[Reuters] EU's Juncker snubs Greek PM after 'absurd' debt deal rebuff
[WSJ] Greece’s Tsipras to Meet With Germany’s Merkel and France’s Hollande
[WSJ] German Politicians Refuse to Give Any More to Greece
[MarketWatch] U.S. considers harder line on Russia
[Bloomberg] Turks Go to Polls to Decide on Erdogan’s Political Ambitions
Saturday, June 6, 2015
Saturday's News Links
[CNBC] Bond market volatility could rein in stocks
[UK Guardian] Tsipras warns G7 leaders time running out to rescue Greece from bankruptcy
[Bloomberg] China Hackers Got Past Costly U.S. Computer Security With Ease
[Reuters] Pentagon chief says new action needed on Russia over Ukraine
[Reuters] Taiwan coast guard launches new ships as South China Sea tensions rise
[Reuters] Saudi Arabia says it shot down Scud missile fired by Yemen's Houthis
[UK Guardian] Tsipras warns G7 leaders time running out to rescue Greece from bankruptcy
[Bloomberg] China Hackers Got Past Costly U.S. Computer Security With Ease
[Reuters] Pentagon chief says new action needed on Russia over Ukraine
[Reuters] Taiwan coast guard launches new ships as South China Sea tensions rise
[Reuters] Saudi Arabia says it shot down Scud missile fired by Yemen's Houthis
Friday, June 5, 2015
My Weekly Commentary: Just the Facts
My apologies. I had commitments today and was unable to find the time to write.
For the Week:
The S&P500 declined 0.7% (up 1.6% y-t-d), and the Dow fell 0.9% (up 0.1%). The Utilities sank 4.1% (down 10.9%). The Banks jumped 2.8% (up 4.5%), and the Broker/Dealers surged 3.2% (up 8.0%). The Transports gained 2.5% (down 6.9%). The S&P 400 Midcaps were little changed (up 5.1%), while the small cap Russell 2000 rose 1.2% (up 4.7%). The Nasdaq100 declined 0.7% (up 5.7%), and the Morgan Stanley High Tech index was about unchanged (up 5.1%). The Semiconductors were hit 2.6% (up 5.7%). The Biotechs slipped 0.5% (up 20.2%). With bullion down $22, the HUI gold index fell 4.2% (down 2.6%).
Three-month Treasury bill rates ended the week at two basis points. Two-year government yields rose 10 bps to 0.71% (up 4bps y-t-d). Five-year T-note yields jumped 25 bps to a 2015 high 1.74% (up 9bps). Ten-year Treasury yields surged 29 bps to an eight-month high 2.41% (up 24bps). Long bond yields rose 23 bps to an eight-month high 3.11% (up 36bps).
Greek 10-year yields fell 20 bps to 10.66% (up 92bps y-t-d). European bonds were routed. Ten-year Portuguese yields surged 39 bps 2.92% (up 30bps). Italian 10-yr yields jumped 39 bps to 2.23% (up 34bps). Spain's 10-year yields surged 38 bps to 2.21% (up 60bps). German bund yields spiked 35 bps higher to 0.84% (up 30 bps). French yields surged 37 bps to 1.16% (up 33bps). The French to German 10-year bond spread widened two to 32 bps. U.K. 10-year gilt yields rose 27 bps to 2.08% (up 33bps).
Japan's Nikkei equities index slipped 0.5% (up 17.3% y-t-d). Japanese 10-year "JGB" yields jumped 10 bps to 0.48% (up 16bps y-t-d). The German DAX equities index fell 1.9% (up 14.2%). Spain's IBEX 35 equities index declined 1.4% (up 7.6%). Italy's FTSE MIB index sank 2.8% (up 20.2%). Emerging equities were volatile. Brazil's Bovespa index recovered 0.4% (up 5.9%). Mexico's Bolsa slipped 0.5% (up 3.1%). South Korea's Kospi index dropped 2.2% (up 8.0%). India’s Sensex equities index sank 3.8% (down 2.7%). China’s bubbling (and volatile!) Shanghai Exchange surged 8.9% (up 55.3%). Turkey's Borsa Istanbul National 100 index fell 1.1% (down 4.4%). Russia's MICEX equities index rallied 2.7% (up 18.3%).
Junk funds saw inflows of $601 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at a 2015 high 3.87% (unchanged y-t-d). Fifteen-year rates were unchanged at 3.08% (down 7bps). One-year ARM rates jumped nine bps to an 18-month high 2.59% (up 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 6 bps to 4.06% (down 22bps).
Federal Reserve Credit last week fell $11.2bn to $4.427 TN. Over the past year, Fed Credit inflated $142bn, or 3.3%. Fed Credit inflated $1.616 TN, or 57%, over the past 134 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $26.9bn last week to $3.354 TN. "Custody holdings" were up $61bn y-t-d.
M2 (narrow) "money" supply jumped $19.2bn to a record $11.960 TN. "Narrow money" expanded $633bn, or 5.6%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits rose $20.6bn, while Savings Deposits declined $2.0bn. Small Time Deposits slipped $2.3bn. Retail Money Funds increased $1.1bn.
For the Week:
The S&P500 declined 0.7% (up 1.6% y-t-d), and the Dow fell 0.9% (up 0.1%). The Utilities sank 4.1% (down 10.9%). The Banks jumped 2.8% (up 4.5%), and the Broker/Dealers surged 3.2% (up 8.0%). The Transports gained 2.5% (down 6.9%). The S&P 400 Midcaps were little changed (up 5.1%), while the small cap Russell 2000 rose 1.2% (up 4.7%). The Nasdaq100 declined 0.7% (up 5.7%), and the Morgan Stanley High Tech index was about unchanged (up 5.1%). The Semiconductors were hit 2.6% (up 5.7%). The Biotechs slipped 0.5% (up 20.2%). With bullion down $22, the HUI gold index fell 4.2% (down 2.6%).
Three-month Treasury bill rates ended the week at two basis points. Two-year government yields rose 10 bps to 0.71% (up 4bps y-t-d). Five-year T-note yields jumped 25 bps to a 2015 high 1.74% (up 9bps). Ten-year Treasury yields surged 29 bps to an eight-month high 2.41% (up 24bps). Long bond yields rose 23 bps to an eight-month high 3.11% (up 36bps).
Greek 10-year yields fell 20 bps to 10.66% (up 92bps y-t-d). European bonds were routed. Ten-year Portuguese yields surged 39 bps 2.92% (up 30bps). Italian 10-yr yields jumped 39 bps to 2.23% (up 34bps). Spain's 10-year yields surged 38 bps to 2.21% (up 60bps). German bund yields spiked 35 bps higher to 0.84% (up 30 bps). French yields surged 37 bps to 1.16% (up 33bps). The French to German 10-year bond spread widened two to 32 bps. U.K. 10-year gilt yields rose 27 bps to 2.08% (up 33bps).
Japan's Nikkei equities index slipped 0.5% (up 17.3% y-t-d). Japanese 10-year "JGB" yields jumped 10 bps to 0.48% (up 16bps y-t-d). The German DAX equities index fell 1.9% (up 14.2%). Spain's IBEX 35 equities index declined 1.4% (up 7.6%). Italy's FTSE MIB index sank 2.8% (up 20.2%). Emerging equities were volatile. Brazil's Bovespa index recovered 0.4% (up 5.9%). Mexico's Bolsa slipped 0.5% (up 3.1%). South Korea's Kospi index dropped 2.2% (up 8.0%). India’s Sensex equities index sank 3.8% (down 2.7%). China’s bubbling (and volatile!) Shanghai Exchange surged 8.9% (up 55.3%). Turkey's Borsa Istanbul National 100 index fell 1.1% (down 4.4%). Russia's MICEX equities index rallied 2.7% (up 18.3%).
Junk funds saw inflows of $601 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at a 2015 high 3.87% (unchanged y-t-d). Fifteen-year rates were unchanged at 3.08% (down 7bps). One-year ARM rates jumped nine bps to an 18-month high 2.59% (up 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 6 bps to 4.06% (down 22bps).
Federal Reserve Credit last week fell $11.2bn to $4.427 TN. Over the past year, Fed Credit inflated $142bn, or 3.3%. Fed Credit inflated $1.616 TN, or 57%, over the past 134 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $26.9bn last week to $3.354 TN. "Custody holdings" were up $61bn y-t-d.
M2 (narrow) "money" supply jumped $19.2bn to a record $11.960 TN. "Narrow money" expanded $633bn, or 5.6%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits rose $20.6bn, while Savings Deposits declined $2.0bn. Small Time Deposits slipped $2.3bn. Retail Money Funds increased $1.1bn.
Money market fund assets increased $3.5bn to $2.618 TN. Money Funds were down $115bn year-to-date, while gaining $38bn y-o-y.
Total Commercial Paper slipped $1.3bn to $944bn. CP declined $95bn over the past year, or 9.1%.
Currency Watch:
The U.S. dollar index declined 0.6% to 96.35 (up 6.7% y-t-d). For the week on the upside, the Swedish krona increased 1.6%, the euro 1.2%, the Brazilian real 1.1%, the British pound 0.1% and the Canadian dollar 0.1%. For the week on the downside, the South African rand declined 3.5%, the Norwegian krone 2.3%, the Mexican peso 2.2%, the Japanese yen 1.2%, the New Zealand dollar 0.8%, the Australian dollar 0.3% and the Swiss franc 0.1%.
Commodities Watch:
The Goldman Sachs Commodities Index declined 1.4% (up 3.5% y-t-d). Spot Gold fell 1.9% to $1,168 (down 1.4%). July Silver sank 4.3% to $15.98 (up 2.4%). June Crude lost $1.17 to $59.13 (up 11%). June Gasoline dropped 2.7% (up 38%), and June Natural Gas fell 1.9% (down 10%). July Copper lost 1.3% (down 5%). July Wheat rallied 8.4% (down 12%). July Corn recovered 2.6% (down 8%).
Fixed Income Bubble Watch:
June 5 – Bloomberg (Simon Kennedy): “There’s a $400 billion reason to worry if you’re a bond investor. That’s how much global currency reserves have shrunk since reaching a record $12 trillion last August… The decline is another potential source of volatility in debt markets rocked this week in part by ebbing deflation fears in Europe and speculation the U.S. Federal Reserve will soon raise interest rates. That’s because contracting reserves leave countries with less money to recycle into bonds, removing a key support, strategists at… Pavilion Global Markets Ltd., said in a note… titled ‘Falling Reserves, Rising Yields.’ Periods of falling reserves historically coincided with increased fixed-income volatility, as measured by a market stress indicator created by the ECB and based on fluctuations in the German 10-year bond, according to the Pavilion team, led by Pierre Lapointe.”
June 3 – Bloomberg (Alexandra Scaggs): “More Wall Street executives are sounding alarms about the bond market. The latest to warn were Gary Cohn, president of Goldman Sachs Group Inc., and Anshu Jain, co-chief executive officer of Deutsche Bank AG. The concern is bond investors looking to buy, or especially to sell, will face wide prices swings and higher costs to get a transaction done. ‘The problem is on the days when you need liquidity, it probably won't be there,’ said Cohn… Large Wall Street banks, or dealers, are carrying a smaller share of bonds on their books, as regulations restrict the capital they can hold on their balance sheets. Money managers, meanwhile, are holding a lot more of them. Dealer inventories dropped by 27% between 2007 and early 2015 while assets held by bond mutual funds and exchange-traded funds almost doubled.”
June 3 – Bloomberg (Michelle Davis): “A dark shadow is lurking behind the happy façade of rising stock prices. U.S. companies are borrowing money faster than they’re earning it -- and they’re doing it at the quickest pace since the aftermath of the financial crisis. Instead of deploying the debt to build factories, hire new workers or expand product lines, companies are funneling more of their money to shareholders or using it to fund deals. Stock buybacks reached an all-time high last year and the volume of global mergers and acquisitions announced so far this year would make it the second-busiest ever… The debt undermines future growth and could dent company income when borrowing costs rise… The consequence: profitability, buoyed by cheap money since rates went to near-zero in 2008, will sink. ‘Companies have said, ‘We don’t have an ability to grow organically, so we can distract shareholders instead,’’ according to Jody Lurie, a credit analyst at Janney Montgomery Scott… ‘When they buy back shares, all it does is optically make earnings per share look better.’”
June 1 – Financial Times (James Fontanella-Khan and Robin Wigglesworth): “US dealmaking hit an all-time monthly record in May, surpassing the previous highs seen during the peak of the dotcom bubble and the zenith of the debt boom that led to the 2008 financial crisis. The overall value of deals in US-bound mergers and acquisitions activity amounted to $243bn in May compared to $226bn during the same month in 2007 and $213bn in January 2000, the previous biggest and second biggest months respectively, according to Dealogic… The data underline how frenzied US dealmaking has become as cheap debt and bullish boardrooms fuel an M&A boom of a size not seen since just before the last two equity market crashes.”
June 3 – Bloomberg (Laura J Keller): “For the hedge funds and money managers that pick over the credit market’s scrap heaps, Puerto Rico has become the new ground zero. Some of the same distressed-debt buyers that started battling seven years ago over the remains of Lehman Brothers… are now girding for a rematch over the U.S. territory’s $72 billion of debt… The conflict is heating up after the Puerto Rico Electric Power Authority, known as Prepa, met with the financial adviser to its creditors Monday to restart talks toward a restructuring that may ask bondholders to take a loss or wait longer to be repaid. Hedge funds now hold as much as 30% of the obligations of Puerto Rico and its agencies, Barclays Plc municipal-debt strategist Mikhail Foux estimates. ‘It’s extremely disorderly and nasty,’ said Joseph Rosenblum, director of municipal-credit research at AllianceBernstein… This ‘messy approach to trying to resolve something with no clear structure or guidance doesn’t give a bondholder any kind of confidence,’ he said.”
U.S. Bubble Watch:
June 3 – New York Times (Noam Scheiber and Dalia Sussman): “Americans are broadly concerned about inequality of wealth and income despite an economy that has improved by most measures, a sentiment that is already driving the 2016 presidential contest, according to a New York Times/CBS News poll. The poll found that a strong majority say that wealth should be more evenly divided and that it is a problem that should be addressed urgently. Nearly six in 10 Americans said government should do more to reduce the gap between the rich and the poor, but they split sharply along partisan lines…These findings help explain the populist appeals from politicians of both parties, but particularly Democrats, who are seeking to capitalize on the sense among Americans that the economic recovery is benefiting only a handful at the very top.”
June 3 – Bloomberg (Hugh Son and Pamela Roux): “Jamie Dimon, who helped assemble Citigroup Inc. and then improved on the experiment with JPMorgan Chase & Co., is responsible for two of the biggest banks the world has ever seen. His life’s work also made him rich. With JPMorgan shares near a record high, Dimon’s net worth is about $1.1 billion… Dimon’s fortune derives from a $485 million stake in… JPMorgan… and an investment portfolio seeded by proceeds from Citigroup stock sales. Dimon’s status is unusual because, with the exception of former mentor Sanford ‘Sandy’ Weill, few bank managers accumulate that much wealth. Most finance-industry billionaires start businesses or investment firms, such as hedge-fund tycoon George Soros, who is worth $28.5 billion, or Blackstone Group LP co-founder Steve Schwarzman, worth $13.4 billion.”
June 1 – USAToday (Greg Gardner): “New-car sales are running at near-peak levels, partly because many consumers are financing their purchases for longer terms. The average new car loan has reached a record 67 months, reports Experian… The percentage of loans with terms of 73 to 84 months also reached a new high of 29.5% in the first quarter of 2015, up from 24.9% a year earlier. Long-term used-vehicle loans also broke records with loan terms of 73 to 84 months reaching 16% in the first quarter 2015, up from 12.94% — also the highest on record.”
June 5 – Bloomberg (Prashant Gopal and John Gittelsohn): “The sales office for condominiums at Miami’s Brickell City Centre attracted more than 100 visitors daily last year, with prospective buyers crowding in and snapping selfies beside a scale model of the $1 billion project. Now, the flow of people has trickled to about a quarter of what it once was. ‘Buyers are asking really good questions’ instead of rushing into deals, said Stephen Owens, president of the U.S. unit of Hong Kong-based Swire Properties Ltd., the developer of the 9-acre condo, hotel, office and shopping complex. ‘Two years ago, it was, ‘Where can I sign?’.’ Downtown Miami’s luxury-condo boom -- fueled by buyers from Latin America and Europe willing to pay half the purchase price up front -- is becoming a casualty of the year-long climb in the U.S. dollar. Diminished purchasing power and rising prices are holding back the overseas investors that make up the bulk of sales at new towers, cooling a frenzied market.”
Federal Reserve Watch:
June 4 – Wall Street Journal (Kevin Brady): “In 1913 President Woodrow Wilson favored the creation of a central bank, but the legacy of President Andrew Jackson—who vetoed a bill to renew the charter of the Second Bank of the United States in 1832—still stood firm in some parts of the country. So to get Congress to pass the Federal Reserve Act, Wilson had to retain the support of pro-central bank northeastern lawmakers while convincing southern and western Democrats that legislation would not, in fact, create a central bank. Wilson’s ingenious solution was federalism: a Federal Reserve composed of 12 district banks under the supervision of a board in Washington. Though arising out of political necessity, the structure of shared decision making and decentralized economic analysis has proved beneficial by ensuring that input into monetary policy comes from the diverse regions of the complex U.S. economy. But this balance is being upset by the growing power of the Board of Governors in Washington, D.C., and one district bank, the Federal Reserve Bank of New York.”
Global Bubble Watch:
June 3 – Bloomberg (Kasia Klimasinska): “The Federal Reserve should hold off from raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time in three months. The lender also said that the dollar was ‘moderately overvalued’ and a further marked appreciation would be ‘harmful,’ in a statement released in Washington on Thursday on its annual checkup of the U.S. economy. ‘The FOMC should remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident,’ the IMF said. Based on the fund’s economic forecast, and ‘barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016.’”
June 3 – Bloomberg (Susanne Walker Barton and David Goodman): “With an insouciant turn of phrase, Mario Draghi whipped up a frenzy of selling in government bonds that left German securities with their worst two-day slump in the history of the euro era. Benchmark Treasury 10-year note yields had the biggest two-day increase in four months after the European Central Bank President said markets must get used to periods of higher volatility… Traders in New York canceled meetings Wednesday as the bond rout intensified. ‘The ECB doesn’t seem too concerned with recent volatility, and so that’s a green light for that volatility to continue without the ECB reacting,’ said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin.”
June 3 – Bloomberg (Tracy Alloway): “Petrobras, the scandal-ridden, junk-rated, state-controlled Brazilian oil producer, surprised markets to sell $2.5bn worth of bonds with a 100-year maturity on Monday. Here's what the unusual debt sale can tell us about markets. Investors are still craving returns - The new Petrobras debt sold like hot cakes thanks to the juicy returns on offer. …the company issued the bonds to yield 8.45% -- that's far higher than Mexico's 100-year bonds, which are trading at a yield of 5.59% or 30-year U.S. Treasuries yielding 2.94%. But that 8.45% yield was also 0.4 percentage point less than the price guidance provided by the deal's bankers.”
May 31 – Bloomberg (Jason Scott): “Sydney is in the grip of a housing bubble, Australia’s most-senior economic bureaucrat said in one of the strongest warnings yet by a government official. ‘When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney -- unequivocally,’ Treasury Secretary John Fraser said… ‘Frankly, whatever the data says, just casual observation would tell you that’s the case.’ Home prices in Sydney rose 15% in May from a year earlier… Australia’s major banks have said they will curb growth in home loans to investors after the country’s financial services regulator asked lenders to limit expansion of these mortgages to 10% a year.”
June 2 – Bloomberg (Katya Kazakina): “In November, a painting of a pensive young woman by French artist Francis Picabia sold for 145,000 euros ($181,159) at auction in Paris. Six months later, the same 1940s work appeared at Christie’s in New York, and at least three bidders pushed the price to $580,000. The anonymous seller scored a 220% gain… The practice of flipping art, popular among some buyers of inexpensive emerging artists, is increasingly reaching the market for established masters such as Andy Warhol, Gerhard Richter and Picabia. Driving it are record prices for high-end artworks and Wall Street investors who are prioritizing rapid returns over long-term collecting. Trophy works that quickly returned to auction were once perceived as ‘a woman who has been divorced three times,’ said Frances Beatty, vice president of Richard L. Feigen & Co., a New York gallery. “Because art is seen as an asset class, the more rapid turnover is considered encouraging. There’s a whole new generation of collectors who are playing the art market.”
Europe Watch:
June 5 – Reuters (Karolina Tagaris and Angeliki Koutantou): “Greek Prime Minister Alexis Tsipras on Friday spurned ‘absurd’ terms of proposed aid from lenders and delayed a debt payment to the International Monetary Fund, prolonging an impasse that threatens to push Greece into default and out of the euro zone. In a defiant speech aimed at winning parliament's backing for his rejection of the austerity-for-aid package, Tsipras balanced indignation with confidence that a deal was ‘closer than ever before’ to keep his country inside the currency bloc. The contradictory message underscored the growing pressure on Tsipras to quickly sign a deal before cash-strapped Athens runs out of money, while also trying to placate hardliners in his leftist party who oppose the terms creditors are demanding. One far-left deputy minister suggested snap elections as a way out, by obtaining public legitimacy for difficult decisions to secure aid. But Tsipras made no mention of elections in an address that focused on attacking the aid plan offered by euro zone and IMF creditors. ‘The Greek government cannot consent to absurd proposals,’ Tsipras told parliament. ‘I want to believe that this proposal was a bad moment for Europe or at the very least a bad negotiating trick and will soon be withdrawn by the masterminds themselves,’ he said.”
China Bubble Watch:
June 4 – Bloomberg: “China has granted another 1 trillion yuan ($161bn) quota to provinces to swap high-interest debt into low-cost bonds, doubling the previous amount, according to people familiar with the matter. The increase comes as the first stage of the bond swap is under way. Commercial banks have been buying such bonds after the central bank flooded the interbank market with cheap funds… The expansion will help the government cut risks from a record surge in borrowing that local authorities took on to fund a glut of investment projects. The process -- which includes inducements for banks to buy new, longer-maturity, lower yielding bonds -- is alleviating a funding crunch among provinces that had threatened to deepen the economy’s slowdown. Local-government obligations may have reached 25 trillion yuan, bigger than the size of the German economy, according to estimates from Mizuho Securities… That compares with the figure of 17.9 trillion yuan as of June 30, 2013 given by the National Audit Office.”
June 3 – Bloomberg (Ye Xie and Bonnie Cao): “China’s initial public offerings are such hot commodities that a company seeking $2 billion attracted bids approaching the entire annual economic output of Hong Kong. China National Nuclear Power Co., the country’s second-biggest atomic power operator, locked up 1.69 trillion yuan ($273 billion) in bids for its IPO… The offering may be the biggest in China since August 2010. Individual investors are piling into newly-issued stocks on mainland exchanges after regulators discouraged companies from selling equity at high valuations. Shares of the 144 firms that went public this year have jumped an average 539% so far, including a 44% increase on the first day of trading, the maximum amount allowed by local bourses…”
June 1 – Bloomberg: “One of the many mysteries behind the share price collapse of the solar panel maker controlled by Li Hejun is this: Which of the Chinese billionaire’s many creditors risk losing every yuan they put into his company? A plethora of Chinese lenders are exposed to Hanergy Thin Film Power Group Ltd. and its parent company… On May 20, 47% of Hanergy Thin Film’s market value vanished in minutes and it’s now under probe by the Hong Kong Securities & Futures Commission. Creditors are nervous: A group of 11 lenders have asked for a meeting to voice their concerns and discuss their $82 million loan… ‘The interesting thing with Hanergy is that so much is happening with the parent company that investors know nothing about,’ said Charles Yonts, an analyst with CLSA Asia-Pacific Markets… ‘The opacity about parent finances and billings is extraordinary.’ …Hanergy Group has given no public accounting of all its debt or the debt scattered among its units.’”
June 4 – Bloomberg: “Guangxi Nonferrous Metals Group Co. may have difficulty repaying its bonds on its own, China Credit Rating Co. said, highlighting the risk of it becoming the second state-owned firm to default. The company, based in Nanning in China’s southern Guangxi province, must repay 1.3 billion yuan ($210 million) of principal and 62.92 million yuan of interest on its 4.84% notes due June 13… A bottle maker that supplies Coca-Cola Co. became the fourth company to miss obligations in the onshore bond market last week and a maker of smoked duck leg cited increasing difficulty getting credit as it defaulted on bank loans ahead of a bond deadline June 12. ‘Lower-rated issuers are facing big pressure to repay debt,’ said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. ‘But given the loose monetary environment, there won’t be a surge in bond defaults in China.’”
EM Bubble Watch:
June 3 – CNN: “Venezuela's economy is imploding. Its currency, the bolivar, is literally worth less than a penny. Just a month ago, $1 was worth 279 bolivars. That was already pretty dismal for Venezuela. Now $1 equals 408 bolivars, according to the unofficial exchange rate, which most Venezuelans get when they try to trade currency. Put another way, one bolivar equals $0.002 -- less than a penny. The country's currency has lost nearly half its value since the beginning of May…”
June 1 – AFP: “Saudi Arabia's foreign currency reserves dropped by $49 billion in the first four months of 2015 following the dive in world oil prices, a report said… The reserves, piled up in the past decade due to high crude prices, dropped from $732 billion at the end of 2014 to $683 billion at the end of April, Saudi firm Jadwa Research said in a report. In March and April alone, the reserves dipped $31 billion, it said.”
June 4 – Bloomberg (Deema Almashabi): “Saudi Arabia’s oil-fueled economic boom is showing signs of losing steam. Official data released last week showed demand for loans growing at the slowest pace since 2011 and the kingdom’s currency reserves plunging for a third month in a row. An index reflecting the performance of the non-oil private economy fell to the lowest level in a year in May. The numbers signal that the drop in oil prices is starting to hurt the biggest Arab economy at a time when the kingdom is undergoing sweeping political changes at home and waging a regional war. The government is moving ahead with spending plans that will widen the budget deficit to 20% of economic output…”
June 3 – Bloomberg (Onur Ant and Selcan Hacaoglu): “Turkey’s consumer price inflation accelerated in May to the highest level this year, led by price gains in transportation and housing. The annual rate of inflation rose to 8.09% from 7.91% in the previous month…”
Brazil Watch:
June 3 – Bloomberg (Mario Sergio Lima): “Brazil raised interest rates for a sixth straight time as policy makers work to convince investors that inflation will reach target. The bank’s board… raised the benchmark rate by a half-point to 13.75% Wednesday, the highest since January 2009… Economists and traders bet the deepest recession in 25 years will prevent Tombini from raising interest rates as much as needed to slow inflation to the 4.5% target next year. Meanwhile, Tombini has pledged to do what it takes to meet the goal even as unemployment rises. ‘The central bank needs to regain credibility to help confidence rise, and they are on the right path,’ Flavio Serrano, senior economist at BESI Brasil… ‘Wrong economic policies are to blame for the economic state right now.’”
