italian 10-year yields surged 23 bps to 2.69% (up 67bps). Spain's 10-year yields declined two bps to 1.44% (down 13bps). German bund yields dipped two bps to 0.39% (down 4bps). French yields were unchanged at 0.71% (down 8bps). The French to German 10-year bond spread widened two to 32 bps. U.K. 10-year gilt yields declined four bps to 1.28% (up 9bps). U.K.'s FTSE equities index declined 0.4% (up 0.2%).
Japan's Nikkei 225 equities dropped 1.2% (down 2.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.05% (unchanged). France's CAC40 fell 1.4% (up 2.9%). The German DAX equities index lost 1.7% (down 1.5%). Spain's IBEX 35 equities index sank 2.0% (down 4.1%). Italy's FTSE MIB index dropped 1.3% (up 1.2%). EM equities were mixed. Brazil's Bovespa index fell 2.1% (up 1.1%), and Mexico's Bolsa slipped 0.2% (down 8.8%). South Korea's Kospi index declined 0.9% (down 1.2%). India’s Sensex equities index gained 0.9% (up 3.4%). China’s Shanghai Exchange dropped 2.1% (down 7.0%). Turkey's Borsa Istanbul National 100 index sank 3.9% (down 14.0%). Russia's MICEX equities declined 0.5% (up 8.8%).
Investment-grade bond funds saw inflows of $849 million, and junk bond funds had outflows of $18 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped 10 bps to 4.56% (up 62bps y-o-y). Fifteen-year rates fell nine bps to 4.06% (up 87bps). Five-year hybrid ARM rates declined seven bps to 3.80% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 14 bps to 4.56% (up 54bps).
Federal Reserve Credit last week declined $10.2bn to $4.289 TN. Over the past year, Fed Credit contracted $132bn, or 3.0%. Fed Credit inflated $1.478 TN, or 53%, over the past 291 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $12.0bn last week to $3.394 TN. "Custody holdings" were up $157bn y-o-y, or 4.8%.
M2 (narrow) "money" supply expanded $14.8bn last week to a record $14.013 TN. "Narrow money" gained $490bn, or 3.6%, over the past year. For the week, Currency increased $5.4bn. Total Checkable Deposits added $3.0bn, while savings Deposits dipped $6.9bn. Small Time Deposits gained $1.6bn. Retail Money Funds jumped $11.7bn.
Total money market fund assets rose $14.5bn to $2.840 TN. Money Funds gained $187bn y-o-y, or 7.0%.
Total Commercial Paper jumped $16.1bn to $1.108 TN. CP gained $114bn y-o-y, or 11.5%.
Currency Watch:
The U.S. dollar index was little changed at 94.156 (up 2.2% y-t-d). For the week on the upside, the New Zealand dollar increased 0.9%, the Swiss franc 0.3%, the Australian dollar 0.3%, the British pound 0.3%, the South Korean won 0.3%, the Singapore dollar 0.2%, the Canadian dollar 0.2%, and the euro 0.1%. For the week on the downside, the Brazilian real declined 3.0%, the Mexican peso 2.0%, the South African rand 1.5%, the Swedish krona 0.6%, the Norwegian krone 0.2% and the Japanese yen 0.1%. The Chinese renminbi declined 0.45% versus the dollar this week (up 1.34% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.9% (up 7.8% y-t-d). Spot Gold slipped 0.6% to $1,294 (down 0.7%). Silver dipped 0.5% to $16.441 (down 4.1%). Crude fell $1.69 to $65.81 (up 9%). Gasoline declined 1.2% (up 19%), while Natural Gas gained 1.1% (unchanged). Copper increased 0.7% (down 6%). Wheat dropped 3.6% (up 23%). Corn sank 3.6% (up 12%).
Market Dislocation Watch:
May 29 - Reuters (Dhara Ranasinghe and Abhinav Ramnarayan): "A deepening political crisis in Italy, the euro zone's third biggest economy, fuelled a selloff in Italian assets and the euro on Tuesday that was reminiscent of the euro zone debt crisis of 2010-12. Short-term Italian bond yields suffered the biggest one-day jump since 1992, while Italian and wider euro zone banking stocks saw their worst day since August 2016."
May 30 - Wall Street Journal (James Mackintosh): "Market reporting can be prone to hyperbole, but Tuesday's Italian bond selloff and Wednesday's partial recovery was truly astonishing. Short-dated bonds that can usually be treated as a close proxy for cash turned toxic, and bond prices suggested a full-blown panic, then the relief of a rescue. Prices fell, and yields on short-dated bonds rose as much or more than when the euro was fighting for survival in 2011 and 2012, before a massive reverse. The reaction of other markets was muted by comparison. Sure, stocks and the flakier end of European government bonds sold off, and there was a flight to the safety of U.S. Treasurys. But this wasn't much more than a run-of-the-mill bad day, mostly reversed on Wednesday."
May 29 - Bloomberg (Samuel Potter): "Reports of the death of the sovereign-bank 'doom loop' are greatly exaggerated. Italian government bonds have blown up, with the yield on two-year notes skyrocketing by as much as 192 bps on Tuesday to the highest level since 2012. Spreads on subordinated debts from euro-area financial companies, meanwhile, have jumped in sympathy as Rome's political turmoil reverberates across markets. The Markit iTraxx Europe Subordinated Financial Index, a gauge of credit default swaps tied to junior debt sold by the region's lenders, has surged to the highest in more than a year."
May 29 - Bloomberg (Jana Randow): "Italy's political stalemate is forcing investors to once again contemplate the survival of the euro. A gauge measuring the likelihood of Italy leaving the currency union within the next 12 months jumped to 11.3% in May from 3.6% in April, according to research group Sentix. That's pushed an index for the entire euro area to 13%, the highest level in more than a year.
May 29 - Financial Times (Kate Allen and Miles Johnson): "Until this weekend, many investors thought eurozone politics were inevitably messy but no longer had the power to trigger volatile and disorderly markets. Italy has forced a rapid and painful reappraisal. Those exposed to eurozone markets, and Italy in particular, are nursing heavy paper losses after near unrelenting selling in bonds and equities since Friday. The shift in markets has been profound, ensnaring the debt of other peripheral countries such as Portugal and hurting banks as investors contemplate the possibility of Italy's political turbulence escalating into another eurozone crisis. The scale of the moves in Italian debt has stunned some. Italy's two-year government bond price has plunged over the past three trading days, sending its yield soaring from 0.27% to as high as 2.72% on Tuesday. The 10-year bond yield has jumped from 2.4% to a high of 3.39% over the same period."
June 1 - Bloomberg (Sridhar Natarajan, Yalman Onaran and Sonali Basak): "Deutsche Bank AG just ended a roller-coaster week. June doesn't look any less harrowing. Shares of Europe's largest investment bank are trading near a record low, as short sellers pile on and credit derivative traders once again signal doubts about the firm's health. It's part of a painful pattern for the bank and its investors: Another spate of bad headlines keeps outweighing the good."
Trump Administration Watch:
May 30 - New York Times (Mark Landler and Ana Swanson): "President Trump, stung by criticism that he has gone soft on China and less worried about Beijing's ability to disrupt a potential summit meeting with North Korea, reversed course on Tuesday and declared that the United States would impose tariffs and other punitive measures on China. Barely a week after Treasury Secretary Steven Mnuchin said that the trade war was 'on hold' and that tariffs would be suspended as negotiations continued, the White House issued a statement saying the United States would move ahead with its plan to impose 25% tariffs on $50 billion worth of imported Chinese goods within the next month. Mr. Trump's reversal was yet another twist in a long-running ideological battle in the West Wing between economic nationalists, who channel Mr. Trump's protectionist instincts, and more mainstream advisers like Mr. Mnuchin, who worry that tariffs and investment restrictions will hurt the stock market and hobble long-term growth."
May 30 - Bloomberg (Jenny Leonard and Rich Miller): "White House trade adviser Peter Navarro criticized Treasury Secretary Steven Mnuchin for declaring the U.S.-China trade war was on hold, calling the remarks an 'unfortunate sound bite' and acknowledging there's a dispute that needs to be resolved. 'What we're having with China is a trade dispute, plain and simple,' Navarro said… 'We lost the trade war long ago' with deals such as Nafta and China's entry into the World Trade Organization, he said. The remarks from Navarro, a hard-liner on President Donald Trump's trade team, come just days before U.S. Commerce Secretary Wilbur Ross is scheduled to meet with his counterparts in Beijing to discuss ways to reduce the U.S. trade deficit with China."
May 29 - Wall Street Journal (William Mauldin and Lingling Wei): "The Trump administration sent a sudden, harsh message to its Chinese counterparts, saying the U.S. was moving forward with its threat to apply tariffs on Chinese imports and other actions to restrict Beijing from accessing sensitive U.S. technology. Tuesday's move surprised many observers after the White House had for days trumpeted the outlines of a deal in which any trade war with China would be put on hold while negotiators-led on the U.S. side by Treasury Secretary Steven Mnuchin -worked on a deal that would have China reduce its $375 billion annual trade advantage by buying more U.S. goods."
May 30 - Reuters (Michael Martina and Ben Blanchard): "China lashed out… at renewed threats from the White House on trade, warning that it was ready to fight back if Washington was looking for a trade war, days ahead of a planned visit by U.S. Commerce Secretary Wilbur Ross. In an unexpected change in tone, the United States said on Tuesday that it still held the threat of imposing tariffs on $50 billion of imports from China unless it addressed the issue of theft of American intellectual property. Washington also said it will press ahead with restrictions on investment by Chinese companies in the United States as well as export controls for goods exported to China."
May 28 - Reuters (Tom Miles): "Chinese and U.S. envoys sparred at the World Trade Organization… over U.S. President Donald Trump's claims that China steals American ideas, the subject of two lawsuits and a White House plan to slap huge punitive tariffs on Chinese goods. U.S. Ambassador Dennis Shea said 'forced technology transfer' was often an unwritten rule for companies trying to access China's burgeoning marketplace… China's licensing and administrative rules forced foreign firms to share technology if they wanted to do business, while government officials could exploit vague investment rules to impose technology transfer requirements, he said. 'This is not the rule of law. In fact, it is China's laws themselves that enable this coercion,' Shea told the WTO's dispute settlement body…"
May 30 - Reuters (Madeline Chambers and Edward Taylor): "A report that U.S. President Donald Trump has threatened to pursue German carmakers until there are no Mercedes-Benz rolling down New York's Fifth Avenue dented shares in the luxury car manufacturers on Thursday… The news and current affairs magazine said Trump had told French President Emmanuel Macron in April that he aimed to push German carmakers out of the United States altogether. Macron's administration in Paris declined to comment on the report."
May 31 - Reuters (Michael Nienaber): "German Chancellor Angela Merkel said… that the European Union would give a 'smart, determined and jointly agreed' response if the United States decides to impose tariffs on European steel and aluminum imports. 'We don't know the decision yet but if tariffs were to be imposed, then we have a clear stance within the European Union,' Merkel said…"
May 30 - Bloomberg (Bryce Baschuk): "President Donald Trump's unilateral tariff measures are necessary to fix a broken global trade system and the U.S., like other nations, should focus on its own interests, according to Commerce Secretary Wilbur Ross. 'Every country's primary obligation is to protect its own citizens and their livelihood,' Ross said at an Organisation for Economic Cooperation and Development conference… 'Maybe that's a populist saying but it's one we feel very strongly about.'"
EM Bubble Watch:
May 29 - Reuters (Simon Webb): "Brazilian President Michel Temer said… there was no chance that a nationwide truckers' protest that has paralyzed Latin America's biggest economy will spark a military coup and topple his government."
May 29 - Bloomberg (Mac Margolis): "After a week of anger and protests, Brazilian truck drivers agreed late Sunday to ease their strike. That's the good news. For more than a week, the truckers had all but staggered this country of 208 million people, jamming the highways with semis and strangling commerce from the grain silos to cargo ports. What's less heartening are the terms of the shaky truce, including cheaper fuel and a tax break for cargo transport workers, which emboldened a powerful pressure group at the expense of Brazilian taxpayers, may well encourage other aggrieved groups to do the same, and did nothing to address the fiscal disarray and ailing infrastructure sapping the region's biggest economy."
May 26 - Reuters (Daren Butler): "Turkish President Tayyip Erdogan called on Turks… to convert their dollar and euro savings into lira, as he sought to bolster the ailing currency which has lost some 20 percent of its value against the U.S. currency this year. 'My brothers who have dollars or euros under their pillow. Go and convert your money into lira. We will thwart this game together,' Erdogan said at a rally…"
Federal Reserve Watch:
June 1 - Bloomberg (Nathan Crooks): "San Francisco Fed President John Williams says federal reserve should continue with gradual rate increases over next two years… Says Fed is about three rate hikes away from reaching a 'neutral' level, where interest rates are neither adding to or taking away from economic growth. Williams sees need for less forward guidance from fed as rates near neutral. Fed does not necessarily need to pause on rate hikes once rates reach neutral…"
U.S. Bubble Watch:
May 25 - Reuters (Noel Randewich): "S&P 500 companies have returned a record $1 trillion to shareholders over the past year, helped by a recent surge in dividends and stock buybacks following sweeping corporate tax cuts introduced by Republicans… In the 12 months through March, S&P 500 companies paid out $428 billion in dividends and bought up $573 billion of their own shares, according to S&P Dow Jones Indices analyst Howard Silverblatt. That compares to combined dividends and buybacks worth $939 billion during the year through March 2017…"
May 29 - CNBC (Diana Olick): "Home values have been rising for six straight years, and the gains have been accelerating for the past two years... 'The continuing run-up in home prices above the pace of income growth is simply not sustainable,' wrote Lawrence Yun, chief economist for the National Association of Realtors… 'From the cyclical low point in home prices six years ago, a typical home price has increased by 48% while the average wage rate has grown by only 14%.'"
May 29 - Wall Street Journal (Rachel Louise Ensign and Lillian Rizzo): "Faced with tepid loan growth and heated competition for clients, banks are sweetening their deals on loans to businesses, a development that is concerning regulators. Lenders are giving corporate borrowers lower rates and looser terms, even if they operate in industries that are under strain… The development is a boon to companies looking to borrow cheaply while the economy is doing well. But regulators are raising red flags, particularly since rising interest rates may make it harder for businesses to pay off the loans. The Office of the Comptroller of the Currency, or OCC, in a report last week identified the easing of commercial loan standards as a top risk in the industry."
May 31 - Reuters (Lucia Mutikani): "U.S. consumer spending increased more than expected in April, a further sign that economic growth was regaining momentum early in the second quarter, while inflation continued to rise steadily. …Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.6% last month, the biggest gain in five months. …March was revised up to show spending rising 0.5%... Prices continued to gradually rise. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased 0.2% for the third straight month."
May 28 - CNBC (Jaden Urbi): "Retailers are facing a shipping squeeze, and the trucking industry just can't keep up. According to the American Trucking Associations, there's a shortage of roughly 50,000 truck drivers across the country. And it's hitting both businesses and consumers in the wallet. Companies are complaining about how the driver shortage is impacting their business. Meanwhile, the cost of convenient shipping is starting to catch up with consumers. Amazon recently hiked its Prime membership to $119 a year from $99 a year. The retail giant said one of the reasons for the price jump was increased shipping costs."
May 25 - CNN Money (Matt Egan): "Get ready for sticker shock at the gas station if you're one of the estimated 36 million Americans hitting the roads this Memorial Day weekend. Gone are the days of $2-a-gallon gasoline. A spike in crude oil prices has lifted the national average price of gas by 31% over the past year to an average of $2.97 a gallon… Prices at the pump haven't been this high heading into the biggest driving holiday of the year since 2014, when crude was sitting in triple-digit territory."
May 30 - Reuters (Jason Lange): "U.S. factories ramped up production in late April and early May despite the risk of a global trade war, but soft consumer spending kept the economy growing at a moderate rate, the Federal Reserve reported… In its periodic 'Beige Book'… the U.S. central bank pointed to strong output in fabricated metals, heavy machinery and electronics equipment. The assessment of growth across the economy represented a slight upgrade from the Fed's prior Beige Book report, which said economic activity was expanding at a 'modest to moderate pace.' 'Manufacturing shifted into higher gear,' the Fed said…"
May 31 - CNBC (Phil LeBeau): "There was a time when new car and truck buyers pushed hard to keep their monthly payment under $500. Those days are quickly fading away. In the first quarter of this year, the average monthly loan payment for a new vehicle climbed $15 compared with last year, hitting an all-time high of $523, according to Experian. The credit analysis company's review of new and open auto loans for the first three months of this year found buyers of new cars, trucks and SUVs borrowed an average of $31,453 - also a record high."
May 30 - Bloomberg (Lucy Meakin, Rich Miller and Catherine Bosley): "A staggering number of American homeowners remain under water on their mortgages a decade after the housing bubble burst. Almost 4.5 million households -- or 9.1% -- owed more than their homes are worth in the fourth quarter of 2017, according to data firm Zillow, with an estimated 713,000 owing at least twice as much as their property's value. While the percentage is declining, families in communities with stagnant property values are 'trapped in their homes with no easy options to regain equity other than waiting,' said Aaron Terrazas, a senior economist at Zillow."
China Watch:
May 28 - Bloomberg: "Strains are spreading in China's $15 trillion shadow banking industry as investors pull back from the debt-like savings products that helped drive leverage to dangerous levels. Most affected are some $3.8 trillion of so-called trust products, until now the fastest-growing shadow banking segment and a popular way for debt-ridden property developers and local governments to raise funds from millions of ordinary Chinese. In recent weeks, at least two of the products have been forced to delay payments as the market started to freeze up, making it harder to refinance maturing issues with new ones. 'On the one hand you have cash-strapped borrowers scrambling for refinancing; on the other you have cash-rich investors not knowing where to put their money for fear of getting burned,' said James Yang, a sales manager at Shanghai Xiangyi Asset Management Co."
May 28 - Wall Street Journal (Manju Dalal and Shen Hong): "Less than seven months ago, an investor consortium led by an obscure Chinese energy conglomerate reached an ambitious deal to buy one of Hong Kong's landmark skyscrapers for a record-setting price. Not long after, the Beijing-based conglomerate known as China Energy Reserve and Chemicals Group backed out of the $5.2 billion deal, and this month it defaulted on a set of U.S. dollar bonds. A subsidiary of the group said in a regulatory filing that it failed to repay the principal amount on $350 million in three-year dollar bonds that matured on May 11. The missed payment triggered default provisions on $655 million in other debt securities that were due to mature in 2021 and 2022. The privately held group blamed a 'tightening in credit conditions' in China over the past two years…"
May 30 - Bloomberg: "The case for the People's Bank of China to cut the amount of cash lenders are required to hold is getting stronger. Chinese banks racked up 2.93 trillion yuan ($457bn) in medium-term loans extended by the PBOC scheduled for repayment during the rest of 2018. That has prompted some analysts to raise bets the PBOC may soon repeat a tactic used in April: cutting the Reserve Requirement Ratio to hand lenders liquidity so they can pay back the debt."
May 31 - Reuters (Stella Qiu and Ryan Woo): "China's vast manufacturing sector grew at the fastest pace in eight months in May, blowing past expectations and easing concerns about an economic slowdown even as risks from trade tensions with the United States and a crackdown on debt point to a bumpy ride ahead. The official Purchasing Managers' Index (PMI) released on Thursday rose to 51.9 in May, from 51.4 in April, and remained well above the 50-point mark that separates growth from contraction for the 22nd straight month."
Central Bank Watch:
May 30 - Bloomberg (Lucy Meakin, Rich Miller and Catherine Bosley): "Just when central bankers thought they were about to get out of the business of emergency economic stimulus, jittery financial markets are threatening to pull some of them back in. For the European Central Bank, the latest threat requiring vigilance is political turmoil in Italy that's reviving memories of the debt crisis that threatened to fracture the euro area. The Bank of England's path is complicated by Brexit and, across emerging markets, central banks are trying to push back against the strong dollar. The People's Bank of China recently eased liquidity conditions for banks, while Indonesia's central bank is forecast to hike rates at an extraordinary policy meeting on Wednesday."
Global Bubble Watch:
May 31 - CNBC (Evelyn Cheng): "The Federal Reserve has designated Deutsche Bank's U.S. business as being in 'troubled condition,' The Wall Street Journal reported… The downgrade to one of the lowest designations occurred about a year ago and has not been previously reported, the report said. The Financial Times also reported… that Deutsche Bank's U.S. subsidiary was added to the Federal Deposit Insurance Corporation's list of 'problem banks,' or those with weaknesses that threaten their financial survival."