Geopolitical Watch:
June 3 – Reuters (Kiyoshi Takenaka): “Philippine President Benigno Aquino made a veiled comparison… between China's activities in the South China Sea and Nazi Germany's expansionism before World War Two, echoing similar remarks he made last year that outraged Beijing. Aquino, who is expected to agree beefed up defense ties with Japan when he meets Prime Minister Shinzo Abe on Thursday, also urged Beijing to rethink its land reclamation projects in the disputed waters… Asked about Washington's strategic ‘rebalance’ to Asia and China's maritime moves, Aquino suggested the U.S. role was key, and alluded to Nazi Germany's territorial expansion before World War Two and Western appeasement. ‘If there was a vacuum, if the United States, which is the superpower, says 'We are not interested', perhaps there is no brake to ambitions of other countries,’ he said… Recalling documentaries on Germany's expansionism before the war, Aquino added: ‘The commentators on these documentaries were saying, 'If somebody said stop to (Adolf) Hitler at that point in time, or to Germany at that time, could we have avoided World War Two?’ ‘So, I say again, America's rebalancing sends a definite signal that we are all supposed to be living under norms that we agreed upon.’”
June 5 – Reuters (Siva Govindasamy): “Vietnam is in talks with European and U.S. contractors to buy fighter jets, maritime patrol planes and unarmed drones, sources said, as it looks to beef up its aerial defenses in the face of China's growing assertiveness in disputed waters. The battle-hardened country has already taken possession of three Russian-built Kilo-attack submarines and has three more on order as part of a $2.6 billion deal agreed in 2009. Upgrading its air force would give Vietnam one of the most potent militaries in Southeast Asia.”
June 5 – Bloomberg (Michael A Riley and John Walcott): “The disclosure by U.S. officials that Chinese hackers stole records of as many as 4 million government workers is now being linked to the thefts of personal information from health-care companies. Forensic evidence indicates that the group of hackers responsible for the U.S. government breach… likely carried out attacks on health-insurance providers Anthem Inc. and Premera Blue Cross that were reported earlier this year, said John Hultquist of iSight Partners Inc., a cyber-intelligence company… The thefts are believed to be part of a larger effort by Chinese hackers to get health-care records and other personal information on millions of U.S. government employees and contractors from various sources, including insurers, government agencies and federal contractors, said an American intelligence official…”
Russia and Ukraine Watch:
June 4 – Reuters (Richard Balmforth and Pavel Polityuk): “Ukraine's president told his military on Thursday to prepare for a possible ‘full-scale invasion’ by Russia all along their joint border, a day after the worst fighting with Russian-backed separatists in months. His address in parliament was one of the first times Petro Poroshenko has used the word ‘invasion’ to refer to Russia's behavior since the start of a separatist rebellion in the east… Referring to a 12-hour firefight involving artillery on both sides on Wednesday when Ukraine says the rebels tried to take the town of Maryinka, Poroshenko said: ‘There is a colossal threat of a renewal of large-scale military operations from the side of the Russian-terrorist groups.’ ‘The military must be ready as much for a renewal of an offensive by the enemy in the Donbass as they are for a full-scale invasion along the whole length of the border with Russia. We must be truly ready for this.’”
Japan Watch:
June 4 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The excessive strength in the yen that damaged Japanese manufacturing in recent years has now been corrected, according to an ally of Bank of Japan Governor Haruhiko Kuroda. ‘The abnormally strong yen has been corrected,’ said Yutaka Harada, who joined the central bank’s policy board in March… Harada’s remarks underscore that Japanese policy makers aren’t seeking further declines in the currency… Since reaching a postwar high of 75.35 in 2011, the yen has fallen 40%, aided by unprecedented monetary easing that Kuroda’s using to reflate the world’s third-biggest economy. ‘Harada’s comments indicate that the BOJ sees no need for additional easing anytime soon,’ said Kazuhiko Ogata, an economist at Credit Agricole SA. ‘The government has become increasingly aware of the negative effects of the weak yen on households and small companies, and that’s something the BOJ can’t ignore.’”
Total Commercial Paper slipped $1.3bn to $944bn. CP declined $95bn over the past year, or 9.1%.
Currency Watch:
The U.S. dollar index declined 0.6% to 96.35 (up 6.7% y-t-d). For the week on the upside, the Swedish krona increased 1.6%, the euro 1.2%, the Brazilian real 1.1%, the British pound 0.1% and the Canadian dollar 0.1%. For the week on the downside, the South African rand declined 3.5%, the Norwegian krone 2.3%, the Mexican peso 2.2%, the Japanese yen 1.2%, the New Zealand dollar 0.8%, the Australian dollar 0.3% and the Swiss franc 0.1%.
Commodities Watch:
The Goldman Sachs Commodities Index declined 1.4% (up 3.5% y-t-d). Spot Gold fell 1.9% to $1,168 (down 1.4%). July Silver sank 4.3% to $15.98 (up 2.4%). June Crude lost $1.17 to $59.13 (up 11%). June Gasoline dropped 2.7% (up 38%), and June Natural Gas fell 1.9% (down 10%). July Copper lost 1.3% (down 5%). July Wheat rallied 8.4% (down 12%). July Corn recovered 2.6% (down 8%).
Fixed Income Bubble Watch:
June 5 – Bloomberg (Simon Kennedy): “There’s a $400 billion reason to worry if you’re a bond investor. That’s how much global currency reserves have shrunk since reaching a record $12 trillion last August… The decline is another potential source of volatility in debt markets rocked this week in part by ebbing deflation fears in Europe and speculation the U.S. Federal Reserve will soon raise interest rates. That’s because contracting reserves leave countries with less money to recycle into bonds, removing a key support, strategists at… Pavilion Global Markets Ltd., said in a note… titled ‘Falling Reserves, Rising Yields.’ Periods of falling reserves historically coincided with increased fixed-income volatility, as measured by a market stress indicator created by the ECB and based on fluctuations in the German 10-year bond, according to the Pavilion team, led by Pierre Lapointe.”
June 3 – Bloomberg (Alexandra Scaggs): “More Wall Street executives are sounding alarms about the bond market. The latest to warn were Gary Cohn, president of Goldman Sachs Group Inc., and Anshu Jain, co-chief executive officer of Deutsche Bank AG. The concern is bond investors looking to buy, or especially to sell, will face wide prices swings and higher costs to get a transaction done. ‘The problem is on the days when you need liquidity, it probably won't be there,’ said Cohn… Large Wall Street banks, or dealers, are carrying a smaller share of bonds on their books, as regulations restrict the capital they can hold on their balance sheets. Money managers, meanwhile, are holding a lot more of them. Dealer inventories dropped by 27% between 2007 and early 2015 while assets held by bond mutual funds and exchange-traded funds almost doubled.”
June 3 – Bloomberg (Michelle Davis): “A dark shadow is lurking behind the happy façade of rising stock prices. U.S. companies are borrowing money faster than they’re earning it -- and they’re doing it at the quickest pace since the aftermath of the financial crisis. Instead of deploying the debt to build factories, hire new workers or expand product lines, companies are funneling more of their money to shareholders or using it to fund deals. Stock buybacks reached an all-time high last year and the volume of global mergers and acquisitions announced so far this year would make it the second-busiest ever… The debt undermines future growth and could dent company income when borrowing costs rise… The consequence: profitability, buoyed by cheap money since rates went to near-zero in 2008, will sink. ‘Companies have said, ‘We don’t have an ability to grow organically, so we can distract shareholders instead,’’ according to Jody Lurie, a credit analyst at Janney Montgomery Scott… ‘When they buy back shares, all it does is optically make earnings per share look better.’”
June 1 – Financial Times (James Fontanella-Khan and Robin Wigglesworth): “US dealmaking hit an all-time monthly record in May, surpassing the previous highs seen during the peak of the dotcom bubble and the zenith of the debt boom that led to the 2008 financial crisis. The overall value of deals in US-bound mergers and acquisitions activity amounted to $243bn in May compared to $226bn during the same month in 2007 and $213bn in January 2000, the previous biggest and second biggest months respectively, according to Dealogic… The data underline how frenzied US dealmaking has become as cheap debt and bullish boardrooms fuel an M&A boom of a size not seen since just before the last two equity market crashes.”
June 3 – Bloomberg (Laura J Keller): “For the hedge funds and money managers that pick over the credit market’s scrap heaps, Puerto Rico has become the new ground zero. Some of the same distressed-debt buyers that started battling seven years ago over the remains of Lehman Brothers… are now girding for a rematch over the U.S. territory’s $72 billion of debt… The conflict is heating up after the Puerto Rico Electric Power Authority, known as Prepa, met with the financial adviser to its creditors Monday to restart talks toward a restructuring that may ask bondholders to take a loss or wait longer to be repaid. Hedge funds now hold as much as 30% of the obligations of Puerto Rico and its agencies, Barclays Plc municipal-debt strategist Mikhail Foux estimates. ‘It’s extremely disorderly and nasty,’ said Joseph Rosenblum, director of municipal-credit research at AllianceBernstein… This ‘messy approach to trying to resolve something with no clear structure or guidance doesn’t give a bondholder any kind of confidence,’ he said.”
U.S. Bubble Watch:
June 3 – New York Times (Noam Scheiber and Dalia Sussman): “Americans are broadly concerned about inequality of wealth and income despite an economy that has improved by most measures, a sentiment that is already driving the 2016 presidential contest, according to a New York Times/CBS News poll. The poll found that a strong majority say that wealth should be more evenly divided and that it is a problem that should be addressed urgently. Nearly six in 10 Americans said government should do more to reduce the gap between the rich and the poor, but they split sharply along partisan lines…These findings help explain the populist appeals from politicians of both parties, but particularly Democrats, who are seeking to capitalize on the sense among Americans that the economic recovery is benefiting only a handful at the very top.”
June 3 – Bloomberg (Hugh Son and Pamela Roux): “Jamie Dimon, who helped assemble Citigroup Inc. and then improved on the experiment with JPMorgan Chase & Co., is responsible for two of the biggest banks the world has ever seen. His life’s work also made him rich. With JPMorgan shares near a record high, Dimon’s net worth is about $1.1 billion… Dimon’s fortune derives from a $485 million stake in… JPMorgan… and an investment portfolio seeded by proceeds from Citigroup stock sales. Dimon’s status is unusual because, with the exception of former mentor Sanford ‘Sandy’ Weill, few bank managers accumulate that much wealth. Most finance-industry billionaires start businesses or investment firms, such as hedge-fund tycoon George Soros, who is worth $28.5 billion, or Blackstone Group LP co-founder Steve Schwarzman, worth $13.4 billion.”
June 1 – USAToday (Greg Gardner): “New-car sales are running at near-peak levels, partly because many consumers are financing their purchases for longer terms. The average new car loan has reached a record 67 months, reports Experian… The percentage of loans with terms of 73 to 84 months also reached a new high of 29.5% in the first quarter of 2015, up from 24.9% a year earlier. Long-term used-vehicle loans also broke records with loan terms of 73 to 84 months reaching 16% in the first quarter 2015, up from 12.94% — also the highest on record.”
June 5 – Bloomberg (Prashant Gopal and John Gittelsohn): “The sales office for condominiums at Miami’s Brickell City Centre attracted more than 100 visitors daily last year, with prospective buyers crowding in and snapping selfies beside a scale model of the $1 billion project. Now, the flow of people has trickled to about a quarter of what it once was. ‘Buyers are asking really good questions’ instead of rushing into deals, said Stephen Owens, president of the U.S. unit of Hong Kong-based Swire Properties Ltd., the developer of the 9-acre condo, hotel, office and shopping complex. ‘Two years ago, it was, ‘Where can I sign?’.’ Downtown Miami’s luxury-condo boom -- fueled by buyers from Latin America and Europe willing to pay half the purchase price up front -- is becoming a casualty of the year-long climb in the U.S. dollar. Diminished purchasing power and rising prices are holding back the overseas investors that make up the bulk of sales at new towers, cooling a frenzied market.”
Federal Reserve Watch:
June 4 – Wall Street Journal (Kevin Brady): “In 1913 President Woodrow Wilson favored the creation of a central bank, but the legacy of President Andrew Jackson—who vetoed a bill to renew the charter of the Second Bank of the United States in 1832—still stood firm in some parts of the country. So to get Congress to pass the Federal Reserve Act, Wilson had to retain the support of pro-central bank northeastern lawmakers while convincing southern and western Democrats that legislation would not, in fact, create a central bank. Wilson’s ingenious solution was federalism: a Federal Reserve composed of 12 district banks under the supervision of a board in Washington. Though arising out of political necessity, the structure of shared decision making and decentralized economic analysis has proved beneficial by ensuring that input into monetary policy comes from the diverse regions of the complex U.S. economy. But this balance is being upset by the growing power of the Board of Governors in Washington, D.C., and one district bank, the Federal Reserve Bank of New York.”
Global Bubble Watch:
June 3 – Bloomberg (Kasia Klimasinska): “The Federal Reserve should hold off from raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time in three months. The lender also said that the dollar was ‘moderately overvalued’ and a further marked appreciation would be ‘harmful,’ in a statement released in Washington on Thursday on its annual checkup of the U.S. economy. ‘The FOMC should remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident,’ the IMF said. Based on the fund’s economic forecast, and ‘barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016.’”
June 3 – Bloomberg (Susanne Walker Barton and David Goodman): “With an insouciant turn of phrase, Mario Draghi whipped up a frenzy of selling in government bonds that left German securities with their worst two-day slump in the history of the euro era. Benchmark Treasury 10-year note yields had the biggest two-day increase in four months after the European Central Bank President said markets must get used to periods of higher volatility… Traders in New York canceled meetings Wednesday as the bond rout intensified. ‘The ECB doesn’t seem too concerned with recent volatility, and so that’s a green light for that volatility to continue without the ECB reacting,’ said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin.”
June 3 – Bloomberg (Tracy Alloway): “Petrobras, the scandal-ridden, junk-rated, state-controlled Brazilian oil producer, surprised markets to sell $2.5bn worth of bonds with a 100-year maturity on Monday. Here's what the unusual debt sale can tell us about markets. Investors are still craving returns - The new Petrobras debt sold like hot cakes thanks to the juicy returns on offer. …the company issued the bonds to yield 8.45% -- that's far higher than Mexico's 100-year bonds, which are trading at a yield of 5.59% or 30-year U.S. Treasuries yielding 2.94%. But that 8.45% yield was also 0.4 percentage point less than the price guidance provided by the deal's bankers.”
May 31 – Bloomberg (Jason Scott): “Sydney is in the grip of a housing bubble, Australia’s most-senior economic bureaucrat said in one of the strongest warnings yet by a government official. ‘When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney -- unequivocally,’ Treasury Secretary John Fraser said… ‘Frankly, whatever the data says, just casual observation would tell you that’s the case.’ Home prices in Sydney rose 15% in May from a year earlier… Australia’s major banks have said they will curb growth in home loans to investors after the country’s financial services regulator asked lenders to limit expansion of these mortgages to 10% a year.”
June 2 – Bloomberg (Katya Kazakina): “In November, a painting of a pensive young woman by French artist Francis Picabia sold for 145,000 euros ($181,159) at auction in Paris. Six months later, the same 1940s work appeared at Christie’s in New York, and at least three bidders pushed the price to $580,000. The anonymous seller scored a 220% gain… The practice of flipping art, popular among some buyers of inexpensive emerging artists, is increasingly reaching the market for established masters such as Andy Warhol, Gerhard Richter and Picabia. Driving it are record prices for high-end artworks and Wall Street investors who are prioritizing rapid returns over long-term collecting. Trophy works that quickly returned to auction were once perceived as ‘a woman who has been divorced three times,’ said Frances Beatty, vice president of Richard L. Feigen & Co., a New York gallery. “Because art is seen as an asset class, the more rapid turnover is considered encouraging. There’s a whole new generation of collectors who are playing the art market.”
Europe Watch:
June 5 – Reuters (Karolina Tagaris and Angeliki Koutantou): “Greek Prime Minister Alexis Tsipras on Friday spurned ‘absurd’ terms of proposed aid from lenders and delayed a debt payment to the International Monetary Fund, prolonging an impasse that threatens to push Greece into default and out of the euro zone. In a defiant speech aimed at winning parliament's backing for his rejection of the austerity-for-aid package, Tsipras balanced indignation with confidence that a deal was ‘closer than ever before’ to keep his country inside the currency bloc. The contradictory message underscored the growing pressure on Tsipras to quickly sign a deal before cash-strapped Athens runs out of money, while also trying to placate hardliners in his leftist party who oppose the terms creditors are demanding. One far-left deputy minister suggested snap elections as a way out, by obtaining public legitimacy for difficult decisions to secure aid. But Tsipras made no mention of elections in an address that focused on attacking the aid plan offered by euro zone and IMF creditors. ‘The Greek government cannot consent to absurd proposals,’ Tsipras told parliament. ‘I want to believe that this proposal was a bad moment for Europe or at the very least a bad negotiating trick and will soon be withdrawn by the masterminds themselves,’ he said.”
China Bubble Watch:
June 4 – Bloomberg: “China has granted another 1 trillion yuan ($161bn) quota to provinces to swap high-interest debt into low-cost bonds, doubling the previous amount, according to people familiar with the matter. The increase comes as the first stage of the bond swap is under way. Commercial banks have been buying such bonds after the central bank flooded the interbank market with cheap funds… The expansion will help the government cut risks from a record surge in borrowing that local authorities took on to fund a glut of investment projects. The process -- which includes inducements for banks to buy new, longer-maturity, lower yielding bonds -- is alleviating a funding crunch among provinces that had threatened to deepen the economy’s slowdown. Local-government obligations may have reached 25 trillion yuan, bigger than the size of the German economy, according to estimates from Mizuho Securities… That compares with the figure of 17.9 trillion yuan as of June 30, 2013 given by the National Audit Office.”
June 3 – Bloomberg (Ye Xie and Bonnie Cao): “China’s initial public offerings are such hot commodities that a company seeking $2 billion attracted bids approaching the entire annual economic output of Hong Kong. China National Nuclear Power Co., the country’s second-biggest atomic power operator, locked up 1.69 trillion yuan ($273 billion) in bids for its IPO… The offering may be the biggest in China since August 2010. Individual investors are piling into newly-issued stocks on mainland exchanges after regulators discouraged companies from selling equity at high valuations. Shares of the 144 firms that went public this year have jumped an average 539% so far, including a 44% increase on the first day of trading, the maximum amount allowed by local bourses…”
June 1 – Bloomberg: “One of the many mysteries behind the share price collapse of the solar panel maker controlled by Li Hejun is this: Which of the Chinese billionaire’s many creditors risk losing every yuan they put into his company? A plethora of Chinese lenders are exposed to Hanergy Thin Film Power Group Ltd. and its parent company… On May 20, 47% of Hanergy Thin Film’s market value vanished in minutes and it’s now under probe by the Hong Kong Securities & Futures Commission. Creditors are nervous: A group of 11 lenders have asked for a meeting to voice their concerns and discuss their $82 million loan… ‘The interesting thing with Hanergy is that so much is happening with the parent company that investors know nothing about,’ said Charles Yonts, an analyst with CLSA Asia-Pacific Markets… ‘The opacity about parent finances and billings is extraordinary.’ …Hanergy Group has given no public accounting of all its debt or the debt scattered among its units.’”
June 4 – Bloomberg: “Guangxi Nonferrous Metals Group Co. may have difficulty repaying its bonds on its own, China Credit Rating Co. said, highlighting the risk of it becoming the second state-owned firm to default. The company, based in Nanning in China’s southern Guangxi province, must repay 1.3 billion yuan ($210 million) of principal and 62.92 million yuan of interest on its 4.84% notes due June 13… A bottle maker that supplies Coca-Cola Co. became the fourth company to miss obligations in the onshore bond market last week and a maker of smoked duck leg cited increasing difficulty getting credit as it defaulted on bank loans ahead of a bond deadline June 12. ‘Lower-rated issuers are facing big pressure to repay debt,’ said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. ‘But given the loose monetary environment, there won’t be a surge in bond defaults in China.’”
EM Bubble Watch:
June 3 – CNN: “Venezuela's economy is imploding. Its currency, the bolivar, is literally worth less than a penny. Just a month ago, $1 was worth 279 bolivars. That was already pretty dismal for Venezuela. Now $1 equals 408 bolivars, according to the unofficial exchange rate, which most Venezuelans get when they try to trade currency. Put another way, one bolivar equals $0.002 -- less than a penny. The country's currency has lost nearly half its value since the beginning of May…”
June 1 – AFP: “Saudi Arabia's foreign currency reserves dropped by $49 billion in the first four months of 2015 following the dive in world oil prices, a report said… The reserves, piled up in the past decade due to high crude prices, dropped from $732 billion at the end of 2014 to $683 billion at the end of April, Saudi firm Jadwa Research said in a report. In March and April alone, the reserves dipped $31 billion, it said.”
June 4 – Bloomberg (Deema Almashabi): “Saudi Arabia’s oil-fueled economic boom is showing signs of losing steam. Official data released last week showed demand for loans growing at the slowest pace since 2011 and the kingdom’s currency reserves plunging for a third month in a row. An index reflecting the performance of the non-oil private economy fell to the lowest level in a year in May. The numbers signal that the drop in oil prices is starting to hurt the biggest Arab economy at a time when the kingdom is undergoing sweeping political changes at home and waging a regional war. The government is moving ahead with spending plans that will widen the budget deficit to 20% of economic output…”
June 3 – Bloomberg (Onur Ant and Selcan Hacaoglu): “Turkey’s consumer price inflation accelerated in May to the highest level this year, led by price gains in transportation and housing. The annual rate of inflation rose to 8.09% from 7.91% in the previous month…”
Brazil Watch:
June 3 – Bloomberg (Mario Sergio Lima): “Brazil raised interest rates for a sixth straight time as policy makers work to convince investors that inflation will reach target. The bank’s board… raised the benchmark rate by a half-point to 13.75% Wednesday, the highest since January 2009… Economists and traders bet the deepest recession in 25 years will prevent Tombini from raising interest rates as much as needed to slow inflation to the 4.5% target next year. Meanwhile, Tombini has pledged to do what it takes to meet the goal even as unemployment rises. ‘The central bank needs to regain credibility to help confidence rise, and they are on the right path,’ Flavio Serrano, senior economist at BESI Brasil… ‘Wrong economic policies are to blame for the economic state right now.’”
Geopolitical Watch:
June 3 – Reuters (Kiyoshi Takenaka): “Philippine President Benigno Aquino made a veiled comparison… between China's activities in the South China Sea and Nazi Germany's expansionism before World War Two, echoing similar remarks he made last year that outraged Beijing. Aquino, who is expected to agree beefed up defense ties with Japan when he meets Prime Minister Shinzo Abe on Thursday, also urged Beijing to rethink its land reclamation projects in the disputed waters… Asked about Washington's strategic ‘rebalance’ to Asia and China's maritime moves, Aquino suggested the U.S. role was key, and alluded to Nazi Germany's territorial expansion before World War Two and Western appeasement. ‘If there was a vacuum, if the United States, which is the superpower, says 'We are not interested', perhaps there is no brake to ambitions of other countries,’ he said… Recalling documentaries on Germany's expansionism before the war, Aquino added: ‘The commentators on these documentaries were saying, 'If somebody said stop to (Adolf) Hitler at that point in time, or to Germany at that time, could we have avoided World War Two?’ ‘So, I say again, America's rebalancing sends a definite signal that we are all supposed to be living under norms that we agreed upon.’”
June 5 – Reuters (Siva Govindasamy): “Vietnam is in talks with European and U.S. contractors to buy fighter jets, maritime patrol planes and unarmed drones, sources said, as it looks to beef up its aerial defenses in the face of China's growing assertiveness in disputed waters. The battle-hardened country has already taken possession of three Russian-built Kilo-attack submarines and has three more on order as part of a $2.6 billion deal agreed in 2009. Upgrading its air force would give Vietnam one of the most potent militaries in Southeast Asia.”
June 5 – Bloomberg (Michael A Riley and John Walcott): “The disclosure by U.S. officials that Chinese hackers stole records of as many as 4 million government workers is now being linked to the thefts of personal information from health-care companies. Forensic evidence indicates that the group of hackers responsible for the U.S. government breach… likely carried out attacks on health-insurance providers Anthem Inc. and Premera Blue Cross that were reported earlier this year, said John Hultquist of iSight Partners Inc., a cyber-intelligence company… The thefts are believed to be part of a larger effort by Chinese hackers to get health-care records and other personal information on millions of U.S. government employees and contractors from various sources, including insurers, government agencies and federal contractors, said an American intelligence official…”
Russia and Ukraine Watch:
June 4 – Reuters (Richard Balmforth and Pavel Polityuk): “Ukraine's president told his military on Thursday to prepare for a possible ‘full-scale invasion’ by Russia all along their joint border, a day after the worst fighting with Russian-backed separatists in months. His address in parliament was one of the first times Petro Poroshenko has used the word ‘invasion’ to refer to Russia's behavior since the start of a separatist rebellion in the east… Referring to a 12-hour firefight involving artillery on both sides on Wednesday when Ukraine says the rebels tried to take the town of Maryinka, Poroshenko said: ‘There is a colossal threat of a renewal of large-scale military operations from the side of the Russian-terrorist groups.’ ‘The military must be ready as much for a renewal of an offensive by the enemy in the Donbass as they are for a full-scale invasion along the whole length of the border with Russia. We must be truly ready for this.’”
Japan Watch:
June 4 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The excessive strength in the yen that damaged Japanese manufacturing in recent years has now been corrected, according to an ally of Bank of Japan Governor Haruhiko Kuroda. ‘The abnormally strong yen has been corrected,’ said Yutaka Harada, who joined the central bank’s policy board in March… Harada’s remarks underscore that Japanese policy makers aren’t seeking further declines in the currency… Since reaching a postwar high of 75.35 in 2011, the yen has fallen 40%, aided by unprecedented monetary easing that Kuroda’s using to reflate the world’s third-biggest economy. ‘Harada’s comments indicate that the BOJ sees no need for additional easing anytime soon,’ said Kazuhiko Ogata, an economist at Credit Agricole SA. ‘The government has become increasingly aware of the negative effects of the weak yen on households and small companies, and that’s something the BOJ can’t ignore.’”
My Weekly Commentary: Just the Facts
My apologies. I had commitments today and was unable to find the time to write.
For the Week:
The S&P500 declined 0.7% (up 1.6% y-t-d), and the Dow fell 0.9% (up 0.1%). The Utilities sank 4.1% (down 10.9%). The Banks jumped 2.8% (up 4.5%), and the Broker/Dealers surged 3.2% (up 8.0%). The Transports gained 2.5% (down 6.9%). The S&P 400 Midcaps were little changed (up 5.1%), while the small cap Russell 2000 rose 1.2% (up 4.7%). The Nasdaq100 declined 0.7% (up 5.7%), and the Morgan Stanley High Tech index was about unchanged (up 5.1%). The Semiconductors were hit 2.6% (up 5.7%). The Biotechs slipped 0.5% (up 20.2%). With bullion down $22, the HUI gold index fell 4.2% (down 2.6%).
Three-month Treasury bill rates ended the week at two basis points. Two-year government yields rose 10 bps to 0.71% (up 4bps y-t-d). Five-year T-note yields jumped 25 bps to a 2015 high 1.74% (up 9bps). Ten-year Treasury yields surged 29 bps to an eight-month high 2.41% (up 24bps). Long bond yields rose 23 bps to an eight-month high 3.11% (up 36bps).
Greek 10-year yields fell 20 bps to 10.66% (up 92bps y-t-d). European bonds were routed. Ten-year Portuguese yields surged 39 bps 2.92% (up 30bps). Italian 10-yr yields jumped 39 bps to 2.23% (up 34bps). Spain's 10-year yields surged 38 bps to 2.21% (up 60bps). German bund yields spiked 35 bps higher to 0.84% (up 30 bps). French yields surged 37 bps to 1.16% (up 33bps). The French to German 10-year bond spread widened two to 32 bps. U.K. 10-year gilt yields rose 27 bps to 2.08% (up 33bps).
Japan's Nikkei equities index slipped 0.5% (up 17.3% y-t-d). Japanese 10-year "JGB" yields jumped 10 bps to 0.48% (up 16bps y-t-d). The German DAX equities index fell 1.9% (up 14.2%). Spain's IBEX 35 equities index declined 1.4% (up 7.6%). Italy's FTSE MIB index sank 2.8% (up 20.2%). Emerging equities were volatile. Brazil's Bovespa index recovered 0.4% (up 5.9%). Mexico's Bolsa slipped 0.5% (up 3.1%). South Korea's Kospi index dropped 2.2% (up 8.0%). India’s Sensex equities index sank 3.8% (down 2.7%). China’s bubbling (and volatile!) Shanghai Exchange surged 8.9% (up 55.3%). Turkey's Borsa Istanbul National 100 index fell 1.1% (down 4.4%). Russia's MICEX equities index rallied 2.7% (up 18.3%).
Junk funds saw inflows of $601 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at a 2015 high 3.87% (unchanged y-t-d). Fifteen-year rates were unchanged at 3.08% (down 7bps). One-year ARM rates jumped nine bps to an 18-month high 2.59% (up 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 6 bps to 4.06% (down 22bps).
Federal Reserve Credit last week fell $11.2bn to $4.427 TN. Over the past year, Fed Credit inflated $142bn, or 3.3%. Fed Credit inflated $1.616 TN, or 57%, over the past 134 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $26.9bn last week to $3.354 TN. "Custody holdings" were up $61bn y-t-d.
M2 (narrow) "money" supply jumped $19.2bn to a record $11.960 TN. "Narrow money" expanded $633bn, or 5.6%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits rose $20.6bn, while Savings Deposits declined $2.0bn. Small Time Deposits slipped $2.3bn. Retail Money Funds increased $1.1bn.
For the Week:
The S&P500 declined 0.7% (up 1.6% y-t-d), and the Dow fell 0.9% (up 0.1%). The Utilities sank 4.1% (down 10.9%). The Banks jumped 2.8% (up 4.5%), and the Broker/Dealers surged 3.2% (up 8.0%). The Transports gained 2.5% (down 6.9%). The S&P 400 Midcaps were little changed (up 5.1%), while the small cap Russell 2000 rose 1.2% (up 4.7%). The Nasdaq100 declined 0.7% (up 5.7%), and the Morgan Stanley High Tech index was about unchanged (up 5.1%). The Semiconductors were hit 2.6% (up 5.7%). The Biotechs slipped 0.5% (up 20.2%). With bullion down $22, the HUI gold index fell 4.2% (down 2.6%).
Three-month Treasury bill rates ended the week at two basis points. Two-year government yields rose 10 bps to 0.71% (up 4bps y-t-d). Five-year T-note yields jumped 25 bps to a 2015 high 1.74% (up 9bps). Ten-year Treasury yields surged 29 bps to an eight-month high 2.41% (up 24bps). Long bond yields rose 23 bps to an eight-month high 3.11% (up 36bps).
Greek 10-year yields fell 20 bps to 10.66% (up 92bps y-t-d). European bonds were routed. Ten-year Portuguese yields surged 39 bps 2.92% (up 30bps). Italian 10-yr yields jumped 39 bps to 2.23% (up 34bps). Spain's 10-year yields surged 38 bps to 2.21% (up 60bps). German bund yields spiked 35 bps higher to 0.84% (up 30 bps). French yields surged 37 bps to 1.16% (up 33bps). The French to German 10-year bond spread widened two to 32 bps. U.K. 10-year gilt yields rose 27 bps to 2.08% (up 33bps).
Japan's Nikkei equities index slipped 0.5% (up 17.3% y-t-d). Japanese 10-year "JGB" yields jumped 10 bps to 0.48% (up 16bps y-t-d). The German DAX equities index fell 1.9% (up 14.2%). Spain's IBEX 35 equities index declined 1.4% (up 7.6%). Italy's FTSE MIB index sank 2.8% (up 20.2%). Emerging equities were volatile. Brazil's Bovespa index recovered 0.4% (up 5.9%). Mexico's Bolsa slipped 0.5% (up 3.1%). South Korea's Kospi index dropped 2.2% (up 8.0%). India’s Sensex equities index sank 3.8% (down 2.7%). China’s bubbling (and volatile!) Shanghai Exchange surged 8.9% (up 55.3%). Turkey's Borsa Istanbul National 100 index fell 1.1% (down 4.4%). Russia's MICEX equities index rallied 2.7% (up 18.3%).
Junk funds saw inflows of $601 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at a 2015 high 3.87% (unchanged y-t-d). Fifteen-year rates were unchanged at 3.08% (down 7bps). One-year ARM rates jumped nine bps to an 18-month high 2.59% (up 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 6 bps to 4.06% (down 22bps).
Federal Reserve Credit last week fell $11.2bn to $4.427 TN. Over the past year, Fed Credit inflated $142bn, or 3.3%. Fed Credit inflated $1.616 TN, or 57%, over the past 134 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $26.9bn last week to $3.354 TN. "Custody holdings" were up $61bn y-t-d.
M2 (narrow) "money" supply jumped $19.2bn to a record $11.960 TN. "Narrow money" expanded $633bn, or 5.6%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits rose $20.6bn, while Savings Deposits declined $2.0bn. Small Time Deposits slipped $2.3bn. Retail Money Funds increased $1.1bn.
Money market fund assets increased $3.5bn to $2.618 TN. Money Funds were down $115bn year-to-date, while gaining $38bn y-o-y.
Total Commercial Paper slipped $1.3bn to $944bn. CP declined $95bn over the past year, or 9.1%.
Currency Watch:
The U.S. dollar index declined 0.6% to 96.35 (up 6.7% y-t-d). For the week on the upside, the Swedish krona increased 1.6%, the euro 1.2%, the Brazilian real 1.1%, the British pound 0.1% and the Canadian dollar 0.1%. For the week on the downside, the South African rand declined 3.5%, the Norwegian krone 2.3%, the Mexican peso 2.2%, the Japanese yen 1.2%, the New Zealand dollar 0.8%, the Australian dollar 0.3% and the Swiss franc 0.1%.
Commodities Watch:
The Goldman Sachs Commodities Index declined 1.4% (up 3.5% y-t-d). Spot Gold fell 1.9% to $1,168 (down 1.4%). July Silver sank 4.3% to $15.98 (up 2.4%). June Crude lost $1.17 to $59.13 (up 11%). June Gasoline dropped 2.7% (up 38%), and June Natural Gas fell 1.9% (down 10%). July Copper lost 1.3% (down 5%). July Wheat rallied 8.4% (down 12%). July Corn recovered 2.6% (down 8%).
Fixed Income Bubble Watch:
June 5 – Bloomberg (Simon Kennedy): “There’s a $400 billion reason to worry if you’re a bond investor. That’s how much global currency reserves have shrunk since reaching a record $12 trillion last August… The decline is another potential source of volatility in debt markets rocked this week in part by ebbing deflation fears in Europe and speculation the U.S. Federal Reserve will soon raise interest rates. That’s because contracting reserves leave countries with less money to recycle into bonds, removing a key support, strategists at… Pavilion Global Markets Ltd., said in a note… titled ‘Falling Reserves, Rising Yields.’ Periods of falling reserves historically coincided with increased fixed-income volatility, as measured by a market stress indicator created by the ECB and based on fluctuations in the German 10-year bond, according to the Pavilion team, led by Pierre Lapointe.”
June 3 – Bloomberg (Alexandra Scaggs): “More Wall Street executives are sounding alarms about the bond market. The latest to warn were Gary Cohn, president of Goldman Sachs Group Inc., and Anshu Jain, co-chief executive officer of Deutsche Bank AG. The concern is bond investors looking to buy, or especially to sell, will face wide prices swings and higher costs to get a transaction done. ‘The problem is on the days when you need liquidity, it probably won't be there,’ said Cohn… Large Wall Street banks, or dealers, are carrying a smaller share of bonds on their books, as regulations restrict the capital they can hold on their balance sheets. Money managers, meanwhile, are holding a lot more of them. Dealer inventories dropped by 27% between 2007 and early 2015 while assets held by bond mutual funds and exchange-traded funds almost doubled.”
June 3 – Bloomberg (Michelle Davis): “A dark shadow is lurking behind the happy façade of rising stock prices. U.S. companies are borrowing money faster than they’re earning it -- and they’re doing it at the quickest pace since the aftermath of the financial crisis. Instead of deploying the debt to build factories, hire new workers or expand product lines, companies are funneling more of their money to shareholders or using it to fund deals. Stock buybacks reached an all-time high last year and the volume of global mergers and acquisitions announced so far this year would make it the second-busiest ever… The debt undermines future growth and could dent company income when borrowing costs rise… The consequence: profitability, buoyed by cheap money since rates went to near-zero in 2008, will sink. ‘Companies have said, ‘We don’t have an ability to grow organically, so we can distract shareholders instead,’’ according to Jody Lurie, a credit analyst at Janney Montgomery Scott… ‘When they buy back shares, all it does is optically make earnings per share look better.’”
June 1 – Financial Times (James Fontanella-Khan and Robin Wigglesworth): “US dealmaking hit an all-time monthly record in May, surpassing the previous highs seen during the peak of the dotcom bubble and the zenith of the debt boom that led to the 2008 financial crisis. The overall value of deals in US-bound mergers and acquisitions activity amounted to $243bn in May compared to $226bn during the same month in 2007 and $213bn in January 2000, the previous biggest and second biggest months respectively, according to Dealogic… The data underline how frenzied US dealmaking has become as cheap debt and bullish boardrooms fuel an M&A boom of a size not seen since just before the last two equity market crashes.”
June 3 – Bloomberg (Laura J Keller): “For the hedge funds and money managers that pick over the credit market’s scrap heaps, Puerto Rico has become the new ground zero. Some of the same distressed-debt buyers that started battling seven years ago over the remains of Lehman Brothers… are now girding for a rematch over the U.S. territory’s $72 billion of debt… The conflict is heating up after the Puerto Rico Electric Power Authority, known as Prepa, met with the financial adviser to its creditors Monday to restart talks toward a restructuring that may ask bondholders to take a loss or wait longer to be repaid. Hedge funds now hold as much as 30% of the obligations of Puerto Rico and its agencies, Barclays Plc municipal-debt strategist Mikhail Foux estimates. ‘It’s extremely disorderly and nasty,’ said Joseph Rosenblum, director of municipal-credit research at AllianceBernstein… This ‘messy approach to trying to resolve something with no clear structure or guidance doesn’t give a bondholder any kind of confidence,’ he said.”
U.S. Bubble Watch:
June 3 – New York Times (Noam Scheiber and Dalia Sussman): “Americans are broadly concerned about inequality of wealth and income despite an economy that has improved by most measures, a sentiment that is already driving the 2016 presidential contest, according to a New York Times/CBS News poll. The poll found that a strong majority say that wealth should be more evenly divided and that it is a problem that should be addressed urgently. Nearly six in 10 Americans said government should do more to reduce the gap between the rich and the poor, but they split sharply along partisan lines…These findings help explain the populist appeals from politicians of both parties, but particularly Democrats, who are seeking to capitalize on the sense among Americans that the economic recovery is benefiting only a handful at the very top.”
June 3 – Bloomberg (Hugh Son and Pamela Roux): “Jamie Dimon, who helped assemble Citigroup Inc. and then improved on the experiment with JPMorgan Chase & Co., is responsible for two of the biggest banks the world has ever seen. His life’s work also made him rich. With JPMorgan shares near a record high, Dimon’s net worth is about $1.1 billion… Dimon’s fortune derives from a $485 million stake in… JPMorgan… and an investment portfolio seeded by proceeds from Citigroup stock sales. Dimon’s status is unusual because, with the exception of former mentor Sanford ‘Sandy’ Weill, few bank managers accumulate that much wealth. Most finance-industry billionaires start businesses or investment firms, such as hedge-fund tycoon George Soros, who is worth $28.5 billion, or Blackstone Group LP co-founder Steve Schwarzman, worth $13.4 billion.”
June 1 – USAToday (Greg Gardner): “New-car sales are running at near-peak levels, partly because many consumers are financing their purchases for longer terms. The average new car loan has reached a record 67 months, reports Experian… The percentage of loans with terms of 73 to 84 months also reached a new high of 29.5% in the first quarter of 2015, up from 24.9% a year earlier. Long-term used-vehicle loans also broke records with loan terms of 73 to 84 months reaching 16% in the first quarter 2015, up from 12.94% — also the highest on record.”
June 5 – Bloomberg (Prashant Gopal and John Gittelsohn): “The sales office for condominiums at Miami’s Brickell City Centre attracted more than 100 visitors daily last year, with prospective buyers crowding in and snapping selfies beside a scale model of the $1 billion project. Now, the flow of people has trickled to about a quarter of what it once was. ‘Buyers are asking really good questions’ instead of rushing into deals, said Stephen Owens, president of the U.S. unit of Hong Kong-based Swire Properties Ltd., the developer of the 9-acre condo, hotel, office and shopping complex. ‘Two years ago, it was, ‘Where can I sign?’.’ Downtown Miami’s luxury-condo boom -- fueled by buyers from Latin America and Europe willing to pay half the purchase price up front -- is becoming a casualty of the year-long climb in the U.S. dollar. Diminished purchasing power and rising prices are holding back the overseas investors that make up the bulk of sales at new towers, cooling a frenzied market.”
Federal Reserve Watch:
June 4 – Wall Street Journal (Kevin Brady): “In 1913 President Woodrow Wilson favored the creation of a central bank, but the legacy of President Andrew Jackson—who vetoed a bill to renew the charter of the Second Bank of the United States in 1832—still stood firm in some parts of the country. So to get Congress to pass the Federal Reserve Act, Wilson had to retain the support of pro-central bank northeastern lawmakers while convincing southern and western Democrats that legislation would not, in fact, create a central bank. Wilson’s ingenious solution was federalism: a Federal Reserve composed of 12 district banks under the supervision of a board in Washington. Though arising out of political necessity, the structure of shared decision making and decentralized economic analysis has proved beneficial by ensuring that input into monetary policy comes from the diverse regions of the complex U.S. economy. But this balance is being upset by the growing power of the Board of Governors in Washington, D.C., and one district bank, the Federal Reserve Bank of New York.”
Global Bubble Watch:
June 3 – Bloomberg (Kasia Klimasinska): “The Federal Reserve should hold off from raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time in three months. The lender also said that the dollar was ‘moderately overvalued’ and a further marked appreciation would be ‘harmful,’ in a statement released in Washington on Thursday on its annual checkup of the U.S. economy. ‘The FOMC should remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident,’ the IMF said. Based on the fund’s economic forecast, and ‘barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016.’”
June 3 – Bloomberg (Susanne Walker Barton and David Goodman): “With an insouciant turn of phrase, Mario Draghi whipped up a frenzy of selling in government bonds that left German securities with their worst two-day slump in the history of the euro era. Benchmark Treasury 10-year note yields had the biggest two-day increase in four months after the European Central Bank President said markets must get used to periods of higher volatility… Traders in New York canceled meetings Wednesday as the bond rout intensified. ‘The ECB doesn’t seem too concerned with recent volatility, and so that’s a green light for that volatility to continue without the ECB reacting,’ said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin.”
June 3 – Bloomberg (Tracy Alloway): “Petrobras, the scandal-ridden, junk-rated, state-controlled Brazilian oil producer, surprised markets to sell $2.5bn worth of bonds with a 100-year maturity on Monday. Here's what the unusual debt sale can tell us about markets. Investors are still craving returns - The new Petrobras debt sold like hot cakes thanks to the juicy returns on offer. …the company issued the bonds to yield 8.45% -- that's far higher than Mexico's 100-year bonds, which are trading at a yield of 5.59% or 30-year U.S. Treasuries yielding 2.94%. But that 8.45% yield was also 0.4 percentage point less than the price guidance provided by the deal's bankers.”
May 31 – Bloomberg (Jason Scott): “Sydney is in the grip of a housing bubble, Australia’s most-senior economic bureaucrat said in one of the strongest warnings yet by a government official. ‘When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney -- unequivocally,’ Treasury Secretary John Fraser said… ‘Frankly, whatever the data says, just casual observation would tell you that’s the case.’ Home prices in Sydney rose 15% in May from a year earlier… Australia’s major banks have said they will curb growth in home loans to investors after the country’s financial services regulator asked lenders to limit expansion of these mortgages to 10% a year.”
June 2 – Bloomberg (Katya Kazakina): “In November, a painting of a pensive young woman by French artist Francis Picabia sold for 145,000 euros ($181,159) at auction in Paris. Six months later, the same 1940s work appeared at Christie’s in New York, and at least three bidders pushed the price to $580,000. The anonymous seller scored a 220% gain… The practice of flipping art, popular among some buyers of inexpensive emerging artists, is increasingly reaching the market for established masters such as Andy Warhol, Gerhard Richter and Picabia. Driving it are record prices for high-end artworks and Wall Street investors who are prioritizing rapid returns over long-term collecting. Trophy works that quickly returned to auction were once perceived as ‘a woman who has been divorced three times,’ said Frances Beatty, vice president of Richard L. Feigen & Co., a New York gallery. “Because art is seen as an asset class, the more rapid turnover is considered encouraging. There’s a whole new generation of collectors who are playing the art market.”
Europe Watch:
June 5 – Reuters (Karolina Tagaris and Angeliki Koutantou): “Greek Prime Minister Alexis Tsipras on Friday spurned ‘absurd’ terms of proposed aid from lenders and delayed a debt payment to the International Monetary Fund, prolonging an impasse that threatens to push Greece into default and out of the euro zone. In a defiant speech aimed at winning parliament's backing for his rejection of the austerity-for-aid package, Tsipras balanced indignation with confidence that a deal was ‘closer than ever before’ to keep his country inside the currency bloc. The contradictory message underscored the growing pressure on Tsipras to quickly sign a deal before cash-strapped Athens runs out of money, while also trying to placate hardliners in his leftist party who oppose the terms creditors are demanding. One far-left deputy minister suggested snap elections as a way out, by obtaining public legitimacy for difficult decisions to secure aid. But Tsipras made no mention of elections in an address that focused on attacking the aid plan offered by euro zone and IMF creditors. ‘The Greek government cannot consent to absurd proposals,’ Tsipras told parliament. ‘I want to believe that this proposal was a bad moment for Europe or at the very least a bad negotiating trick and will soon be withdrawn by the masterminds themselves,’ he said.”
China Bubble Watch:
June 4 – Bloomberg: “China has granted another 1 trillion yuan ($161bn) quota to provinces to swap high-interest debt into low-cost bonds, doubling the previous amount, according to people familiar with the matter. The increase comes as the first stage of the bond swap is under way. Commercial banks have been buying such bonds after the central bank flooded the interbank market with cheap funds… The expansion will help the government cut risks from a record surge in borrowing that local authorities took on to fund a glut of investment projects. The process -- which includes inducements for banks to buy new, longer-maturity, lower yielding bonds -- is alleviating a funding crunch among provinces that had threatened to deepen the economy’s slowdown. Local-government obligations may have reached 25 trillion yuan, bigger than the size of the German economy, according to estimates from Mizuho Securities… That compares with the figure of 17.9 trillion yuan as of June 30, 2013 given by the National Audit Office.”
June 3 – Bloomberg (Ye Xie and Bonnie Cao): “China’s initial public offerings are such hot commodities that a company seeking $2 billion attracted bids approaching the entire annual economic output of Hong Kong. China National Nuclear Power Co., the country’s second-biggest atomic power operator, locked up 1.69 trillion yuan ($273 billion) in bids for its IPO… The offering may be the biggest in China since August 2010. Individual investors are piling into newly-issued stocks on mainland exchanges after regulators discouraged companies from selling equity at high valuations. Shares of the 144 firms that went public this year have jumped an average 539% so far, including a 44% increase on the first day of trading, the maximum amount allowed by local bourses…”
June 1 – Bloomberg: “One of the many mysteries behind the share price collapse of the solar panel maker controlled by Li Hejun is this: Which of the Chinese billionaire’s many creditors risk losing every yuan they put into his company? A plethora of Chinese lenders are exposed to Hanergy Thin Film Power Group Ltd. and its parent company… On May 20, 47% of Hanergy Thin Film’s market value vanished in minutes and it’s now under probe by the Hong Kong Securities & Futures Commission. Creditors are nervous: A group of 11 lenders have asked for a meeting to voice their concerns and discuss their $82 million loan… ‘The interesting thing with Hanergy is that so much is happening with the parent company that investors know nothing about,’ said Charles Yonts, an analyst with CLSA Asia-Pacific Markets… ‘The opacity about parent finances and billings is extraordinary.’ …Hanergy Group has given no public accounting of all its debt or the debt scattered among its units.’”
June 4 – Bloomberg: “Guangxi Nonferrous Metals Group Co. may have difficulty repaying its bonds on its own, China Credit Rating Co. said, highlighting the risk of it becoming the second state-owned firm to default. The company, based in Nanning in China’s southern Guangxi province, must repay 1.3 billion yuan ($210 million) of principal and 62.92 million yuan of interest on its 4.84% notes due June 13… A bottle maker that supplies Coca-Cola Co. became the fourth company to miss obligations in the onshore bond market last week and a maker of smoked duck leg cited increasing difficulty getting credit as it defaulted on bank loans ahead of a bond deadline June 12. ‘Lower-rated issuers are facing big pressure to repay debt,’ said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. ‘But given the loose monetary environment, there won’t be a surge in bond defaults in China.’”
EM Bubble Watch:
June 3 – CNN: “Venezuela's economy is imploding. Its currency, the bolivar, is literally worth less than a penny. Just a month ago, $1 was worth 279 bolivars. That was already pretty dismal for Venezuela. Now $1 equals 408 bolivars, according to the unofficial exchange rate, which most Venezuelans get when they try to trade currency. Put another way, one bolivar equals $0.002 -- less than a penny. The country's currency has lost nearly half its value since the beginning of May…”
June 1 – AFP: “Saudi Arabia's foreign currency reserves dropped by $49 billion in the first four months of 2015 following the dive in world oil prices, a report said… The reserves, piled up in the past decade due to high crude prices, dropped from $732 billion at the end of 2014 to $683 billion at the end of April, Saudi firm Jadwa Research said in a report. In March and April alone, the reserves dipped $31 billion, it said.”
June 4 – Bloomberg (Deema Almashabi): “Saudi Arabia’s oil-fueled economic boom is showing signs of losing steam. Official data released last week showed demand for loans growing at the slowest pace since 2011 and the kingdom’s currency reserves plunging for a third month in a row. An index reflecting the performance of the non-oil private economy fell to the lowest level in a year in May. The numbers signal that the drop in oil prices is starting to hurt the biggest Arab economy at a time when the kingdom is undergoing sweeping political changes at home and waging a regional war. The government is moving ahead with spending plans that will widen the budget deficit to 20% of economic output…”
June 3 – Bloomberg (Onur Ant and Selcan Hacaoglu): “Turkey’s consumer price inflation accelerated in May to the highest level this year, led by price gains in transportation and housing. The annual rate of inflation rose to 8.09% from 7.91% in the previous month…”
Brazil Watch:
June 3 – Bloomberg (Mario Sergio Lima): “Brazil raised interest rates for a sixth straight time as policy makers work to convince investors that inflation will reach target. The bank’s board… raised the benchmark rate by a half-point to 13.75% Wednesday, the highest since January 2009… Economists and traders bet the deepest recession in 25 years will prevent Tombini from raising interest rates as much as needed to slow inflation to the 4.5% target next year. Meanwhile, Tombini has pledged to do what it takes to meet the goal even as unemployment rises. ‘The central bank needs to regain credibility to help confidence rise, and they are on the right path,’ Flavio Serrano, senior economist at BESI Brasil… ‘Wrong economic policies are to blame for the economic state right now.’”