The S&P500 increased 0.5% (up 2.3% y-t-d), while the Dow declined 0.5% (down 0.3%). The Utilities slipped 0.6% (down 5.5%). The Banks fell 1.3% (up 0.7%), and the Broker/Dealers lost 1.3% (up 9.4%). The Transports were little changed (up 2.7%). The S&P 400 Midcaps added 0.6% (up 3.0%), and the small cap Russell 2000 jumped 1.3% (up 7.3%). The Nasdaq100 advanced 1.8% (up 10.7%).The Semiconductors rose 1.5% (up 12.6%). The Biotechs surged 3.0% (up 14.2%). With bullion down $8, the HUI gold index dipped 0.6% (down 6.8%).
Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields were little changed at 2.47% (up 59bps y-t-d). Five-year T-note yields slipped two bps to 2.75% (up 54bps). Ten-year Treasury yields declined three bps to 2.90% (up 50bps). Long bond yields fell four bps to 3.05% (up 31bps). Benchmark Fannie Mae MBS yields dipped two bps to 3.62% (up 62bps).
Greek 10-year yields jumped 10 bps to 4.47% (up 39bps y-t-d). Ten-year Portuguese yields fell seven bps to 1.88% (down 6bps). Italian 10-year yields surged 23 bps to 2.69% (up 67bps). Spain's 10-year yields declined two bps to 1.44% (down 13bps). German bund yields dipped two bps to 0.39% (down 4bps). French yields were unchanged at 0.71% (down 8bps). The French to German 10-year bond spread widened two to 32 bps. U.K. 10-year gilt yields declined four bps to 1.28% (up 9bps). U.K.'s FTSE equities index declined 0.4% (up 0.2%).
Japan's Nikkei 225 equities dropped 1.2% (down 2.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.05% (unchanged). France's CAC40 fell 1.4% (up 2.9%). The German DAX equities index lost 1.7% (down 1.5%). Spain's IBEX 35 equities index sank 2.0% (down 4.1%). Italy's FTSE MIB index dropped 1.3% (up 1.2%). EM equities were mixed. Brazil's Bovespa index fell 2.1% (up 1.1%), and Mexico's Bolsa slipped 0.2% (down 8.8%). South Korea's Kospi index declined 0.9% (down 1.2%). India’s Sensex equities index gained 0.9% (up 3.4%). China’s Shanghai Exchange dropped 2.1% (down 7.0%). Turkey's Borsa Istanbul National 100 index sank 3.9% (down 14.0%). Russia's MICEX equities declined 0.5% (up 8.8%).
Investment-grade bond funds saw inflows of $849 million, and junk bond funds had outflows of $18 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped 10 bps to 4.56% (up 62bps y-o-y). Fifteen-year rates fell nine bps to 4.06% (up 87bps). Five-year hybrid ARM rates declined seven bps to 3.80% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 14 bps to 4.56% (up 54bps).
Federal Reserve Credit last week declined $10.2bn to $4.289 TN. Over the past year, Fed Credit contracted $132bn, or 3.0%. Fed Credit inflated $1.478 TN, or 53%, over the past 291 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $12.0bn last week to $3.394 TN. "Custody holdings" were up $157bn y-o-y, or 4.8%.
M2 (narrow) "money" supply expanded $14.8bn last week to a record $14.013 TN. "Narrow money" gained $490bn, or 3.6%, over the past year. For the week, Currency increased $5.4bn. Total Checkable Deposits added $3.0bn, while savings Deposits dipped $6.9bn. Small Time Deposits gained $1.6bn. Retail Money Funds jumped $11.7bn.
Total money market fund assets rose $14.5bn to $2.840 TN. Money Funds gained $187bn y-o-y, or 7.0%.
Total Commercial Paper jumped $16.1bn to $1.108 TN. CP gained $114bn y-o-y, or 11.5%.
Currency Watch:
The U.S. dollar index was little changed at 94.156 (up 2.2% y-t-d). For the week on the upside, the New Zealand dollar increased 0.9%, the Swiss franc 0.3%, the Australian dollar 0.3%, the British pound 0.3%, the South Korean won 0.3%, the Singapore dollar 0.2%, the Canadian dollar 0.2%, and the euro 0.1%. For the week on the downside, the Brazilian real declined 3.0%, the Mexican peso 2.0%, the South African rand 1.5%, the Swedish krona 0.6%, the Norwegian krone 0.2% and the Japanese yen 0.1%. The Chinese renminbi declined 0.45% versus the dollar this week (up 1.34% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.9% (up 7.8% y-t-d). Spot Gold slipped 0.6% to $1,294 (down 0.7%). Silver dipped 0.5% to $16.441 (down 4.1%). Crude fell $1.69 to $65.81 (up 9%). Gasoline declined 1.2% (up 19%), while Natural Gas gained 1.1% (unchanged). Copper increased 0.7% (down 6%). Wheat dropped 3.6% (up 23%). Corn sank 3.6% (up 12%).
Market Dislocation Watch:
May 29 - Reuters (Dhara Ranasinghe and Abhinav Ramnarayan): "A deepening political crisis in Italy, the euro zone's third biggest economy, fuelled a selloff in Italian assets and the euro on Tuesday that was reminiscent of the euro zone debt crisis of 2010-12. Short-term Italian bond yields suffered the biggest one-day jump since 1992, while Italian and wider euro zone banking stocks saw their worst day since August 2016."
May 30 - Wall Street Journal (James Mackintosh): "Market reporting can be prone to hyperbole, but Tuesday's Italian bond selloff and Wednesday's partial recovery was truly astonishing. Short-dated bonds that can usually be treated as a close proxy for cash turned toxic, and bond prices suggested a full-blown panic, then the relief of a rescue. Prices fell, and yields on short-dated bonds rose as much or more than when the euro was fighting for survival in 2011 and 2012, before a massive reverse. The reaction of other markets was muted by comparison. Sure, stocks and the flakier end of European government bonds sold off, and there was a flight to the safety of U.S. Treasurys. But this wasn't much more than a run-of-the-mill bad day, mostly reversed on Wednesday."
May 29 - Bloomberg (Samuel Potter): "Reports of the death of the sovereign-bank 'doom loop' are greatly exaggerated. Italian government bonds have blown up, with the yield on two-year notes skyrocketing by as much as 192 bps on Tuesday to the highest level since 2012. Spreads on subordinated debts from euro-area financial companies, meanwhile, have jumped in sympathy as Rome's political turmoil reverberates across markets. The Markit iTraxx Europe Subordinated Financial Index, a gauge of credit default swaps tied to junior debt sold by the region's lenders, has surged to the highest in more than a year."
May 29 - Bloomberg (Jana Randow): "Italy's political stalemate is forcing investors to once again contemplate the survival of the euro. A gauge measuring the likelihood of Italy leaving the currency union within the next 12 months jumped to 11.3% in May from 3.6% in April, according to research group Sentix. That's pushed an index for the entire euro area to 13%, the highest level in more than a year.
May 29 - Financial Times (Kate Allen and Miles Johnson): "Until this weekend, many investors thought eurozone politics were inevitably messy but no longer had the power to trigger volatile and disorderly markets. Italy has forced a rapid and painful reappraisal. Those exposed to eurozone markets, and Italy in particular, are nursing heavy paper losses after near unrelenting selling in bonds and equities since Friday. The shift in markets has been profound, ensnaring the debt of other peripheral countries such as Portugal and hurting banks as investors contemplate the possibility of Italy's political turbulence escalating into another eurozone crisis. The scale of the moves in Italian debt has stunned some. Italy's two-year government bond price has plunged over the past three trading days, sending its yield soaring from 0.27% to as high as 2.72% on Tuesday. The 10-year bond yield has jumped from 2.4% to a high of 3.39% over the same period."
June 1 - Bloomberg (Sridhar Natarajan, Yalman Onaran and Sonali Basak): "Deutsche Bank AG just ended a roller-coaster week. June doesn't look any less harrowing. Shares of Europe's largest investment bank are trading near a record low, as short sellers pile on and credit derivative traders once again signal doubts about the firm's health. It's part of a painful pattern for the bank and its investors: Another spate of bad headlines keeps outweighing the good."
Trump Administration Watch:
May 30 - New York Times (Mark Landler and Ana Swanson): "President Trump, stung by criticism that he has gone soft on China and less worried about Beijing's ability to disrupt a potential summit meeting with North Korea, reversed course on Tuesday and declared that the United States would impose tariffs and other punitive measures on China. Barely a week after Treasury Secretary Steven Mnuchin said that the trade war was 'on hold' and that tariffs would be suspended as negotiations continued, the White House issued a statement saying the United States would move ahead with its plan to impose 25% tariffs on $50 billion worth of imported Chinese goods within the next month. Mr. Trump's reversal was yet another twist in a long-running ideological battle in the West Wing between economic nationalists, who channel Mr. Trump's protectionist instincts, and more mainstream advisers like Mr. Mnuchin, who worry that tariffs and investment restrictions will hurt the stock market and hobble long-term growth."
May 30 - Bloomberg (Jenny Leonard and Rich Miller): "White House trade adviser Peter Navarro criticized Treasury Secretary Steven Mnuchin for declaring the U.S.-China trade war was on hold, calling the remarks an 'unfortunate sound bite' and acknowledging there's a dispute that needs to be resolved. 'What we're having with China is a trade dispute, plain and simple,' Navarro said… 'We lost the trade war long ago' with deals such as Nafta and China's entry into the World Trade Organization, he said. The remarks from Navarro, a hard-liner on President Donald Trump's trade team, come just days before U.S. Commerce Secretary Wilbur Ross is scheduled to meet with his counterparts in Beijing to discuss ways to reduce the U.S. trade deficit with China."
May 29 - Wall Street Journal (William Mauldin and Lingling Wei): "The Trump administration sent a sudden, harsh message to its Chinese counterparts, saying the U.S. was moving forward with its threat to apply tariffs on Chinese imports and other actions to restrict Beijing from accessing sensitive U.S. technology. Tuesday's move surprised many observers after the White House had for days trumpeted the outlines of a deal in which any trade war with China would be put on hold while negotiators-led on the U.S. side by Treasury Secretary Steven Mnuchin -worked on a deal that would have China reduce its $375 billion annual trade advantage by buying more U.S. goods."
May 30 - Reuters (Michael Martina and Ben Blanchard): "China lashed out… at renewed threats from the White House on trade, warning that it was ready to fight back if Washington was looking for a trade war, days ahead of a planned visit by U.S. Commerce Secretary Wilbur Ross. In an unexpected change in tone, the United States said on Tuesday that it still held the threat of imposing tariffs on $50 billion of imports from China unless it addressed the issue of theft of American intellectual property. Washington also said it will press ahead with restrictions on investment by Chinese companies in the United States as well as export controls for goods exported to China."
May 28 - Reuters (Tom Miles): "Chinese and U.S. envoys sparred at the World Trade Organization… over U.S. President Donald Trump's claims that China steals American ideas, the subject of two lawsuits and a White House plan to slap huge punitive tariffs on Chinese goods. U.S. Ambassador Dennis Shea said 'forced technology transfer' was often an unwritten rule for companies trying to access China's burgeoning marketplace… China's licensing and administrative rules forced foreign firms to share technology if they wanted to do business, while government officials could exploit vague investment rules to impose technology transfer requirements, he said. 'This is not the rule of law. In fact, it is China's laws themselves that enable this coercion,' Shea told the WTO's dispute settlement body…"
May 30 - Reuters (Madeline Chambers and Edward Taylor): "A report that U.S. President Donald Trump has threatened to pursue German carmakers until there are no Mercedes-Benz rolling down New York's Fifth Avenue dented shares in the luxury car manufacturers on Thursday… The news and current affairs magazine said Trump had told French President Emmanuel Macron in April that he aimed to push German carmakers out of the United States altogether. Macron's administration in Paris declined to comment on the report."
May 31 - Reuters (Michael Nienaber): "German Chancellor Angela Merkel said… that the European Union would give a 'smart, determined and jointly agreed' response if the United States decides to impose tariffs on European steel and aluminum imports. 'We don't know the decision yet but if tariffs were to be imposed, then we have a clear stance within the European Union,' Merkel said…"
May 30 - Bloomberg (Bryce Baschuk): "President Donald Trump's unilateral tariff measures are necessary to fix a broken global trade system and the U.S., like other nations, should focus on its own interests, according to Commerce Secretary Wilbur Ross. 'Every country's primary obligation is to protect its own citizens and their livelihood,' Ross said at an Organisation for Economic Cooperation and Development conference… 'Maybe that's a populist saying but it's one we feel very strongly about.'"
EM Bubble Watch:
May 29 - Reuters (Simon Webb): "Brazilian President Michel Temer said… there was no chance that a nationwide truckers' protest that has paralyzed Latin America's biggest economy will spark a military coup and topple his government."
May 29 - Bloomberg (Mac Margolis): "After a week of anger and protests, Brazilian truck drivers agreed late Sunday to ease their strike. That's the good news. For more than a week, the truckers had all but staggered this country of 208 million people, jamming the highways with semis and strangling commerce from the grain silos to cargo ports. What's less heartening are the terms of the shaky truce, including cheaper fuel and a tax break for cargo transport workers, which emboldened a powerful pressure group at the expense of Brazilian taxpayers, may well encourage other aggrieved groups to do the same, and did nothing to address the fiscal disarray and ailing infrastructure sapping the region's biggest economy."
May 26 - Reuters (Daren Butler): "Turkish President Tayyip Erdogan called on Turks… to convert their dollar and euro savings into lira, as he sought to bolster the ailing currency which has lost some 20 percent of its value against the U.S. currency this year. 'My brothers who have dollars or euros under their pillow. Go and convert your money into lira. We will thwart this game together,' Erdogan said at a rally…"
Federal Reserve Watch:
June 1 - Bloomberg (Nathan Crooks): "San Francisco Fed President John Williams says federal reserve should continue with gradual rate increases over next two years… Says Fed is about three rate hikes away from reaching a 'neutral' level, where interest rates are neither adding to or taking away from economic growth. Williams sees need for less forward guidance from fed as rates near neutral. Fed does not necessarily need to pause on rate hikes once rates reach neutral…"
U.S. Bubble Watch:
May 25 - Reuters (Noel Randewich): "S&P 500 companies have returned a record $1 trillion to shareholders over the past year, helped by a recent surge in dividends and stock buybacks following sweeping corporate tax cuts introduced by Republicans… In the 12 months through March, S&P 500 companies paid out $428 billion in dividends and bought up $573 billion of their own shares, according to S&P Dow Jones Indices analyst Howard Silverblatt. That compares to combined dividends and buybacks worth $939 billion during the year through March 2017…"
May 29 - CNBC (Diana Olick): "Home values have been rising for six straight years, and the gains have been accelerating for the past two years... 'The continuing run-up in home prices above the pace of income growth is simply not sustainable,' wrote Lawrence Yun, chief economist for the National Association of Realtors… 'From the cyclical low point in home prices six years ago, a typical home price has increased by 48% while the average wage rate has grown by only 14%.'"
May 29 - Wall Street Journal (Rachel Louise Ensign and Lillian Rizzo): "Faced with tepid loan growth and heated competition for clients, banks are sweetening their deals on loans to businesses, a development that is concerning regulators. Lenders are giving corporate borrowers lower rates and looser terms, even if they operate in industries that are under strain… The development is a boon to companies looking to borrow cheaply while the economy is doing well. But regulators are raising red flags, particularly since rising interest rates may make it harder for businesses to pay off the loans. The Office of the Comptroller of the Currency, or OCC, in a report last week identified the easing of commercial loan standards as a top risk in the industry."
May 31 - Reuters (Lucia Mutikani): "U.S. consumer spending increased more than expected in April, a further sign that economic growth was regaining momentum early in the second quarter, while inflation continued to rise steadily. …Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.6% last month, the biggest gain in five months. …March was revised up to show spending rising 0.5%... Prices continued to gradually rise. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased 0.2% for the third straight month."
May 28 - CNBC (Jaden Urbi): "Retailers are facing a shipping squeeze, and the trucking industry just can't keep up. According to the American Trucking Associations, there's a shortage of roughly 50,000 truck drivers across the country. And it's hitting both businesses and consumers in the wallet. Companies are complaining about how the driver shortage is impacting their business. Meanwhile, the cost of convenient shipping is starting to catch up with consumers. Amazon recently hiked its Prime membership to $119 a year from $99 a year. The retail giant said one of the reasons for the price jump was increased shipping costs."
May 25 - CNN Money (Matt Egan): "Get ready for sticker shock at the gas station if you're one of the estimated 36 million Americans hitting the roads this Memorial Day weekend. Gone are the days of $2-a-gallon gasoline. A spike in crude oil prices has lifted the national average price of gas by 31% over the past year to an average of $2.97 a gallon… Prices at the pump haven't been this high heading into the biggest driving holiday of the year since 2014, when crude was sitting in triple-digit territory."
May 30 - Reuters (Jason Lange): "U.S. factories ramped up production in late April and early May despite the risk of a global trade war, but soft consumer spending kept the economy growing at a moderate rate, the Federal Reserve reported… In its periodic 'Beige Book'… the U.S. central bank pointed to strong output in fabricated metals, heavy machinery and electronics equipment. The assessment of growth across the economy represented a slight upgrade from the Fed's prior Beige Book report, which said economic activity was expanding at a 'modest to moderate pace.' 'Manufacturing shifted into higher gear,' the Fed said…"
May 31 - CNBC (Phil LeBeau): "There was a time when new car and truck buyers pushed hard to keep their monthly payment under $500. Those days are quickly fading away. In the first quarter of this year, the average monthly loan payment for a new vehicle climbed $15 compared with last year, hitting an all-time high of $523, according to Experian. The credit analysis company's review of new and open auto loans for the first three months of this year found buyers of new cars, trucks and SUVs borrowed an average of $31,453 - also a record high."
May 30 - Bloomberg (Lucy Meakin, Rich Miller and Catherine Bosley): "A staggering number of American homeowners remain under water on their mortgages a decade after the housing bubble burst. Almost 4.5 million households -- or 9.1% -- owed more than their homes are worth in the fourth quarter of 2017, according to data firm Zillow, with an estimated 713,000 owing at least twice as much as their property's value. While the percentage is declining, families in communities with stagnant property values are 'trapped in their homes with no easy options to regain equity other than waiting,' said Aaron Terrazas, a senior economist at Zillow."
China Watch:
May 28 - Bloomberg: "Strains are spreading in China's $15 trillion shadow banking industry as investors pull back from the debt-like savings products that helped drive leverage to dangerous levels. Most affected are some $3.8 trillion of so-called trust products, until now the fastest-growing shadow banking segment and a popular way for debt-ridden property developers and local governments to raise funds from millions of ordinary Chinese. In recent weeks, at least two of the products have been forced to delay payments as the market started to freeze up, making it harder to refinance maturing issues with new ones. 'On the one hand you have cash-strapped borrowers scrambling for refinancing; on the other you have cash-rich investors not knowing where to put their money for fear of getting burned,' said James Yang, a sales manager at Shanghai Xiangyi Asset Management Co."
May 28 - Wall Street Journal (Manju Dalal and Shen Hong): "Less than seven months ago, an investor consortium led by an obscure Chinese energy conglomerate reached an ambitious deal to buy one of Hong Kong's landmark skyscrapers for a record-setting price. Not long after, the Beijing-based conglomerate known as China Energy Reserve and Chemicals Group backed out of the $5.2 billion deal, and this month it defaulted on a set of U.S. dollar bonds. A subsidiary of the group said in a regulatory filing that it failed to repay the principal amount on $350 million in three-year dollar bonds that matured on May 11. The missed payment triggered default provisions on $655 million in other debt securities that were due to mature in 2021 and 2022. The privately held group blamed a 'tightening in credit conditions' in China over the past two years…"
May 30 - Bloomberg: "The case for the People's Bank of China to cut the amount of cash lenders are required to hold is getting stronger. Chinese banks racked up 2.93 trillion yuan ($457bn) in medium-term loans extended by the PBOC scheduled for repayment during the rest of 2018. That has prompted some analysts to raise bets the PBOC may soon repeat a tactic used in April: cutting the Reserve Requirement Ratio to hand lenders liquidity so they can pay back the debt."
May 31 - Reuters (Stella Qiu and Ryan Woo): "China's vast manufacturing sector grew at the fastest pace in eight months in May, blowing past expectations and easing concerns about an economic slowdown even as risks from trade tensions with the United States and a crackdown on debt point to a bumpy ride ahead. The official Purchasing Managers' Index (PMI) released on Thursday rose to 51.9 in May, from 51.4 in April, and remained well above the 50-point mark that separates growth from contraction for the 22nd straight month."