Geopolitical Watch:
June 3 – Reuters (Kiyoshi Takenaka): “Philippine President Benigno Aquino made a veiled comparison… between China's activities in the South China Sea and Nazi Germany's expansionism before World War Two, echoing similar remarks he made last year that outraged Beijing. Aquino, who is expected to agree beefed up defense ties with Japan when he meets Prime Minister Shinzo Abe on Thursday, also urged Beijing to rethink its land reclamation projects in the disputed waters… Asked about Washington's strategic ‘rebalance’ to Asia and China's maritime moves, Aquino suggested the U.S. role was key, and alluded to Nazi Germany's territorial expansion before World War Two and Western appeasement. ‘If there was a vacuum, if the United States, which is the superpower, says 'We are not interested', perhaps there is no brake to ambitions of other countries,’ he said… Recalling documentaries on Germany's expansionism before the war, Aquino added: ‘The commentators on these documentaries were saying, 'If somebody said stop to (Adolf) Hitler at that point in time, or to Germany at that time, could we have avoided World War Two?’ ‘So, I say again, America's rebalancing sends a definite signal that we are all supposed to be living under norms that we agreed upon.’”
June 5 – Reuters (Siva Govindasamy): “Vietnam is in talks with European and U.S. contractors to buy fighter jets, maritime patrol planes and unarmed drones, sources said, as it looks to beef up its aerial defenses in the face of China's growing assertiveness in disputed waters. The battle-hardened country has already taken possession of three Russian-built Kilo-attack submarines and has three more on order as part of a $2.6 billion deal agreed in 2009. Upgrading its air force would give Vietnam one of the most potent militaries in Southeast Asia.”
June 5 – Bloomberg (Michael A Riley and John Walcott): “The disclosure by U.S. officials that Chinese hackers stole records of as many as 4 million government workers is now being linked to the thefts of personal information from health-care companies. Forensic evidence indicates that the group of hackers responsible for the U.S. government breach… likely carried out attacks on health-insurance providers Anthem Inc. and Premera Blue Cross that were reported earlier this year, said John Hultquist of iSight Partners Inc., a cyber-intelligence company… The thefts are believed to be part of a larger effort by Chinese hackers to get health-care records and other personal information on millions of U.S. government employees and contractors from various sources, including insurers, government agencies and federal contractors, said an American intelligence official…”
Russia and Ukraine Watch:
June 4 – Reuters (Richard Balmforth and Pavel Polityuk): “Ukraine's president told his military on Thursday to prepare for a possible ‘full-scale invasion’ by Russia all along their joint border, a day after the worst fighting with Russian-backed separatists in months. His address in parliament was one of the first times Petro Poroshenko has used the word ‘invasion’ to refer to Russia's behavior since the start of a separatist rebellion in the east… Referring to a 12-hour firefight involving artillery on both sides on Wednesday when Ukraine says the rebels tried to take the town of Maryinka, Poroshenko said: ‘There is a colossal threat of a renewal of large-scale military operations from the side of the Russian-terrorist groups.’ ‘The military must be ready as much for a renewal of an offensive by the enemy in the Donbass as they are for a full-scale invasion along the whole length of the border with Russia. We must be truly ready for this.’”
Japan Watch:
June 4 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The excessive strength in the yen that damaged Japanese manufacturing in recent years has now been corrected, according to an ally of Bank of Japan Governor Haruhiko Kuroda. ‘The abnormally strong yen has been corrected,’ said Yutaka Harada, who joined the central bank’s policy board in March… Harada’s remarks underscore that Japanese policy makers aren’t seeking further declines in the currency… Since reaching a postwar high of 75.35 in 2011, the yen has fallen 40%, aided by unprecedented monetary easing that Kuroda’s using to reflate the world’s third-biggest economy. ‘Harada’s comments indicate that the BOJ sees no need for additional easing anytime soon,’ said Kazuhiko Ogata, an economist at Credit Agricole SA. ‘The government has become increasingly aware of the negative effects of the weak yen on households and small companies, and that’s something the BOJ can’t ignore.’”
Total Commercial Paper slipped $1.3bn to $944bn. CP declined $95bn over the past year, or 9.1%.
Currency Watch:
The U.S. dollar index declined 0.6% to 96.35 (up 6.7% y-t-d). For the week on the upside, the Swedish krona increased 1.6%, the euro 1.2%, the Brazilian real 1.1%, the British pound 0.1% and the Canadian dollar 0.1%. For the week on the downside, the South African rand declined 3.5%, the Norwegian krone 2.3%, the Mexican peso 2.2%, the Japanese yen 1.2%, the New Zealand dollar 0.8%, the Australian dollar 0.3% and the Swiss franc 0.1%.
Commodities Watch:
The Goldman Sachs Commodities Index declined 1.4% (up 3.5% y-t-d). Spot Gold fell 1.9% to $1,168 (down 1.4%). July Silver sank 4.3% to $15.98 (up 2.4%). June Crude lost $1.17 to $59.13 (up 11%). June Gasoline dropped 2.7% (up 38%), and June Natural Gas fell 1.9% (down 10%). July Copper lost 1.3% (down 5%). July Wheat rallied 8.4% (down 12%). July Corn recovered 2.6% (down 8%).
Fixed Income Bubble Watch:
June 5 – Bloomberg (Simon Kennedy): “There’s a $400 billion reason to worry if you’re a bond investor. That’s how much global currency reserves have shrunk since reaching a record $12 trillion last August… The decline is another potential source of volatility in debt markets rocked this week in part by ebbing deflation fears in Europe and speculation the U.S. Federal Reserve will soon raise interest rates. That’s because contracting reserves leave countries with less money to recycle into bonds, removing a key support, strategists at… Pavilion Global Markets Ltd., said in a note… titled ‘Falling Reserves, Rising Yields.’ Periods of falling reserves historically coincided with increased fixed-income volatility, as measured by a market stress indicator created by the ECB and based on fluctuations in the German 10-year bond, according to the Pavilion team, led by Pierre Lapointe.”
June 3 – Bloomberg (Alexandra Scaggs): “More Wall Street executives are sounding alarms about the bond market. The latest to warn were Gary Cohn, president of Goldman Sachs Group Inc., and Anshu Jain, co-chief executive officer of Deutsche Bank AG. The concern is bond investors looking to buy, or especially to sell, will face wide prices swings and higher costs to get a transaction done. ‘The problem is on the days when you need liquidity, it probably won't be there,’ said Cohn… Large Wall Street banks, or dealers, are carrying a smaller share of bonds on their books, as regulations restrict the capital they can hold on their balance sheets. Money managers, meanwhile, are holding a lot more of them. Dealer inventories dropped by 27% between 2007 and early 2015 while assets held by bond mutual funds and exchange-traded funds almost doubled.”
June 3 – Bloomberg (Michelle Davis): “A dark shadow is lurking behind the happy façade of rising stock prices. U.S. companies are borrowing money faster than they’re earning it -- and they’re doing it at the quickest pace since the aftermath of the financial crisis. Instead of deploying the debt to build factories, hire new workers or expand product lines, companies are funneling more of their money to shareholders or using it to fund deals. Stock buybacks reached an all-time high last year and the volume of global mergers and acquisitions announced so far this year would make it the second-busiest ever… The debt undermines future growth and could dent company income when borrowing costs rise… The consequence: profitability, buoyed by cheap money since rates went to near-zero in 2008, will sink. ‘Companies have said, ‘We don’t have an ability to grow organically, so we can distract shareholders instead,’’ according to Jody Lurie, a credit analyst at Janney Montgomery Scott… ‘When they buy back shares, all it does is optically make earnings per share look better.’”
June 1 – Financial Times (James Fontanella-Khan and Robin Wigglesworth): “US dealmaking hit an all-time monthly record in May, surpassing the previous highs seen during the peak of the dotcom bubble and the zenith of the debt boom that led to the 2008 financial crisis. The overall value of deals in US-bound mergers and acquisitions activity amounted to $243bn in May compared to $226bn during the same month in 2007 and $213bn in January 2000, the previous biggest and second biggest months respectively, according to Dealogic… The data underline how frenzied US dealmaking has become as cheap debt and bullish boardrooms fuel an M&A boom of a size not seen since just before the last two equity market crashes.”
June 3 – Bloomberg (Laura J Keller): “For the hedge funds and money managers that pick over the credit market’s scrap heaps, Puerto Rico has become the new ground zero. Some of the same distressed-debt buyers that started battling seven years ago over the remains of Lehman Brothers… are now girding for a rematch over the U.S. territory’s $72 billion of debt… The conflict is heating up after the Puerto Rico Electric Power Authority, known as Prepa, met with the financial adviser to its creditors Monday to restart talks toward a restructuring that may ask bondholders to take a loss or wait longer to be repaid. Hedge funds now hold as much as 30% of the obligations of Puerto Rico and its agencies, Barclays Plc municipal-debt strategist Mikhail Foux estimates. ‘It’s extremely disorderly and nasty,’ said Joseph Rosenblum, director of municipal-credit research at AllianceBernstein… This ‘messy approach to trying to resolve something with no clear structure or guidance doesn’t give a bondholder any kind of confidence,’ he said.”
U.S. Bubble Watch:
June 3 – New York Times (Noam Scheiber and Dalia Sussman): “Americans are broadly concerned about inequality of wealth and income despite an economy that has improved by most measures, a sentiment that is already driving the 2016 presidential contest, according to a New York Times/CBS News poll. The poll found that a strong majority say that wealth should be more evenly divided and that it is a problem that should be addressed urgently. Nearly six in 10 Americans said government should do more to reduce the gap between the rich and the poor, but they split sharply along partisan lines…These findings help explain the populist appeals from politicians of both parties, but particularly Democrats, who are seeking to capitalize on the sense among Americans that the economic recovery is benefiting only a handful at the very top.”
June 3 – Bloomberg (Hugh Son and Pamela Roux): “Jamie Dimon, who helped assemble Citigroup Inc. and then improved on the experiment with JPMorgan Chase & Co., is responsible for two of the biggest banks the world has ever seen. His life’s work also made him rich. With JPMorgan shares near a record high, Dimon’s net worth is about $1.1 billion… Dimon’s fortune derives from a $485 million stake in… JPMorgan… and an investment portfolio seeded by proceeds from Citigroup stock sales. Dimon’s status is unusual because, with the exception of former mentor Sanford ‘Sandy’ Weill, few bank managers accumulate that much wealth. Most finance-industry billionaires start businesses or investment firms, such as hedge-fund tycoon George Soros, who is worth $28.5 billion, or Blackstone Group LP co-founder Steve Schwarzman, worth $13.4 billion.”
June 1 – USAToday (Greg Gardner): “New-car sales are running at near-peak levels, partly because many consumers are financing their purchases for longer terms. The average new car loan has reached a record 67 months, reports Experian… The percentage of loans with terms of 73 to 84 months also reached a new high of 29.5% in the first quarter of 2015, up from 24.9% a year earlier. Long-term used-vehicle loans also broke records with loan terms of 73 to 84 months reaching 16% in the first quarter 2015, up from 12.94% — also the highest on record.”
June 5 – Bloomberg (Prashant Gopal and John Gittelsohn): “The sales office for condominiums at Miami’s Brickell City Centre attracted more than 100 visitors daily last year, with prospective buyers crowding in and snapping selfies beside a scale model of the $1 billion project. Now, the flow of people has trickled to about a quarter of what it once was. ‘Buyers are asking really good questions’ instead of rushing into deals, said Stephen Owens, president of the U.S. unit of Hong Kong-based Swire Properties Ltd., the developer of the 9-acre condo, hotel, office and shopping complex. ‘Two years ago, it was, ‘Where can I sign?’.’ Downtown Miami’s luxury-condo boom -- fueled by buyers from Latin America and Europe willing to pay half the purchase price up front -- is becoming a casualty of the year-long climb in the U.S. dollar. Diminished purchasing power and rising prices are holding back the overseas investors that make up the bulk of sales at new towers, cooling a frenzied market.”
Federal Reserve Watch:
June 4 – Wall Street Journal (Kevin Brady): “In 1913 President Woodrow Wilson favored the creation of a central bank, but the legacy of President Andrew Jackson—who vetoed a bill to renew the charter of the Second Bank of the United States in 1832—still stood firm in some parts of the country. So to get Congress to pass the Federal Reserve Act, Wilson had to retain the support of pro-central bank northeastern lawmakers while convincing southern and western Democrats that legislation would not, in fact, create a central bank. Wilson’s ingenious solution was federalism: a Federal Reserve composed of 12 district banks under the supervision of a board in Washington. Though arising out of political necessity, the structure of shared decision making and decentralized economic analysis has proved beneficial by ensuring that input into monetary policy comes from the diverse regions of the complex U.S. economy. But this balance is being upset by the growing power of the Board of Governors in Washington, D.C., and one district bank, the Federal Reserve Bank of New York.”
Global Bubble Watch:
June 3 – Bloomberg (Kasia Klimasinska): “The Federal Reserve should hold off from raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time in three months. The lender also said that the dollar was ‘moderately overvalued’ and a further marked appreciation would be ‘harmful,’ in a statement released in Washington on Thursday on its annual checkup of the U.S. economy. ‘The FOMC should remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident,’ the IMF said. Based on the fund’s economic forecast, and ‘barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016.’”
June 3 – Bloomberg (Susanne Walker Barton and David Goodman): “With an insouciant turn of phrase, Mario Draghi whipped up a frenzy of selling in government bonds that left German securities with their worst two-day slump in the history of the euro era. Benchmark Treasury 10-year note yields had the biggest two-day increase in four months after the European Central Bank President said markets must get used to periods of higher volatility… Traders in New York canceled meetings Wednesday as the bond rout intensified. ‘The ECB doesn’t seem too concerned with recent volatility, and so that’s a green light for that volatility to continue without the ECB reacting,’ said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin.”
June 3 – Bloomberg (Tracy Alloway): “Petrobras, the scandal-ridden, junk-rated, state-controlled Brazilian oil producer, surprised markets to sell $2.5bn worth of bonds with a 100-year maturity on Monday. Here's what the unusual debt sale can tell us about markets. Investors are still craving returns - The new Petrobras debt sold like hot cakes thanks to the juicy returns on offer. …the company issued the bonds to yield 8.45% -- that's far higher than Mexico's 100-year bonds, which are trading at a yield of 5.59% or 30-year U.S. Treasuries yielding 2.94%. But that 8.45% yield was also 0.4 percentage point less than the price guidance provided by the deal's bankers.”
May 31 – Bloomberg (Jason Scott): “Sydney is in the grip of a housing bubble, Australia’s most-senior economic bureaucrat said in one of the strongest warnings yet by a government official. ‘When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney -- unequivocally,’ Treasury Secretary John Fraser said… ‘Frankly, whatever the data says, just casual observation would tell you that’s the case.’ Home prices in Sydney rose 15% in May from a year earlier… Australia’s major banks have said they will curb growth in home loans to investors after the country’s financial services regulator asked lenders to limit expansion of these mortgages to 10% a year.”
June 2 – Bloomberg (Katya Kazakina): “In November, a painting of a pensive young woman by French artist Francis Picabia sold for 145,000 euros ($181,159) at auction in Paris. Six months later, the same 1940s work appeared at Christie’s in New York, and at least three bidders pushed the price to $580,000. The anonymous seller scored a 220% gain… The practice of flipping art, popular among some buyers of inexpensive emerging artists, is increasingly reaching the market for established masters such as Andy Warhol, Gerhard Richter and Picabia. Driving it are record prices for high-end artworks and Wall Street investors who are prioritizing rapid returns over long-term collecting. Trophy works that quickly returned to auction were once perceived as ‘a woman who has been divorced three times,’ said Frances Beatty, vice president of Richard L. Feigen & Co., a New York gallery. “Because art is seen as an asset class, the more rapid turnover is considered encouraging. There’s a whole new generation of collectors who are playing the art market.”
Europe Watch:
June 5 – Reuters (Karolina Tagaris and Angeliki Koutantou): “Greek Prime Minister Alexis Tsipras on Friday spurned ‘absurd’ terms of proposed aid from lenders and delayed a debt payment to the International Monetary Fund, prolonging an impasse that threatens to push Greece into default and out of the euro zone. In a defiant speech aimed at winning parliament's backing for his rejection of the austerity-for-aid package, Tsipras balanced indignation with confidence that a deal was ‘closer than ever before’ to keep his country inside the currency bloc. The contradictory message underscored the growing pressure on Tsipras to quickly sign a deal before cash-strapped Athens runs out of money, while also trying to placate hardliners in his leftist party who oppose the terms creditors are demanding. One far-left deputy minister suggested snap elections as a way out, by obtaining public legitimacy for difficult decisions to secure aid. But Tsipras made no mention of elections in an address that focused on attacking the aid plan offered by euro zone and IMF creditors. ‘The Greek government cannot consent to absurd proposals,’ Tsipras told parliament. ‘I want to believe that this proposal was a bad moment for Europe or at the very least a bad negotiating trick and will soon be withdrawn by the masterminds themselves,’ he said.”
China Bubble Watch:
June 4 – Bloomberg: “China has granted another 1 trillion yuan ($161bn) quota to provinces to swap high-interest debt into low-cost bonds, doubling the previous amount, according to people familiar with the matter. The increase comes as the first stage of the bond swap is under way. Commercial banks have been buying such bonds after the central bank flooded the interbank market with cheap funds… The expansion will help the government cut risks from a record surge in borrowing that local authorities took on to fund a glut of investment projects. The process -- which includes inducements for banks to buy new, longer-maturity, lower yielding bonds -- is alleviating a funding crunch among provinces that had threatened to deepen the economy’s slowdown. Local-government obligations may have reached 25 trillion yuan, bigger than the size of the German economy, according to estimates from Mizuho Securities… That compares with the figure of 17.9 trillion yuan as of June 30, 2013 given by the National Audit Office.”
June 3 – Bloomberg (Ye Xie and Bonnie Cao): “China’s initial public offerings are such hot commodities that a company seeking $2 billion attracted bids approaching the entire annual economic output of Hong Kong. China National Nuclear Power Co., the country’s second-biggest atomic power operator, locked up 1.69 trillion yuan ($273 billion) in bids for its IPO… The offering may be the biggest in China since August 2010. Individual investors are piling into newly-issued stocks on mainland exchanges after regulators discouraged companies from selling equity at high valuations. Shares of the 144 firms that went public this year have jumped an average 539% so far, including a 44% increase on the first day of trading, the maximum amount allowed by local bourses…”
June 1 – Bloomberg: “One of the many mysteries behind the share price collapse of the solar panel maker controlled by Li Hejun is this: Which of the Chinese billionaire’s many creditors risk losing every yuan they put into his company? A plethora of Chinese lenders are exposed to Hanergy Thin Film Power Group Ltd. and its parent company… On May 20, 47% of Hanergy Thin Film’s market value vanished in minutes and it’s now under probe by the Hong Kong Securities & Futures Commission. Creditors are nervous: A group of 11 lenders have asked for a meeting to voice their concerns and discuss their $82 million loan… ‘The interesting thing with Hanergy is that so much is happening with the parent company that investors know nothing about,’ said Charles Yonts, an analyst with CLSA Asia-Pacific Markets… ‘The opacity about parent finances and billings is extraordinary.’ …Hanergy Group has given no public accounting of all its debt or the debt scattered among its units.’”
June 4 – Bloomberg: “Guangxi Nonferrous Metals Group Co. may have difficulty repaying its bonds on its own, China Credit Rating Co. said, highlighting the risk of it becoming the second state-owned firm to default. The company, based in Nanning in China’s southern Guangxi province, must repay 1.3 billion yuan ($210 million) of principal and 62.92 million yuan of interest on its 4.84% notes due June 13… A bottle maker that supplies Coca-Cola Co. became the fourth company to miss obligations in the onshore bond market last week and a maker of smoked duck leg cited increasing difficulty getting credit as it defaulted on bank loans ahead of a bond deadline June 12. ‘Lower-rated issuers are facing big pressure to repay debt,’ said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. ‘But given the loose monetary environment, there won’t be a surge in bond defaults in China.’”
EM Bubble Watch:
June 3 – CNN: “Venezuela's economy is imploding. Its currency, the bolivar, is literally worth less than a penny. Just a month ago, $1 was worth 279 bolivars. That was already pretty dismal for Venezuela. Now $1 equals 408 bolivars, according to the unofficial exchange rate, which most Venezuelans get when they try to trade currency. Put another way, one bolivar equals $0.002 -- less than a penny. The country's currency has lost nearly half its value since the beginning of May…”
June 1 – AFP: “Saudi Arabia's foreign currency reserves dropped by $49 billion in the first four months of 2015 following the dive in world oil prices, a report said… The reserves, piled up in the past decade due to high crude prices, dropped from $732 billion at the end of 2014 to $683 billion at the end of April, Saudi firm Jadwa Research said in a report. In March and April alone, the reserves dipped $31 billion, it said.”
June 4 – Bloomberg (Deema Almashabi): “Saudi Arabia’s oil-fueled economic boom is showing signs of losing steam. Official data released last week showed demand for loans growing at the slowest pace since 2011 and the kingdom’s currency reserves plunging for a third month in a row. An index reflecting the performance of the non-oil private economy fell to the lowest level in a year in May. The numbers signal that the drop in oil prices is starting to hurt the biggest Arab economy at a time when the kingdom is undergoing sweeping political changes at home and waging a regional war. The government is moving ahead with spending plans that will widen the budget deficit to 20% of economic output…”
June 3 – Bloomberg (Onur Ant and Selcan Hacaoglu): “Turkey’s consumer price inflation accelerated in May to the highest level this year, led by price gains in transportation and housing. The annual rate of inflation rose to 8.09% from 7.91% in the previous month…”
Brazil Watch:
June 3 – Bloomberg (Mario Sergio Lima): “Brazil raised interest rates for a sixth straight time as policy makers work to convince investors that inflation will reach target. The bank’s board… raised the benchmark rate by a half-point to 13.75% Wednesday, the highest since January 2009… Economists and traders bet the deepest recession in 25 years will prevent Tombini from raising interest rates as much as needed to slow inflation to the 4.5% target next year. Meanwhile, Tombini has pledged to do what it takes to meet the goal even as unemployment rises. ‘The central bank needs to regain credibility to help confidence rise, and they are on the right path,’ Flavio Serrano, senior economist at BESI Brasil… ‘Wrong economic policies are to blame for the economic state right now.’”
Geopolitical Watch:
June 3 – Reuters (Kiyoshi Takenaka): “Philippine President Benigno Aquino made a veiled comparison… between China's activities in the South China Sea and Nazi Germany's expansionism before World War Two, echoing similar remarks he made last year that outraged Beijing. Aquino, who is expected to agree beefed up defense ties with Japan when he meets Prime Minister Shinzo Abe on Thursday, also urged Beijing to rethink its land reclamation projects in the disputed waters… Asked about Washington's strategic ‘rebalance’ to Asia and China's maritime moves, Aquino suggested the U.S. role was key, and alluded to Nazi Germany's territorial expansion before World War Two and Western appeasement. ‘If there was a vacuum, if the United States, which is the superpower, says 'We are not interested', perhaps there is no brake to ambitions of other countries,’ he said… Recalling documentaries on Germany's expansionism before the war, Aquino added: ‘The commentators on these documentaries were saying, 'If somebody said stop to (Adolf) Hitler at that point in time, or to Germany at that time, could we have avoided World War Two?’ ‘So, I say again, America's rebalancing sends a definite signal that we are all supposed to be living under norms that we agreed upon.’”
June 5 – Reuters (Siva Govindasamy): “Vietnam is in talks with European and U.S. contractors to buy fighter jets, maritime patrol planes and unarmed drones, sources said, as it looks to beef up its aerial defenses in the face of China's growing assertiveness in disputed waters. The battle-hardened country has already taken possession of three Russian-built Kilo-attack submarines and has three more on order as part of a $2.6 billion deal agreed in 2009. Upgrading its air force would give Vietnam one of the most potent militaries in Southeast Asia.”
June 5 – Bloomberg (Michael A Riley and John Walcott): “The disclosure by U.S. officials that Chinese hackers stole records of as many as 4 million government workers is now being linked to the thefts of personal information from health-care companies. Forensic evidence indicates that the group of hackers responsible for the U.S. government breach… likely carried out attacks on health-insurance providers Anthem Inc. and Premera Blue Cross that were reported earlier this year, said John Hultquist of iSight Partners Inc., a cyber-intelligence company… The thefts are believed to be part of a larger effort by Chinese hackers to get health-care records and other personal information on millions of U.S. government employees and contractors from various sources, including insurers, government agencies and federal contractors, said an American intelligence official…”
Russia and Ukraine Watch:
June 4 – Reuters (Richard Balmforth and Pavel Polityuk): “Ukraine's president told his military on Thursday to prepare for a possible ‘full-scale invasion’ by Russia all along their joint border, a day after the worst fighting with Russian-backed separatists in months. His address in parliament was one of the first times Petro Poroshenko has used the word ‘invasion’ to refer to Russia's behavior since the start of a separatist rebellion in the east… Referring to a 12-hour firefight involving artillery on both sides on Wednesday when Ukraine says the rebels tried to take the town of Maryinka, Poroshenko said: ‘There is a colossal threat of a renewal of large-scale military operations from the side of the Russian-terrorist groups.’ ‘The military must be ready as much for a renewal of an offensive by the enemy in the Donbass as they are for a full-scale invasion along the whole length of the border with Russia. We must be truly ready for this.’”
Japan Watch:
June 4 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The excessive strength in the yen that damaged Japanese manufacturing in recent years has now been corrected, according to an ally of Bank of Japan Governor Haruhiko Kuroda. ‘The abnormally strong yen has been corrected,’ said Yutaka Harada, who joined the central bank’s policy board in March… Harada’s remarks underscore that Japanese policy makers aren’t seeking further declines in the currency… Since reaching a postwar high of 75.35 in 2011, the yen has fallen 40%, aided by unprecedented monetary easing that Kuroda’s using to reflate the world’s third-biggest economy. ‘Harada’s comments indicate that the BOJ sees no need for additional easing anytime soon,’ said Kazuhiko Ogata, an economist at Credit Agricole SA. ‘The government has become increasingly aware of the negative effects of the weak yen on households and small companies, and that’s something the BOJ can’t ignore.’”