Central Bank Watch:
May 30 - Bloomberg (Lucy Meakin, Rich Miller and Catherine Bosley): "Just when central bankers thought they were about to get out of the business of emergency economic stimulus, jittery financial markets are threatening to pull some of them back in. For the European Central Bank, the latest threat requiring vigilance is political turmoil in Italy that's reviving memories of the debt crisis that threatened to fracture the euro area. The Bank of England's path is complicated by Brexit and, across emerging markets, central banks are trying to push back against the strong dollar. The People's Bank of China recently eased liquidity conditions for banks, while Indonesia's central bank is forecast to hike rates at an extraordinary policy meeting on Wednesday."
Global Bubble Watch:
May 31 - CNBC (Evelyn Cheng): "The Federal Reserve has designated Deutsche Bank's U.S. business as being in 'troubled condition,' The Wall Street Journal reported… The downgrade to one of the lowest designations occurred about a year ago and has not been previously reported, the report said. The Financial Times also reported… that Deutsche Bank's U.S. subsidiary was added to the Federal Deposit Insurance Corporation's list of 'problem banks,' or those with weaknesses that threaten their financial survival."
Europe Watch:
May 29 - Bloomberg (Tommaso Ebhardt and John Follain): "Italy's Democratic Party signaled a return to campaign mode as it charged its rivals, the League and the Five Star Movement, with having prepared a plan to pull the country out of the euro if they had succeeded in forming a government together. The two parties gambled with the country's well-being 'with a project to take Italy out of the euro zone, and they did it in a ruthless way,' acting PD leader Maurizio Martina wrote on Twitter. League head Matteo Salvini and Five Star chief Luigi Di Maio have both denied any plan to leave the euro."
May 29 - Bloomberg (Tommaso Ebhardt and John Follain): "Italy's Democratic Party signaled a return to campaign mode as it charged its rivals, the League and the Five Star Movement, with having prepared a plan to pull the country out of the euro if they had succeeded in forming a government together. The two parties gambled with the country's well-being 'with a project to take Italy out of the euro zone, and they did it in a ruthless way,' acting PD leader Maurizio Martina wrote on Twitter. League head Matteo Salvini and Five Star chief Luigi Di Maio have both denied any plan to leave the euro."
May 30 - Financial Times (Robin Wigglesworth): "For most of the past decade the main job of Doug Rediker, Washington's former top man at the International Monetary Fund, has essentially been to tell US investors to relax about Europe. Now he thinks they might not be nervous enough. Italy's political chaos has reawakened concerns over the country's future in the eurozone, but given its size, the crisis could dwarf that caused by Greece just a few years ago, Mr Rediker worries. 'My own anxiety level has increased significantly,' he admits. 'Italy is too big to save, and too big to fail.' Investors are therefore dusting off their old eurozone crisis playbooks."
May 30 - Bloomberg (John follain): "The Italian establishment is heading into a showdown against the populists with its armies in disarray. Former Prime Minister Silvio Berlusconi's center-right Forza Italia has been practically swallowed up by Matteo Salvini's League since the inconclusive election on March 4, while the center-left Democratic Party of outgoing premier Paolo Gentiloni is still casting around for a way forward after its worst-ever result. The League and its would-be coalition partner Five Star Movement, meanwhile, are increasingly setting the agenda. Efforts by former International Monetary Fund official Carlo Cottarelli to forge a short-term technocratic government stalled Tuesday with the populists baying for a fresh election… 'The pro-European ruling class is very weak,' said Giovanni Orsina, professor of government at Luiss University in Rome. 'Mattarella has picked the wrong fight.'"
May 31 - Reuters: "Euro zone inflation jumped by far more than expected in May on higher energy costs, bringing relief to the European Central Bank after market turbulence that has jeopardized its planned exit from a lavish stimulus program. Inflation in the 19 countries sharing the euro rose to 1.9% from 1.2% in April…"
Fixed Income Bubble Watch:
May 30 - Bloomberg (Shelly Hagan and Adam Tempkin): "It's gotten a lot harder to borrow money from the raft of fintech firms looking to bring online lending into the mainstream. Besieged by a wave of defaults after several years of rapid growth, the biggest online-lending platforms have been forced by bond investors to tighten underwriting standards. Social Finance, Prosper, LendingClub and Avant now demand higher average credit scores and offer shorter maturities to boost the quality of loans they repackage into asset-backed securities. The shift in the $30 billion market comes after a swarm of borrower defaults in the past three years rattled ABS investors… 'They all had a pretty tough time and took losses a lot more than expected,' said Henry Song, a portfolio manager at Diamond Hill Capital Management…, a firm that invests in online-lending securitizations… 'Some dropped certain grades and the mentality of grabbing market share to be profitable has shifted.'"
Leveraged Speculator Watch:
May 27 - Financial Times (Lindsay Fortado): "The Wall Street star system is dominating hedge-fund launches this year, with a handful of better known managers raising billions of dollars for new investment vehicles. The four biggest hedge fund launches of 2018 have attracted more than $17bn… That compares with the $13.7bn investors have put in existing funds, according to data from eVestment."
Geopolitical Watch:
May 30 - Fox News (Lukas Mikelionis): "Defense Secretary Jim Mattis said… that the U.S. will continue to confront China's increasing militarization of islands in the South China Sea -- despite the U.S. angering Beijing over the weekend by sending two Navy ships to the region. Mattis rebuked China and said the country hasn't abided by its promise to stop militarization of the Spratly Islands, a disputed territory whose ownership is contested by Brunei, Malaysia, the Philippines, Taiwan and Vietnam. Mattis said U.S. ships are maintaining a 'steady drumbeat' of naval operations and will confront 'what we believe is out of step with international law.' 'You'll notice there is only one country that seems to take active steps to rebuff them or state their resentment [to] them, but it's international waters and a lot of nations want to see freedom of navigation,' Mattis told reporters…"
May 30 - Bloomberg (Keith Zhai and Jason Koutsoukis): "Tensions are rising between the U.S. and China ahead of Asia's biggest security conference this week, even as the two powers push for peace on the Korean Peninsula. Defense Secretary James Mattis said… he was planning to raise U.S. concerns about China's recent moves to 'militarize' the South China Sea. Meanwhile, China warned the U.S…. against expanding defense ties with the democratically run island of Taiwan, which Beijing views as a province. Such exchanges have occurred almost daily in recent weeks as old disputes flare up amid the Trump administration's efforts to counter Chinese influence on everything from security to trade."
May 28 - Reuters (Joseph Nasr, Michael Nienaber and Thomas Escritt): "Germany is worried by signs of weakening in the network of multilateral organizations and agreements designed to foster international cooperation, Chancellor Angela Merkel said… Merkel blamed the fraying of the multilateral order on a 'double transition' - the gradual fading of the direct memory of searing global conflict and the sheer pace and scale of technological change. 'The people who experienced World War Two, the last true global catastrophe, are dying out and are no longer there as eyewitnesses,' she told a conference in Berlin."
May 28 - Wall Street Journal (Benoit Faucon): "Chinese and Russian state-backed companies are maneuvering to profit from European firms leaving Iran, threatening the Trump administration's bid to raise economic pressure on Tehran. Their efforts show how Iran's business landscape has shifted since the Trump administration withdrew from the nuclear pact... Secretary of State Mike Pompeo has threatened the 'strongest set of sanctions in history' if Iran doesn't rein in its military activities across the Middle East and stop testing long-range missiles. European executives who tried to make inroads in Iran since the Obama administration struck the nuclear deal in 2015 are now concerned Beijing and Moscow will seize an insurmountable advantage in a large, growing market."
May 30 - Bloomberg (John follain): "The Italian establishment is heading into a showdown against the populists with its armies in disarray. Former Prime Minister Silvio Berlusconi's center-right Forza Italia has been practically swallowed up by Matteo Salvini's League since the inconclusive election on March 4, while the center-left Democratic Party of outgoing premier Paolo Gentiloni is still casting around for a way forward after its worst-ever result. The League and its would-be coalition partner Five Star Movement, meanwhile, are increasingly setting the agenda. Efforts by former International Monetary Fund official Carlo Cottarelli to forge a short-term technocratic government stalled Tuesday with the populists baying for a fresh election… 'The pro-European ruling class is very weak,' said Giovanni Orsina, professor of government at Luiss University in Rome. 'Mattarella has picked the wrong fight.'"
May 31 - Reuters: "Euro zone inflation jumped by far more than expected in May on higher energy costs, bringing relief to the European Central Bank after market turbulence that has jeopardized its planned exit from a lavish stimulus program. Inflation in the 19 countries sharing the euro rose to 1.9% from 1.2% in April…"
Fixed Income Bubble Watch:
May 30 - Bloomberg (Shelly Hagan and Adam Tempkin): "It's gotten a lot harder to borrow money from the raft of fintech firms looking to bring online lending into the mainstream. Besieged by a wave of defaults after several years of rapid growth, the biggest online-lending platforms have been forced by bond investors to tighten underwriting standards. Social Finance, Prosper, LendingClub and Avant now demand higher average credit scores and offer shorter maturities to boost the quality of loans they repackage into asset-backed securities. The shift in the $30 billion market comes after a swarm of borrower defaults in the past three years rattled ABS investors… 'They all had a pretty tough time and took losses a lot more than expected,' said Henry Song, a portfolio manager at Diamond Hill Capital Management…, a firm that invests in online-lending securitizations… 'Some dropped certain grades and the mentality of grabbing market share to be profitable has shifted.'"
Leveraged Speculator Watch:
May 27 - Financial Times (Lindsay Fortado): "The Wall Street star system is dominating hedge-fund launches this year, with a handful of better known managers raising billions of dollars for new investment vehicles. The four biggest hedge fund launches of 2018 have attracted more than $17bn… That compares with the $13.7bn investors have put in existing funds, according to data from eVestment."
Geopolitical Watch:
May 30 - Fox News (Lukas Mikelionis): "Defense Secretary Jim Mattis said… that the U.S. will continue to confront China's increasing militarization of islands in the South China Sea -- despite the U.S. angering Beijing over the weekend by sending two Navy ships to the region. Mattis rebuked China and said the country hasn't abided by its promise to stop militarization of the Spratly Islands, a disputed territory whose ownership is contested by Brunei, Malaysia, the Philippines, Taiwan and Vietnam. Mattis said U.S. ships are maintaining a 'steady drumbeat' of naval operations and will confront 'what we believe is out of step with international law.' 'You'll notice there is only one country that seems to take active steps to rebuff them or state their resentment [to] them, but it's international waters and a lot of nations want to see freedom of navigation,' Mattis told reporters…"
May 30 - Bloomberg (Keith Zhai and Jason Koutsoukis): "Tensions are rising between the U.S. and China ahead of Asia's biggest security conference this week, even as the two powers push for peace on the Korean Peninsula. Defense Secretary James Mattis said… he was planning to raise U.S. concerns about China's recent moves to 'militarize' the South China Sea. Meanwhile, China warned the U.S…. against expanding defense ties with the democratically run island of Taiwan, which Beijing views as a province. Such exchanges have occurred almost daily in recent weeks as old disputes flare up amid the Trump administration's efforts to counter Chinese influence on everything from security to trade."
May 28 - Reuters (Joseph Nasr, Michael Nienaber and Thomas Escritt): "Germany is worried by signs of weakening in the network of multilateral organizations and agreements designed to foster international cooperation, Chancellor Angela Merkel said… Merkel blamed the fraying of the multilateral order on a 'double transition' - the gradual fading of the direct memory of searing global conflict and the sheer pace and scale of technological change. 'The people who experienced World War Two, the last true global catastrophe, are dying out and are no longer there as eyewitnesses,' she told a conference in Berlin."
May 28 - Wall Street Journal (Benoit Faucon): "Chinese and Russian state-backed companies are maneuvering to profit from European firms leaving Iran, threatening the Trump administration's bid to raise economic pressure on Tehran. Their efforts show how Iran's business landscape has shifted since the Trump administration withdrew from the nuclear pact... Secretary of State Mike Pompeo has threatened the 'strongest set of sanctions in history' if Iran doesn't rein in its military activities across the Middle East and stop testing long-range missiles. European executives who tried to make inroads in Iran since the Obama administration struck the nuclear deal in 2015 are now concerned Beijing and Moscow will seize an insurmountable advantage in a large, growing market."
May 27 - Wall Street Journal (Chun Han Wong): "China criticized the U.S. for sending two warships into South China Sea waters that Beijing considers its territory, amid simmering bilateral tensions over trade and North Korea. …China's foreign and defense ministries each expressed 'firm opposition' to what they described as violations of Chinese sovereignty by the guided-missile destroyer USS Higgins and the guided-missile cruiser USS Antietam… 'The Chinese military took immediate action, deploying ships and aircraft to identify the U.S. vessels and issued warnings to drive them away,' Chinese Defense Ministry spokesman Wu Qian said…, which said that the two vessels made 'unauthorized' entry into Chinese waters."
Friday Evening Links
[BloombergQ] Stocks Rally, Led by Tech, as Jobs Give Fed Cover: Markets Wrap
[Reuters] U.S. isolated at G7 meeting as tariffs prompt retaliation
[CNBC] The US economy suddenly looks like it's unstoppable
[Reuters] Fed's Williams says rates may start to brake growth by next year
[Reuters] Italy's Conte sworn in as PM of anti-establishment government
[Reuters] Brazil strike boosts far right candidate's shot at presidency
[Reuters] U.S. isolated at G7 meeting as tariffs prompt retaliation
[CNBC] The US economy suddenly looks like it's unstoppable
[Reuters] Fed's Williams says rates may start to brake growth by next year
[Reuters] Italy's Conte sworn in as PM of anti-establishment government
[Reuters] Brazil strike boosts far right candidate's shot at presidency
Thursday, May 31, 2018
Friday's News Links
[Reuters] Global stocks rise, bond yields fall as political tensions ebb
[BloombergQ] Treasuries Fall, Dollar Rises as Jobs Data Beats: Markets Wrap
[Reuters] Borrowing costs drop for Italy and Spain as political concerns ease
[BloombergQ] U.S. Payrolls Rise 223,000 as Jobless Rate Matches Historic Low
[Reuters] Moment of truth arrives for EU after U.S. tariffs strike
[Reuters] Sanchez takes charge in Spain as tarnished Rajoy departs
[BloombergQ] Worst Month Ever in Italian Bonds Leaves Confidence in Tatters
[Reuters] Japan wants to work with the US to stop China's 'market-distorting' practices
[BloombergQ] Rajoy Falls, Paying Price for Generation of Corruption in Spain
[BloombergQ] BOJ Unexpectedly Cuts Bond Buying in Test of Yen Speculators
[Reuters] Deutsche Bank gets ECB, key investor support as S&P questions strategy
[Yahoo/Bloomberg] U.S. Opens Criminal Probe Into Trading in Fannie, Freddie Bonds
[CNBC] Beijing is upping the pressure on Taiwan: 'Expectation of reunification is certainly increasing'
[WSJ] U.S., China Trade Negotiators Haggling Over Purchases of American Goods
[FT] Italian market rout points to strains in market structure
[BloombergQ] Treasuries Fall, Dollar Rises as Jobs Data Beats: Markets Wrap
[Reuters] Borrowing costs drop for Italy and Spain as political concerns ease
[BloombergQ] U.S. Payrolls Rise 223,000 as Jobless Rate Matches Historic Low
[Reuters] Moment of truth arrives for EU after U.S. tariffs strike
[Reuters] Sanchez takes charge in Spain as tarnished Rajoy departs
[BloombergQ] Worst Month Ever in Italian Bonds Leaves Confidence in Tatters
[Reuters] Japan wants to work with the US to stop China's 'market-distorting' practices
[BloombergQ] Rajoy Falls, Paying Price for Generation of Corruption in Spain
[BloombergQ] BOJ Unexpectedly Cuts Bond Buying in Test of Yen Speculators
[Reuters] Deutsche Bank gets ECB, key investor support as S&P questions strategy
[Yahoo/Bloomberg] U.S. Opens Criminal Probe Into Trading in Fannie, Freddie Bonds
[CNBC] Beijing is upping the pressure on Taiwan: 'Expectation of reunification is certainly increasing'
[WSJ] U.S., China Trade Negotiators Haggling Over Purchases of American Goods
[FT] Italian market rout points to strains in market structure
Thursday Evening Links
[CNBC] Dow drops more than 200 points as Trump tariffs reignite trade-war fears
[CNBC] US allies quickly fire back at Trump's tariffs – escalating an already-tense trade battle
[Reuters] U.S. hits allies with tariffs as trade war fears rise
[CNBC] 'Protectionism, pure and simple:' Europe promises WTO action over US tariffs
[Reuters] Italy's League, 5-Star clinch deal on coalition government: sources
[BloombergQ] Italy Populists Surge to Power in Challenge to Europe
[Reuters] Loan repricings lead to market fatigue as deals pulled
[BloombergQ] What Spain's Socialists Want in Pushing Out Rajoy: QuickTake
[WSJ] U.S. Tariffs Prompt Anger, Retaliation From Trade Allies
[FT] Spain’s opposition secures votes to oust Mariano Rajoy
[FT] Italy turmoil accelerates outflows from Europe
[FT] Italy buys back €500m of its debt amid political woes
[FT] Make America 1929 again
[CNBC] US allies quickly fire back at Trump's tariffs – escalating an already-tense trade battle
[Reuters] U.S. hits allies with tariffs as trade war fears rise
[CNBC] 'Protectionism, pure and simple:' Europe promises WTO action over US tariffs
[Reuters] Italy's League, 5-Star clinch deal on coalition government: sources
[BloombergQ] Italy Populists Surge to Power in Challenge to Europe
[Reuters] Loan repricings lead to market fatigue as deals pulled
[BloombergQ] What Spain's Socialists Want in Pushing Out Rajoy: QuickTake
[WSJ] U.S. Tariffs Prompt Anger, Retaliation From Trade Allies
[FT] Spain’s opposition secures votes to oust Mariano Rajoy
[FT] Italy turmoil accelerates outflows from Europe
[FT] Italy buys back €500m of its debt amid political woes
[FT] Make America 1929 again
Wednesday, May 30, 2018
Thursday's News Links
[BloombergQ] Stocks Drop, Bonds Rise as Trade Tensions Simmer: Markets Wrap
[BloombergQ] Trump Slaps Steel Tariffs on Closest Allies as Tensions Rise
[Reuters] U.S. to impose tariffs on EU steel, aluminum
[Reuters] Europe will give determined response to any U.S. tariffs: Merkel
[Reuters] German carmakers hit by report Trump threatens to drive them off U.S. streets
[Reuters] U.S. consumer spending records biggest gain in five months
[Reuters] Salvini, Di Maio to meet in last-ditch bid to avert Italian election
[Reuters] Spanish PM's future in balance as no-confidence debate hots up
[Reuters] China May factory growth at 8-month high, but tight funding hits smaller firms
[Reuters] Japan's factory output growth slumps in April, dims production prospects
[BloombergQ] Italy's President Asks Populists: Call Me When You're Ready
[BloombergQ] EU Braces for Trump Broadside as Steel Tariff Deadline Looms
[CNBC] Euro zone inflation well above expectations in May
[CNBC] Deutsche Bank US operations designated to be in 'troubled condition' by the Fed
[CNBC] A $523 monthly payment is the new standard for car buyers
[BloombergQ] Soros Contention on Global Crisis `Ridiculous,' Gorman Says
[WSJ] Storm Clouds Gather Over the Fed
[WSJ] Why Italian Markets Were Primed for a Blowup
[WSJ] Fed Backs Easing Volcker Rule Restrictions on Big Banks’ Trading
[FT] Italy turmoil gives Draghi dilemma over ECB’s plan of action
[FT] Rajoy under fire: how Spain’s PM could be pushed out
[BloombergQ] Trump Slaps Steel Tariffs on Closest Allies as Tensions Rise
[Reuters] U.S. to impose tariffs on EU steel, aluminum
[Reuters] Europe will give determined response to any U.S. tariffs: Merkel
[Reuters] German carmakers hit by report Trump threatens to drive them off U.S. streets
[Reuters] U.S. consumer spending records biggest gain in five months
[Reuters] Salvini, Di Maio to meet in last-ditch bid to avert Italian election
[Reuters] Spanish PM's future in balance as no-confidence debate hots up
[Reuters] China May factory growth at 8-month high, but tight funding hits smaller firms
[Reuters] Japan's factory output growth slumps in April, dims production prospects
[BloombergQ] Italy's President Asks Populists: Call Me When You're Ready
[BloombergQ] EU Braces for Trump Broadside as Steel Tariff Deadline Looms
[CNBC] Euro zone inflation well above expectations in May
[CNBC] Deutsche Bank US operations designated to be in 'troubled condition' by the Fed
[CNBC] A $523 monthly payment is the new standard for car buyers
[BloombergQ] Soros Contention on Global Crisis `Ridiculous,' Gorman Says
[WSJ] Storm Clouds Gather Over the Fed
[WSJ] Why Italian Markets Were Primed for a Blowup
[WSJ] Fed Backs Easing Volcker Rule Restrictions on Big Banks’ Trading
[FT] Italy turmoil gives Draghi dilemma over ECB’s plan of action
[FT] Rajoy under fire: how Spain’s PM could be pushed out
Wednesday Evening Links
[CNBC] Dow jumps more than 300 points after banks rebound; small caps hit new record
[Reuters] Italy's Cottarelli opens door to possible eurosceptic government
[CNBC] This bond market alarm went off when investors freaked out about Italy
[BloombergQ] Navarro Rebukes Mnuchin Over Trade Truce Before China Talks
[Reuters] U.S. factories shift into 'higher gear' despite trade worries: Fed
[BloombergQ] Fed Says Economy Grew `Moderately' Amid Strong Manufacturing
[BloombergQ] Online Lenders Tighten Rules as Default Wave Rattles Investors
[BloombergQ] Brazil's Recovery Threatened by Strike And Domestic Turmoil
[WSJ] U.S. Plans to Hit EU With Steel, Aluminum Tariffs
[WSJ] U.S. Tariff Threat Could Scuttle Planned Trade Talks With China
[WSJ] Then and Now: The Italian Crisis in Seven Charts
[Reuters] Italy's Cottarelli opens door to possible eurosceptic government
[CNBC] This bond market alarm went off when investors freaked out about Italy
[BloombergQ] Navarro Rebukes Mnuchin Over Trade Truce Before China Talks
[Reuters] U.S. factories shift into 'higher gear' despite trade worries: Fed
[BloombergQ] Fed Says Economy Grew `Moderately' Amid Strong Manufacturing
[BloombergQ] Online Lenders Tighten Rules as Default Wave Rattles Investors
[BloombergQ] Brazil's Recovery Threatened by Strike And Domestic Turmoil
[WSJ] U.S. Plans to Hit EU With Steel, Aluminum Tariffs
[WSJ] U.S. Tariff Threat Could Scuttle Planned Trade Talks With China
[WSJ] Then and Now: The Italian Crisis in Seven Charts
Tuesday, May 29, 2018
Wednesday News Links
[BloombergQ] Stocks Rally, Bonds Decline as Italy Concerns Fade: Markets Wrap
[Reuters] Italy renews attempt to form a government and end turmoil
[BloombergQ] Italy Banks Under Scrutiny as Messy Politics Prompts Downgrades
[Reuters] U.S. first-quarter growth revised down to 2.2 percent
[BondBuyer] ADP May jobs estimate below expectations; tough to find workers
[BloombergQ] Ross Embraces Populist Push to Make America Great With Tariffs
[Reuters] China vows to protect its interests from 'reckless' U.S. trade threats
[Reuters] Italy renews attempt to form a government and end turmoil
[BloombergQ] Italy Banks Under Scrutiny as Messy Politics Prompts Downgrades
[Reuters] U.S. first-quarter growth revised down to 2.2 percent
[BondBuyer] ADP May jobs estimate below expectations; tough to find workers
[BloombergQ] Ross Embraces Populist Push to Make America Great With Tariffs
[Reuters] China vows to protect its interests from 'reckless' U.S. trade threats
[Bloomberg] Italy's Establishment Faces Populist Onslaught With No Champion
[BloombergQ] Italy’s Credit Impulse Doesn’t Bode Well for the Economy: Chart
[BloombergQ] China's Economy Is Battling Slowdown, Earliest Indicators Show
[BloombergQ] Italy’s Credit Impulse Doesn’t Bode Well for the Economy: Chart
[BloombergQ] China's Economy Is Battling Slowdown, Earliest Indicators Show
[BloombergQ] Millions of U.S. Homeowners Still Under Water on Mortgages
[BloombergQ] U.S.-China Military Tensions Rise Ahead of Asia Security Forum
[BloombergQ] U.S.-China Military Tensions Rise Ahead of Asia Security Forum
[NYT] Trump, Stung by Being Attacked as Soft on China, Pushes Ahead on Tariffs
[WSJ] U.S. Tariff Threat Could Scuttle Planned Trade Talks With China
[WSJ] Banks Hunting Growth Loosen Terms on Business Loans
[WSJ] Scarcity of Housing in Rural America Drives Worker Shortage
[WSJ] U.S. Tariff Threat Could Scuttle Planned Trade Talks With China
[WSJ] Banks Hunting Growth Loosen Terms on Business Loans
[WSJ] Scarcity of Housing in Rural America Drives Worker Shortage
[WSJ] U.S. Moves Ahead on China Trade Curbs, Catching Beijing Off Guard
[WSJ] What to Make of Italy’s Astonishing Bond Selloff
[WSJ] What to Make of Italy’s Astonishing Bond Selloff
Tuesday Evening Links
[BloombergQ] Stocks Drop, Bonds Rally as Italy Woes Jolt Assets: Markets Wrap
[BloombergQ] Italian Political Impasse Envelops Country's Corporate Bonds
[Reuters] Italy may return to polls in July, sources say, amid market rout
[Reuters] U.S. Treasury sees Italy better off in euro zone: official
[BloombergQ] Trump Ratchets Up Pressure on China With Swerve on Tariff Plans
[CNBC] US forces Germany's Bayer to shed $9 billion in ag business in biggest ever antitrust sell-off
[CNBC] Run-up in home prices is "not sustainable:" Realtors' chief economist
[Reuters] Brazil's Temer says no threat of a coup amid truckers' protest
[BloombergQ] Most Port Terminals Run Out of Soybeans: Brazil Strike Update
[CBSNY] 5G Wireless Service Is Coming, And So Are Health Concerns Over The Towers That Support It
[NYT] White House Moves Ahead With Tough Trade Measures on China
[FT] Italian political turmoil fuels ‘risk-off’ mood
[BloombergQ] Italian Political Impasse Envelops Country's Corporate Bonds
[Reuters] Italy may return to polls in July, sources say, amid market rout
[Reuters] U.S. Treasury sees Italy better off in euro zone: official
[BloombergQ] Trump Ratchets Up Pressure on China With Swerve on Tariff Plans
[CNBC] US forces Germany's Bayer to shed $9 billion in ag business in biggest ever antitrust sell-off
[CNBC] Run-up in home prices is "not sustainable:" Realtors' chief economist
[Reuters] Brazil's Temer says no threat of a coup amid truckers' protest
[BloombergQ] Most Port Terminals Run Out of Soybeans: Brazil Strike Update
[CBSNY] 5G Wireless Service Is Coming, And So Are Health Concerns Over The Towers That Support It
[NYT] White House Moves Ahead With Tough Trade Measures on China
[FT] Italian political turmoil fuels ‘risk-off’ mood
Monday, May 28, 2018
Tuesday's News Links
[BloombergQ] U.S. Stocks Drop as Italian Woes Trigger Selloff: Markets Wrap
[BloombergQ] Italian Bonds in Meltdown Spark a Global Flight to Haven Assets
[Reuters] Italian bonds suffer worst day in more than 25 years
[Reuters] Euro falls to 10-month low after Italy debt selloff
[BloombergQ] Italy's Political Crisis Rekindles Investor Fear of Euro Breakup
[CNBC] Italian voters brace for euro showdown ahead of snap elections
[BloombergQ] Trump Plows Ahead on China Tariff Threats, Investment Curbs
[Reuters] U.S. to continue trade actions against China: White House
[CNBC] Home price gains ease in March, but growth accelerates in big cities: S&P Case-Shiller
[BloombergQ] China’s $15 Trillion Shadow Bank Edifice Shows More Cracks
[BloombergQ] Italian Drama Reawakens Fear of Europe's Sovereign-Bank Loop
[BloombergQ] Europe's Fragility Is Exposed Again
[BloombergQ] Italy's Democrats Claim League, Five Star Had Euro Exit Plan
[BloombergQ] Soros Sees New Global Financial Crisis Brewing, EU Under Threat
[BloombergQ] Brazil Trucker Strike Shows a State Running on Empty
[Reuters] Germany's Merkel laments fraying of multilateral order
[BloombergQ] Crises Past and Future Occupy Bernanke, Reinhart at Nobel's Home
[WSJ] Italy Sparks Global Fear of Fresh Euro Crisis
[WSJ] In ‘Founder Friendly’ Era, Star Tech Entrepreneurs Grab Power, Huge Pay
[WSJ] China and Russia Push Into Iran, Exploiting Europe’s Caution
[FT] Italy’s redenomination fear gauge surges on political turmoil
[FT] Italian bank bond yields surge in fallout from political turmoil
[FT] Bank of Italy warns Rome is close to losing ‘asset of trust’
[BloombergQ] Italian Bonds in Meltdown Spark a Global Flight to Haven Assets
[Reuters] Italian bonds suffer worst day in more than 25 years
[Reuters] Euro falls to 10-month low after Italy debt selloff
[BloombergQ] Italy's Political Crisis Rekindles Investor Fear of Euro Breakup
[CNBC] Italian voters brace for euro showdown ahead of snap elections
[BloombergQ] Trump Plows Ahead on China Tariff Threats, Investment Curbs
[Reuters] U.S. to continue trade actions against China: White House
[CNBC] Home price gains ease in March, but growth accelerates in big cities: S&P Case-Shiller
[BloombergQ] China’s $15 Trillion Shadow Bank Edifice Shows More Cracks
[BloombergQ] Italian Drama Reawakens Fear of Europe's Sovereign-Bank Loop
[BloombergQ] Europe's Fragility Is Exposed Again
[BloombergQ] Italy's Democrats Claim League, Five Star Had Euro Exit Plan
[BloombergQ] Soros Sees New Global Financial Crisis Brewing, EU Under Threat
[BloombergQ] Brazil Trucker Strike Shows a State Running on Empty
[Reuters] Germany's Merkel laments fraying of multilateral order
[BloombergQ] Crises Past and Future Occupy Bernanke, Reinhart at Nobel's Home
[WSJ] Italy Sparks Global Fear of Fresh Euro Crisis
[WSJ] In ‘Founder Friendly’ Era, Star Tech Entrepreneurs Grab Power, Huge Pay
[WSJ] China and Russia Push Into Iran, Exploiting Europe’s Caution
[FT] Italy’s redenomination fear gauge surges on political turmoil
[FT] Italian bank bond yields surge in fallout from political turmoil
[FT] Bank of Italy warns Rome is close to losing ‘asset of trust’
Monday Evening
[BloombergQ] Asian Stocks Set for Lower Open; Oil Declines: Markets Wrap
[Reuters] Brazil stocks hit year low, battered by truckers' protest
[Reuters] U.S. and China clash over 'technology transfer' at WTO
[BloombergQ] Italy's Populists Mobilize in Protest as Cabinet List Drawn Up
[WSJ] Italy’s Political Drama Raises Stakes For Euro
[WSJ] Chinese Energy Company’s Missed Bond Payment Fans Fears of More Defaults
[FT] Italian sell-off deepens as new premier picked
[Reuters] Brazil stocks hit year low, battered by truckers' protest
[Reuters] U.S. and China clash over 'technology transfer' at WTO
[BloombergQ] Italy's Populists Mobilize in Protest as Cabinet List Drawn Up
[WSJ] Italy’s Political Drama Raises Stakes For Euro
[WSJ] Chinese Energy Company’s Missed Bond Payment Fans Fears of More Defaults
[FT] Italian sell-off deepens as new premier picked
Sunday, May 27, 2018
Monday's News Links
[BloombergQ] Risk Appetite Fades on Italy Outlook; Oil Slumps: Markets Wrap
[TheStreet.com] Italy Bonds Plunge, Stocks Hit 13-Month Low as Constitutional Crisis Intensifies
[BloombergQ] Italian Banks Lead Stock Declines as Government Plan Unravels
[Reuters] Italy Heads to New Vote With Europe as Campaign Faultline
[BloombergQ] Italy’s Failure to Form Government Deepens Political Chaos
[CNBC] Traders are worried this could be the 'big unwinding' of Italian bond markets
[Reuters] Italy's president calls in former IMF official amid political turmoil
[BBC] Italy crisis: Call to impeach president after candidate vetoed
[Reuters] China rejects U.S. charge of 'forced technology transfer' at WTO
[CNBC] The U.S. needs 50,000 truck drivers to avoid a shipping squeeze
[BloombergQ] Bid to Block Trump's Deal on ZTE Would Have Support, Rubio Says
[VOA] Weeklong Brazil Trucker Strike Leaves Food, Fuel Scarce
[Reuters] Japan's PM defends its automakers against U.S. import probe
[Reuters] Spanish prime minister to face confidence vote on Friday
[BloombergQ] Spain's Divided Opposition Struggles With Plan to Oust Rajoy
[BBC] What is Italy's political crisis all about?
[WSJ] Italian Political Crisis Roils Markets
[FT] Key questions for investors as Italian tumoil deepens
[FT] When will the US Fed stop tightening?
[TheStreet.com] Italy Bonds Plunge, Stocks Hit 13-Month Low as Constitutional Crisis Intensifies
[BloombergQ] Italian Banks Lead Stock Declines as Government Plan Unravels
[Reuters] Italy Heads to New Vote With Europe as Campaign Faultline
[BloombergQ] Italy’s Failure to Form Government Deepens Political Chaos
[CNBC] Traders are worried this could be the 'big unwinding' of Italian bond markets
[Reuters] Italy's president calls in former IMF official amid political turmoil
[BBC] Italy crisis: Call to impeach president after candidate vetoed
[Reuters] China rejects U.S. charge of 'forced technology transfer' at WTO
[CNBC] The U.S. needs 50,000 truck drivers to avoid a shipping squeeze
[BloombergQ] Bid to Block Trump's Deal on ZTE Would Have Support, Rubio Says
[VOA] Weeklong Brazil Trucker Strike Leaves Food, Fuel Scarce
[Reuters] Japan's PM defends its automakers against U.S. import probe
[Reuters] Spanish prime minister to face confidence vote on Friday
[BloombergQ] Spain's Divided Opposition Struggles With Plan to Oust Rajoy
[BBC] What is Italy's political crisis all about?
[WSJ] Italian Political Crisis Roils Markets
[FT] Key questions for investors as Italian tumoil deepens
[FT] When will the US Fed stop tightening?
Sunday's News Links
[Reuters] Italy's efforts to form government fail as president defends euro
[Reuters] Italy president under pressure to accept euroskeptic minister
[BloombergQ] Italy's Conte Fights to Form Team as Ally Threatens New Vote
[UK Express] Italy's new government to cause 'BIG PROBLEMS' for Brussels and for the Eurozone
[BloombergQ] China Industrial Profit Growth Accelerates on Higher Output
[Spiegel] Italy's New Goverment Is Bad News for the Euro
[Reuters] Exclusive: U.S. warships sail near South China Sea islands claimed by Beijing
[WSJ] China Protests U.S. Warships in Disputed Waters
[FT] Hedge fund stars rake in billions for new funds
[Reuters] Italy president under pressure to accept euroskeptic minister
[BloombergQ] Italy's Conte Fights to Form Team as Ally Threatens New Vote
[UK Express] Italy's new government to cause 'BIG PROBLEMS' for Brussels and for the Eurozone
[BloombergQ] China Industrial Profit Growth Accelerates on Higher Output
[Spiegel] Italy's New Goverment Is Bad News for the Euro
[Reuters] Exclusive: U.S. warships sail near South China Sea islands claimed by Beijing
[WSJ] China Protests U.S. Warships in Disputed Waters
[FT] Hedge fund stars rake in billions for new funds
Saturday, May 26, 2018
Saturday's News Links
[CNN] Gas prices are up 31% from last Memorial Day. Here's why
[MarketWatch] Tax breaks for home mortgages to sink 30% in 2018 due to Trump tax law, study shows
[BloombergQ] Italy's Standoff on Finance Chief Stalls Talks on New Government
[Reuters] Erdogan calls on Turks to convert dollar, euros into lira
[Reuters] S&P 500 companies return $1 trillion to shareholders in tax-cut surge
[Reuters] Leaders of two Koreas hold surprise meeting as Trump revives hopes of summit with North
[Reuters] Chinese fighter jets complete night landings on carrier, live-fire drills
[FT] Recep Tayyip Erdogan: Turkey’s strongman grapples with the markets
[MarketWatch] Tax breaks for home mortgages to sink 30% in 2018 due to Trump tax law, study shows
[BloombergQ] Italy's Standoff on Finance Chief Stalls Talks on New Government
[Reuters] Erdogan calls on Turks to convert dollar, euros into lira
[Reuters] S&P 500 companies return $1 trillion to shareholders in tax-cut surge
[Reuters] Leaders of two Koreas hold surprise meeting as Trump revives hopes of summit with North
[Reuters] Chinese fighter jets complete night landings on carrier, live-fire drills
[FT] Recep Tayyip Erdogan: Turkey’s strongman grapples with the markets
Friday, May 25, 2018
Weekly Commentary: Unfolding Instability Thesis
Interestingly, financial crises over the ages have often unfolded during autumn. Early economic thinkers pondered and debated the sources of instability and the root cause of recurring economic cycles. Even in relatively primitive economic systems, money and Credit played a leading role. I admit to finding "trade cycle" analysis intriguing. Even in a simple agrarian economic structure, farmers would borrow for the spring planting season and repay loans later in the fall. This Credit Cycle played prominently, with monetary abundance and associated economic boom in the spring and summer followed by tightening and vulnerability as bank lending books contracted after harvest.
Trade cycle and monetary analysis from the British economist Ralph Hawtrey (1879-1975) has over the years resonated:
"The general rise of prices will involve a proportional increase of borrowing to finance a given output of goods, over and above the increase necessitated by the increase in output. This increase of borrowing, meaning an increase in the volume of credit, will further stimulate trade. Where will the process end? In the case of the curtailment of credit the self-interest of the bankers and the distress of the merchants combined to restore the creation of credits…but in the case of the expansion of credits there is no such corrective influence at work. An indefinite expansion of credit seems to be in the immediate interest of merchants and bankers alike. The continuous and progressive rise of prices makes it profitable to hold goods in stock…thus the merchant and the banker share between them a larger rate of profit on a larger turnover... The greater the amount of credit created, the greater will be the amount of purchasing power and the better the market for the sales of all kinds of goods. The better the market the greater the demand for credit. Thus an increase in the supply of credit itself stimulates the demand for credit…" (Hawtrey, "Currency and Credit").
"Mr. Hawtrey's theory explains why there were not merely small oscillations around the equilibrium, but big swings of the pendulum in the one or the other direction. The reason is the cumulative, self-sustaining nature of the process of expansion and contraction. The equilibrium line is like a razor's edge. The slightest deviation involves the risk of further movement away from equilibrium…the expansion could go on indefinitely, if there were no limits to the increase in the quantity of money" (Gottfried Haberler, "Prosperity and Depression").
In Hawtrey's analysis, "dealers" borrowed to finance inventories of goods and commodities. This borrowing activity created the marginal monetary flow and purchasing power within the economic system. Credit flows were fundamental to the monetary forces sustaining the economic cycle. Hawtrey appreciated that Credit and the "flow of money" were inherently self-reinforcing, hence unstable. During upcycles, Credit begets additional Credit; monetary excess begets further destabilizing excess. Eventually, the monetary expansion comes to an end and a painful downside to the cycle becomes unavoidable. At least that's the way it used to work.
Hawtrey would find today's financial architecture unrecognizable: unfettered finance on a global basis; near zero and even negative interest rates; open-ended QE and ballooning central bank balance sheets; central bank manipulation of bond yields and asset prices; highly leveraged securities holdings and a derivatives marketplace to the tune of hundreds of Trillions.
While Hawtrey's "dealers" were financing goods inventories, contemporary "dealers" - the central banks, banks, hedge funds and leveraged speculators, derivatives operators, GSEs, etc. - finance inventories of securities. Instead of banks (restrained by reserve and capital requirements) lending against goods inventories, boundless global "money" markets finance unfathomable speculative securities holdings. Going back now at least 25 years, the financing of securities holdings has been the marginal source of liquidity fueling recurring asset Bubbles and economic cycles. This monetary structure has been acutely unstable. Over time, worsening instability fostered increasingly intrusive central bank command over the cost of finance, marketplace liquidity and securities market pricing more generally.