Friday Evening Links
[Bloomberg] Emerging Stocks, Currencies Tumble on Fed Interest Rate Outlook
[Reuters] Greek PM rejects 'absurd' proposal from lenders
[Bloomberg] China’s Stock Market Capitalization Set to Reach $10 Trillion
[Reuters] Ukraine's creditors say detailed debt talks still elusive
[CNBC] China may try to force US tech firms to give up code
[Reuters] West, Russia trade accusations at U.N. over new Ukraine violence
[Reuters] Greek PM rejects 'absurd' proposal from lenders
[Bloomberg] China’s Stock Market Capitalization Set to Reach $10 Trillion
[Reuters] Ukraine's creditors say detailed debt talks still elusive
[CNBC] China may try to force US tech firms to give up code
[Reuters] West, Russia trade accusations at U.N. over new Ukraine violence
Friday's News Links
[Reuters] Greece cannot accept lenders' latest proposal: economy minister
[Bloomberg] Greece Raises Stakes in Showdown as Payment to IMF Deferred
[Bloomberg] German Bond Drop Leaves Securities Set for Worst Week Since 1998
[Bloomberg] European Stocks Drop for Fourth Day as Greece Defers IMF Payment
[Bloomberg] Here's What to Watch for in Friday's Jobs Report
[Bloomberg] $400 Billion Reasons Why Ebbing Currency Reserves Threaten Bonds
[Bloomberg] Junk Bonds Proving Haven in Global Bond Rout That’s Erased Gains
[Bloomberg] Miami’s Hot Condo Market Cools as Dollar Derails Buyers
[Washington Post] Chinese breach data of 4 million federal workers
[Bloomberg] China’s Hack of U.S Data Tied to Health-Care Record Thefts
[Reuters] Exclusive: Vietnam eyes Western warplanes, patrol aircraft to counter China
[NYT] High Inflation Makes Ukraine’s Troubled Situation Worse
[Bloomberg] Greece Raises Stakes in Showdown as Payment to IMF Deferred
[Bloomberg] German Bond Drop Leaves Securities Set for Worst Week Since 1998
[Bloomberg] European Stocks Drop for Fourth Day as Greece Defers IMF Payment
[Bloomberg] Here's What to Watch for in Friday's Jobs Report
[Bloomberg] $400 Billion Reasons Why Ebbing Currency Reserves Threaten Bonds
[Bloomberg] Junk Bonds Proving Haven in Global Bond Rout That’s Erased Gains
[Bloomberg] Miami’s Hot Condo Market Cools as Dollar Derails Buyers
[Washington Post] Chinese breach data of 4 million federal workers
[Bloomberg] China’s Hack of U.S Data Tied to Health-Care Record Thefts
[Reuters] Exclusive: Vietnam eyes Western warplanes, patrol aircraft to counter China
[NYT] High Inflation Makes Ukraine’s Troubled Situation Worse
Thursday, June 4, 2015
Thursday Evening Links
[Bloomberg] Greece Defers IMF Payment as Merkel Says Resolution Far Away
[Reuters] Greek PM Tsipras won't come to Brussels Friday, talks becoming difficult
[Bloomberg] Chinese Hackers Said to Steal Federal Personnel Data in Breach
[AP] US officials: Massive breach of federal personnel data
[Reuters] Wall St. drops as Greece worries linger; materials, energy fall
[Bloomberg] You Call This a Bond Rout? Wait Until the Real Selling Starts
[Reuters] Fed's Tarullo, BlackRock's Fink cite bond market liquidity concerns
[CNBC] Mortgage rates: 'Definitely in panic mode'
[BloombergView] Ukraine's War Is Back
[Washington Post] Quietly, al-Qaeda offshoots expand in Yemen and Syria
[Reuters] Greek PM Tsipras won't come to Brussels Friday, talks becoming difficult
[Bloomberg] Chinese Hackers Said to Steal Federal Personnel Data in Breach
[AP] US officials: Massive breach of federal personnel data
[Reuters] Wall St. drops as Greece worries linger; materials, energy fall
[Bloomberg] You Call This a Bond Rout? Wait Until the Real Selling Starts
[Reuters] Fed's Tarullo, BlackRock's Fink cite bond market liquidity concerns
[CNBC] Mortgage rates: 'Definitely in panic mode'
[BloombergView] Ukraine's War Is Back
[Washington Post] Quietly, al-Qaeda offshoots expand in Yemen and Syria
Thursday's News Links
[Reuters] U.S. productivity plunges in first-quarter; unit labor costs surge
[Bloomberg] Fed Urged by IMF to Postpone Rate Liftoff to First Half of 2016
[Bloomberg] Global Bond Slump Deepens as European Shares Slide, Ruble Drops
[Bloomberg] German Bonds Shown No Respite Extending Worst Euro-Era Decline
[Bloomberg] Bond Rout Wipes Out 2015 Gains as Traders Stay Glued to Screens
[Dow Jones] Bond-market Carnage Triggers Selloff In U.S. Stock Futures
[Breakingviews] For bonds, crowds are more dangerous than Draghi
[Reuters] Greek left vents fury at creditors as Tsipras nears deal
[Bloomberg] Greek Groundhog Day Continues With Talks Failing to Break Impasse
[Reuters] Creditors' offer prompts anger, dismay in Greece
[Bloomberg] Euro Extends Biggest Three-Day Rally Since 2009 on German Yields
[Bloomberg] China Stocks Close Higher After Margin Curbs Spark 5.4% Rout
[Bloomberg] China Said to Double Local Bond-Swap to Defuse Debt Bomb
[Bloomberg] China State Firm Seen Facing Debt Pressure as Bonds Due
[Bloomberg] Kuroda Ally at BOJ Says Excess Yen Strength Now Corrected
[NYT] Inequality Troubles Americans Across Party Lines, Times/CBS Poll Finds
[Bloomberg] The Cost of Oil’s Slump: Saudi Economy Shows Slowdown Signs
[Reuters] Ukraine's Poroshenko warns of Russian invasion threat after fighting surge
[Reuters] Ukraine says five servicemen killed in fighting, tensions still high
[Der Spiegel] Angels and Demons: Ukraine, One Year After Poroshenko
[Bloomberg] Fed Urged by IMF to Postpone Rate Liftoff to First Half of 2016
[Bloomberg] Global Bond Slump Deepens as European Shares Slide, Ruble Drops
[Bloomberg] German Bonds Shown No Respite Extending Worst Euro-Era Decline
[Bloomberg] Bond Rout Wipes Out 2015 Gains as Traders Stay Glued to Screens
[Dow Jones] Bond-market Carnage Triggers Selloff In U.S. Stock Futures
[Breakingviews] For bonds, crowds are more dangerous than Draghi
[Reuters] Greek left vents fury at creditors as Tsipras nears deal
[Bloomberg] Greek Groundhog Day Continues With Talks Failing to Break Impasse
[Reuters] Creditors' offer prompts anger, dismay in Greece
[Bloomberg] Euro Extends Biggest Three-Day Rally Since 2009 on German Yields
[Bloomberg] China Stocks Close Higher After Margin Curbs Spark 5.4% Rout
[Bloomberg] China Said to Double Local Bond-Swap to Defuse Debt Bomb
[Bloomberg] China State Firm Seen Facing Debt Pressure as Bonds Due
[Bloomberg] Kuroda Ally at BOJ Says Excess Yen Strength Now Corrected
[NYT] Inequality Troubles Americans Across Party Lines, Times/CBS Poll Finds
[Bloomberg] The Cost of Oil’s Slump: Saudi Economy Shows Slowdown Signs
[Reuters] Ukraine's Poroshenko warns of Russian invasion threat after fighting surge
[Reuters] Ukraine says five servicemen killed in fighting, tensions still high
[Der Spiegel] Angels and Demons: Ukraine, One Year After Poroshenko
Wednesday, June 3, 2015
Wednesday Evening Links
[Bloomberg] Draghi Says Volatility Here to Stay as Global Bond Rout Deepens
[The Guardian] Greek leader meets eurozone creditors – but as expected, no deal yet
[Bloomberg] China’s Hot IPO Market Lures $273 Billion to $2 Billion Offering
[Bloomberg] Brazil Boosts Rate for Sixth Time as Investors Doubt Tombini
[Reuters] Seeking compromise deal, Greece warns it might skip IMF payment
[Bloomberg] BofA Explains How the Bond Rout Could Turn Into a Bloodbath
[Bloomberg] Wall Street Sounds Bond Warning as Holdings Shift Sparks Concern
[Reuters] Ukraine forces, separatists fight first serious battles in months
[AFP] Fighting surges in Ukraine after Kiev says rebels launch assault
[The Guardian] Greek leader meets eurozone creditors – but as expected, no deal yet
[Bloomberg] China’s Hot IPO Market Lures $273 Billion to $2 Billion Offering
[Bloomberg] Brazil Boosts Rate for Sixth Time as Investors Doubt Tombini
[Reuters] Seeking compromise deal, Greece warns it might skip IMF payment
[Bloomberg] BofA Explains How the Bond Rout Could Turn Into a Bloodbath
[Bloomberg] Wall Street Sounds Bond Warning as Holdings Shift Sparks Concern
[Reuters] Ukraine forces, separatists fight first serious battles in months
[AFP] Fighting surges in Ukraine after Kiev says rebels launch assault
Wednesday's News Links
[Bloomberg] Emerging Stocks Fall for Eighth Day; Qatar Stocks Drop on FIFA
[Reuters] Greece will not pay IMF on Friday without prospect of a deal: lawmaker
[Reuters] Greek PM Calls on Lenders to Show 'Realism', End Grexit Talk
[WSJ] Greece’s Creditors Draft Final Offer for Bailout Aid in Bid to Break Stalemate
[Bloomberg] Companies' Borrowing Spree Darkens Stock Market Future
[Bloomberg] Euro Bond Rout Wipes Out 2015 Profit as Inflation Returns
[Reuters] Investors piling into volatility funds bet on more anxiety ahead
[Reuters] German finance minister accuses Greece's ruling party of misleading voters
[Bloomberg View, Bershidsky] Does Greece Have a Diabolical Plan B?
[Bloomberg] OECD Cuts Global Growth Outlook as Investment Lags, Greece Looms
[Reuters] China May services PMI rises to 53.5, new business up most since 2012
[Bloomberg View] China After the Bubble
[WSJ] Shares Too Pricey? Bernanke Doesn’t Think So
[Bloomberg] Jamie Dimon Becomes Billionaire Ushering in Era of the Megabank
[Bloomberg] Turkey Annual Inflation Climbs to Highest Level This Year
[CNN] Venezuela's currency isn't worth a penny
[Reuters] Philippine's Aquino revives comparison between China and Nazi Germany
[Bloomberg] Two Civilians Dead as Ukraine Sees ‘Significantly’ More Shelling
[Washington Post] How Saudi Arabia’s 79-year-old King Salman is shaking up the Middle East
[Der Spiegel] Paid as a Pro-Kremlin Troll: 'The Hatred Spills over into the Real World'
[AP] California's Largest Lake Threatened by Urban Water Transfer
[Reuters] Greece will not pay IMF on Friday without prospect of a deal: lawmaker
[Reuters] Greek PM Calls on Lenders to Show 'Realism', End Grexit Talk
[WSJ] Greece’s Creditors Draft Final Offer for Bailout Aid in Bid to Break Stalemate
[Bloomberg] Companies' Borrowing Spree Darkens Stock Market Future
[Bloomberg] Euro Bond Rout Wipes Out 2015 Profit as Inflation Returns
[Reuters] Investors piling into volatility funds bet on more anxiety ahead
[Reuters] German finance minister accuses Greece's ruling party of misleading voters
[Bloomberg View, Bershidsky] Does Greece Have a Diabolical Plan B?
[Bloomberg] OECD Cuts Global Growth Outlook as Investment Lags, Greece Looms
[Reuters] China May services PMI rises to 53.5, new business up most since 2012
[Bloomberg View] China After the Bubble
[WSJ] Shares Too Pricey? Bernanke Doesn’t Think So
[Bloomberg] Jamie Dimon Becomes Billionaire Ushering in Era of the Megabank
[Bloomberg] Turkey Annual Inflation Climbs to Highest Level This Year
[CNN] Venezuela's currency isn't worth a penny
[Reuters] Philippine's Aquino revives comparison between China and Nazi Germany
[Bloomberg] Two Civilians Dead as Ukraine Sees ‘Significantly’ More Shelling
[Washington Post] How Saudi Arabia’s 79-year-old King Salman is shaking up the Middle East
[Der Spiegel] Paid as a Pro-Kremlin Troll: 'The Hatred Spills over into the Real World'
[AP] California's Largest Lake Threatened by Urban Water Transfer
Tuesday, June 2, 2015
Tuesday Evening Link
[Bloomberg] Greek Stalemate Leaves Tsipras Facing Final Offer From Creditors
[Bloomberg] The Secret Money Behind Vladimir Putin's War Machine
[Bloomberg] Greece's creditors draft deal to unlock aid, Athens resists
[Bloomberg] Fed's Brainard: global troubles weighing on U.S., may delay rate hike
[Bloomberg] These New Petrobras Bonds Tell You a Lot About the State of Markets
[Bloomberg] Goldman Sachs to Companies: Stop Buying Back Your Stock
[AFP] Bernanke blames Congress as China flexes economic muscles
[Bloomberg] The Secret Money Behind Vladimir Putin's War Machine
[Bloomberg] Greece's creditors draft deal to unlock aid, Athens resists
[Bloomberg] Fed's Brainard: global troubles weighing on U.S., may delay rate hike
[Bloomberg] These New Petrobras Bonds Tell You a Lot About the State of Markets
[Bloomberg] Goldman Sachs to Companies: Stop Buying Back Your Stock
[AFP] Bernanke blames Congress as China flexes economic muscles
Tuesday's News Links
[Bloomberg] Emerging Market Stocks Drop for Seventh Day; Ruble Strengthens
[Bloomberg] European Leaders Deciding On Greece's Fate Agree That Talks Must Intensify
[Reuters] Greek PM says sent comprehensive proposal to lenders on Monday
[Bloomberg] Greek Standoff Takes Another Twist as Dueling Plans Are Drafted
[Dow Jones] Greek Insolvency Could Be 'Gigantic'
[Bloomberg] Spanish Bond Declines Push 10-Year Yield to Most Since November
[WSJ] Glut of Chinese Goods Pinches Global Economy
[Bloomberg] China Debt Markets Show Stress Amid Duck Supplier's Default
[Bloomberg] Troubled Hanergy’s Debt Web Snags State Banks to Shadow Lenders
[Bloomberg] Chinese ETF Buyers Whipsawed Amid Widest Price Swings Since 2010
[USAT] New-car loans keep getting longer
[Bloomberg] Puerto Rico’s $72 Billion Distress Mess Reunites Lehman-Era Foes
[Bloomberg] Even Goldilocks Won’t Keep Bears From Turkey: Election Scenarios
[VOA] MERS Outbreak Spreads in South Korea
[BBC] Islamic State advance failure of world - Iraqi PM
[Bloomberg] European Leaders Deciding On Greece's Fate Agree That Talks Must Intensify
[Reuters] Greek PM says sent comprehensive proposal to lenders on Monday
[Bloomberg] Greek Standoff Takes Another Twist as Dueling Plans Are Drafted
[Dow Jones] Greek Insolvency Could Be 'Gigantic'
[Bloomberg] Spanish Bond Declines Push 10-Year Yield to Most Since November
[WSJ] Glut of Chinese Goods Pinches Global Economy
[Bloomberg] China Debt Markets Show Stress Amid Duck Supplier's Default
[Bloomberg] Troubled Hanergy’s Debt Web Snags State Banks to Shadow Lenders
[Bloomberg] Chinese ETF Buyers Whipsawed Amid Widest Price Swings Since 2010
[USAT] New-car loans keep getting longer
[Bloomberg] Puerto Rico’s $72 Billion Distress Mess Reunites Lehman-Era Foes
[Bloomberg] Even Goldilocks Won’t Keep Bears From Turkey: Election Scenarios
[VOA] MERS Outbreak Spreads in South Korea
[BBC] Islamic State advance failure of world - Iraqi PM
Monday, June 1, 2015
Monday Evening Links
[NYT, Appelbaum] Ben Bernanke Says Fed Can’t Get Caught Up in Inequality Debate
[NYT, Sorkin] Reflections on Stress and Long Hours on Wall Street
[Independent] US preparing to face down China in the South China Sea
[FT] US dealmaking hits $243bn monthly record
[Bloomberg] Merkel, Hollande and Juncker to Meet in Berlin in Attempt to Save Greece
[Bloomberg] Will Greece Join These Deadbeats That Missed Debt Payments to the IMF?
[Reuters] Obama: land reclamation projects in South China Sea 'counterproductive'
[AFP] Saudi reserves dip $49 bn from end-2014: report
[Reuters] U.N. finds growing signs of Russian involvement in Ukraine war
[NYT, Sorkin] Reflections on Stress and Long Hours on Wall Street
[Independent] US preparing to face down China in the South China Sea
[FT] US dealmaking hits $243bn monthly record
[Bloomberg] Merkel, Hollande and Juncker to Meet in Berlin in Attempt to Save Greece
[Bloomberg] Will Greece Join These Deadbeats That Missed Debt Payments to the IMF?
[Reuters] Obama: land reclamation projects in South China Sea 'counterproductive'
[AFP] Saudi reserves dip $49 bn from end-2014: report
[Reuters] U.N. finds growing signs of Russian involvement in Ukraine war
Monday's News Links
[Bloomberg] Consumer Spending Stalled in April as Americans Saved More
[Reuters] China's key stock index posts biggest one-day rise in 2 1/2 yrs
[Reuters] Asia shares pare losses as China markets rally
[Reuters] S.Korea airline shares fall, drugmakers rise on MERS scare
[CNBC] Greek PM slams creditors in 'defiant' tirade
[Bloomberg] How Greek Capital Controls Would Work If Deadlock Persists: Q&A
[Reuters] Fed's Fischer warns against complacency on financial crisis risks
[Bloomberg] Everyone's Been Worried About Liquidity in the Wrong Bond Market
[Bloomberg] Bond Dealers Enfeebled as Liquidity Woes Boost Derivatives
[CNBC] Rate hike needed to pop bubbles: Robert Shiller
[Reuters] China's factories slow to respond to stimulus, South Korea exports dive
[Bloomberg] China Considers Doubling Its Local Bond-Swap Program
[Bloomberg] Two Years Into the BOJ's Bold Bet: Here's What's Happening
[Bloomberg] Australia’s Treasury Says Sydney Is 'Unequivocally' in a Housing Bubble
[Bloomberg] Ukraine Seen Prevailing in Creditor Showdown Over Debt Write-Off
[Bloomberg] INSIDE CHINA: Bonds Fall; Goldman Sees Further Loosening
[BBC] Ashton Carter: US will play 'pivotal' role in Asia
[Reuters] Italy's Renzi stumbles in local elections
[Greece] Prime Minister Alexis Tsipras’ article in Le Monde newspaper: Europe at crossroads
[Reuters] China's key stock index posts biggest one-day rise in 2 1/2 yrs
[Reuters] Asia shares pare losses as China markets rally
[Reuters] S.Korea airline shares fall, drugmakers rise on MERS scare
[CNBC] Greek PM slams creditors in 'defiant' tirade
[Bloomberg] How Greek Capital Controls Would Work If Deadlock Persists: Q&A
[Reuters] Fed's Fischer warns against complacency on financial crisis risks
[Bloomberg] Everyone's Been Worried About Liquidity in the Wrong Bond Market
[Bloomberg] Bond Dealers Enfeebled as Liquidity Woes Boost Derivatives
[CNBC] Rate hike needed to pop bubbles: Robert Shiller
[Reuters] China's factories slow to respond to stimulus, South Korea exports dive
[Bloomberg] China Considers Doubling Its Local Bond-Swap Program
[Bloomberg] Two Years Into the BOJ's Bold Bet: Here's What's Happening
[Bloomberg] Australia’s Treasury Says Sydney Is 'Unequivocally' in a Housing Bubble
[Bloomberg] Ukraine Seen Prevailing in Creditor Showdown Over Debt Write-Off
[Bloomberg] INSIDE CHINA: Bonds Fall; Goldman Sees Further Loosening
[BBC] Ashton Carter: US will play 'pivotal' role in Asia
[Reuters] Italy's Renzi stumbles in local elections
[Greece] Prime Minister Alexis Tsipras’ article in Le Monde newspaper: Europe at crossroads
Sunday, May 31, 2015
Sunday Evening Links
[Bloomberg] Greece’s Endgame Nears as Tsipras Warns Bell May Toll for Europe
[Reuters] Greece continues talks on aid, deal unlikely on Sunday: sources
[FT] Tsipras accuses bailout monitors of making ‘absurd’ demands
[Bloomberg] Greece Pins Hopes on Merkel as Talks Yield Little Progress
[Bloomberg] Bad Debts Prompt China’s Banks to Balk at Loan-Backed Bond Call
[Bloomberg] China Stock Rout Grips Market With Deja Vu of 5/30 Catastrophe
[FT] Shadow banks grab record US loans share
[Reuters] Greece continues talks on aid, deal unlikely on Sunday: sources
[FT] Tsipras accuses bailout monitors of making ‘absurd’ demands
[Bloomberg] Greece Pins Hopes on Merkel as Talks Yield Little Progress
[Bloomberg] Bad Debts Prompt China’s Banks to Balk at Loan-Backed Bond Call
[Bloomberg] China Stock Rout Grips Market With Deja Vu of 5/30 Catastrophe
[FT] Shadow banks grab record US loans share
Sunday's News Links
[Reuters] Crunch time for Greece; U.S. and Chinese data in focus
[AFP] Greece, economy, bond purchases top agenda of ECB meet
[UKGuardian] Whether Greece does a deal or defaults, the prospects seem equally grim
[Reuters] China says South China Sea air defense zone depends on security
[AFP] China rejects US criticism of sea reclamations
[Reuters] Exclusive: Six powers agree way to restore U.N. sanctions in push for Iran deal - sources
[BBC] Ukraine gives former Georgian president citizenship, governor's job
[AFP] Greece, economy, bond purchases top agenda of ECB meet
[UKGuardian] Whether Greece does a deal or defaults, the prospects seem equally grim
[Reuters] China says South China Sea air defense zone depends on security
[AFP] China rejects US criticism of sea reclamations
[Reuters] Exclusive: Six powers agree way to restore U.N. sanctions in push for Iran deal - sources
[BBC] Ukraine gives former Georgian president citizenship, governor's job
Saturday, May 30, 2015
Saturday's News Links
[Reuters] Greece open to compromise to seal deal this week: interior minister
[Dow Jones] U.S. Recovery Stumbles Yet Again--Update
[MarketWatch] May on track to set record for U.S. M&A activity
[CNBC] Texas floods and commodities: Farms face 'total loss for year'
[WSJ] Defense Chiefs Clash Over South China Sea
[Bloomberg] China Says Carter’s Sea Comments ‘Foment Dissension’
[NYT] Chinese Security Laws Elevate the Party and Stifle Dissent. Mao Would Approve.
[Reuters] Fighters battle Houthis in Yemen's southern city of Aden
[Dow Jones] U.S. Recovery Stumbles Yet Again--Update
[MarketWatch] May on track to set record for U.S. M&A activity
[CNBC] Texas floods and commodities: Farms face 'total loss for year'
[WSJ] Defense Chiefs Clash Over South China Sea
[Bloomberg] China Says Carter’s Sea Comments ‘Foment Dissension’
[NYT] Chinese Security Laws Elevate the Party and Stifle Dissent. Mao Would Approve.
[Reuters] Fighters battle Houthis in Yemen's southern city of Aden
Friday, May 29, 2015
My Weekly Commentary: Out of Thin Air
In its basic form, Credit is someone’s promise to pay “money” at some point in the future. Credit instruments are an “IOU.” Importantly, new Credit/“IOUs” create additional purchasing power. Especially late in prolonged Credit booms, financial instruments and claims come to account for enormous amounts of system “wealth.” Crises are the process of rectifying the divergence that develops between financial wealth and actual underlying economic wealth. This process invariably unmasks the systematic wealth redistribution that gathered momentum throughout the boom cycle.
Borrowing language from Murray Rothbard, money (and Credit) can be created “Out of Thin Air.” Such Credit expansion is referred to as “Credit inflation.” And, importantly, the resulting inflation in purchasing power can exert various price and other inflationary effects. It’s a popular misconception that consumer price inflation is the prevailing and more dangerous type of inflation. Never has this been as apparent as right now.
Traditionally, banks and governments were the culprits responsible for Credit expansions that on occasion turned into runaway booms and devastating busts. There are excellent historical accounts and analyses of centuries of Credit Bubbles. Even so – and even post-2008 - central bankers remain more determined than ever to disregard Credit theory, history and analysis.
The current global Credit Bubble is unlike anything in history (and the analysis incredibly challenging). I’ve tried to explain its origin was the Federal Reserve’s response to the early-nineties banking crisis. The Greenspan Fed spurred non-bank Credit growth that evolved into a historic Credit expansion. The upshot was a Bubble in Credit instruments intermediated through Fannie Mae, Freddie Mac and the Federal Home Loan Bank System. Closely related was a corresponding general boom in securitizations and derivatives, along with myriad Credit instruments involved in securities finance/leveraging (“repos,” Fed funds, financial CP, special purpose vehicles, etc.). Over the years, I referred to this powerful new financial apparatus as “market-based Credit” and “Wall Street finance.”
Updating Minsky’s analysis, I coined the term “Financial Arbitrage Capitalism” to describe the period of the nineties through 2008. The extraordinary post-mortgage finance Bubble reflation compelled another analytical “update.” We are now well into our seventh year of “Global Government Finance Quasi-Capitalism.” There should be little mystery surrounding so-called “secular stagnation,” as well as rising social stress and geopolitical friction.
The creation of “money” and Credit (“Out of Thin Air”) throughout the market-based Credit apparatus evolved into history’s most powerful Credit mechanism. It also proved fatefully contagious. Unprecedented access to cheap mortgage (along with auto, Credit card, student loan, etc.) borrowings was granted to millions of individuals with deficient Credit histories. Similar dynamics created unimaginably easy Credit Availability for business borrowers. For sovereigns, the boom in market-based finance doomed the likes of Argentina, Iceland and Greece (to name only a few). Predictably, the resulting busts have been progressively more spectacular.
“Market-based” Credit has always been somewhat of a misnomer. Sure, the nineties saw Trillions of new Credit instruments trade freely in the marketplace at impressive valuations (i.e. narrow spreads to Treasuries). Yet the entire marketplace was constructed upon the explicit and implied guarantees from the Treasury and Federal Reserve. The resulting “moneyness” of this Credit apparatus ensured excesses neared catastrophic extremes.
The consensus view holds that today’s financial backdrop is benign. Policymakers have learned from previous mistakes. There is nothing comparable to the excesses of subprime and Lehman Brothers.
The reality is that governments globally have now overtly commandeered so-called “market-based finance.” Securities markets are openly manipulated. Trillions of securities have been monetized. Prices and risk perceptions throughout global securities and derivatives markets have been perverted like never before. The upshot has been a globalized Bubble of unprecedented scope. Looking back, the 2008/09 crisis was a case of major market distortions coming home to roost. Today’s global market distortions greatly overshadow those of 2008.
Backed by concerted government manipulation and intervention, global “money” and Credit have become fungible. Tens of Trillions of electronic debits and Credits spur the free-flow of “money” in and about global markets. Never have such enormous quantities of global securities and financial instruments been perceived as safe or low-risk (“money-like”).
There are a few critical aspects to the backdrop worth keeping in mind. For all intents and purposes, it’s become one enormous global Bubble – the U.S., China, EM, Europe and Japan. Unfettered fungible “money” and Credit - “Out of Thin Air” - have provided both the fuel and the glue. Especially after BOJ and ECB QE/currency devaluations – and the resulting flow of speculative finance to “king dollar” securities markets – tightly interrelated global Bubbles essentially converged into one. With China’s renminbi tied to the U.S. dollar, the two super financial and economic Bubbles have for awhile now been closely interlinked. And as cracks have surfaced in China - surely exacerbated by global competitive currency devaluations - Chinese and American Bubbles have become only further melded.
Throughout history, booms have been a source of major increases in perceived wealth and power. Yet Credit inflations and Bubbles are at their roots about wealth redistribution and destruction. Given sufficient time and opportunity, the creation of “money” and Credit “Out of Thin Air” will have profoundly adverse consequences and ramifications. And, indeed, this runaway global Credit inflation’s deleterious effects are these days on display.
I’ll borrow a Larry Lindsey quote from last week’s CBB: “Because the government will not voluntarily let itself go out of business. It will use all of its powers - I’m not talking about just our government but any government - will use all of its powers in order to fund itself…”
So much of the world’s wealth now hinges upon the global Credit Bubble. It’s a given that governments around the world will use all their powers to fund themselves. Will they also use all their powers to protect their nation’s wealth – real as well as perceived wealth that has inflated so profoundly during this boom? When government officials in today’s increasingly hostile world focus on “security” matters, do they place financial security in equal footing with military security? And this gets to the heart of a critical facet of the globalized adoption of market-based finance: inflated securities market prices have become fundamental to a nation’s wealth, national interests, political and social stability, and national security. In an increasingly polarized and spiteful world, who is now willing to take away the punchbowl?
At this point, global central bankers remain united in their cause. Military leaders are not. On the one hand, central banks around the world face similar pressures and remain motivated to work in concert to sustain both domestic Bubbles and the greater global Credit Bubble. Government and military officials, though, are increasingly focused on a spectrum of pressing security issues – military, cyber, economic and financial. With the global pie no longer expanding, policies have turned inward looking and insecure. Integration and cooperation are giving way to antagonism and aggression. We saw it again this week.
And this framework helps explain what can appear a confounding paradox: In an increasingly troubling and uncertain world, global securities markets seemingly couldn’t be more upbeat. At this point, markets remain fixated on central bankers. And the more antagonistic the geopolitical backdrop, the more confident market players have become that timid central bankers will fall in line. There’s too much to lose. Thursday WSJ headline: “Fed’s Williams Says Never Use Rates to Prick Bubbles.” Only use rates to inflate Bubbles.
My deep concerns for the global Credit Bubble are coming to fruition. The Chinese Bubble got completely away from officials. They recognized their predicament too late and too reluctantly. Meanwhile, a complex geopolitical backdrop has unfolded. No longer is reining in Credit Bubble excess viewed as a priority. Chinese domestic fragilities were much greater than previously appreciated – and there’s today no tolerance for risking a bust. Meanwhile, opting out of the inflating global Bubble would not be in China’s interest. With the U.S., Japan and Europe desperately inflating a securities market Bubble, Chinese officials may have decided the risks of being the lone Bubble Popper were too great.
I believe future historians will look back at Russia’s invasion of Ukraine as a major geopolitical and financial inflection point. Putin’s speeches laid it out rather clearly: Russia can only be pushed around for so long. There is a line that can’t be crossed – and the U.S. and the “West” crossed that line. Putin slammed the U.S. for blatantly violating Russia’s vital national interests in neighboring Ukraine.
A year ago economic sanctions were going to discipline an “isolated” Russia. In a world of integrated markets and economies, changes in behavior could be dictated without resorting to tanks and bombers. Moreover, in this dispute between Russia and the West, China was viewed as neutral at worst. Putin’s rants against U.S. domination of global finance, trade and security arrangements could be dismissed as a lunatic’s senseless tirade.
The U.S. is now involved in an increasingly tense standoff with the Chinese in the South China Sea. Presidents Putin and Xi have become fast friends. And I just don’t see aggressive behavior from Russian and Chinese governments as coincidental. They will both err on the side of belligerence.
Last year’s Ukrainian crisis corresponded with serious cracks throughout the emerging markets, not to mention a collapse in crude (that Russia claims was orchestrated as punishment) and commodities. It quickly became an inopportune juncture for the Chinese to rein in their Credit Bubble. Instead, opportunity beckoned to begin building a formidable non-U.S. alliance and competing (non-dollar) global financial structure. This would require ongoing Chinese economic expansion and a stable currency. The Chinese must have viewed the benefits of a new global structure as exceeding the risks associated with accommodating additional Bubble excess. Moreover, imposing sanctions on Russia awakened the Chinese to the risks of something similar befalling their economy.
Global market Bubbles have benefited from the Chinese backtracking from Bubble containment. In the short-term, this lessened the risk of a Chinese financial accident. Similarly, having the Chinese focused on their currency attaining international reserve status has also reduced near-term risk of a disorderly currency devaluation. This has as well been pro-global Bubble.
Meanwhile, intermediate- and long-term risks are rapidly escalating. Regrettably, China has prolonged its “Terminal Phase” of excess, with dire consequences. Extending the life of the global Bubble comes with similar risks. At the same time, the building of a non-U.S. alliance and competing global financial infrastructure unfolds in earnest. Clearly, the Chinese military is preparing for a world that is changing in profound ways. The U.S. military has begun to adjust as well.
Global markets remain unsettled. The Chinese stock market Bubble has all appearances of an accident in the making. A Greek accident could be only days away. European periphery debt markets appear more fragile. EM seems more vulnerable. Currency markets are highly unstable. The dollar, bunds and Treasuries caught decent safe haven bids this week.
The age old problem with creating “money” is that once commenced in earnest it’s extremely difficult to curb. There comes a point where the soundness of the underlying Credit structure begins to be questioned. Such questioning is well overdue. Do central bankers have any idea of their role in fomenting geopolitical turmoil? Just print “money” Out of Thin Air.
For the Week:
The S&P500 declined 0.9% (up 2.4% y-t-d), and the Dow fell 1.2% (up 1.1%). The Utilities slipped 0.3% (down 7.1%). The Banks lost 0.8% (up 1.7%), and the Broker/Dealers dipped 0.4% (up 4.6%). The Transports dropped another 2.2% (down 9.2%). The S&P 400 Midcaps declined 1.1% (up 5.0%), and the small cap Russell 2000 fell 0.5% (up 3.5%). The Nasdaq100 declined 0.4% (up 6.4%), and the Morgan Stanley High Tech index fell 0.6% (up 3.3%). The Semiconductors surged 3.5% (up 8.5%). The Biotechs were little changed (up 20.8%). With bullion down $13, the HUI gold index dropped 2.6% (up 1.7%).
Three-month Treasury bill rates ended the week at zero. Two-year government yields were unchanged at 0.61% (down 6bps y-t-d). Five-year T-note yields fell seven bps to 1.49% (down 16bps). Ten-year Treasury yields dropped nine bps to 2.12% (down 5bps). Long bond yields declined 10 bps to 2.88% (up 13bps).
Greek 10-year yields declined 16 bps to 10.86% (up 112bps y-t-d). Ten-year Portuguese yields rose 13 bps to a four-month high 2.53% (down 9bps). Italian 10-yr yields slipped a basis point to 1.84% (down 5bps). Spain's 10-year yields rose six bps to a six-month high 1.83% (up 22bps). German bund yields fell 11 bps to 0.49% (down 5bps). French yields dropped 10 bps to 0.79% (down 4bps). The French to German 10-year bond spread widened one to 30 bps. U.K. 10-year gilt yields sank 12 bps to 1.81% (up 6bps).
Japan's Nikkei equities index gained 1.5% (up 17.8% y-t-d). Japanese 10-year "JGB" yields slipped three bps to 0.38% (up 6bps y-t-d). The German DAX equities index was hit for 3.4% (up 16.4%). Spain's IBEX 35 equities index sank 2.9% (up 9.1%). Italy's FTSE MIB index fell 1.2% (up 23.6%). Emerging equities were under pressure. Brazil's Bovespa index was hit 3.0% (up 5.5%). Mexico's Bolsa slipped 0.4% (up 3.6%). South Korea's Kospi index fell 1.5% (up 10.4%). India’s Sensex equities index declined 0.5% (up 1.2%). China’s bubbling (and volatile!) Shanghai Exchange declined 1.0% (up 42.6%). Turkey's Borsa Istanbul National 100 index was slammed for 3.4% (down 3.3%). Russia's MICEX equities index sank 3.4% (up 15.2%).
Junk funds saw outflows of $111 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased three bps to a 2015 high 3.87% (unchanged y-t-d). Fifteen-year rates gained six bps to 3.11% (down 4bps). One-year ARM rates dipped a basis point to 2.50% (up 10bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.00% (down 28bps).
Federal Reserve Credit last week declined $5.0bn to $4.438 TN. Over the past year, Fed Credit inflated $154bn, or 3.6%. Fed Credit inflated $1.627 TN, or 58%, over the past 133 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.1bn last week to $3.327 TN. "Custody holdings" were up $33.6bn y-t-d.
M2 (narrow) "money" supply jumped $27.0bn to a record $11.940 TN. "Narrow money" expanded $650bn, or 5.8%, over the past year. For the week, Currency increased $1.6bn. Total Checkable Deposits fell $10.8bn, while Savings Deposits jumped $39.7bn. Small Time Deposits slipped $2.5bn. Retail Money Funds declined $1.1bn.
Money market fund assets gained $4.6bn to $2.614 TN. Money Funds were down $119bn year-to-date, while gaining $27bn y-o-y.
Total Commercial Paper dropped another $18.9bn to $9bn. CP declined $83bn over the past year, or 8.1%.
Currency Watch:
May 29 – Wall Street Journal (Lingling Wei): “China’s central bank has made the yuan Asia’s best-performing currency in the past year, rising in value against major currencies, in an effort to stem capital outflows and raise the Chinese currency’s appeal globally. Now, at least one prominent government adviser is publicly making a case for devaluing the yuan to help bolster the country’s flagging growth. In an analysis released early this week, Zhang Ming, a senior economist at the government think tank Chinese Academy of Social Sciences, said the yuan’s strength has ‘seriously deviated’ from China’s economic fundamentals. ‘A devaluation by a proper amount,’ he argued, would help revive China’s exports and growth. Mr. Zhang’s comments come as the Chinese leadership is struggling to reach its already-lowered growth target, set at 7% this year. A range of economic ills – from weak exports to an anemic property market and a heavy debt load – are weighing on the world’s second-largest economy.”
The U.S. dollar index advanced 0.8% to 96.89 (up 7.3% y-t-d). For the week on the downside, the New Zealand dollar declined 2.8%, the Brazilian real 2.7%, the Australian dollar 2.3%, the South African rand 2.2%, the Japanese yen 2.1%, the Norwegian krone 1.6%, the Swedish krona 1.5%, the Canadian dollar 1.4%, the British pound 1.3%, the Mexican peso 0.7% and the euro 0.2%.
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.6% (up 5.0% y-t-d). Spot Gold dropped 1.1% to $1,191 (up 0.5%). July Silver lost 2.1% to $16.70 (up 7%). June Crude increased 58 cents to $60.30 (up 13%). June Gasoline gained 0.9% (up 42%), while June Natural Gas sank 8.7% (down 9%). July Copper fell 3.0% (down 4%). July Wheat lost 3.0% (down 4%). July Corn sank 7.4% (down 19%).
Fixed Income Bubble Watch:
May 28 – CNBC (Lawrence Delevingne): “Billionaire investor Paul Singer says he has spotted the next big thing to bet against: bonds. ‘Today, six and a half years after the collapse of Lehman, there is a Bigger Short cooking. That Bigger Short is long-term claims on paper money, i.e., bonds,’ Singer wrote in a letter to investors of his hedge fund firm Elliott Management… ‘Bigger Short’ is a play on ‘The Big Short,’ the book by Michael Lewis describing how a tiny group of investors made huge sums of money for their contrarian bets against mortgage-backed securities... ‘Central bankers have chosen, and doubled down on, a palliative (super-easy money and QE), which is unprecedented and extreme, and whose ultimate effects are unknowable,’ Singer wrote… ‘Asset prices are skyrocketing because of massive public-sector purchases. The tinkering and experimentation that characterizes each round of novel central bank policy leads to more and more complicated unwanted consequences and convolutions…Central bankers are, in our view, getting 'pretzeled' by all this flailing, yet they deliver it with aplomb and serene self-confidence. Are they really taming volatility with their bond-buying, or just jamming it into a coiled spring?’”
May 29 – Reuters (Anjuli Davies): “Dealmaking in the United States has made its strongest start to a year since Reuters records began in 1980, climbing 52% year on year to $746.9 billion in the Jan. 1 to May 28 period… Global M&A activity is up 35% from the same period in 2014, with $1.7 trillion of deals having been struck.”
U.S. Bubble Watch:
May 27 – Bloomberg (Jeanna Smialek): “Five years after the recession ended, many Americans still teeter on the financial brink, barely prepared to handle an emergency expense and aging toward retirements they haven’t saved for, a Federal Reserve report shows. About 47% of 5,896 respondents in the Fed’s 2014 household survey, taken last October and November, wouldn’t be able to cover an emergency $400 expense without selling something or borrowing money. While that marks an improvement from 52% last year, the report states that it shows many Americans to be ‘ill-prepared for a financial disruption.’ The survey paints an image of fragile households, seemingly at odds with climbing consumer confidence and a healing economy.”
May 26 – Wall Street Journal (Vipal Monga, David Benoit and Theo Francis): “U.S. businesses, feeling heat from activist investors, are slashing long-term spending and returning billions of dollars to shareholders, a fundamental shift in the way they are deploying capital. Data show a broad array of companies have been plowing more cash into dividends and stock buybacks, while spending less on investments such as new factories and research and development… An analysis conducted for The Wall Street Journal by S&P Capital IQ shows that companies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003.”
May 27 – Wall Street Journal (Peter Rudegeair and Ryan Tracy): “U.S. banks are lending to businesses at such a rapid clip that those loans are on pace to overtake residential mortgages for the first time since the 1980s.Commercial and industrial loans rose 8.5% in the first quarter from the year-ago period and accounted for about 21% of outstanding loan balances at U.S. banks, the highest level in 13 years, according to Federal Deposit Insurance Corp. data… If they continue increasing at this pace over the next year, business loans would overtake residential mortgages at banks for the first time since 1988… The shift shows that manufacturers, retailers and other big companies have ramped up borrowing in recent months to get ahead of an expected rise in interest rates.”
May 27 – New York Times (Mary Williams Walsh): “Facing a shortfall of more than $50 billion in his state’s pensions, and with no simple solution at hand, Gov. Tom Wolf of Pennsylvania is proposing to issue $3 billion in bonds, despite the role that such bonds have already played in the fiscal woes of other places. And he is not alone. Several states and municipalities are considering similar action as they struggle with ballooning pension costs. Interest in so-called pension obligation bonds is expected to intensify in the wake of a recent Illinois Supreme Court decision that rejected the state’s attempt to overhaul its severely depleted pension system. The court ruled unanimously that Illinois could not legally cut its public workers’ retirement benefits to lower costs, forcing lawmakers to scramble for the billions of dollars it will take to keep the system intact.”
May 25 – New York Times (Monica Davey and Mary Williams Walsh): “Illinois is facing one of the worst fiscal crises of any state in recent decades, largely because it has mismanaged its pension system. The shortfalls could potentially mean sharply higher taxes and cuts in spending. And even though the state’s highest court just this month threw out a landmark plan to cut worker and retiree benefits, some lawmakers say they may have to find another way to make those reductions as well. Illinois’s problems resonate well beyond its borders. Pennsylvania, New Jersey and Kentucky are among the states confronting similar problems, and to them, Illinois is a model of what can go wrong — with political intransigence, mounting costs and a complicated legal terrain… The state faces a range of problems. Illinois has one of the worst-funded pension systems in the nation. Chicago also has a pension crisis, leading Moody’s… to downgrade its credit rating to junk status… And the state faces an expected budget deficit of $6 billion, which it needs to address quickly.”
May 26 – Bloomberg (John Gittelsohn): “One of the biggest homes in U.S. history is rising on a Los Angeles hilltop, and the developer hopes to sell it for a record $500 million. Nile Niami, a film producer and speculative residential developer, is pouring concrete in L.A.’s Bel Air neighborhood for a compound with a 74,000-square-foot (6,900-square-meter) main residence and three smaller homes… The project… will exceed 100,000 square feet, including a 5,000-square-foot master bedroom, a 30-car garage and a ‘Monaco-style casino,’ Niami said. ‘The house will have almost every amenity available in the world,’ he wrote in an e-mail. ‘The asking price will be $500 million.’”
May 27 – Bloomberg (Prashant Gopal and Heather Perlberg): “Merion Homes bought two dozen rambler-style houses in Northern Virginia’s Pimmit Hills community for about $450,000 each, just to knock them down. Now it’s selling customized residences three times larger at prices topping $1 million. ‘The original homes don’t fit today’s market,’ said Ryan Bensten, 35, a principal of Merion Homes… ‘They don’t have enough bedrooms -- they’re too small.’ Home teardowns are becoming common in U.S. suburbs such as Pimmit Hills…”
Federal Reserve Watch:
May 28 – Dow Jones (Pedro Nicolaci da Costa): “The Federal Reserve should refrain from using interest-rate policy to address risks to financial stability ‘even as a last resort,’ San Francisco Fed President John Williams said… That is because the effects of monetary policy on financial markets and excess risk taking are highly uncertain and potentially detrimental to the central bank's main objectives of stable inflation and maximum employment. ‘I am convinced that monetary policy should not be used to address risks to financial stability given the very real and sizable costs, not to mention that the potential benefits are anything but certain,’ Mr. Williams said… His remarks come amid debate over whether central banks should consider raising interest rates to prick apparent financial asset bubbles while they are forming, to forestall the damage to the financial system that could occur if they burst on their own.”
May 26 – Wall Street Journal (Pedro Nicolaci da Costa): “The Federal Reserve and other financial regulators have yet to adequately deal with the problem of banks that are viewed as too big to fail—and many of their interventions only heighten the perception, Richmond Fed President Jeffrey Lacker said… ‘Perceived guarantees thus encourage fragility, which induces interventions, which encourages further fragility,’ Mr. Lacker said in prepared remarks… ‘The ultimate result of this cycle is taxpayer-funded subsidies to financial firms that are widely viewed as deeply unfair.’ Mr. Lacker a frequent critic of the Fed’s interventions during the financial crisis… said new regulations stopped short of ensuring regulators will resist the urge to bail out very large Wall Street firms that run into trouble, Mr. Lacker said… ‘Regulation alone is not likely to be enough to counteract the moral hazard afflicting such a large — and growing — share of the financial sector’s liabilities… Creditors must not expect government support in the event of financial distress. Policymakers must actually allow financial firms to fail without government support.’”
Global Bubble Watch:
May 29 – Reuters (Caroline Copley): “Europe's rescue fund is seeking to revise its investment guidelines to allow it to buy lower-rated debt as it grapples with record low interest rates, according to documents from the so-called ESM and German finance ministry… At the end of March, more than half of the ESM's paid-in capital of 80 billion euros ($87.6 billion) was invested in assets with negative yields… To avoid incurring losses, the ESM wants to change its investment guidelines so that it can invest in riskier assets that generate higher returns. The ESM was set up in 2012 to provide financial aid to euro zone member states in difficulty… The trend underscores the limitations - at least so far - on so-called quantitative easing or money printing to buy government bonds. ‘Lots of the ECB's money is going into mortgages," said Carsten Brzeski, an economist with ING. "Construction is booming in Germany. The rest is being hoarded or spent on bonds and shares.’”
Central Bank Watch:
May 28 – Reuters (Love Liman and Johan Carlstrom): “Some of the biggest banks in Scandinavia are warning that Sweden’s Riksbank risks hurting bond market liquidity with its quantitative easing program. Any efforts to expand asset purchases would deplete Sweden’s already limited sovereign debt supply, according to SEB AB and Danske Bank A/S. ‘We see wider bid-ask spreads, lower liquidity, lower volumes and lower liquidity in the inter-bank system, which makes it more difficult for market makers to manage their risk,’ Jussi Hiljanen, head of fixed-income strategy at SEB…said… ‘I’m worried that liquidity in the Swedish bond market will be very low for the rest of the year.’”
Europe Watch:
May 27 – Reuters (Ben Hirschler): “Cash-strapped Greece has racked up mounting debts with international drugmakers and now owes the industry more than 1.1 billion euros ($1.2bn), a leading industry official said… The rising unpaid bill reflects the growing struggle by the nearly bankrupt country to muster cash, and creates a dilemma for companies under moral pressure not to cut off supplies of life-saving medicines. Richard Bergstrom, director general of the European Federation of Pharmaceutical Industries and Associations, told Reuters his members had not been paid by Greece since December 2014.”
May 29 – Reuters (John O'Donnell and Jonathan Gould): “Lending throughout the euro zone failed to grow in April after a promising uptick a month earlier, a slip that tempers hopes for a rapid turnaround in borrowing to boost the economy. European Central Bank data showed… that overall lending growth to households and firms was unchanged in the month, despite the recent launch of a massive money-printing programme to bolster the 19 countries in the euro bloc.”
May 29 – CNBC (Julia Chatterley): “While Greece has been hitting the headlines recently, Matteo Renzi has quietly had a tough few months. The Italian prime minister has had to tackle difficulties both abroad and at home – including a slow economic recovery. All this presents a difficult backdrop for Renzi as he faces 22 million voters with elections in 7 regions and over 1,000 municipalities this weekend. On the domestic front, we've seen protests over education reform and a court ruling that pension cuts were unconstitutional, a decision that will require 13 billion euros ($14.2bn) in repayments. On top of that, there are accusations of political corruption and organised crime links within Renzi's Democratic Party (PD).”
May 27 – UK Telegraph (Mehreen Khan): “Tensions over the future course of eurozone integration have been laid bare as Spain has proposed a radical expansion of the European Central Bank's powers over member states. Ahead of a June summit of European leaders, Madrid has urged its fellow member states to expand the role of the ECB in order to curb dangerous ‘macroeconomic imbalances’ building up in the currency union. In list of highly ambitious proposals, Spain also called for the single currency to adopt a common budget for use in emergency rescues, and issue debt in the form of eurobonds… Both measures are likely to meet the resistance in Germany, Europe's largest creditor, as a further pooling of funds that would effectively subsidise southern debtor states.”
China Bubble Watch:
May 25 – Reuters (Li Zheng, Li He and Pete Sweeney): “China's top banking regulator warned of rising credit risk from real estate, local government debt and unconventional forms of finance, sources with direct knowledge told Reuters, highlighting Beijing's struggles to prevent risky debt from engulfing a stuttering economy. The sources cited a speech given by Shang Fulin, chairman of the China Banking Regulatory Commission (CBRC)… The amount of non-performing loans in the first quarter has already reached 56% of the total amount last year, Shang said… Unconventional forms of credit… were also on the rise, he said… Shang said credit risk had risen among commercial banks in China in the first quarter, with the total number of bad loans at 982.5 billion yuan (102.3 billion pounds), up 139.9 billion yuan from the same period last year, bringing the bad loan ratio to 1.39%. He said over 30% of loans to local governments used land or proceeds from land sales as collateral, which will cause increased repayment pressure as proceeds from land sales decline… Sliding land prices will also cause the value of the loan collateral to decrease, Shang added.”
May 26 – CNN (Sophia Yan): “Wealthy Chinese are getting even richer really fast. A new billionaire was created almost every week in China in the first quarter of 2015, according to a report by UBS and PricewaterhouseCoopers. Wealth creation is booming for the Chinese… and it's all happened in the last 15 years, said Francis Liu, a managing director at UBS Wealth Management. They're primarily pulling in the big bucks from real estate, technology, healthcare and other consumer industries, he said. In 2014, there were about 200 billionaires in China, versus 570 in the U.S., according to UBS.”
May 27 – Bloomberg: “Brokerages across China are tightening rules for lending to stock investors to try to limit the risks from any market bust. Changjiang Securities Co. joined larger rivals GF Securities Co. and Haitong Securities Co. in increasing its margin requirement… ‘We will definitely see more brokerages follow suit, stock prices have risen too fast and risks are accumulating,’ said Tang Yayun, a Shanghai-based analyst at Northeast Securities Co. ‘Brokerages are taking measures to protect themselves as there’s been concern that a bubble is forming in the stock market.’”
May 27 – Reuters (Peter Thal Larsen): “The main fuel for China’s stock market boom is running low. Borrowed money helped the Shanghai and Shenzhen stock exchanges double in value in six months. Despite frantic fundraising by brokerage houses, however, demand for leverage may be nearing its limits… The balance of outstanding margin loans has almost doubled since the end of last year to reach 1.9 trillion yuan ($300bn), according to Fitch. Breakneck growth in this lucrative but capital-intensive business has sent securities firms scrambling to raise new funds. Hence outfits such as GF Securities… have issued equity worth more than $10 billion this year. At Huatai Securities, the Nanjing-based broker currently completing a $4.5 billion Hong Kong fundraising, margin-related lending and trading accounted for 28% of revenue in the first quarter, up from just 8% in 2012.”