Audience question from a Friday panel discussion at a Swedish Riksbank event: "Imaging you're traveling into the future - 25 years. What would you expect to receive when you are evaluated 25 years into the future regarding the present period of unconventional policy methods?"
Bank of England governor Mark Carney: "Great question to ask. Terrible question to answer… Those who are marking our exam papers will start with our objectives. And we'll see how well we achieved our objectives. So, starting with whether we've achieved our inflation target and, subject to that, reduced unwarranted volatility in output and employment. And the steps we have taken on the financial side - the effectiveness of those will be revealed by 25 years down the road. They will have been properly tested in a way that, obviously, everyone in this room cannot truly mark that exam paper right now."
I doubt future analysts and historians looking back in 25 years will have much interest in whether inflation targets were achieved or the policy effects on unemployment rates and GDP. Contemporary central bankers will instead be judged by the impact a decade plus of extreme monetary measures had on Financial Stability. Sure, unprecedented monetary stimulus reflated securities markets, asset prices, perceived wealth and economic activity. But did it nurture sustainable Financial Stability - or instead only create more systemic and perilous global financial and economic Bubbles? I believe the answer lies foremost in the global dimensions of speculative leverage.
My view holds that prolonged experimental policy stimulus has been a boon for global securities leveraged speculation. The scope of today's Bubble is unprecedented; the monetary role of securities finance upon the maladjusted and unbalanced global economy unparalleled. The Bubble in EM has gone miles beyond 1997. The Bubble in China is truly epic. I suspect a staggering amount of "carry trade" leverage has accumulated globally over this protracted speculative cycle. ECB policies have clearly spurred leveraged speculation throughout euro zone bond markets, especially the unsound periphery. Eastern Europe as well? There is surely massive leverage in U.S. Credit, most likely having played a prevailing role in the booming investment-grade corporate marketplace.
We're in the stage of the cycle where things look good. In the U.S., in particular, the New Era and New Paradigm mentality has taken deep root. The economy appears robust, bolstered by fantastic technological advancement and scientific development. The underlying instability of finance goes unrecognized; the global nature of Bubble Dynamics unappreciated. Meanwhile, markets again this week provided confirmation of the Unfolding Instability Thesis.
Italian 10-year yields surged 23 bps this week to 2.46%, the high since October 2014. In only three weeks, Italian two-year yields have jumped 79 bps to 0.46%. Portuguese 10-year yields rose eight bps this week to 1.95%, a three-month high. Spanish yields traded above 1.5% in Monday trading, the high going back to early March.
This month's almost 70 bps spike in Italian 10-year yields is alarming. I would argue this week's 17 bps drop in German 10-year yields (to 41bps) is more problematic for markets more generally. The Italian to German 10-year yields spread widened 40 bps in just one week. The Portuguese to German spread widened 25 bps this week, with the Spanish to German 10-year spread 19 bps wider. The Italian to German two-year yield spread has widened 78 bps in two weeks.
It was a rough week for those short German bunds (or even French bonds) to finance leveraged holdings in European periphery debt. Pain in this popular (Crowded?) trade follows on the heels of painful losses in various EM "carry trades." The Turkish lira dropped another 4.7% this week. And while Latin American currencies for the most part rallied this week, Eastern European currencies were notably weak. The Hungarian forint dropped 1.5%, the Polish zloty 1.4%, the Czech koruna 1.4%, the Bulgarian lev 1.1% and the Romanian leu 1.0%. How much leveraged has accumulated in higher-yielding European EM debt?
After trading at 3.08% in Tuesday trading, 10-year Treasury yields reversed course and closed the week down 12 bps to 2.93%. Minutes from the early-May FOMC meeting were released Wednesday afternoon. The minutes were generally viewed as dovish, with the Fed tolerant of inflation rising above target and "uncertainty surrounding trade issues could damp business sentiment and spending."
Bond markets have been anxiously anticipating some hint from the Federal Reserve that unstable global markets could slow the path of rate increases. They seemed to discern as much embedded in the minutes. The Treasury rally alleviated some off the selling pressure on EM bonds. At the same time, the upheaval in Italian and European debt markets appeared a significant escalation in global de-risking/de-leveraging dynamics. Sentiment with respect to global economic prospects has begun to deteriorate.
Japan's Nikkei stock index dropped 2.1% this week, and the Shanghai Composite fell 1.6%. A paralyzing truckers' strike in Brazil further eroded sentiment. Brazilian stocks sank 5.0% this week. European equities were under pressure as well. Italian stocks sank 4.5%, and Spanish equities fell 2.8%. European banks were slammed 4.1%, led by an 8.1% drop in the Italian bank index. Japan's Topix Bank index fell 4.1%, and Hong Kong's Hang Seng Financials were down 1.7%. U.S. stocks outperformed, not unhelpful to the rising dollar (up 0.7% this week). Curiously, crude was slammed 5.3%, much of the losses coming late in the week.
The euro dropped 1.0% this week to the lowest level since last November, adding fuel to the destabilizing dollar rally.
May 23 - New York Times (Jason Horowitz): "The populist parties that won Italy's elections two months ago by demonizing the political establishment, the European Union and illegal migrants in often vulgar terms were granted the go-ahead… to form a government, crystallizing some of the biggest fears of Europe's leaders, who were already bracing for turbulence. The rapid ascent of populists in Italy - the birthplace of Fascism, a founding member of the European Union, and the bloc's fourth-largest economy - shattered the nation's decades-old party system. It also gave fresh energy to the nationalist impulses tugging at the Continent and moved the greatest threat to the European Union's cohesion from newer member states on the periphery, such as Hungary and Poland, to its very core. After 80 days of arduous talks, President Sergio Mattarella gave a mandate to form a government to the parties' consensus pick for prime minister, Giuseppe Conte, a little-known lawyer with no government experience."
If uncertainties associated with the new Italian government weren't enough, Spain continues to fester.
May 25 - Financial Times (Michael Stothard): "The risk of early elections in Spain rose dramatically on Friday after two opposition parties threatened motions of no-confidence against the government in response to a damning court ruling in a graft case involving members of the ruling People's Party. Spanish stocks fell and bond yields rose after Socialist leader Pedro Sanchez said that he had tabled a vote of no confidence to topple the government. The liberal Ciudadanos party said it would table its own motion if new elections are not called. This comes as dozens of people related to the ruling centre-right PP, including a former treasurer, were convicted on Thursday of a range of crimes related to the use of an illegal slush fund that helped finance party election campaigns between 1999 and 2005… The judge said that the testimony of prime minister Mariano Rajoy and other party officials that they knew nothing was 'not credible'."
On a global basis, risk aversion is taking hold. De-risking/De-leveraging Dynamics have gained momentum. Liquidity abundance has begun to wane; financial conditions globally are beginning to tighten. This ensures markets will now assume a different approach with risk. So long as risk embracement and resulting liquidity abundance were commanding global markets, EM and Italian fragilities were inconsequential. The same could be said for vulnerabilities in regions, countries, governmental entities, sectors, corporations and businesses around the globe. Rather suddenly, however, prospects for risk aversion, Credit tightening and illiquidity will have newly mindful markets keen to sidestep the weakened, the fragile and the sickly. It may at this point be subtle, but it's also quite a sea change.
The past decade of stimulus-induced bull markets has been occasionally interrupted by bouts of "Risk Off." Granted, these spells proved short-lived. Central bankers - through talk and/or more aggressive stimulus measures - quickly extinguished nascent Fear. Most of all, zero rates and massive and unrelenting QE reinforced Greed. And this went on for way too long. Faith in central banking was further emboldened, ensuring an upsurge in speculative leveraging the world over.
My long-held view is that central bank measures to guarantee buoyant and liquid markets in the end ensure a liquidity crisis. The perception that central banks will always backstop liquidity has incentivized a degree of speculative leverage - and resulting monetary flows - that virtually guarantees financial and economic dislocation.
The world is now on contagion watch. More and more, De-risking/Deleveraging Dynamics are encroaching on Greed. The Fed is raising rates, and global central banks are winding down QE. A shrinking pool of new QE liquidity confronts a rapidly expanding pool of speculative holding liquidations.
I don't expect the Powell Fed to turn hawkish. Indeed, if things unfold as I expect the Fed will surely turn more cautious with rate hikes. But I also believe the new Chairman would rather not come quickly to the market's defense. Markets are long overdue for removing the training wheels. Interestingly, John Authers' Friday evening FT article was titled "Lack of 'Powell Put' Tightens Financial Conditions." Akin to Italy's debt load, the true status of the Fed (and global central banker) put will be a greater concern now that financial conditions have begun to tighten and asset markets have turned more vulnerable.
For the Week:
The S&P500 added 0.3% (up 1.8% y-t-d), and the Dow increased 0.2% (up 0.1%). The Utilities jumped 3.2% (down 4.9%). The Banks declined 0.5% (down 0.5%), and the Broker/Dealers slipped 0.3% (up 10.9%). The Transports jumped 1.6% (up 2.7%). The S&P 400 Midcaps added 0.2% (up 2.4%), while the small cap Russell 2000 was unchanged (up 6.0%). The Nasdaq100 rallied 1.4% (up 8.8%). The Semiconductors surged 3.4% (up 11.0%). The Biotechs declined 0.5% (up 10.8%). With bullion up $9, the HUI gold index recovered 1.4% (down 6.3%).
Three-month Treasury bill rates ended the week at 1.86%. Two-year government yields fell seven bps to 2.48% (up 59bps y-t-d). Five-year T-note yields dropped 12 bps to 2.77% (up 56bps). Ten-year Treasury yields sank 12 bps to 2.93% (up 53bps). Long bond yields fell 11 bps to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields dropped 12 bps to 3.64% (up 64bps).
Greek 10-year yields fell 13 bps to 4.37% (up 30bps y-t-d). Ten-year Portuguese yields rose eight bps to 1.95% (up 1bp). Italian 10-year yields surged another 23 bps to 2.46% (up 45bps). Spain's 10-year yields added two bps to 1.47% (down 10bps). German bund yields sank 17 bps to 0.41% (down 2bps). French yields fell 12 bps to 0.71% (down 7bps). The French to German 10-year bond spread widened five to 30 bps. U.K. 10-year gilt yields dropped 18 bps to 1.32% (up 13bps). U.K.'s FTSE equities index slipped 0.6% (up 0.6%).
Japan's Nikkei 225 equities dropped 2.1% (down 1.4% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.04% (down 1bp). France's CAC40 lost 1.3% (up 4.3%). The German DAX equities index fell 1.1% (up 0.2%). Spain's IBEX 35 equities index sank 2.8% (down 2.2%). Italy's FTSE MIB index was pounded 4.5% (up 2.5%). EM equities were mostly lower. Brazil's Bovespa index sank 5.0% (up 3.3%), and Mexico's Bolsa declined 1.3% (down 8.6%). South Korea's Kospi index was little changed (down 0.3%). India’s Sensex equities index added 0.2% (up 2.5%). China’s Shanghai Exchange dropped 1.6% (down 5.0%). Turkey's Borsa Istanbul National 100 index gained 0.8% (down 10.5%). Russia's MICEX equities declined 0.9% (up 9.3%).
Investment-grade bond funds saw inflows of $2.529 billion, and junk bond funds had inflows of $261 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose five bps to 4.66% (up 71bps y-o-y). Fifteen-year rates jumped seven bps to 4.15% (up 96bps). Five-year hybrid ARM rates gained five bps to 3.87% (up 80bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.70% (up 64bps).
Federal Reserve Credit last week declined $15.4bn to $4.299 TN. Over the past year, Fed Credit contracted $135.7bn, or 3.1%. Fed Credit inflated $1.488 TN, or 53%, over the past 290 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.8bn last week to a five-month low $3.382 TN. "Custody holdings" were up $138bn y-o-y, or 4.3%.
M2 (narrow) "money" supply jumped $27.1bn last week to a record $13.999 TN. "Narrow money" gained $513bn, or 3.8%, over the past year. For the week, Currency increased $3.7bn. Total Checkable Deposits rose $33.6bn, while savings Deposits declined $16.0bn. Small Time Deposits gained $3.5bn. Retail Money Funds added $2.3bn.
Total money market fund assets added $1.3bn to $2.826 TN. Money Funds gained $177bn y-o-y, or 6.7%.
Total Commercial Paper surged $22.8bn to $1.092 TN. CP gained $104bn y-o-y, or 10.6%.
Currency Watch:
The U.S. dollar index gained 0.7% to 94.258 (up 2.3% y-t-d). For the week on the upside, the Brazilian real increased 2.3%, the South African rand 2.1%, the Mexican peso 2.1%, the Japanese yen 1.3%, the Swiss franc 0.7%, the Australian dollar 0.5%, the New Zealand dollar 0.1% and the Singapore dollar 0.1%. For the week on the downside, the British pound declined 1.2%, the euro 1.0%, the Canadian dollar 0.7%, the Norwegian krone 0.7% and the Swedish krona 0.2%. The Chinese renminbi declined 0.18% versus the dollar this week (up 1.80% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.5% (up 11.1% y-t-d). Spot Gold increased 0.7% to $1,302 (down 0.1%). Silver recovered 0.4% to $16.52 (down 3.6%). Crude was slammed $3.78 to $67.50 (up 12%). Gasoline dropped 2.8% (up 21%), while Natural Gas gained 2.9% (down 1%). Copper increased 0.4% (down 7%). Wheat surged 4.8% (up 27%). Corn gained 0.9% (up 16%).
Market Dislocation Watch:
May 23 - Financial Times (Roger Blitz): "Turkey's currency collapse is adding fuel to a widespread retreat in emerging market forex. Much of the weakness is in Central and Eastern Europe. Poland's zloty has fallen 1%, while the Hungarian forint and the Czech koruna are also sharply lower. But Asian EM currencies, which have largely resisted dollar strength in recent weeks, started succumbing to the pressure, including the Korean won, down 0.5%, the Singapore dollar and the Taiwanese dollar."
May 21 - Bloomberg (Luke Kawa): "The Italian government's borrowing costs have surged to inauspicious territory. The nation is getting punished in the bond market as the incoming populist government coalition seems ready to boost spending without much regard for European Union budget strictures and mulls the potential creation of assets tantamount to a parallel currency. The result: An Italian note maturing in February 2028 now yields 10 bps more than a euro-denominated sovereign from Indonesia due four months later."
May 24 - Reuters (Sujata Rao and Saikat Chatterjee): "Goldman Sachs said… that any systemic spillovers from Italian political risks into peripheral Europe could push the euro down against the dollar by 'around five big figures.' The prospect of a coalition government between the anti-establishment 5-Star Movement and far-right League, bent on big spending plans that would put Italy on a collision course with the European Union, have rattled markets in the past week. 'Should this become a more systemic event...we estimate that EUR/USD could fall by around 5 big figures,' the U.S. bank said in a note…"
Trump Administration Watch:
May 23 - New York Times (Ana Swanson): "President Trump has asked for a sweeping trade investigation into whether autos imported into the United States pose a threat to national security, a move that could ultimately result in tariffs on foreign-made cars and further strain relations with global allies. …The Commerce Department said it had begun an investigation 'following a conversation' with Mr. Trump. The announcement followed a statement from the president, in which he said he had instructed the commerce secretary, Wilbur Ross, to investigate imports of cars, trucks and auto parts 'to determine their effects on America's national security.' 'Core industries such as automobiles and automotive parts are critical to our strength as a nation,' Mr. Trump said."
May 24 - Wall Street Journal (Sean McLain in Tokyo, William Boston and Trefor Moss): "President Donald Trump's push to impose painful tariffs on auto imports has put close U.S. allies in the crosshairs of a global trade row that is creating uncertainty among auto makers, investors and governments. Shares of some of the biggest international auto makers… which have big exposure to the U.S., fell Thursday, a day after the U.S. Commerce Department launched a probe into whether it could raise tariffs to up to 25% on auto imports on the basis of national security. The probe adds to a battle over steel tariffs and, again, pitches the U.S. against three of its closest military allies-Japan, South Korea and Germany. All are major car exporters."
May 24 - Bloomberg (Chris Reiter): "U.S. President Donald Trump's threat to levy tariffs on imported vehicles aims at the heart of Germany's export-led economy, further straining relations between the two long-standing allies. While Trump didn't specifically point to Germany when calling for an investigation into protections for the U.S. auto industry on national security grounds, he didn't have to. Past statements have made clear that he resents the country's trade surplus, which amounted to 14.2 billion euros ($16.7bn) last year for Germany's auto industry."
May 23 - Reuters (James Oliphant and Lisa Lambert): "U.S. President Donald Trump… railed against Mexico and Canada's efforts in renegotiating the North American Free Trade Agreement (NAFTA), saying both of the United States' neighbors had been very difficult. 'NAFTA is very difficult. Mexico has been very difficult to deal with. Canada has been very difficult to deal with ... but I will tell you that in the end we win,' Trump told reporters…"
May 24 - Reuters (Susan Heavey): "U.S. President Donald Trump has signaled a new direction in U.S.-China trade talks and said any deal would need 'a different structure,' fueling uncertainty over current negotiations. In an early Wednesday morning post on Twitter, Trump said the current track appeared 'too hard to get done' and cited difficulties such as verification, but he gave no other details about what he or his administration was looking for amid ongoing negotiations."
May 24 - Bloomberg (Jenny Leonard and Saleha Mohsin): "President Donald Trump is backing away from the trade agreement the U.S. just announced with Beijing, under pressure from China hawks among his supporters and in Congress who have assailed the accord as a capitulation. 'Our Trade Deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion,' Trump said… After boasting of the deal's benefits for farmers in tweets on Monday, Trump first indicated on Tuesday he was having second thoughts as some of his loyalists publicly criticized the agreement. Asked if he was pleased with the direction of his administration's negotiations with China, Trump told reporters 'no, not really.' He later added, 'they're a start.'"
May 19 - Wall Street Journal (Bob Davis and Lingling Wei): "A last-ditch effort by the Trump administration failed to get China to accept its demand for a $200 billion cut in the U.S. bilateral trade deficit, as Chinese officials resisted committing to any specific targets after two days of contentious negotiations. The two days of deliberations in Washington ended with both sides arguing all night on Friday over what to say in a joint statement… The Chinese had come willing to step up purchases of U.S. merchandise as a measure to narrow China's $375 billion trade advantage. But U.S. negotiators pushed the Chinese delegates to approve a specific target of $200 billion in additional Chinese purchases. The Chinese refused any such target in specific dollar amounts, and the matter is now in the hands of President Donald Trump and President Xi Jinping, the people said."
May 22 - Wall Street Journal (Kate O'Keeffe and Bob Davis): "Lawmakers are moving to thwart Trump administration efforts to ease restrictions on Chinese telecommunications giant ZTE Corp. and other sensitive technology, citing fears the positions would compromise national security in the latest twist in trade negotiations between the world's largest economies. The Senate Banking Committee unanimously approved legislation… that would tighten national-security reviews of Chinese technology deals by the interagency Committee on Foreign Investment in the U.S., strengthen export controls and prohibit the Trump administration from lifting stiff penalties imposed on ZTE."
May 24 - CNBC (Stephanie Landsman): "One of Wall Street's top Asia experts isn't ruling out a U.S.-China trade war. According to Yale University senior fellow Stephen Roach, the threat is still real, and it could take a big bite out of stocks. 'The bottom line is China has been one of President Trump's core economic issues, and I'd be surprised if he just capitulates on this,' Roach told CNBC's 'Trading Nation'… 'We have to look at the risk of some type of trade tensions very seriously.' Roach, who was Morgan Stanley Asia chairman for five years, said it's hard to have confidence in White House trade policy when Trump administration officials are constantly changing their minds."
May 22 - CNBC (Tom DiChristopher): "Secretary of State Mike Pompeo has announced a list of a dozen demands that Iran must meet before the United States lifts punishing sanctions against the country. However, the list is a non-starter and raises the specter of a prolonged standoff in the world's busiest oil exporting region. Pompeo articulated the list at the conservative Heritage Foundation… The address clarified the U.S. playbook for containing Iran following President Donald Trump's announcement that he will abandon a 2015 nuclear deal with Iran and restore sanctions on the Iranian economy, including its lifeblood oil industry."
May 23 - Wall Street Journal (Ryan Tracy and Andrew Ackerman): "Ten days after his inauguration, President Donald Trump promised to 'do a big number' on the Dodd-Frank law that tightened rules on financial firms after the 2008 crisis. Behind the scenes, his then top economic adviser and a powerful senator settled on a less ambitious plan. And in recent weeks, Mr. Trump called a senior House lawmaker, urging him to move forward despite objections from Republicans who wanted broader changes. The strategy to seek modest Dodd-Frank changes… paid dividends on Tuesday: The House of Representatives by 258-159 approved the resulting bipartisan legislation…"
May 22 - Reuters (Jeff Mason and Eric Beech): "U.S. President Donald Trump said… he will propose new tax cuts sometime prior to November, when Republicans look to retain their control of the U.S. Congress in midterm elections. Trump said he would meet with Republican Representative Kevin Brady, chairman of the tax-writing House Ways and Means Committee, about the proposal."