May 27 – CNBC (Mia Tahara-Stubbs): “Kaisa Group Holdings Ltd., the first Chinese developer to default on offshore debt, had its restructuring thrown into doubt after rival Sunac China Holdings Ltd. abandoned a proposed acquisition. Kaisa bonds slumped the most in five weeks in early trade after Sunac announced Thursday that it dropped the offer that could have helped the troubled developer restructure its $10.5 billion of debt, including $2.5 billion of offshore bonds.”
May 25 – Bloomberg (David Yong): “China will likely prop up bondholders in any onshore defaults until August to ensure a smooth clean up of its local debt mess, according to Oversea-Chinese Banking Corp. Events this year have defied Chinese rhetoric on embracing market-based reforms, after authorities passed up chances to make investors stomach losses from two local defaults, the bank wrote… This week sees a potential third missed payment after beverages bottle maker Zhuhai Zhongfu Enterprise Co. said it can only partly pay principal due May 28. Forcing investor losses may sour market sentiment and hinder the successful completion of state efforts to clear a debt pile issued by provincial cities, according to OCBC. Banks must swap out 1 trillion yuan ($161bn) of high-cost local government bonds issued by 36 Chinese cities for municipal debt with lower coupons by the end of August, it said.”
EM Bubble Watch:
May 25 – Bloomberg (Nathan Crooks and Andrew Rosati): “Venezuela’s largest bill of 100 bolivars is now worth less than a U.S. quarter to money-changers after a plunge in the currency’s black-market value. The bolivar fell 25% on the black market last week to 423 per dollar before strengthening to 413 today… That’s 66 times the primary official rate of 6.3 bolivars per dollar, and means the 100-bolivar bill fetches about 24 U.S. cents from illegal street dealers.”
May 27 – Bloomberg (Piotr Zalewski): “If you give me the powers I'm asking for, I can boost gross domestic product from $11,000 per capita today to $25,000 in eight years. That is the ambitious vow Turkish President Recep Tayyip Erdogan has made to voters in an attempt to turn the nation's June 7 parliamentary elections into a referendum on his political goals. If his Justice and Development Party (AKP) wins the fiercely contested vote by a wide enough margin, Erdogan has announced, he will transform Turkey into a presidential system, effectively consolidating his role as a one-man executive. An increasingly populist debate over the country's economy — an issue that has helped Erdogan and the AKP win every election since 2002 — will help determine whether he gets what he wants.”
May 26 – Reuters (Nick Tattersall and Orhan Coskun): “Turkey's general election looks likely to push Tayyip Erdogan's dream of an all-powerful presidency further from his reach, and usher in a period of turbulence as its most divisive modern leader jockeys to maintain his dominance. Barred by the constitution from party politics as head of state, Erdogan has nonetheless campaigned across Turkey before the June 7 parliamentary vote in a sign of how much he has riding on the outcome. ‘You will not take me away from these stages, you will not silence me,’ he told a rally… explaining why the presidency should get greater powers. Constitutionally, most authority has lain with the Turkish prime minister, an office Erdogan held from 2003 to 2014. But since becoming head of state last year, he has pushed hard for an executive presidency akin to the United States or France. However, the AK Party which he founded looks unlikely to win two thirds of the seats in parliament, the majority needed to change the constitution without putting the plan to a referendum.”
Brazil Watch:
May 29 – Bloomberg (Filipe Pacheco and Paula Sambo): “The real extended its monthly decline as Brazil braced for its worst recession in 25 years after the government reported that Latin America’s largest economy contracted in the first quarter. Attempts by President Dilma Rousseff’s administration to reassure investors by raising taxes and reducing expenditures are expected to limit the nation’s gross domestic product in the second quarter. The central bank’s increase in interest rates to their highest level since 2009 to curb above-target inflation adds to the drag on output.”
Geopolitical Watch:
May 29 – UK Telegraph (Xing Zhigang): “A Chinese guard of honour joined the Victory Day parade in Moscow’s Red Square for the first time on May 9, as 18 Russian veterans who fought against the Japanese in Northeast China during the Second World War were presented with medals. The events highlighted the friendship between China and Russia, forged with lives and blood during the war, and Russian President Vladimir Putin was officially invited to attend a parade in China on Sept 3 to celebrate the Chinese victory over the Japanese aggression. President Xi Jinping took advantage of the Chinese presence at the Moscow commemorations for the 70th anniversary of the end of the Great Patriotic War… to lay the foundations for China’s own celebrations. The near-complete absence of Western leaders at the ceremony, underlining the tensions between Russia and the West over the Ukraine crisis, also gave prominence to the presence of President Xi…”
May 26 – New York Times (Andrew Jacobs): “China intends to project naval power in the open ocean in coming years, and not just defend the country’s coastal waters, according to a strategy paper… The paper, the first policy document issued by the Chinese military in two years, comes at a time of growing Chinese assertiveness in the South China Sea. China’s efforts to enforce its disputed claims to vast stretches of the sea by building up artificial islands and structures on reefs and outcroppings have drawn the Philippines and its ally the United States into a test of wills in the region… The policy document… lays out China’s military ambitions, a central element of what its leaders call a ‘national rejuvenation,’ as Beijing moves to counter what it sees as American efforts to contain its rise. It extends beyond naval policy to emphasize the continued modernization of the Chinese military in general, and it describes cyberwarfare as a ‘grave security threat’ that requires the development of a cybermilitary force.”
May 26 – Reuters (Megha Rajagopalan): “China outlined a strategy to boost its naval reach on Tuesday and held a groundbreaking ceremony for two lighthouses in disputed waters, developments likely to escalate tensions in a region already jittery about Beijing's maritime ambitions. In a policy document issued by the State Council, the Communist-ruled country's cabinet, China vowed to increase its ‘open seas protection’, switching from air defense to both offence and defense, and criticized neighbors who take ‘provocative actions’ on its reefs and islands.”
May 27 – Financial Times (Charles Clover): “China has mooted the possibility of controlling the airspace over the disputed South China Sea, as it ratchets up rhetoric in response to a US overflight of an island claimed by China earlier this month. A senior foreign ministry official spoke on Wednesday about the possibility of implementing an Air Defence Identification Zone over the sea, a move that would be widely regarded as an effort to stamp its sovereignty over a series of islands it claims. An ADIZ requires all aircraft flying through it to identify themselves to the controlling government. ‘China has the right to establish ADIZs,’ said Ouyang Yujing, director of boundaries and oceanic affairs for the foreign ministry… Whether or not China will establish a South China Sea ADIZ will depend on factors such as whether China’s air safety is under threat, and the seriousness of the threat,’ he said.”
May 27 – Washington Post (Craig Whitlock): “Defense Secretary Ashton Carter bluntly warned China Wednesday to stop its buildup of man-made islands in the South China Sea and vowed that the U.S. military would continue to patrol international waters and airspace in the region. Carter’s comments… further escalated a simmering rhetorical conflict between Washington and Beijing over access to the South China Sea and other Asian waters. ‘There should be no mistake: the United States will fly, sail, and operate wherever international law allows, as we do all around the world,’ Carter said at the U.S. military’s joint base at Pearl Harbor.”
May 27 – AFP (Dan De Luce): “Russia's provocative rhetoric and its dramatic expansion of flights by nuclear bombers are deeply troubling and dangerous, NATO Secretary General Jens Stoltenberg said… Russia's plans to deploy nuclear-capable missiles in Kaliningrad -- near Poland's border -- and its threat to move nuclear forces in Crimea would ‘fundamentally change the balance of security in Europe,’ Stoltenberg warned… In blunt language, the NATO chief delivered a scathing critique of Russia's behavior over the past year… and vowed the transatlantic alliance would redouble its commitment to ‘collective defense.’ ‘Russia's recent use of nuclear rhetoric, exercises and operations are deeply troubling,’ he told an audience…”
May 27 – CNN (Chris Frates): “The IRS believes that a major cyber breach that allowed criminals to steal the tax returns of more than 100,000 people originated in Russia, two sources briefed on the data theft tell CNN. On Tuesday, the Internal Revenue Service announced that organized crime syndicates used personal data obtained elsewhere to access tax information, which they then used to file $50 million in fraudulent tax refunds.”
May 25 – Reuters (Matt Siegel): “Japan will join a major U.S.-Australian military exercise for the first time in a sign of growing security links between the three countries as tensions fester over China's island building in the South China Sea. While only 40 Japanese officers and soldiers will take part in drills involving 30,000 U.S. and Australian troops in early July, experts said the move showed how Washington wanted to foster cooperation among its security allies in Asia… ‘I think the U.S. is trying to get its allies to do more,’ said Euan Graham, director of the International Security Program at the Lowy Institute in Sydney.”
May 24 – Financial Times (Simeon Kerr): “Lines of green Saudi flags hang proudly along Riyadh’s wide highways while screens around the capital broadcast footage on a loop of warplanes flying into combat and massive explosions. Local companies have taken out giant billboards pledging allegiance to the ‘decisive and determined’ King Salman bin Abdulaziz al-Saud, while ordinary Saudis have taken to social media to show their support for the new king and the county’s military campaign in Yemen. An unprecedented jingoism — hidden for decades — has swept through Saudi Arabia since King Salman ascended to the throne in January and the launch in March of the aerial campaign against Shia Houthi rebels. Although the air strikes have raised international concern and heightened tensions with Iran, its rival for regional dominance, they have been cheered in Saudi by an increasingly nationalist and sectarian sentiment. ‘We are strong again under them,’ says Ahmed, a middle-aged Saudi national…”
Russia and Ukraine Watch:
May 27 – Reuters (Maria Tsvetkova): “Russia's army is massing troops and hundreds of pieces of weaponry including mobile rocket launchers, tanks and artillery at a makeshift base near the border with Ukraine, a Reuters reporter saw this week. Many of the vehicles have number plates and identifying marks removed while many of the servicemen had taken insignia off their fatigues. As such, they match the appearance of some of the forces spotted in eastern Ukraine, which Kiev and its Western allies allege are covert Russian detachments. The scene at the base on the Kuzminsky firing range, around 50 km (30 miles) from the border, offers some of the clearest evidence to date of what appeared to be a concerted Russian military build-up in the area. Earlier this month, NATO military commander General Philip Breedlove said he believed the separatists were taking advantage of a ceasefire that came into force in February to re-arm and prepare for a new offensive.”
May 27 – Financial Times (Elaine Moore): “Ukraine’s decision last week to grant its government the power to stop foreign debt payments marks a distinct shift in tone for the wartorn and recession-battered country. As negotiations between Kiev and its creditors stall and full-blown bankruptcy nears, the rhetoric of government communiques is shifting from conciliation to accusation. Spot the difference in sentiment. In March a presentation to investors noted that ‘a collaborative process is paramount . . . Ukraine is committed to undertake consultations with its creditors’. By May the government declared it ‘has the right . . . not to return loans borrowed by [a] kleptocratic regime’. In sovereign debt circles the tack Ukraine appears to be taking is known as the odious debt argument, which rejects the notion that governments are liable for the debts of their predecessor.”
Japan Watch:
May 27 – Bloomberg: “Tokyo stocks are at fifteen-year highs and the yen at eight-year lows, but Bank of Japan Governor Haruhiko Kuroda told CNBC he doesn't think a bubble is brewing nor is he worried about where the yen is headed. ‘We don't think there is any asset bubble or stock market bubble, but we will continue to monitor carefully,’ BOJ governor Haruhiko Kuroda told CNBC… As for the Japanese currency, the ‘yen might appreciate. But I think the exchange rate, including the yen, should move in line with economic fundamentals,’ he said.”
May 27 – Bloomberg (Dave McCombs and Jason Clenfield): “Japan’s companies, long known for stinginess with shareholders, doled out record amounts of cash to investors in the last year. It’s just the start of the payouts. Dividends and buybacks soared 76% to 12.8 trillion yen ($104bn) in the 12 months ended in March, according to Nomura Holdings… This newfound affection for shareholders is born out of necessity, not sudden generosity.”
Borrowing language from Murray Rothbard, money (and Credit) can be created “Out of Thin Air.” Such Credit expansion is referred to as “Credit inflation.” And, importantly, the resulting inflation in purchasing power can exert various price and other inflationary effects. It’s a popular misconception that consumer price inflation is the prevailing and more dangerous type of inflation. Never has this been as apparent as right now.
Traditionally, banks and governments were the culprits responsible for Credit expansions that on occasion turned into runaway booms and devastating busts. There are excellent historical accounts and analyses of centuries of Credit Bubbles. Even so – and even post-2008 - central bankers remain more determined than ever to disregard Credit theory, history and analysis.
The current global Credit Bubble is unlike anything in history (and the analysis incredibly challenging). I’ve tried to explain its origin was the Federal Reserve’s response to the early-nineties banking crisis. The Greenspan Fed spurred non-bank Credit growth that evolved into a historic Credit expansion. The upshot was a Bubble in Credit instruments intermediated through Fannie Mae, Freddie Mac and the Federal Home Loan Bank System. Closely related was a corresponding general boom in securitizations and derivatives, along with myriad Credit instruments involved in securities finance/leveraging (“repos,” Fed funds, financial CP, special purpose vehicles, etc.). Over the years, I referred to this powerful new financial apparatus as “market-based Credit” and “Wall Street finance.”
Updating Minsky’s analysis, I coined the term “Financial Arbitrage Capitalism” to describe the period of the nineties through 2008. The extraordinary post-mortgage finance Bubble reflation compelled another analytical “update.” We are now well into our seventh year of “Global Government Finance Quasi-Capitalism.” There should be little mystery surrounding so-called “secular stagnation,” as well as rising social stress and geopolitical friction.
The creation of “money” and Credit (“Out of Thin Air”) throughout the market-based Credit apparatus evolved into history’s most powerful Credit mechanism. It also proved fatefully contagious. Unprecedented access to cheap mortgage (along with auto, Credit card, student loan, etc.) borrowings was granted to millions of individuals with deficient Credit histories. Similar dynamics created unimaginably easy Credit Availability for business borrowers. For sovereigns, the boom in market-based finance doomed the likes of Argentina, Iceland and Greece (to name only a few). Predictably, the resulting busts have been progressively more spectacular.
“Market-based” Credit has always been somewhat of a misnomer. Sure, the nineties saw Trillions of new Credit instruments trade freely in the marketplace at impressive valuations (i.e. narrow spreads to Treasuries). Yet the entire marketplace was constructed upon the explicit and implied guarantees from the Treasury and Federal Reserve. The resulting “moneyness” of this Credit apparatus ensured excesses neared catastrophic extremes.
The consensus view holds that today’s financial backdrop is benign. Policymakers have learned from previous mistakes. There is nothing comparable to the excesses of subprime and Lehman Brothers.
The reality is that governments globally have now overtly commandeered so-called “market-based finance.” Securities markets are openly manipulated. Trillions of securities have been monetized. Prices and risk perceptions throughout global securities and derivatives markets have been perverted like never before. The upshot has been a globalized Bubble of unprecedented scope. Looking back, the 2008/09 crisis was a case of major market distortions coming home to roost. Today’s global market distortions greatly overshadow those of 2008.
Backed by concerted government manipulation and intervention, global “money” and Credit have become fungible. Tens of Trillions of electronic debits and Credits spur the free-flow of “money” in and about global markets. Never have such enormous quantities of global securities and financial instruments been perceived as safe or low-risk (“money-like”).
There are a few critical aspects to the backdrop worth keeping in mind. For all intents and purposes, it’s become one enormous global Bubble – the U.S., China, EM, Europe and Japan. Unfettered fungible “money” and Credit - “Out of Thin Air” - have provided both the fuel and the glue. Especially after BOJ and ECB QE/currency devaluations – and the resulting flow of speculative finance to “king dollar” securities markets – tightly interrelated global Bubbles essentially converged into one. With China’s renminbi tied to the U.S. dollar, the two super financial and economic Bubbles have for awhile now been closely interlinked. And as cracks have surfaced in China - surely exacerbated by global competitive currency devaluations - Chinese and American Bubbles have become only further melded.
Throughout history, booms have been a source of major increases in perceived wealth and power. Yet Credit inflations and Bubbles are at their roots about wealth redistribution and destruction. Given sufficient time and opportunity, the creation of “money” and Credit “Out of Thin Air” will have profoundly adverse consequences and ramifications. And, indeed, this runaway global Credit inflation’s deleterious effects are these days on display.
I’ll borrow a Larry Lindsey quote from last week’s CBB: “Because the government will not voluntarily let itself go out of business. It will use all of its powers - I’m not talking about just our government but any government - will use all of its powers in order to fund itself…”
So much of the world’s wealth now hinges upon the global Credit Bubble. It’s a given that governments around the world will use all their powers to fund themselves. Will they also use all their powers to protect their nation’s wealth – real as well as perceived wealth that has inflated so profoundly during this boom? When government officials in today’s increasingly hostile world focus on “security” matters, do they place financial security in equal footing with military security? And this gets to the heart of a critical facet of the globalized adoption of market-based finance: inflated securities market prices have become fundamental to a nation’s wealth, national interests, political and social stability, and national security. In an increasingly polarized and spiteful world, who is now willing to take away the punchbowl?
At this point, global central bankers remain united in their cause. Military leaders are not. On the one hand, central banks around the world face similar pressures and remain motivated to work in concert to sustain both domestic Bubbles and the greater global Credit Bubble. Government and military officials, though, are increasingly focused on a spectrum of pressing security issues – military, cyber, economic and financial. With the global pie no longer expanding, policies have turned inward looking and insecure. Integration and cooperation are giving way to antagonism and aggression. We saw it again this week.
And this framework helps explain what can appear a confounding paradox: In an increasingly troubling and uncertain world, global securities markets seemingly couldn’t be more upbeat. At this point, markets remain fixated on central bankers. And the more antagonistic the geopolitical backdrop, the more confident market players have become that timid central bankers will fall in line. There’s too much to lose. Thursday WSJ headline: “Fed’s Williams Says Never Use Rates to Prick Bubbles.” Only use rates to inflate Bubbles.
My deep concerns for the global Credit Bubble are coming to fruition. The Chinese Bubble got completely away from officials. They recognized their predicament too late and too reluctantly. Meanwhile, a complex geopolitical backdrop has unfolded. No longer is reining in Credit Bubble excess viewed as a priority. Chinese domestic fragilities were much greater than previously appreciated – and there’s today no tolerance for risking a bust. Meanwhile, opting out of the inflating global Bubble would not be in China’s interest. With the U.S., Japan and Europe desperately inflating a securities market Bubble, Chinese officials may have decided the risks of being the lone Bubble Popper were too great.
I believe future historians will look back at Russia’s invasion of Ukraine as a major geopolitical and financial inflection point. Putin’s speeches laid it out rather clearly: Russia can only be pushed around for so long. There is a line that can’t be crossed – and the U.S. and the “West” crossed that line. Putin slammed the U.S. for blatantly violating Russia’s vital national interests in neighboring Ukraine.
A year ago economic sanctions were going to discipline an “isolated” Russia. In a world of integrated markets and economies, changes in behavior could be dictated without resorting to tanks and bombers. Moreover, in this dispute between Russia and the West, China was viewed as neutral at worst. Putin’s rants against U.S. domination of global finance, trade and security arrangements could be dismissed as a lunatic’s senseless tirade.
The U.S. is now involved in an increasingly tense standoff with the Chinese in the South China Sea. Presidents Putin and Xi have become fast friends. And I just don’t see aggressive behavior from Russian and Chinese governments as coincidental. They will both err on the side of belligerence.
Last year’s Ukrainian crisis corresponded with serious cracks throughout the emerging markets, not to mention a collapse in crude (that Russia claims was orchestrated as punishment) and commodities. It quickly became an inopportune juncture for the Chinese to rein in their Credit Bubble. Instead, opportunity beckoned to begin building a formidable non-U.S. alliance and competing (non-dollar) global financial structure. This would require ongoing Chinese economic expansion and a stable currency. The Chinese must have viewed the benefits of a new global structure as exceeding the risks associated with accommodating additional Bubble excess. Moreover, imposing sanctions on Russia awakened the Chinese to the risks of something similar befalling their economy.
Global market Bubbles have benefited from the Chinese backtracking from Bubble containment. In the short-term, this lessened the risk of a Chinese financial accident. Similarly, having the Chinese focused on their currency attaining international reserve status has also reduced near-term risk of a disorderly currency devaluation. This has as well been pro-global Bubble.
Meanwhile, intermediate- and long-term risks are rapidly escalating. Regrettably, China has prolonged its “Terminal Phase” of excess, with dire consequences. Extending the life of the global Bubble comes with similar risks. At the same time, the building of a non-U.S. alliance and competing global financial infrastructure unfolds in earnest. Clearly, the Chinese military is preparing for a world that is changing in profound ways. The U.S. military has begun to adjust as well.
Global markets remain unsettled. The Chinese stock market Bubble has all appearances of an accident in the making. A Greek accident could be only days away. European periphery debt markets appear more fragile. EM seems more vulnerable. Currency markets are highly unstable. The dollar, bunds and Treasuries caught decent safe haven bids this week.
The age old problem with creating “money” is that once commenced in earnest it’s extremely difficult to curb. There comes a point where the soundness of the underlying Credit structure begins to be questioned. Such questioning is well overdue. Do central bankers have any idea of their role in fomenting geopolitical turmoil? Just print “money” Out of Thin Air.
For the Week:
The S&P500 declined 0.9% (up 2.4% y-t-d), and the Dow fell 1.2% (up 1.1%). The Utilities slipped 0.3% (down 7.1%). The Banks lost 0.8% (up 1.7%), and the Broker/Dealers dipped 0.4% (up 4.6%). The Transports dropped another 2.2% (down 9.2%). The S&P 400 Midcaps declined 1.1% (up 5.0%), and the small cap Russell 2000 fell 0.5% (up 3.5%). The Nasdaq100 declined 0.4% (up 6.4%), and the Morgan Stanley High Tech index fell 0.6% (up 3.3%). The Semiconductors surged 3.5% (up 8.5%). The Biotechs were little changed (up 20.8%). With bullion down $13, the HUI gold index dropped 2.6% (up 1.7%).
Three-month Treasury bill rates ended the week at zero. Two-year government yields were unchanged at 0.61% (down 6bps y-t-d). Five-year T-note yields fell seven bps to 1.49% (down 16bps). Ten-year Treasury yields dropped nine bps to 2.12% (down 5bps). Long bond yields declined 10 bps to 2.88% (up 13bps).
Greek 10-year yields declined 16 bps to 10.86% (up 112bps y-t-d). Ten-year Portuguese yields rose 13 bps to a four-month high 2.53% (down 9bps). Italian 10-yr yields slipped a basis point to 1.84% (down 5bps). Spain's 10-year yields rose six bps to a six-month high 1.83% (up 22bps). German bund yields fell 11 bps to 0.49% (down 5bps). French yields dropped 10 bps to 0.79% (down 4bps). The French to German 10-year bond spread widened one to 30 bps. U.K. 10-year gilt yields sank 12 bps to 1.81% (up 6bps).
Japan's Nikkei equities index gained 1.5% (up 17.8% y-t-d). Japanese 10-year "JGB" yields slipped three bps to 0.38% (up 6bps y-t-d). The German DAX equities index was hit for 3.4% (up 16.4%). Spain's IBEX 35 equities index sank 2.9% (up 9.1%). Italy's FTSE MIB index fell 1.2% (up 23.6%). Emerging equities were under pressure. Brazil's Bovespa index was hit 3.0% (up 5.5%). Mexico's Bolsa slipped 0.4% (up 3.6%). South Korea's Kospi index fell 1.5% (up 10.4%). India’s Sensex equities index declined 0.5% (up 1.2%). China’s bubbling (and volatile!) Shanghai Exchange declined 1.0% (up 42.6%). Turkey's Borsa Istanbul National 100 index was slammed for 3.4% (down 3.3%). Russia's MICEX equities index sank 3.4% (up 15.2%).
Junk funds saw outflows of $111 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased three bps to a 2015 high 3.87% (unchanged y-t-d). Fifteen-year rates gained six bps to 3.11% (down 4bps). One-year ARM rates dipped a basis point to 2.50% (up 10bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.00% (down 28bps).
Federal Reserve Credit last week declined $5.0bn to $4.438 TN. Over the past year, Fed Credit inflated $154bn, or 3.6%. Fed Credit inflated $1.627 TN, or 58%, over the past 133 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.1bn last week to $3.327 TN. "Custody holdings" were up $33.6bn y-t-d.
M2 (narrow) "money" supply jumped $27.0bn to a record $11.940 TN. "Narrow money" expanded $650bn, or 5.8%, over the past year. For the week, Currency increased $1.6bn. Total Checkable Deposits fell $10.8bn, while Savings Deposits jumped $39.7bn. Small Time Deposits slipped $2.5bn. Retail Money Funds declined $1.1bn.
Money market fund assets gained $4.6bn to $2.614 TN. Money Funds were down $119bn year-to-date, while gaining $27bn y-o-y.
Total Commercial Paper dropped another $18.9bn to $9bn. CP declined $83bn over the past year, or 8.1%.
Currency Watch:
May 29 – Wall Street Journal (Lingling Wei): “China’s central bank has made the yuan Asia’s best-performing currency in the past year, rising in value against major currencies, in an effort to stem capital outflows and raise the Chinese currency’s appeal globally. Now, at least one prominent government adviser is publicly making a case for devaluing the yuan to help bolster the country’s flagging growth. In an analysis released early this week, Zhang Ming, a senior economist at the government think tank Chinese Academy of Social Sciences, said the yuan’s strength has ‘seriously deviated’ from China’s economic fundamentals. ‘A devaluation by a proper amount,’ he argued, would help revive China’s exports and growth. Mr. Zhang’s comments come as the Chinese leadership is struggling to reach its already-lowered growth target, set at 7% this year. A range of economic ills – from weak exports to an anemic property market and a heavy debt load – are weighing on the world’s second-largest economy.”
The U.S. dollar index advanced 0.8% to 96.89 (up 7.3% y-t-d). For the week on the downside, the New Zealand dollar declined 2.8%, the Brazilian real 2.7%, the Australian dollar 2.3%, the South African rand 2.2%, the Japanese yen 2.1%, the Norwegian krone 1.6%, the Swedish krona 1.5%, the Canadian dollar 1.4%, the British pound 1.3%, the Mexican peso 0.7% and the euro 0.2%.