EM Bubble Watch:
May 22 - Bloomberg (Enda Curran and Lianting Tu): "Emerging-market companies and governments straining to deal with the rising cost of borrowing in dollars face increasing pressure as a record slew of bonds come due. Some $249 billion needs to be repaid or refinanced through next year… That's a legacy of a decade-long debt binge during which emerging markets more than doubled their borrowing in dollars, ignoring the many lessons of history from the 1980s Latin American debt crisis, the 1990s Asian financial crisis and the 2000s Argentine default. Even since the 2013 taper tantrum, the group's dollar debt has climbed in excess of $1 trillion -- more than the combined size of the Mexican and Thai economies…"
May 23 - Financial Times (Laura Pitel): "The few remaining market-friendly members of Recep Tayyip Erdogan's economic team were notably silent as the Turkish lira plummeted to record lows this week. As warnings of a full-blown currency crisis have increased in the run-up to crucial presidential and parliamentary elections, it was the president's son-in-law who was left to speak out. Berat Albayrak said… that the beleaguered lira was the victim of an 'operation' of 'overseas origins' aimed at bringing down the government. That Mr Albayrak has become one of the president's closest confidants in recent years is a symbol of the growing siege mentality at the presidential palace. Analysts and officials say that over the 15 years that Mr Erdogan has dominated Turkish politics, threats both real and imagined have forced him to retreat into an inner circle of people who tell him only what he wants to hear. 'His advisers are a bunch of idiots and sycophants,' says one Turkish official. 'He no longer listens to sensible advice.'"
May 24 - Bloomberg (Ugur Yilmaz): "Every market analyst in Turkey knows who Mert Ulker is: He's the expert who was fired as research chief at one of the country's biggest brokerages for publishing speculation that President Recep Tayyip Erdogan might have staged the failed 2016 coup to tighten his grip on power. He's now a cautionary tale. With Erdogan just weeks away from elections likely to cement his near-absolute authority, barely a word of criticism creeps into research published by strategists and economists based in Turkey - not even after Erdogan's threat to force the central bank to cut interest rates sent the lira into freefall. 'Each time I am about to write a bearish comment, my managers and colleagues remind me of what happened to Mert Ulker,' said one analyst who works at a state-run financial institution in Istanbul…"
May 24 - Bloomberg (Sabrina Valle): "Eight anxious hours. That's how long it took the chief executive officer of Petrobras to decide that he must break a promise to investors to help contain the growing chaos from a Brazilian trucker strike. For the first time in three years, Petrobras agreed to sell fuel below market prices in a move based purely on politics. The reaction? Truckers rejected the move and shares in the state-controlled oil producer tumbled the most in a year. Pedro Parente's actions Wednesday came after what started as a routine labor dispute became a logistical crisis spanning Latin America's largest economy. Flights were canceled at some airports amid fuel shortages. Buses were idled in Rio de Janeiro, where the company is based. Supermarkets were beginning to limit purchases in fear of coming shortages."
May 21 - Bloomberg (Rieka Rahadiana and Tassia Sipahutar): "Indonesia's central bank pledged to continue its intervention in the currency and bonds market to ease volatility, and said it will boost forex liquidity as the rupiah slumped to a fresh 31-month low. Bank Indonesia will hold three forex swap auctions to ensure sufficient liquidity in the interbank market… The bank, which usually holds two auctions a week, has been holding additional sales to ensure the market is well supplied, he said."
Federal Reserve Watch:
May 23 - CNBC (Jeff Cox): "Federal Reserve officials would be content to let inflation briefly run above their 2% target as the economy continues to recover, according to minutes from the central bank's most recent meeting. Following the May 1-2 session, the policymaking Federal Open Market Committee said it wasn't raising rates yet but added the word 'symmetric' to describe its inflation goal. Market participants since have puzzled over what the change in language might imply. The summary… indicates a substantial level of debate over how the Fed should approach inflation. The minutes also pointed to an interest rate hike at the June meeting amid debate over how close the Fed might be getting to the end of this rate-hiking cycle."
U.S. Bubble Watch:
May 24 - Bloomberg (Alex Tanzi): "National home values have increased 8.7% since last April to a median value of $215,600, according to Zillow. Newly released data from the Federal Housing Finance Agency confirm the widespread gains seen by Zillow… The FHFA report shows first-quarter home prices rose 6.9% from a year earlier. Annual appreciation surpassed 10% in Nevada (13.7%), Washington (13.1%), Idaho (11.1%), Colorado (10.6%). The rise in home prices has allowed more people to take cash-out of the homes when they refinance. Refinancing, where the home owner took additional cash out, rose to 61% in the first quarter -- the highest rate seen since the third quarter of 2008…"
May 22 - CNBC (Jeff Cox): "Investors and policymakers have gone looking for inflation over the past decade and largely have come up empty. It could, however, come barreling at them soon like an 18-wheeler. Multiple signs of inflation in freight-related industries are at or near historical highs, in what could be an early sign that price pressures are building and ready to reverberate around the economy. Freight marketplace DAT keeps track of supply and demand in the freight industry through a bulletin board that matches companies with loads to be delivered to the vehicles that will take the goods to the marketplace… Recent readings show demand for vehicles skyrocketing, a sign that generally points to inflationary pressures building up in the supply chain."
May 22 - Reuters (Pete Schroeder): "U.S. banks reported $56 billion in profits in the first quarter, up 27.5% from a year earlier, as institutions began to take advantage of a lower effective tax rate… Over 70% of U.S. banks reported growth in year-over-year earnings, as the industry enjoyed higher net operating revenue amid a significantly lower corporate tax rate, according to the regulator. Net interest income was up 8.5% to $131.3 billion."
May 21 - Bloomberg (Saleha Mohsin and David McLaughlin): "Treasury Secretary Steven Mnuchin urged the Justice Department to review the power that large technology firms such as Google have over the American economy, the latest U.S. official to back antitrust scrutiny of the industry. A '60 Minutes' segment on Sunday devoted to assertions that Alphabet Inc.'s Google wields a destructive monopoly in online search hammered home the notion of the company's dominance during a time of heightened public concern with technology giants… 'These issues deserve to be reviewed carefully,' Mnuchin said… 'These are issues the Justice Department needs to look at seriously, not for any one company, but as these technology companies have a greater and greater impact on the economy.'"
May 24 - Wall Street Journal (Nour Malas): "The Silicon Valley cities that are home to Google and Apple Inc. are considering the kind of per-employee tax that Seattle recently drew criticism for imposing. Mountain View, Calif., and nearby Cupertino are both weighing possible ballot measures this fall. Officials said the taxes could raise money to help manage local problems tied to rapid growth, including traffic and a need for affordable housing. 'We are pursuing a more aggressive agenda to respond to our housing and transportation crises, which have both gotten significantly worse in the last year,' said Rod Sinks, the vice mayor of Cupertino, where Apple is based."
May 20 - Financial Times (Rana Foroohar): "Financial crises always start the same way. Loose monetary policy leads to an increase in debt and a rise in risk-taking. Over-confident financiers, lax regulators and politicians desperate to please voters operate in this toxic environment until a bubble eventually bursts, taking the financial system down with it. I am not saying we are heading for this fate in the very near future. But it is worth noting that this coming week the US Congress may very well pass a bill to rollback the post-financial crisis-era Dodd-Frank reforms. This is happening at a time when interest rates have been at historic lows for nearly 10 years, public and private debt is at record levels, consumer debt loads and subprime defaults are rising, and politicians are looking to throw a bit more kerosene on the economy to seduce voters in the run-up to November's midterm elections."
May 23 - Bloomberg (Joe Light): "Two U.S. senators who have played key roles in trying to advance housing-finance reform are acknowledging the legislative efforts to end government control of Fannie Mae and Freddie Mac are dead, at least for now. Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia commented on the status of the two companies… Corker and Warner tried to develop a bill that would have largely preserved the operations of Fannie and Freddie while opening the market to new competition. That effort foundered after failing to win support from progressives, who wanted to preserve the companies' affordable-housing mandates… 'My sense is that these institutions may well stay in conservatorship for some time,' Corker said…"
May 22 - Bloomberg (Shelly Hagan): "U.S. consumers are more devoted to their mobile phones than their automobiles. The sea change has taken place over the last few years as mobile devices become an integral tool not just for communication with loved ones or employers, but also everything from banking to dating to watching TV and listening to music. As cars grow relatively less important, borrowers struggling to pay back their loans on time are increasingly prioritizing payments on the latest iPhone instead of making sure they hold on to their pickup or coupe."
May 23 - Reuters (Richard Leong): "U.S. applications on mortgages to refinance an existing home fell to their lowest level in 17-1/2 years as some 30-year borrowing costs climbed to their highest levels in over seven years, the Mortgage Bankers Association said…"
China Watch:
May 20 - Reuters (Li Zheng, Ma Rong and Kevin Yao): "China will 'actively and steadily' deleverage and tackle financial risks, sources said…, citing the country's five-year plan (2016-2020) for the financial sector. China will boost the role of price-based monetary policy targets with interest rates as core, according to two sources with knowledge of the matter and a document seen by Reuters."
May 23 - Reuters (Andreas Rinke and Ben Blanchard): "China said… it would 'open its door wider' to German businesses, giving a warm reception to visiting Chancellor Angela Merkel, who has wooed Beijing to counterbalance trade threats from U.S. President Donald Trump. Germany and China, two exporting nations that run large trade surpluses with the United States, have found themselves in Trump's firing line and are scrambling to preserve the multi-lateral order on which their prosperity rests. Merkel faces a delicate balancing act on the trip to show Chinese-German solidarity over trade and the Iran nuclear deal without harming ties with long-term ally Washington."
Central Bank Watch:
May 24 - Bloomberg (Alessandro Speciale): "European Central Bank officials with memories of Greece's brinkmanship aren't about to blink as they face another populist government from a country many times its size. In the same month that the… institution potentially closed the book on its involvement with the Greek debt crisis, its guardians have been keeping a nervous eye on Italy. Populists there are trying to form a coalition government with euro-skeptic tendencies and spending promises of as much as 126 billion euros ($147bn) a year. With the biggest debt burden in the euro zone, such pledges in Italy have unsettled bond markets scarred by the European sovereign crisis of recent years. For the ECB, which spearheaded efforts to contain that turmoil, the prospect of a wayward government at the helm of the region's third-biggest economy is a political nightmare for officials who will insist on euro-zone members sticking to the rules of monetary union."
May 24 - Financial Times (Claire Jones): "The eurozone's central bankers want to maintain 'a steady hand' as they continue to plan for the removal of their crisis-era stimulus in the face of concern that the slowdown in growth may prove more than a blip. The bank also warned that it needed to strengthen its message on government spending in the face of events in Italy. After a bumper 2017, growth in the opening months of this year has been slower in the eurozone. Most economists view the setback as temporary..."
May 24 - Financial Times (Claire Jones): "The European Central Bank has warned the eurozone's more heavily indebted member states that loosening their fiscal policy could cause investors to offload their bonds. The warning comes just hours after Italy's president blessed a coalition composed of two anti-establishment parties that have made higher fiscal spending a cornerstone of their mandate the right to form a government. The ECB said… to mark the release of its latest edition of its Financial Stablity Review: 'A deteriorating growth environment or a loosening of the fiscal stance in high-debt countries could impact the fiscal outlook and, by extension, market sentiment towards some euro area sovereign issuers.'"
Global Bubble Watch:
May 22 - Financial Times (Robin Wigglesworth): "Every morning, Wayne Wicker goes to the gym and watches CNBC to catch up on the financial news. Lately, one particular theme dominates the broadcasting agenda. 'There seems to be a new merger on CNBC every day,' noted Mr Wicker, the chief investment officer at ICMA-RC… 'It's a pretty spectacular trend.' Indeed, the overall volume of mergers and acquisitions globally has reached nearly $2tn already this year, according to Dealogic, on track to beat the post-crisis high of 2015. However, M&A splurges tend to be a classic late-cycle harbinger. The acquisitions boom has already left US companies with record amounts of debt on their balance sheets, and the quality of that debt… has deteriorated."
May 24 - Bloomberg (Lianting Tu and Narae Kim): "Debt issuers in the Asian dollar-bond market are learning the wisdom behind the old adage 'if at first you don't succeed, try, try again.' In a twist hardly thinkable during the record sales of last year, investors balked at two investment-grade Chinese companies' offerings last week. Increasing strains thanks to the appreciating dollar and steady increase in benchmark Treasury yields are shaking up this near-$1 trillion market…"
May 21 - Financial Times (Attracta Mooney): "Chinese investors have been big buyers of international property for years, helping to boost real estate markets globally as they ploughed money into so-called trophy assets. However, last year the country tightened capital controls on foreign property purchases. As a result, Chinese cross-border real estate investment in the first quarter of 2018 was the lowest in three years, as outflows fell 27% year-on-year to $5.6bn for the period. Now institutional investors are grappling with what this tightening of policy means for commercial property markets around the world and whether the retreat of Chinese buyers will push down prices."
Europe Watch:
May 23 - CNN (Andrea Mammone and Federico Finchelstein): "Italy is set to create its most anti-establishment government since the end of fascism in 1945. The Five Star Movement's leader, Luigi Di Maio, and Matteo Salvini's Northern League met with Italy's President, Sergio Mattarella, and put forward Giuseppe Conte -- a law professor with no political experience -- as their proposed candidate for prime minister The formation of a new cabinet under Conte's leadership could take a while yet, but one thing is sure: Italy -- and the rest of Europe -- is a long way from stemming the anti-establishment surge that's been plaguing the continent in recent years Some pundits believe that the 'modern barbarians' are literally at the gate of Rome."
May 25 - Financial Times (Jessica Dye): "Italy's political uncertainty has prompted Moody's to put the country's rating on review for a possible downgrade. Moody's said that Italy's Baa2 rating - two notches above non-investment grade, or junk, status - was at risk due to two key factors: the potential for its fiscal strength to crumble under the new coalition government's plans, and the chance that current efforts at structural reform will falter, or that past reforms could be undone."
Trade cycle and monetary analysis from the British economist Ralph Hawtrey (1879-1975) has over the years resonated:
"The general rise of prices will involve a proportional increase of borrowing to finance a given output of goods, over and above the increase necessitated by the increase in output. This increase of borrowing, meaning an increase in the volume of credit, will further stimulate trade. Where will the process end? In the case of the curtailment of credit the self-interest of the bankers and the distress of the merchants combined to restore the creation of credits…but in the case of the expansion of credits there is no such corrective influence at work. An indefinite expansion of credit seems to be in the immediate interest of merchants and bankers alike. The continuous and progressive rise of prices makes it profitable to hold goods in stock…thus the merchant and the banker share between them a larger rate of profit on a larger turnover... The greater the amount of credit created, the greater will be the amount of purchasing power and the better the market for the sales of all kinds of goods. The better the market the greater the demand for credit. Thus an increase in the supply of credit itself stimulates the demand for credit…" (Hawtrey, "Currency and Credit").
"Mr. Hawtrey's theory explains why there were not merely small oscillations around the equilibrium, but big swings of the pendulum in the one or the other direction. The reason is the cumulative, self-sustaining nature of the process of expansion and contraction. The equilibrium line is like a razor's edge. The slightest deviation involves the risk of further movement away from equilibrium…the expansion could go on indefinitely, if there were no limits to the increase in the quantity of money" (Gottfried Haberler, "Prosperity and Depression").
In Hawtrey's analysis, "dealers" borrowed to finance inventories of goods and commodities. This borrowing activity created the marginal monetary flow and purchasing power within the economic system. Credit flows were fundamental to the monetary forces sustaining the economic cycle. Hawtrey appreciated that Credit and the "flow of money" were inherently self-reinforcing, hence unstable. During upcycles, Credit begets additional Credit; monetary excess begets further destabilizing excess. Eventually, the monetary expansion comes to an end and a painful downside to the cycle becomes unavoidable. At least that's the way it used to work.
Hawtrey would find today's financial architecture unrecognizable: unfettered finance on a global basis; near zero and even negative interest rates; open-ended QE and ballooning central bank balance sheets; central bank manipulation of bond yields and asset prices; highly leveraged securities holdings and a derivatives marketplace to the tune of hundreds of Trillions.
While Hawtrey's "dealers" were financing goods inventories, contemporary "dealers" - the central banks, banks, hedge funds and leveraged speculators, derivatives operators, GSEs, etc. - finance inventories of securities. Instead of banks (restrained by reserve and capital requirements) lending against goods inventories, boundless global "money" markets finance unfathomable speculative securities holdings. Going back now at least 25 years, the financing of securities holdings has been the marginal source of liquidity fueling recurring asset Bubbles and economic cycles. This monetary structure has been acutely unstable. Over time, worsening instability fostered increasingly intrusive central bank command over the cost of finance, marketplace liquidity and securities market pricing more generally.
Audience question from a Friday panel discussion at a Swedish Riksbank event: "Imaging you're traveling into the future - 25 years. What would you expect to receive when you are evaluated 25 years into the future regarding the present period of unconventional policy methods?"
Bank of England governor Mark Carney: "Great question to ask. Terrible question to answer… Those who are marking our exam papers will start with our objectives. And we'll see how well we achieved our objectives. So, starting with whether we've achieved our inflation target and, subject to that, reduced unwarranted volatility in output and employment. And the steps we have taken on the financial side - the effectiveness of those will be revealed by 25 years down the road. They will have been properly tested in a way that, obviously, everyone in this room cannot truly mark that exam paper right now."
I doubt future analysts and historians looking back in 25 years will have much interest in whether inflation targets were achieved or the policy effects on unemployment rates and GDP. Contemporary central bankers will instead be judged by the impact a decade plus of extreme monetary measures had on Financial Stability. Sure, unprecedented monetary stimulus reflated securities markets, asset prices, perceived wealth and economic activity. But did it nurture sustainable Financial Stability - or instead only create more systemic and perilous global financial and economic Bubbles? I believe the answer lies foremost in the global dimensions of speculative leverage.
My view holds that prolonged experimental policy stimulus has been a boon for global securities leveraged speculation. The scope of today's Bubble is unprecedented; the monetary role of securities finance upon the maladjusted and unbalanced global economy unparalleled. The Bubble in EM has gone miles beyond 1997. The Bubble in China is truly epic. I suspect a staggering amount of "carry trade" leverage has accumulated globally over this protracted speculative cycle. ECB policies have clearly spurred leveraged speculation throughout euro zone bond markets, especially the unsound periphery. Eastern Europe as well? There is surely massive leverage in U.S. Credit, most likely having played a prevailing role in the booming investment-grade corporate marketplace.
We're in the stage of the cycle where things look good. In the U.S., in particular, the New Era and New Paradigm mentality has taken deep root. The economy appears robust, bolstered by fantastic technological advancement and scientific development. The underlying instability of finance goes unrecognized; the global nature of Bubble Dynamics unappreciated. Meanwhile, markets again this week provided confirmation of the Unfolding Instability Thesis.
Italian 10-year yields surged 23 bps this week to 2.46%, the high since October 2014. In only three weeks, Italian two-year yields have jumped 79 bps to 0.46%. Portuguese 10-year yields rose eight bps this week to 1.95%, a three-month high. Spanish yields traded above 1.5% in Monday trading, the high going back to early March.
This month's almost 70 bps spike in Italian 10-year yields is alarming. I would argue this week's 17 bps drop in German 10-year yields (to 41bps) is more problematic for markets more generally. The Italian to German 10-year yields spread widened 40 bps in just one week. The Portuguese to German spread widened 25 bps this week, with the Spanish to German 10-year spread 19 bps wider. The Italian to German two-year yield spread has widened 78 bps in two weeks.
It was a rough week for those short German bunds (or even French bonds) to finance leveraged holdings in European periphery debt. Pain in this popular (Crowded?) trade follows on the heels of painful losses in various EM "carry trades." The Turkish lira dropped another 4.7% this week. And while Latin American currencies for the most part rallied this week, Eastern European currencies were notably weak. The Hungarian forint dropped 1.5%, the Polish zloty 1.4%, the Czech koruna 1.4%, the Bulgarian lev 1.1% and the Romanian leu 1.0%. How much leveraged has accumulated in higher-yielding European EM debt?