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.6% (up 5.0% y-t-d). Spot Gold dropped 1.1% to $1,191 (up 0.5%). July Silver lost 2.1% to $16.70 (up 7%). June Crude increased 58 cents to $60.30 (up 13%). June Gasoline gained 0.9% (up 42%), while June Natural Gas sank 8.7% (down 9%). July Copper fell 3.0% (down 4%). July Wheat lost 3.0% (down 4%). July Corn sank 7.4% (down 19%).
Fixed Income Bubble Watch:
May 28 – CNBC (Lawrence Delevingne): “Billionaire investor Paul Singer says he has spotted the next big thing to bet against: bonds. ‘Today, six and a half years after the collapse of Lehman, there is a Bigger Short cooking. That Bigger Short is long-term claims on paper money, i.e., bonds,’ Singer wrote in a letter to investors of his hedge fund firm Elliott Management… ‘Bigger Short’ is a play on ‘The Big Short,’ the book by Michael Lewis describing how a tiny group of investors made huge sums of money for their contrarian bets against mortgage-backed securities... ‘Central bankers have chosen, and doubled down on, a palliative (super-easy money and QE), which is unprecedented and extreme, and whose ultimate effects are unknowable,’ Singer wrote… ‘Asset prices are skyrocketing because of massive public-sector purchases. The tinkering and experimentation that characterizes each round of novel central bank policy leads to more and more complicated unwanted consequences and convolutions…Central bankers are, in our view, getting 'pretzeled' by all this flailing, yet they deliver it with aplomb and serene self-confidence. Are they really taming volatility with their bond-buying, or just jamming it into a coiled spring?’”
May 29 – Reuters (Anjuli Davies): “Dealmaking in the United States has made its strongest start to a year since Reuters records began in 1980, climbing 52% year on year to $746.9 billion in the Jan. 1 to May 28 period… Global M&A activity is up 35% from the same period in 2014, with $1.7 trillion of deals having been struck.”
U.S. Bubble Watch:
May 27 – Bloomberg (Jeanna Smialek): “Five years after the recession ended, many Americans still teeter on the financial brink, barely prepared to handle an emergency expense and aging toward retirements they haven’t saved for, a Federal Reserve report shows. About 47% of 5,896 respondents in the Fed’s 2014 household survey, taken last October and November, wouldn’t be able to cover an emergency $400 expense without selling something or borrowing money. While that marks an improvement from 52% last year, the report states that it shows many Americans to be ‘ill-prepared for a financial disruption.’ The survey paints an image of fragile households, seemingly at odds with climbing consumer confidence and a healing economy.”
May 26 – Wall Street Journal (Vipal Monga, David Benoit and Theo Francis): “U.S. businesses, feeling heat from activist investors, are slashing long-term spending and returning billions of dollars to shareholders, a fundamental shift in the way they are deploying capital. Data show a broad array of companies have been plowing more cash into dividends and stock buybacks, while spending less on investments such as new factories and research and development… An analysis conducted for The Wall Street Journal by S&P Capital IQ shows that companies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003.”
May 27 – Wall Street Journal (Peter Rudegeair and Ryan Tracy): “U.S. banks are lending to businesses at such a rapid clip that those loans are on pace to overtake residential mortgages for the first time since the 1980s.Commercial and industrial loans rose 8.5% in the first quarter from the year-ago period and accounted for about 21% of outstanding loan balances at U.S. banks, the highest level in 13 years, according to Federal Deposit Insurance Corp. data… If they continue increasing at this pace over the next year, business loans would overtake residential mortgages at banks for the first time since 1988… The shift shows that manufacturers, retailers and other big companies have ramped up borrowing in recent months to get ahead of an expected rise in interest rates.”
May 27 – New York Times (Mary Williams Walsh): “Facing a shortfall of more than $50 billion in his state’s pensions, and with no simple solution at hand, Gov. Tom Wolf of Pennsylvania is proposing to issue $3 billion in bonds, despite the role that such bonds have already played in the fiscal woes of other places. And he is not alone. Several states and municipalities are considering similar action as they struggle with ballooning pension costs. Interest in so-called pension obligation bonds is expected to intensify in the wake of a recent Illinois Supreme Court decision that rejected the state’s attempt to overhaul its severely depleted pension system. The court ruled unanimously that Illinois could not legally cut its public workers’ retirement benefits to lower costs, forcing lawmakers to scramble for the billions of dollars it will take to keep the system intact.”
May 25 – New York Times (Monica Davey and Mary Williams Walsh): “Illinois is facing one of the worst fiscal crises of any state in recent decades, largely because it has mismanaged its pension system. The shortfalls could potentially mean sharply higher taxes and cuts in spending. And even though the state’s highest court just this month threw out a landmark plan to cut worker and retiree benefits, some lawmakers say they may have to find another way to make those reductions as well. Illinois’s problems resonate well beyond its borders. Pennsylvania, New Jersey and Kentucky are among the states confronting similar problems, and to them, Illinois is a model of what can go wrong — with political intransigence, mounting costs and a complicated legal terrain… The state faces a range of problems. Illinois has one of the worst-funded pension systems in the nation. Chicago also has a pension crisis, leading Moody’s… to downgrade its credit rating to junk status… And the state faces an expected budget deficit of $6 billion, which it needs to address quickly.”
May 26 – Bloomberg (John Gittelsohn): “One of the biggest homes in U.S. history is rising on a Los Angeles hilltop, and the developer hopes to sell it for a record $500 million. Nile Niami, a film producer and speculative residential developer, is pouring concrete in L.A.’s Bel Air neighborhood for a compound with a 74,000-square-foot (6,900-square-meter) main residence and three smaller homes… The project… will exceed 100,000 square feet, including a 5,000-square-foot master bedroom, a 30-car garage and a ‘Monaco-style casino,’ Niami said. ‘The house will have almost every amenity available in the world,’ he wrote in an e-mail. ‘The asking price will be $500 million.’”
May 27 – Bloomberg (Prashant Gopal and Heather Perlberg): “Merion Homes bought two dozen rambler-style houses in Northern Virginia’s Pimmit Hills community for about $450,000 each, just to knock them down. Now it’s selling customized residences three times larger at prices topping $1 million. ‘The original homes don’t fit today’s market,’ said Ryan Bensten, 35, a principal of Merion Homes… ‘They don’t have enough bedrooms -- they’re too small.’ Home teardowns are becoming common in U.S. suburbs such as Pimmit Hills…”
Federal Reserve Watch:
May 28 – Dow Jones (Pedro Nicolaci da Costa): “The Federal Reserve should refrain from using interest-rate policy to address risks to financial stability ‘even as a last resort,’ San Francisco Fed President John Williams said… That is because the effects of monetary policy on financial markets and excess risk taking are highly uncertain and potentially detrimental to the central bank's main objectives of stable inflation and maximum employment. ‘I am convinced that monetary policy should not be used to address risks to financial stability given the very real and sizable costs, not to mention that the potential benefits are anything but certain,’ Mr. Williams said… His remarks come amid debate over whether central banks should consider raising interest rates to prick apparent financial asset bubbles while they are forming, to forestall the damage to the financial system that could occur if they burst on their own.”
May 26 – Wall Street Journal (Pedro Nicolaci da Costa): “The Federal Reserve and other financial regulators have yet to adequately deal with the problem of banks that are viewed as too big to fail—and many of their interventions only heighten the perception, Richmond Fed President Jeffrey Lacker said… ‘Perceived guarantees thus encourage fragility, which induces interventions, which encourages further fragility,’ Mr. Lacker said in prepared remarks… ‘The ultimate result of this cycle is taxpayer-funded subsidies to financial firms that are widely viewed as deeply unfair.’ Mr. Lacker a frequent critic of the Fed’s interventions during the financial crisis… said new regulations stopped short of ensuring regulators will resist the urge to bail out very large Wall Street firms that run into trouble, Mr. Lacker said… ‘Regulation alone is not likely to be enough to counteract the moral hazard afflicting such a large — and growing — share of the financial sector’s liabilities… Creditors must not expect government support in the event of financial distress. Policymakers must actually allow financial firms to fail without government support.’”
Global Bubble Watch:
May 29 – Reuters (Caroline Copley): “Europe's rescue fund is seeking to revise its investment guidelines to allow it to buy lower-rated debt as it grapples with record low interest rates, according to documents from the so-called ESM and German finance ministry… At the end of March, more than half of the ESM's paid-in capital of 80 billion euros ($87.6 billion) was invested in assets with negative yields… To avoid incurring losses, the ESM wants to change its investment guidelines so that it can invest in riskier assets that generate higher returns. The ESM was set up in 2012 to provide financial aid to euro zone member states in difficulty… The trend underscores the limitations - at least so far - on so-called quantitative easing or money printing to buy government bonds. ‘Lots of the ECB's money is going into mortgages," said Carsten Brzeski, an economist with ING. "Construction is booming in Germany. The rest is being hoarded or spent on bonds and shares.’”
Central Bank Watch:
May 28 – Reuters (Love Liman and Johan Carlstrom): “Some of the biggest banks in Scandinavia are warning that Sweden’s Riksbank risks hurting bond market liquidity with its quantitative easing program. Any efforts to expand asset purchases would deplete Sweden’s already limited sovereign debt supply, according to SEB AB and Danske Bank A/S. ‘We see wider bid-ask spreads, lower liquidity, lower volumes and lower liquidity in the inter-bank system, which makes it more difficult for market makers to manage their risk,’ Jussi Hiljanen, head of fixed-income strategy at SEB…said… ‘I’m worried that liquidity in the Swedish bond market will be very low for the rest of the year.’”
Europe Watch:
May 27 – Reuters (Ben Hirschler): “Cash-strapped Greece has racked up mounting debts with international drugmakers and now owes the industry more than 1.1 billion euros ($1.2bn), a leading industry official said… The rising unpaid bill reflects the growing struggle by the nearly bankrupt country to muster cash, and creates a dilemma for companies under moral pressure not to cut off supplies of life-saving medicines. Richard Bergstrom, director general of the European Federation of Pharmaceutical Industries and Associations, told Reuters his members had not been paid by Greece since December 2014.”
May 29 – Reuters (John O'Donnell and Jonathan Gould): “Lending throughout the euro zone failed to grow in April after a promising uptick a month earlier, a slip that tempers hopes for a rapid turnaround in borrowing to boost the economy. European Central Bank data showed… that overall lending growth to households and firms was unchanged in the month, despite the recent launch of a massive money-printing programme to bolster the 19 countries in the euro bloc.”
May 29 – CNBC (Julia Chatterley): “While Greece has been hitting the headlines recently, Matteo Renzi has quietly had a tough few months. The Italian prime minister has had to tackle difficulties both abroad and at home – including a slow economic recovery. All this presents a difficult backdrop for Renzi as he faces 22 million voters with elections in 7 regions and over 1,000 municipalities this weekend. On the domestic front, we've seen protests over education reform and a court ruling that pension cuts were unconstitutional, a decision that will require 13 billion euros ($14.2bn) in repayments. On top of that, there are accusations of political corruption and organised crime links within Renzi's Democratic Party (PD).”
May 27 – UK Telegraph (Mehreen Khan): “Tensions over the future course of eurozone integration have been laid bare as Spain has proposed a radical expansion of the European Central Bank's powers over member states. Ahead of a June summit of European leaders, Madrid has urged its fellow member states to expand the role of the ECB in order to curb dangerous ‘macroeconomic imbalances’ building up in the currency union. In list of highly ambitious proposals, Spain also called for the single currency to adopt a common budget for use in emergency rescues, and issue debt in the form of eurobonds… Both measures are likely to meet the resistance in Germany, Europe's largest creditor, as a further pooling of funds that would effectively subsidise southern debtor states.”
China Bubble Watch:
May 25 – Reuters (Li Zheng, Li He and Pete Sweeney): “China's top banking regulator warned of rising credit risk from real estate, local government debt and unconventional forms of finance, sources with direct knowledge told Reuters, highlighting Beijing's struggles to prevent risky debt from engulfing a stuttering economy. The sources cited a speech given by Shang Fulin, chairman of the China Banking Regulatory Commission (CBRC)… The amount of non-performing loans in the first quarter has already reached 56% of the total amount last year, Shang said… Unconventional forms of credit… were also on the rise, he said… Shang said credit risk had risen among commercial banks in China in the first quarter, with the total number of bad loans at 982.5 billion yuan (102.3 billion pounds), up 139.9 billion yuan from the same period last year, bringing the bad loan ratio to 1.39%. He said over 30% of loans to local governments used land or proceeds from land sales as collateral, which will cause increased repayment pressure as proceeds from land sales decline… Sliding land prices will also cause the value of the loan collateral to decrease, Shang added.”
May 26 – CNN (Sophia Yan): “Wealthy Chinese are getting even richer really fast. A new billionaire was created almost every week in China in the first quarter of 2015, according to a report by UBS and PricewaterhouseCoopers. Wealth creation is booming for the Chinese… and it's all happened in the last 15 years, said Francis Liu, a managing director at UBS Wealth Management. They're primarily pulling in the big bucks from real estate, technology, healthcare and other consumer industries, he said. In 2014, there were about 200 billionaires in China, versus 570 in the U.S., according to UBS.”
May 27 – Bloomberg: “Brokerages across China are tightening rules for lending to stock investors to try to limit the risks from any market bust. Changjiang Securities Co. joined larger rivals GF Securities Co. and Haitong Securities Co. in increasing its margin requirement… ‘We will definitely see more brokerages follow suit, stock prices have risen too fast and risks are accumulating,’ said Tang Yayun, a Shanghai-based analyst at Northeast Securities Co. ‘Brokerages are taking measures to protect themselves as there’s been concern that a bubble is forming in the stock market.’”
May 27 – Reuters (Peter Thal Larsen): “The main fuel for China’s stock market boom is running low. Borrowed money helped the Shanghai and Shenzhen stock exchanges double in value in six months. Despite frantic fundraising by brokerage houses, however, demand for leverage may be nearing its limits… The balance of outstanding margin loans has almost doubled since the end of last year to reach 1.9 trillion yuan ($300bn), according to Fitch. Breakneck growth in this lucrative but capital-intensive business has sent securities firms scrambling to raise new funds. Hence outfits such as GF Securities… have issued equity worth more than $10 billion this year. At Huatai Securities, the Nanjing-based broker currently completing a $4.5 billion Hong Kong fundraising, margin-related lending and trading accounted for 28% of revenue in the first quarter, up from just 8% in 2012.”
May 27 – CNBC (Mia Tahara-Stubbs): “Kaisa Group Holdings Ltd., the first Chinese developer to default on offshore debt, had its restructuring thrown into doubt after rival Sunac China Holdings Ltd. abandoned a proposed acquisition. Kaisa bonds slumped the most in five weeks in early trade after Sunac announced Thursday that it dropped the offer that could have helped the troubled developer restructure its $10.5 billion of debt, including $2.5 billion of offshore bonds.”
May 25 – Bloomberg (David Yong): “China will likely prop up bondholders in any onshore defaults until August to ensure a smooth clean up of its local debt mess, according to Oversea-Chinese Banking Corp. Events this year have defied Chinese rhetoric on embracing market-based reforms, after authorities passed up chances to make investors stomach losses from two local defaults, the bank wrote… This week sees a potential third missed payment after beverages bottle maker Zhuhai Zhongfu Enterprise Co. said it can only partly pay principal due May 28. Forcing investor losses may sour market sentiment and hinder the successful completion of state efforts to clear a debt pile issued by provincial cities, according to OCBC. Banks must swap out 1 trillion yuan ($161bn) of high-cost local government bonds issued by 36 Chinese cities for municipal debt with lower coupons by the end of August, it said.”
EM Bubble Watch:
May 25 – Bloomberg (Nathan Crooks and Andrew Rosati): “Venezuela’s largest bill of 100 bolivars is now worth less than a U.S. quarter to money-changers after a plunge in the currency’s black-market value. The bolivar fell 25% on the black market last week to 423 per dollar before strengthening to 413 today… That’s 66 times the primary official rate of 6.3 bolivars per dollar, and means the 100-bolivar bill fetches about 24 U.S. cents from illegal street dealers.”
May 27 – Bloomberg (Piotr Zalewski): “If you give me the powers I'm asking for, I can boost gross domestic product from $11,000 per capita today to $25,000 in eight years. That is the ambitious vow Turkish President Recep Tayyip Erdogan has made to voters in an attempt to turn the nation's June 7 parliamentary elections into a referendum on his political goals. If his Justice and Development Party (AKP) wins the fiercely contested vote by a wide enough margin, Erdogan has announced, he will transform Turkey into a presidential system, effectively consolidating his role as a one-man executive. An increasingly populist debate over the country's economy — an issue that has helped Erdogan and the AKP win every election since 2002 — will help determine whether he gets what he wants.”
May 26 – Reuters (Nick Tattersall and Orhan Coskun): “Turkey's general election looks likely to push Tayyip Erdogan's dream of an all-powerful presidency further from his reach, and usher in a period of turbulence as its most divisive modern leader jockeys to maintain his dominance. Barred by the constitution from party politics as head of state, Erdogan has nonetheless campaigned across Turkey before the June 7 parliamentary vote in a sign of how much he has riding on the outcome. ‘You will not take me away from these stages, you will not silence me,’ he told a rally… explaining why the presidency should get greater powers. Constitutionally, most authority has lain with the Turkish prime minister, an office Erdogan held from 2003 to 2014. But since becoming head of state last year, he has pushed hard for an executive presidency akin to the United States or France. However, the AK Party which he founded looks unlikely to win two thirds of the seats in parliament, the majority needed to change the constitution without putting the plan to a referendum.”
Brazil Watch:
May 29 – Bloomberg (Filipe Pacheco and Paula Sambo): “The real extended its monthly decline as Brazil braced for its worst recession in 25 years after the government reported that Latin America’s largest economy contracted in the first quarter. Attempts by President Dilma Rousseff’s administration to reassure investors by raising taxes and reducing expenditures are expected to limit the nation’s gross domestic product in the second quarter. The central bank’s increase in interest rates to their highest level since 2009 to curb above-target inflation adds to the drag on output.”
Geopolitical Watch:
May 29 – UK Telegraph (Xing Zhigang): “A Chinese guard of honour joined the Victory Day parade in Moscow’s Red Square for the first time on May 9, as 18 Russian veterans who fought against the Japanese in Northeast China during the Second World War were presented with medals. The events highlighted the friendship between China and Russia, forged with lives and blood during the war, and Russian President Vladimir Putin was officially invited to attend a parade in China on Sept 3 to celebrate the Chinese victory over the Japanese aggression. President Xi Jinping took advantage of the Chinese presence at the Moscow commemorations for the 70th anniversary of the end of the Great Patriotic War… to lay the foundations for China’s own celebrations. The near-complete absence of Western leaders at the ceremony, underlining the tensions between Russia and the West over the Ukraine crisis, also gave prominence to the presence of President Xi…”
May 26 – New York Times (Andrew Jacobs): “China intends to project naval power in the open ocean in coming years, and not just defend the country’s coastal waters, according to a strategy paper… The paper, the first policy document issued by the Chinese military in two years, comes at a time of growing Chinese assertiveness in the South China Sea. China’s efforts to enforce its disputed claims to vast stretches of the sea by building up artificial islands and structures on reefs and outcroppings have drawn the Philippines and its ally the United States into a test of wills in the region… The policy document… lays out China’s military ambitions, a central element of what its leaders call a ‘national rejuvenation,’ as Beijing moves to counter what it sees as American efforts to contain its rise. It extends beyond naval policy to emphasize the continued modernization of the Chinese military in general, and it describes cyberwarfare as a ‘grave security threat’ that requires the development of a cybermilitary force.”
May 26 – Reuters (Megha Rajagopalan): “China outlined a strategy to boost its naval reach on Tuesday and held a groundbreaking ceremony for two lighthouses in disputed waters, developments likely to escalate tensions in a region already jittery about Beijing's maritime ambitions. In a policy document issued by the State Council, the Communist-ruled country's cabinet, China vowed to increase its ‘open seas protection’, switching from air defense to both offence and defense, and criticized neighbors who take ‘provocative actions’ on its reefs and islands.”
May 27 – Financial Times (Charles Clover): “China has mooted the possibility of controlling the airspace over the disputed South China Sea, as it ratchets up rhetoric in response to a US overflight of an island claimed by China earlier this month. A senior foreign ministry official spoke on Wednesday about the possibility of implementing an Air Defence Identification Zone over the sea, a move that would be widely regarded as an effort to stamp its sovereignty over a series of islands it claims. An ADIZ requires all aircraft flying through it to identify themselves to the controlling government. ‘China has the right to establish ADIZs,’ said Ouyang Yujing, director of boundaries and oceanic affairs for the foreign ministry… Whether or not China will establish a South China Sea ADIZ will depend on factors such as whether China’s air safety is under threat, and the seriousness of the threat,’ he said.”
May 27 – Washington Post (Craig Whitlock): “Defense Secretary Ashton Carter bluntly warned China Wednesday to stop its buildup of man-made islands in the South China Sea and vowed that the U.S. military would continue to patrol international waters and airspace in the region. Carter’s comments… further escalated a simmering rhetorical conflict between Washington and Beijing over access to the South China Sea and other Asian waters. ‘There should be no mistake: the United States will fly, sail, and operate wherever international law allows, as we do all around the world,’ Carter said at the U.S. military’s joint base at Pearl Harbor.”
May 27 – AFP (Dan De Luce): “Russia's provocative rhetoric and its dramatic expansion of flights by nuclear bombers are deeply troubling and dangerous, NATO Secretary General Jens Stoltenberg said… Russia's plans to deploy nuclear-capable missiles in Kaliningrad -- near Poland's border -- and its threat to move nuclear forces in Crimea would ‘fundamentally change the balance of security in Europe,’ Stoltenberg warned… In blunt language, the NATO chief delivered a scathing critique of Russia's behavior over the past year… and vowed the transatlantic alliance would redouble its commitment to ‘collective defense.’ ‘Russia's recent use of nuclear rhetoric, exercises and operations are deeply troubling,’ he told an audience…”
May 27 – CNN (Chris Frates): “The IRS believes that a major cyber breach that allowed criminals to steal the tax returns of more than 100,000 people originated in Russia, two sources briefed on the data theft tell CNN. On Tuesday, the Internal Revenue Service announced that organized crime syndicates used personal data obtained elsewhere to access tax information, which they then used to file $50 million in fraudulent tax refunds.”
May 25 – Reuters (Matt Siegel): “Japan will join a major U.S.-Australian military exercise for the first time in a sign of growing security links between the three countries as tensions fester over China's island building in the South China Sea. While only 40 Japanese officers and soldiers will take part in drills involving 30,000 U.S. and Australian troops in early July, experts said the move showed how Washington wanted to foster cooperation among its security allies in Asia… ‘I think the U.S. is trying to get its allies to do more,’ said Euan Graham, director of the International Security Program at the Lowy Institute in Sydney.”
May 24 – Financial Times (Simeon Kerr): “Lines of green Saudi flags hang proudly along Riyadh’s wide highways while screens around the capital broadcast footage on a loop of warplanes flying into combat and massive explosions. Local companies have taken out giant billboards pledging allegiance to the ‘decisive and determined’ King Salman bin Abdulaziz al-Saud, while ordinary Saudis have taken to social media to show their support for the new king and the county’s military campaign in Yemen. An unprecedented jingoism — hidden for decades — has swept through Saudi Arabia since King Salman ascended to the throne in January and the launch in March of the aerial campaign against Shia Houthi rebels. Although the air strikes have raised international concern and heightened tensions with Iran, its rival for regional dominance, they have been cheered in Saudi by an increasingly nationalist and sectarian sentiment. ‘We are strong again under them,’ says Ahmed, a middle-aged Saudi national…”
Russia and Ukraine Watch:
May 27 – Reuters (Maria Tsvetkova): “Russia's army is massing troops and hundreds of pieces of weaponry including mobile rocket launchers, tanks and artillery at a makeshift base near the border with Ukraine, a Reuters reporter saw this week. Many of the vehicles have number plates and identifying marks removed while many of the servicemen had taken insignia off their fatigues. As such, they match the appearance of some of the forces spotted in eastern Ukraine, which Kiev and its Western allies allege are covert Russian detachments. The scene at the base on the Kuzminsky firing range, around 50 km (30 miles) from the border, offers some of the clearest evidence to date of what appeared to be a concerted Russian military build-up in the area. Earlier this month, NATO military commander General Philip Breedlove said he believed the separatists were taking advantage of a ceasefire that came into force in February to re-arm and prepare for a new offensive.”
May 27 – Financial Times (Elaine Moore): “Ukraine’s decision last week to grant its government the power to stop foreign debt payments marks a distinct shift in tone for the wartorn and recession-battered country. As negotiations between Kiev and its creditors stall and full-blown bankruptcy nears, the rhetoric of government communiques is shifting from conciliation to accusation. Spot the difference in sentiment. In March a presentation to investors noted that ‘a collaborative process is paramount . . . Ukraine is committed to undertake consultations with its creditors’. By May the government declared it ‘has the right . . . not to return loans borrowed by [a] kleptocratic regime’. In sovereign debt circles the tack Ukraine appears to be taking is known as the odious debt argument, which rejects the notion that governments are liable for the debts of their predecessor.”
Japan Watch:
May 27 – Bloomberg: “Tokyo stocks are at fifteen-year highs and the yen at eight-year lows, but Bank of Japan Governor Haruhiko Kuroda told CNBC he doesn't think a bubble is brewing nor is he worried about where the yen is headed. ‘We don't think there is any asset bubble or stock market bubble, but we will continue to monitor carefully,’ BOJ governor Haruhiko Kuroda told CNBC… As for the Japanese currency, the ‘yen might appreciate. But I think the exchange rate, including the yen, should move in line with economic fundamentals,’ he said.”
May 27 – Bloomberg (Dave McCombs and Jason Clenfield): “Japan’s companies, long known for stinginess with shareholders, doled out record amounts of cash to investors in the last year. It’s just the start of the payouts. Dividends and buybacks soared 76% to 12.8 trillion yen ($104bn) in the 12 months ended in March, according to Nomura Holdings… This newfound affection for shareholders is born out of necessity, not sudden generosity.”
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