After trading at 3.08% in Tuesday trading, 10-year Treasury yields reversed course and closed the week down 12 bps to 2.93%. Minutes from the early-May FOMC meeting were released Wednesday afternoon. The minutes were generally viewed as dovish, with the Fed tolerant of inflation rising above target and "uncertainty surrounding trade issues could damp business sentiment and spending."
Bond markets have been anxiously anticipating some hint from the Federal Reserve that unstable global markets could slow the path of rate increases. They seemed to discern as much embedded in the minutes. The Treasury rally alleviated some off the selling pressure on EM bonds. At the same time, the upheaval in Italian and European debt markets appeared a significant escalation in global de-risking/de-leveraging dynamics. Sentiment with respect to global economic prospects has begun to deteriorate.
Japan's Nikkei stock index dropped 2.1% this week, and the Shanghai Composite fell 1.6%. A paralyzing truckers' strike in Brazil further eroded sentiment. Brazilian stocks sank 5.0% this week. European equities were under pressure as well. Italian stocks sank 4.5%, and Spanish equities fell 2.8%. European banks were slammed 4.1%, led by an 8.1% drop in the Italian bank index. Japan's Topix Bank index fell 4.1%, and Hong Kong's Hang Seng Financials were down 1.7%. U.S. stocks outperformed, not unhelpful to the rising dollar (up 0.7% this week). Curiously, crude was slammed 5.3%, much of the losses coming late in the week.
The euro dropped 1.0% this week to the lowest level since last November, adding fuel to the destabilizing dollar rally.
May 23 - New York Times (Jason Horowitz): "The populist parties that won Italy's elections two months ago by demonizing the political establishment, the European Union and illegal migrants in often vulgar terms were granted the go-ahead… to form a government, crystallizing some of the biggest fears of Europe's leaders, who were already bracing for turbulence. The rapid ascent of populists in Italy - the birthplace of Fascism, a founding member of the European Union, and the bloc's fourth-largest economy - shattered the nation's decades-old party system. It also gave fresh energy to the nationalist impulses tugging at the Continent and moved the greatest threat to the European Union's cohesion from newer member states on the periphery, such as Hungary and Poland, to its very core. After 80 days of arduous talks, President Sergio Mattarella gave a mandate to form a government to the parties' consensus pick for prime minister, Giuseppe Conte, a little-known lawyer with no government experience."
If uncertainties associated with the new Italian government weren't enough, Spain continues to fester.
May 25 - Financial Times (Michael Stothard): "The risk of early elections in Spain rose dramatically on Friday after two opposition parties threatened motions of no-confidence against the government in response to a damning court ruling in a graft case involving members of the ruling People's Party. Spanish stocks fell and bond yields rose after Socialist leader Pedro Sanchez said that he had tabled a vote of no confidence to topple the government. The liberal Ciudadanos party said it would table its own motion if new elections are not called. This comes as dozens of people related to the ruling centre-right PP, including a former treasurer, were convicted on Thursday of a range of crimes related to the use of an illegal slush fund that helped finance party election campaigns between 1999 and 2005… The judge said that the testimony of prime minister Mariano Rajoy and other party officials that they knew nothing was 'not credible'."
On a global basis, risk aversion is taking hold. De-risking/De-leveraging Dynamics have gained momentum. Liquidity abundance has begun to wane; financial conditions globally are beginning to tighten. This ensures markets will now assume a different approach with risk. So long as risk embracement and resulting liquidity abundance were commanding global markets, EM and Italian fragilities were inconsequential. The same could be said for vulnerabilities in regions, countries, governmental entities, sectors, corporations and businesses around the globe. Rather suddenly, however, prospects for risk aversion, Credit tightening and illiquidity will have newly mindful markets keen to sidestep the weakened, the fragile and the sickly. It may at this point be subtle, but it's also quite a sea change.
The past decade of stimulus-induced bull markets has been occasionally interrupted by bouts of "Risk Off." Granted, these spells proved short-lived. Central bankers - through talk and/or more aggressive stimulus measures - quickly extinguished nascent Fear. Most of all, zero rates and massive and unrelenting QE reinforced Greed. And this went on for way too long. Faith in central banking was further emboldened, ensuring an upsurge in speculative leveraging the world over.
My long-held view is that central bank measures to guarantee buoyant and liquid markets in the end ensure a liquidity crisis. The perception that central banks will always backstop liquidity has incentivized a degree of speculative leverage - and resulting monetary flows - that virtually guarantees financial and economic dislocation.
The world is now on contagion watch. More and more, De-risking/Deleveraging Dynamics are encroaching on Greed. The Fed is raising rates, and global central banks are winding down QE. A shrinking pool of new QE liquidity confronts a rapidly expanding pool of speculative holding liquidations.
I don't expect the Powell Fed to turn hawkish. Indeed, if things unfold as I expect the Fed will surely turn more cautious with rate hikes. But I also believe the new Chairman would rather not come quickly to the market's defense. Markets are long overdue for removing the training wheels. Interestingly, John Authers' Friday evening FT article was titled "Lack of 'Powell Put' Tightens Financial Conditions." Akin to Italy's debt load, the true status of the Fed (and global central banker) put will be a greater concern now that financial conditions have begun to tighten and asset markets have turned more vulnerable.
For the Week:
The S&P500 added 0.3% (up 1.8% y-t-d), and the Dow increased 0.2% (up 0.1%). The Utilities jumped 3.2% (down 4.9%). The Banks declined 0.5% (down 0.5%), and the Broker/Dealers slipped 0.3% (up 10.9%). The Transports jumped 1.6% (up 2.7%). The S&P 400 Midcaps added 0.2% (up 2.4%), while the small cap Russell 2000 was unchanged (up 6.0%). The Nasdaq100 rallied 1.4% (up 8.8%). The Semiconductors surged 3.4% (up 11.0%). The Biotechs declined 0.5% (up 10.8%). With bullion up $9, the HUI gold index recovered 1.4% (down 6.3%).
Three-month Treasury bill rates ended the week at 1.86%. Two-year government yields fell seven bps to 2.48% (up 59bps y-t-d). Five-year T-note yields dropped 12 bps to 2.77% (up 56bps). Ten-year Treasury yields sank 12 bps to 2.93% (up 53bps). Long bond yields fell 11 bps to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields dropped 12 bps to 3.64% (up 64bps).
Greek 10-year yields fell 13 bps to 4.37% (up 30bps y-t-d). Ten-year Portuguese yields rose eight bps to 1.95% (up 1bp). Italian 10-year yields surged another 23 bps to 2.46% (up 45bps). Spain's 10-year yields added two bps to 1.47% (down 10bps). German bund yields sank 17 bps to 0.41% (down 2bps). French yields fell 12 bps to 0.71% (down 7bps). The French to German 10-year bond spread widened five to 30 bps. U.K. 10-year gilt yields dropped 18 bps to 1.32% (up 13bps). U.K.'s FTSE equities index slipped 0.6% (up 0.6%).
Japan's Nikkei 225 equities dropped 2.1% (down 1.4% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.04% (down 1bp). France's CAC40 lost 1.3% (up 4.3%). The German DAX equities index fell 1.1% (up 0.2%). Spain's IBEX 35 equities index sank 2.8% (down 2.2%). Italy's FTSE MIB index was pounded 4.5% (up 2.5%). EM equities were mostly lower. Brazil's Bovespa index sank 5.0% (up 3.3%), and Mexico's Bolsa declined 1.3% (down 8.6%). South Korea's Kospi index was little changed (down 0.3%). India’s Sensex equities index added 0.2% (up 2.5%). China’s Shanghai Exchange dropped 1.6% (down 5.0%). Turkey's Borsa Istanbul National 100 index gained 0.8% (down 10.5%). Russia's MICEX equities declined 0.9% (up 9.3%).
Investment-grade bond funds saw inflows of $2.529 billion, and junk bond funds had inflows of $261 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose five bps to 4.66% (up 71bps y-o-y). Fifteen-year rates jumped seven bps to 4.15% (up 96bps). Five-year hybrid ARM rates gained five bps to 3.87% (up 80bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.70% (up 64bps).
Federal Reserve Credit last week declined $15.4bn to $4.299 TN. Over the past year, Fed Credit contracted $135.7bn, or 3.1%. Fed Credit inflated $1.488 TN, or 53%, over the past 290 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.8bn last week to a five-month low $3.382 TN. "Custody holdings" were up $138bn y-o-y, or 4.3%.
M2 (narrow) "money" supply jumped $27.1bn last week to a record $13.999 TN. "Narrow money" gained $513bn, or 3.8%, over the past year. For the week, Currency increased $3.7bn. Total Checkable Deposits rose $33.6bn, while savings Deposits declined $16.0bn. Small Time Deposits gained $3.5bn. Retail Money Funds added $2.3bn.
Total money market fund assets added $1.3bn to $2.826 TN. Money Funds gained $177bn y-o-y, or 6.7%.
Total Commercial Paper surged $22.8bn to $1.092 TN. CP gained $104bn y-o-y, or 10.6%.
Currency Watch:
The U.S. dollar index gained 0.7% to 94.258 (up 2.3% y-t-d). For the week on the upside, the Brazilian real increased 2.3%, the South African rand 2.1%, the Mexican peso 2.1%, the Japanese yen 1.3%, the Swiss franc 0.7%, the Australian dollar 0.5%, the New Zealand dollar 0.1% and the Singapore dollar 0.1%. For the week on the downside, the British pound declined 1.2%, the euro 1.0%, the Canadian dollar 0.7%, the Norwegian krone 0.7% and the Swedish krona 0.2%. The Chinese renminbi declined 0.18% versus the dollar this week (up 1.80% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.5% (up 11.1% y-t-d). Spot Gold increased 0.7% to $1,302 (down 0.1%). Silver recovered 0.4% to $16.52 (down 3.6%). Crude was slammed $3.78 to $67.50 (up 12%). Gasoline dropped 2.8% (up 21%), while Natural Gas gained 2.9% (down 1%). Copper increased 0.4% (down 7%). Wheat surged 4.8% (up 27%). Corn gained 0.9% (up 16%).
Market Dislocation Watch:
May 23 - Financial Times (Roger Blitz): "Turkey's currency collapse is adding fuel to a widespread retreat in emerging market forex. Much of the weakness is in Central and Eastern Europe. Poland's zloty has fallen 1%, while the Hungarian forint and the Czech koruna are also sharply lower. But Asian EM currencies, which have largely resisted dollar strength in recent weeks, started succumbing to the pressure, including the Korean won, down 0.5%, the Singapore dollar and the Taiwanese dollar."
May 21 - Bloomberg (Luke Kawa): "The Italian government's borrowing costs have surged to inauspicious territory. The nation is getting punished in the bond market as the incoming populist government coalition seems ready to boost spending without much regard for European Union budget strictures and mulls the potential creation of assets tantamount to a parallel currency. The result: An Italian note maturing in February 2028 now yields 10 bps more than a euro-denominated sovereign from Indonesia due four months later."
May 24 - Reuters (Sujata Rao and Saikat Chatterjee): "Goldman Sachs said… that any systemic spillovers from Italian political risks into peripheral Europe could push the euro down against the dollar by 'around five big figures.' The prospect of a coalition government between the anti-establishment 5-Star Movement and far-right League, bent on big spending plans that would put Italy on a collision course with the European Union, have rattled markets in the past week. 'Should this become a more systemic event...we estimate that EUR/USD could fall by around 5 big figures,' the U.S. bank said in a note…"
Trump Administration Watch:
May 23 - New York Times (Ana Swanson): "President Trump has asked for a sweeping trade investigation into whether autos imported into the United States pose a threat to national security, a move that could ultimately result in tariffs on foreign-made cars and further strain relations with global allies. …The Commerce Department said it had begun an investigation 'following a conversation' with Mr. Trump. The announcement followed a statement from the president, in which he said he had instructed the commerce secretary, Wilbur Ross, to investigate imports of cars, trucks and auto parts 'to determine their effects on America's national security.' 'Core industries such as automobiles and automotive parts are critical to our strength as a nation,' Mr. Trump said."
May 24 - Wall Street Journal (Sean McLain in Tokyo, William Boston and Trefor Moss): "President Donald Trump's push to impose painful tariffs on auto imports has put close U.S. allies in the crosshairs of a global trade row that is creating uncertainty among auto makers, investors and governments. Shares of some of the biggest international auto makers… which have big exposure to the U.S., fell Thursday, a day after the U.S. Commerce Department launched a probe into whether it could raise tariffs to up to 25% on auto imports on the basis of national security. The probe adds to a battle over steel tariffs and, again, pitches the U.S. against three of its closest military allies-Japan, South Korea and Germany. All are major car exporters."
May 24 - Bloomberg (Chris Reiter): "U.S. President Donald Trump's threat to levy tariffs on imported vehicles aims at the heart of Germany's export-led economy, further straining relations between the two long-standing allies. While Trump didn't specifically point to Germany when calling for an investigation into protections for the U.S. auto industry on national security grounds, he didn't have to. Past statements have made clear that he resents the country's trade surplus, which amounted to 14.2 billion euros ($16.7bn) last year for Germany's auto industry."
May 23 - Reuters (James Oliphant and Lisa Lambert): "U.S. President Donald Trump… railed against Mexico and Canada's efforts in renegotiating the North American Free Trade Agreement (NAFTA), saying both of the United States' neighbors had been very difficult. 'NAFTA is very difficult. Mexico has been very difficult to deal with. Canada has been very difficult to deal with ... but I will tell you that in the end we win,' Trump told reporters…"
May 24 - Reuters (Susan Heavey): "U.S. President Donald Trump has signaled a new direction in U.S.-China trade talks and said any deal would need 'a different structure,' fueling uncertainty over current negotiations. In an early Wednesday morning post on Twitter, Trump said the current track appeared 'too hard to get done' and cited difficulties such as verification, but he gave no other details about what he or his administration was looking for amid ongoing negotiations."
May 24 - Bloomberg (Jenny Leonard and Saleha Mohsin): "President Donald Trump is backing away from the trade agreement the U.S. just announced with Beijing, under pressure from China hawks among his supporters and in Congress who have assailed the accord as a capitulation. 'Our Trade Deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion,' Trump said… After boasting of the deal's benefits for farmers in tweets on Monday, Trump first indicated on Tuesday he was having second thoughts as some of his loyalists publicly criticized the agreement. Asked if he was pleased with the direction of his administration's negotiations with China, Trump told reporters 'no, not really.' He later added, 'they're a start.'"
May 19 - Wall Street Journal (Bob Davis and Lingling Wei): "A last-ditch effort by the Trump administration failed to get China to accept its demand for a $200 billion cut in the U.S. bilateral trade deficit, as Chinese officials resisted committing to any specific targets after two days of contentious negotiations. The two days of deliberations in Washington ended with both sides arguing all night on Friday over what to say in a joint statement… The Chinese had come willing to step up purchases of U.S. merchandise as a measure to narrow China's $375 billion trade advantage. But U.S. negotiators pushed the Chinese delegates to approve a specific target of $200 billion in additional Chinese purchases. The Chinese refused any such target in specific dollar amounts, and the matter is now in the hands of President Donald Trump and President Xi Jinping, the people said."
May 22 - Wall Street Journal (Kate O'Keeffe and Bob Davis): "Lawmakers are moving to thwart Trump administration efforts to ease restrictions on Chinese telecommunications giant ZTE Corp. and other sensitive technology, citing fears the positions would compromise national security in the latest twist in trade negotiations between the world's largest economies. The Senate Banking Committee unanimously approved legislation… that would tighten national-security reviews of Chinese technology deals by the interagency Committee on Foreign Investment in the U.S., strengthen export controls and prohibit the Trump administration from lifting stiff penalties imposed on ZTE."
May 24 - CNBC (Stephanie Landsman): "One of Wall Street's top Asia experts isn't ruling out a U.S.-China trade war. According to Yale University senior fellow Stephen Roach, the threat is still real, and it could take a big bite out of stocks. 'The bottom line is China has been one of President Trump's core economic issues, and I'd be surprised if he just capitulates on this,' Roach told CNBC's 'Trading Nation'… 'We have to look at the risk of some type of trade tensions very seriously.' Roach, who was Morgan Stanley Asia chairman for five years, said it's hard to have confidence in White House trade policy when Trump administration officials are constantly changing their minds."
May 22 - CNBC (Tom DiChristopher): "Secretary of State Mike Pompeo has announced a list of a dozen demands that Iran must meet before the United States lifts punishing sanctions against the country. However, the list is a non-starter and raises the specter of a prolonged standoff in the world's busiest oil exporting region. Pompeo articulated the list at the conservative Heritage Foundation… The address clarified the U.S. playbook for containing Iran following President Donald Trump's announcement that he will abandon a 2015 nuclear deal with Iran and restore sanctions on the Iranian economy, including its lifeblood oil industry."
May 23 - Wall Street Journal (Ryan Tracy and Andrew Ackerman): "Ten days after his inauguration, President Donald Trump promised to 'do a big number' on the Dodd-Frank law that tightened rules on financial firms after the 2008 crisis. Behind the scenes, his then top economic adviser and a powerful senator settled on a less ambitious plan. And in recent weeks, Mr. Trump called a senior House lawmaker, urging him to move forward despite objections from Republicans who wanted broader changes. The strategy to seek modest Dodd-Frank changes… paid dividends on Tuesday: The House of Representatives by 258-159 approved the resulting bipartisan legislation…"
May 22 - Reuters (Jeff Mason and Eric Beech): "U.S. President Donald Trump said… he will propose new tax cuts sometime prior to November, when Republicans look to retain their control of the U.S. Congress in midterm elections. Trump said he would meet with Republican Representative Kevin Brady, chairman of the tax-writing House Ways and Means Committee, about the proposal."
EM Bubble Watch:
May 22 - Bloomberg (Enda Curran and Lianting Tu): "Emerging-market companies and governments straining to deal with the rising cost of borrowing in dollars face increasing pressure as a record slew of bonds come due. Some $249 billion needs to be repaid or refinanced through next year… That's a legacy of a decade-long debt binge during which emerging markets more than doubled their borrowing in dollars, ignoring the many lessons of history from the 1980s Latin American debt crisis, the 1990s Asian financial crisis and the 2000s Argentine default. Even since the 2013 taper tantrum, the group's dollar debt has climbed in excess of $1 trillion -- more than the combined size of the Mexican and Thai economies…"
May 23 - Financial Times (Laura Pitel): "The few remaining market-friendly members of Recep Tayyip Erdogan's economic team were notably silent as the Turkish lira plummeted to record lows this week. As warnings of a full-blown currency crisis have increased in the run-up to crucial presidential and parliamentary elections, it was the president's son-in-law who was left to speak out. Berat Albayrak said… that the beleaguered lira was the victim of an 'operation' of 'overseas origins' aimed at bringing down the government. That Mr Albayrak has become one of the president's closest confidants in recent years is a symbol of the growing siege mentality at the presidential palace. Analysts and officials say that over the 15 years that Mr Erdogan has dominated Turkish politics, threats both real and imagined have forced him to retreat into an inner circle of people who tell him only what he wants to hear. 'His advisers are a bunch of idiots and sycophants,' says one Turkish official. 'He no longer listens to sensible advice.'"
May 24 - Bloomberg (Ugur Yilmaz): "Every market analyst in Turkey knows who Mert Ulker is: He's the expert who was fired as research chief at one of the country's biggest brokerages for publishing speculation that President Recep Tayyip Erdogan might have staged the failed 2016 coup to tighten his grip on power. He's now a cautionary tale. With Erdogan just weeks away from elections likely to cement his near-absolute authority, barely a word of criticism creeps into research published by strategists and economists based in Turkey - not even after Erdogan's threat to force the central bank to cut interest rates sent the lira into freefall. 'Each time I am about to write a bearish comment, my managers and colleagues remind me of what happened to Mert Ulker,' said one analyst who works at a state-run financial institution in Istanbul…"
May 24 - Bloomberg (Sabrina Valle): "Eight anxious hours. That's how long it took the chief executive officer of Petrobras to decide that he must break a promise to investors to help contain the growing chaos from a Brazilian trucker strike. For the first time in three years, Petrobras agreed to sell fuel below market prices in a move based purely on politics. The reaction? Truckers rejected the move and shares in the state-controlled oil producer tumbled the most in a year. Pedro Parente's actions Wednesday came after what started as a routine labor dispute became a logistical crisis spanning Latin America's largest economy. Flights were canceled at some airports amid fuel shortages. Buses were idled in Rio de Janeiro, where the company is based. Supermarkets were beginning to limit purchases in fear of coming shortages."
May 21 - Bloomberg (Rieka Rahadiana and Tassia Sipahutar): "Indonesia's central bank pledged to continue its intervention in the currency and bonds market to ease volatility, and said it will boost forex liquidity as the rupiah slumped to a fresh 31-month low. Bank Indonesia will hold three forex swap auctions to ensure sufficient liquidity in the interbank market… The bank, which usually holds two auctions a week, has been holding additional sales to ensure the market is well supplied, he said."
Federal Reserve Watch:
May 23 - CNBC (Jeff Cox): "Federal Reserve officials would be content to let inflation briefly run above their 2% target as the economy continues to recover, according to minutes from the central bank's most recent meeting. Following the May 1-2 session, the policymaking Federal Open Market Committee said it wasn't raising rates yet but added the word 'symmetric' to describe its inflation goal. Market participants since have puzzled over what the change in language might imply. The summary… indicates a substantial level of debate over how the Fed should approach inflation. The minutes also pointed to an interest rate hike at the June meeting amid debate over how close the Fed might be getting to the end of this rate-hiking cycle."
U.S. Bubble Watch:
May 24 - Bloomberg (Alex Tanzi): "National home values have increased 8.7% since last April to a median value of $215,600, according to Zillow. Newly released data from the Federal Housing Finance Agency confirm the widespread gains seen by Zillow… The FHFA report shows first-quarter home prices rose 6.9% from a year earlier. Annual appreciation surpassed 10% in Nevada (13.7%), Washington (13.1%), Idaho (11.1%), Colorado (10.6%). The rise in home prices has allowed more people to take cash-out of the homes when they refinance. Refinancing, where the home owner took additional cash out, rose to 61% in the first quarter -- the highest rate seen since the third quarter of 2008…"
May 22 - CNBC (Jeff Cox): "Investors and policymakers have gone looking for inflation over the past decade and largely have come up empty. It could, however, come barreling at them soon like an 18-wheeler. Multiple signs of inflation in freight-related industries are at or near historical highs, in what could be an early sign that price pressures are building and ready to reverberate around the economy. Freight marketplace DAT keeps track of supply and demand in the freight industry through a bulletin board that matches companies with loads to be delivered to the vehicles that will take the goods to the marketplace… Recent readings show demand for vehicles skyrocketing, a sign that generally points to inflationary pressures building up in the supply chain."
May 22 - Reuters (Pete Schroeder): "U.S. banks reported $56 billion in profits in the first quarter, up 27.5% from a year earlier, as institutions began to take advantage of a lower effective tax rate… Over 70% of U.S. banks reported growth in year-over-year earnings, as the industry enjoyed higher net operating revenue amid a significantly lower corporate tax rate, according to the regulator. Net interest income was up 8.5% to $131.3 billion."
May 21 - Bloomberg (Saleha Mohsin and David McLaughlin): "Treasury Secretary Steven Mnuchin urged the Justice Department to review the power that large technology firms such as Google have over the American economy, the latest U.S. official to back antitrust scrutiny of the industry. A '60 Minutes' segment on Sunday devoted to assertions that Alphabet Inc.'s Google wields a destructive monopoly in online search hammered home the notion of the company's dominance during a time of heightened public concern with technology giants… 'These issues deserve to be reviewed carefully,' Mnuchin said… 'These are issues the Justice Department needs to look at seriously, not for any one company, but as these technology companies have a greater and greater impact on the economy.'"
May 24 - Wall Street Journal (Nour Malas): "The Silicon Valley cities that are home to Google and Apple Inc. are considering the kind of per-employee tax that Seattle recently drew criticism for imposing. Mountain View, Calif., and nearby Cupertino are both weighing possible ballot measures this fall. Officials said the taxes could raise money to help manage local problems tied to rapid growth, including traffic and a need for affordable housing. 'We are pursuing a more aggressive agenda to respond to our housing and transportation crises, which have both gotten significantly worse in the last year,' said Rod Sinks, the vice mayor of Cupertino, where Apple is based."
May 20 - Financial Times (Rana Foroohar): "Financial crises always start the same way. Loose monetary policy leads to an increase in debt and a rise in risk-taking. Over-confident financiers, lax regulators and politicians desperate to please voters operate in this toxic environment until a bubble eventually bursts, taking the financial system down with it. I am not saying we are heading for this fate in the very near future. But it is worth noting that this coming week the US Congress may very well pass a bill to rollback the post-financial crisis-era Dodd-Frank reforms. This is happening at a time when interest rates have been at historic lows for nearly 10 years, public and private debt is at record levels, consumer debt loads and subprime defaults are rising, and politicians are looking to throw a bit more kerosene on the economy to seduce voters in the run-up to November's midterm elections."
May 23 - Bloomberg (Joe Light): "Two U.S. senators who have played key roles in trying to advance housing-finance reform are acknowledging the legislative efforts to end government control of Fannie Mae and Freddie Mac are dead, at least for now. Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia commented on the status of the two companies… Corker and Warner tried to develop a bill that would have largely preserved the operations of Fannie and Freddie while opening the market to new competition. That effort foundered after failing to win support from progressives, who wanted to preserve the companies' affordable-housing mandates… 'My sense is that these institutions may well stay in conservatorship for some time,' Corker said…"
May 22 - Bloomberg (Shelly Hagan): "U.S. consumers are more devoted to their mobile phones than their automobiles. The sea change has taken place over the last few years as mobile devices become an integral tool not just for communication with loved ones or employers, but also everything from banking to dating to watching TV and listening to music. As cars grow relatively less important, borrowers struggling to pay back their loans on time are increasingly prioritizing payments on the latest iPhone instead of making sure they hold on to their pickup or coupe."
May 23 - Reuters (Richard Leong): "U.S. applications on mortgages to refinance an existing home fell to their lowest level in 17-1/2 years as some 30-year borrowing costs climbed to their highest levels in over seven years, the Mortgage Bankers Association said…"
China Watch:
May 20 - Reuters (Li Zheng, Ma Rong and Kevin Yao): "China will 'actively and steadily' deleverage and tackle financial risks, sources said…, citing the country's five-year plan (2016-2020) for the financial sector. China will boost the role of price-based monetary policy targets with interest rates as core, according to two sources with knowledge of the matter and a document seen by Reuters."
May 23 - Reuters (Andreas Rinke and Ben Blanchard): "China said… it would 'open its door wider' to German businesses, giving a warm reception to visiting Chancellor Angela Merkel, who has wooed Beijing to counterbalance trade threats from U.S. President Donald Trump. Germany and China, two exporting nations that run large trade surpluses with the United States, have found themselves in Trump's firing line and are scrambling to preserve the multi-lateral order on which their prosperity rests. Merkel faces a delicate balancing act on the trip to show Chinese-German solidarity over trade and the Iran nuclear deal without harming ties with long-term ally Washington."
Central Bank Watch:
May 24 - Bloomberg (Alessandro Speciale): "European Central Bank officials with memories of Greece's brinkmanship aren't about to blink as they face another populist government from a country many times its size. In the same month that the… institution potentially closed the book on its involvement with the Greek debt crisis, its guardians have been keeping a nervous eye on Italy. Populists there are trying to form a coalition government with euro-skeptic tendencies and spending promises of as much as 126 billion euros ($147bn) a year. With the biggest debt burden in the euro zone, such pledges in Italy have unsettled bond markets scarred by the European sovereign crisis of recent years. For the ECB, which spearheaded efforts to contain that turmoil, the prospect of a wayward government at the helm of the region's third-biggest economy is a political nightmare for officials who will insist on euro-zone members sticking to the rules of monetary union."
May 24 - Financial Times (Claire Jones): "The eurozone's central bankers want to maintain 'a steady hand' as they continue to plan for the removal of their crisis-era stimulus in the face of concern that the slowdown in growth may prove more than a blip. The bank also warned that it needed to strengthen its message on government spending in the face of events in Italy. After a bumper 2017, growth in the opening months of this year has been slower in the eurozone. Most economists view the setback as temporary..."
May 24 - Financial Times (Claire Jones): "The European Central Bank has warned the eurozone's more heavily indebted member states that loosening their fiscal policy could cause investors to offload their bonds. The warning comes just hours after Italy's president blessed a coalition composed of two anti-establishment parties that have made higher fiscal spending a cornerstone of their mandate the right to form a government. The ECB said… to mark the release of its latest edition of its Financial Stablity Review: 'A deteriorating growth environment or a loosening of the fiscal stance in high-debt countries could impact the fiscal outlook and, by extension, market sentiment towards some euro area sovereign issuers.'"
Global Bubble Watch:
May 22 - Financial Times (Robin Wigglesworth): "Every morning, Wayne Wicker goes to the gym and watches CNBC to catch up on the financial news. Lately, one particular theme dominates the broadcasting agenda. 'There seems to be a new merger on CNBC every day,' noted Mr Wicker, the chief investment officer at ICMA-RC… 'It's a pretty spectacular trend.' Indeed, the overall volume of mergers and acquisitions globally has reached nearly $2tn already this year, according to Dealogic, on track to beat the post-crisis high of 2015. However, M&A splurges tend to be a classic late-cycle harbinger. The acquisitions boom has already left US companies with record amounts of debt on their balance sheets, and the quality of that debt… has deteriorated."
May 24 - Bloomberg (Lianting Tu and Narae Kim): "Debt issuers in the Asian dollar-bond market are learning the wisdom behind the old adage 'if at first you don't succeed, try, try again.' In a twist hardly thinkable during the record sales of last year, investors balked at two investment-grade Chinese companies' offerings last week. Increasing strains thanks to the appreciating dollar and steady increase in benchmark Treasury yields are shaking up this near-$1 trillion market…"
May 21 - Financial Times (Attracta Mooney): "Chinese investors have been big buyers of international property for years, helping to boost real estate markets globally as they ploughed money into so-called trophy assets. However, last year the country tightened capital controls on foreign property purchases. As a result, Chinese cross-border real estate investment in the first quarter of 2018 was the lowest in three years, as outflows fell 27% year-on-year to $5.6bn for the period. Now institutional investors are grappling with what this tightening of policy means for commercial property markets around the world and whether the retreat of Chinese buyers will push down prices."
Europe Watch:
May 23 - CNN (Andrea Mammone and Federico Finchelstein): "Italy is set to create its most anti-establishment government since the end of fascism in 1945. The Five Star Movement's leader, Luigi Di Maio, and Matteo Salvini's Northern League met with Italy's President, Sergio Mattarella, and put forward Giuseppe Conte -- a law professor with no political experience -- as their proposed candidate for prime minister The formation of a new cabinet under Conte's leadership could take a while yet, but one thing is sure: Italy -- and the rest of Europe -- is a long way from stemming the anti-establishment surge that's been plaguing the continent in recent years Some pundits believe that the 'modern barbarians' are literally at the gate of Rome."
May 25 - Financial Times (Jessica Dye): "Italy's political uncertainty has prompted Moody's to put the country's rating on review for a possible downgrade. Moody's said that Italy's Baa2 rating - two notches above non-investment grade, or junk, status - was at risk due to two key factors: the potential for its fiscal strength to crumble under the new coalition government's plans, and the chance that current efforts at structural reform will falter, or that past reforms could be undone."
May 25 - Bloomberg (Maria Tadeo and Esteban Duarte): "Spanish Prime Minister Mariano Rajoy said he aims to see out the rest of his four-year term after the opposition called a vote of no-confidence in his scandal-plagued administration. 'As far as it's in my power, it is evident that I want the legislature to last four years,' Rajoy said Friday… 'That is good. It gives certainty, it gives security, it allows you to govern with a degree of calmness.' The Socialists, the biggest opposition group, called a vote to oust Rajoy's minority administration after the National Court convicted former officials from the governing party of running a multi million-euro racket on his watch. The anti-establishment group Podemos backed the motion, while Ciudadanos said the prime minister's position has become 'unsustainable' and demanded a snap election."
Fixed Income Bubble Watch:
May 21 - Bloomberg (Cecile Gutscher): "You need to rifle through 18 years of history to find selloffs that compare to the one corporate bond investors are now enduring. Debt of American companies just posted their third-worst 100-day returns since 2000, according to a JPMorgan Chase & Co. index, as tighter monetary conditions leave their mark on high-quality bonds with longer maturities. With negative returns likely to scare off retail investors, the outlook for the asset class looks grim, JPMorgan strategists said in a Friday note. But they find a silver lining: the highest yields in almost five years are likely to discourage new bond supply, which would at least help the technical picture. The selloff in corporate credit is now on par with the routing emerging markets. A Bloomberg Barclays index of U.S. investment-grade credit is down 3.9 percent so far this year, while dollar bonds of developing nations have declined at about the same clip."
May 25 - Bloomberg (Tracy Alloway and Cecile Gutscher): "The C-C-Craze for some of the riskiest corporate credits has gone too far, according to Goldman Sachs… While U.S. investment-grade bonds that are most sensitive to moves in borrowing costs have been hit hard this year, investors continue to pile into debt sold by some of the weakest junk-rated companies. Bonds in the CCC category -- just two notches above default -- have returned a whopping 330 bps in total this year… That outperformance has helped push spreads on the Bank of America Merrill Lynch gauge of CCC rated debt to below 700 bps earlier this week -- the smallest premium since July 2014. Meanwhile, Goldman's preferred valuation measure of corporate credit, which subtracts their projected expected-loss rates from current spreads, shows U.S. high-yield obligations are now mispriced for even the most benign scenarios."
May 25 - Bloomberg (Sally Bakewell): "Wall Street's hottest debt market is approaching hyperdrive. Investors haven't been able to get enough of the repackaged corporate loans known as collateralized loan obligations. That intense demand is allowing the money managers that put these securities together to sell off pieces of CLOs that by law they previously had to hang on to. These sales are the crest of what could be a $7 billion wave of such deals. The frenzied buying isn't limited to older securities -- Wells Fargo & Co. is forecasting that there will be a record $150 billion of new U.S. CLOs issued this year. Moody's… can't keep up with the demand for its services, and is taking around a month more to rate the securities than it needed before. That strong demand is allowing managers to sell CLOs with weaker protections, and it's making the leveraged loans that get bundled into the securities riskier too. Investors are buying CLOs because they are seen as safe: they offer protection against rising interest rates and against losses if loans default."
Japan Watch:
May 21 - Reuters (Stanley White and Leika Kihara): "The Bank of Japan… won approval from influential members of the government's leading advisory panel for its decision to abandon the timeframe it had set for meeting its inflation target… In its quarterly outlook report, the BOJ ditched its forecast for when inflation will reach 2%, saying this will dispel the notion that the central bank is obliged to ease policy if it pushes back this forecast."
May 24 - Bloomberg (Christopher Anstey): "When Tadashi Kikugawa arrived on the Japanese bond desk at Fuji Bank in 1988 after finishing a college degree in physics, he had to get to grips with a market with 'huge' fluctuations. Trades worth $1 billion in one shot weren't unusual, he says, and they would often send yields seesawing. Fast forward three decades and the market for Japanese government bonds -- JGBs -- is very different. Gone are the days of wild swings, and sometimes the market doesn't move at all. On one Tuesday in March there wasn't a single trade in the benchmark 10-year Japanese government bond. 'That was very sad," Kikugawa said... "We used to say that volatility was your friend. There's no friend anymore.'"
Geopolitical Watch:
May 18 - Reuters (David Stanway and Winni Zhou): "China's air force has landed bombers on islands and reefs in the South China Sea as part of a training exercise in the disputed region, it said… It said the pilot of the H-6K bomber conducted assault training on a designated sea target and then carried out take-offs and landings at an airport in the area, describing the exercise as preparation for 'the West Pacific and the battle for the South China Sea'."
May 23 - CNBC (Holly Ellyatt): "Diplomatic tensions and the 'aggressive policy' of the U.S. toward Moscow are of more concern than economic sanctions, the president and chairman of one of Russia's largest lenders said… 'What concerns me more than any economic sanctions, that for the first time since the Cuban (missile) crisis - people, at least in Russia and probably in America also, have started to feel that there is more danger of World War III,' Andrei Kostin, the president and chairman of Russia's VTB Bank told CNBC's Geoff Cutmore… 'There is a recent public opinion poll (in) Russia (that) showed that 55% of Russians now believe or think that World War III is possible because of the aggressive policy of the United States,' he added."
Fixed Income Bubble Watch:
May 21 - Bloomberg (Cecile Gutscher): "You need to rifle through 18 years of history to find selloffs that compare to the one corporate bond investors are now enduring. Debt of American companies just posted their third-worst 100-day returns since 2000, according to a JPMorgan Chase & Co. index, as tighter monetary conditions leave their mark on high-quality bonds with longer maturities. With negative returns likely to scare off retail investors, the outlook for the asset class looks grim, JPMorgan strategists said in a Friday note. But they find a silver lining: the highest yields in almost five years are likely to discourage new bond supply, which would at least help the technical picture. The selloff in corporate credit is now on par with the routing emerging markets. A Bloomberg Barclays index of U.S. investment-grade credit is down 3.9 percent so far this year, while dollar bonds of developing nations have declined at about the same clip."
May 25 - Bloomberg (Tracy Alloway and Cecile Gutscher): "The C-C-Craze for some of the riskiest corporate credits has gone too far, according to Goldman Sachs… While U.S. investment-grade bonds that are most sensitive to moves in borrowing costs have been hit hard this year, investors continue to pile into debt sold by some of the weakest junk-rated companies. Bonds in the CCC category -- just two notches above default -- have returned a whopping 330 bps in total this year… That outperformance has helped push spreads on the Bank of America Merrill Lynch gauge of CCC rated debt to below 700 bps earlier this week -- the smallest premium since July 2014. Meanwhile, Goldman's preferred valuation measure of corporate credit, which subtracts their projected expected-loss rates from current spreads, shows U.S. high-yield obligations are now mispriced for even the most benign scenarios."
May 25 - Bloomberg (Sally Bakewell): "Wall Street's hottest debt market is approaching hyperdrive. Investors haven't been able to get enough of the repackaged corporate loans known as collateralized loan obligations. That intense demand is allowing the money managers that put these securities together to sell off pieces of CLOs that by law they previously had to hang on to. These sales are the crest of what could be a $7 billion wave of such deals. The frenzied buying isn't limited to older securities -- Wells Fargo & Co. is forecasting that there will be a record $150 billion of new U.S. CLOs issued this year. Moody's… can't keep up with the demand for its services, and is taking around a month more to rate the securities than it needed before. That strong demand is allowing managers to sell CLOs with weaker protections, and it's making the leveraged loans that get bundled into the securities riskier too. Investors are buying CLOs because they are seen as safe: they offer protection against rising interest rates and against losses if loans default."
Japan Watch:
May 21 - Reuters (Stanley White and Leika Kihara): "The Bank of Japan… won approval from influential members of the government's leading advisory panel for its decision to abandon the timeframe it had set for meeting its inflation target… In its quarterly outlook report, the BOJ ditched its forecast for when inflation will reach 2%, saying this will dispel the notion that the central bank is obliged to ease policy if it pushes back this forecast."
May 24 - Bloomberg (Christopher Anstey): "When Tadashi Kikugawa arrived on the Japanese bond desk at Fuji Bank in 1988 after finishing a college degree in physics, he had to get to grips with a market with 'huge' fluctuations. Trades worth $1 billion in one shot weren't unusual, he says, and they would often send yields seesawing. Fast forward three decades and the market for Japanese government bonds -- JGBs -- is very different. Gone are the days of wild swings, and sometimes the market doesn't move at all. On one Tuesday in March there wasn't a single trade in the benchmark 10-year Japanese government bond. 'That was very sad," Kikugawa said... "We used to say that volatility was your friend. There's no friend anymore.'"
Geopolitical Watch:
May 18 - Reuters (David Stanway and Winni Zhou): "China's air force has landed bombers on islands and reefs in the South China Sea as part of a training exercise in the disputed region, it said… It said the pilot of the H-6K bomber conducted assault training on a designated sea target and then carried out take-offs and landings at an airport in the area, describing the exercise as preparation for 'the West Pacific and the battle for the South China Sea'."
May 23 - CNBC (Holly Ellyatt): "Diplomatic tensions and the 'aggressive policy' of the U.S. toward Moscow are of more concern than economic sanctions, the president and chairman of one of Russia's largest lenders said… 'What concerns me more than any economic sanctions, that for the first time since the Cuban (missile) crisis - people, at least in Russia and probably in America also, have started to feel that there is more danger of World War III,' Andrei Kostin, the president and chairman of Russia's VTB Bank told CNBC's Geoff Cutmore… 'There is a recent public opinion poll (in) Russia (that) showed that 55% of Russians now believe or think that World War III is possible because of the aggressive policy of the United States,' he added."
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