[CNBC] Trump and Putin are the main event, but there's a lot to move markets in the week ahead
[Spiegel] Trump Takes Aim at Germany and NATO
[WSJ] Federal Reserve Report Defends Use of New Tools to Set Interest Rates
[FT] Argentina learns to live with its inflation dragon
Saturday, July 14, 2018
Friday, July 13, 2018
Weekly Commentary: $247 Trillion and (Rapidly) Counting
Please join us Thursday, July 19th, at 4:30 pm Eastern for the McAlvany Wealth Management Tactical Short Q2 Recap ("Cracks in the Global Bubble") Conference Call. Click to Register.
I chronicled mortgage finance Bubble excess on a weekly basis. Relevant data were right there in plain sight, much of it courtesy of the Federal Reserve. Yet only after the Bubble burst did it all suddenly become obvious. Flashing warning signs were masked by manic delusions of endless prosperity and faith in the almighty "inside the beltway". These days, data for the global government finance Bubble is not as easily-accessible, though there is ample evidence for which to draw conclusions. It will all be frustratingly obvious in hindsight.
The Institute of International Finance is out with their latest data that, unfortunately, is not made available in detail to the general public. Global debt ended the first quarter at a record $247 Trillion, or 318% of GDP. Even after a decade of historic Credit inflation, global debt continues to expand at ("Terminal Phase") double-digit rates (11.1% y-o-y).
Global debt growth accelerated during the first quarter to $8.0 Trillion - and surged $30 Trillion over just the past five quarters. In a single data point not to be disregarded, Global Debt Has Expanded (a difficult to fathom) $150 Trillion, or 150%, Over the Past Ten Years. Actually, the trajectory of Bubble-period Credit expansion may seem rather familiar. It's been, after all, a replay of the reckless U.S. mortgage Credit episode, only on a much grander global scale.
July 10 - Financial Times (Jonathan Wheatley): "The amount of debt in the world increased by nearly $25tn in the year to the end of March, piling more pressure on a global financial system already struggling to deal with rising US interest rates, widening spreads for borrowers and a strengthening US dollar. The Institute of International Finance… said total debts owed by households, governments and financial and non-financial corporations amounted to $247.2tn at the end of March, up from $222.6tn a year earlier and an increase of nearly $8tn in the first quarter alone. 'The increase in the level of debt, both in absolute terms and relative to GDP, against a backdrop of tightening financial conditions, is, of course, a cause for concern,' said Hung Tran, the IIF's executive managing director… The IIF said the debts of non-financial corporations in EMs rose $1.5tn in the first quarter to $31.5tn, the equivalent of 94.4% of GDP…"
A few notable quotes from press reports:
"With global growth losing some momentum and becoming more divergent, and U.S. rates rising steadily, worries about credit risk are returning to the fore - including in many mature economies," the IIF said.
"Non-financial borrowers in the corporate sector, in the household sector, in the government sector having very high debt levels, will find it very costly and difficult to refinance and borrow more in order to sustain investment and consumption going forward. That is really causing growth to falter, so what I term headwinds to growth." IIF Executive Managing Director Hung Tran.
"For many emerging markets, which rely heavily on bank financing, higher borrowing costs for banks could be passed through to the corporate and household sectors, so something of a hidden risk in terms of this floating rate borrowing," said IIF Senior Director Sonja Gibbs.
Bloomberg (Alexandre Tanzi): "Government debt has risen most sharply in Brazil, Saudi Arabia, Nigeria and Argentina, according to the report. Of the four, U.S. dollar refinancing risk is particularly high for Argentina and Nigeria, where over three-quarters of redemptions will be in dollars. About $900 billion is in U.S. dollar-dominated emerging bonds/syndicated loans that will mature by 2020…"
July 10 - Yahoo Finance (Dion Rabouin): "'The pace is indeed a cause for concern,' IIF's Executive Managing Director Hung Tran told Yahoo… 'The problem with the pace and speed is if you borrow or if you lend very quickly … the quality of the credit tends to suffer.' That means more governments, businesses and individuals have been borrowing that could have trouble paying the money back. 'The quality of creditworthiness has declined sharply,' Tran added… Sonja Gibbs, IIF's senior director of the global capital markets department, noted that there was an increased risk of sovereign debt crises in a select few developed markets as a result of the increase of debt and financing costs. 'Government debt is higher than it was prior to the crisis and corporate debt as well,' Gibbs said… Gibbs added that the United States' debt growth was particularly worrisome, given that it has now grown to more than 100% of GDP. With the increases in spending from President Donald Trump and Congress, the U.S. will now have funding needs of 25% of its GDP. 'The U.S. really stands out here because … a lot of that is the expanding budget deficit as well as maturing debt,' Gibbs said. 'That's a lot of financing need affecting the market.'"
U.S. government debt surpassed 100% of GDP during the quarter. Japanese government debt-to-GDP ended the quarter at 224%, the euro area at 101%, the UK at 105% and the emerging markets to 48% of GDP.
To see non-productive U.S. government debt, the foundational "Core" of global finance, inflate so rapidly should be quite distressing. Worse yet, extreme Credit excess is systematic, as debt balloons also at the "Periphery". From my analytical perspective, we're witnessing catastrophic, all-encompassing "Terminal Phase" excess. The first quarter saw emerging market debt rise by $2.5 trillion, or about 18% annualized, to a record $58.5 TN. EM Non-financial Corporate debt surged $1.5 TN, or about 25% annualized, to $31.5 TN - and now exceeds 94% of GDP. One big final blow-off setting the stage for crisis.
From the FT (Jonathan Wheatley): "'The emerging market bond market has grown tremendously over the past decade but trading volumes have not kept pace,' said Sonja Gibbs, senior director at the IIF. 'When you combine a rising rate environment, stronger dollar and low levels of liquidity, you have a recipe for volatility and the exacerbation of any periods of market strain.'"
My thesis holds that the global Bubble has been pierced at the "Periphery." Not atypically, this follows on the heels of remarkable "Terminal Phase Excess," including phenomenal Credit growth and massive "hot money" inflows. The "hot money" has now reversed; de-risking/de-leveraging dynamics are taking hold. Market complacency is at least partially explained by the sizable reserves the emerging markets have accumulated over recent years, resources the marketplace sees available for stabilizing currencies and Credit systems.
July 9 - Wall Street Journal (Chelsey Dulaney): "Emerging-market central banks are tapping a roughly $6 trillion stash of foreign-exchange reserves as they struggle to contain deepening currency declines. Policymakers across the developing world built up foreign reserve buffers over the past year, capitalizing on investor interest in higher-yielding emerging market assets as global growth remained sanguine. In the first five months of 2018, the central banks added $114 billion to their reserves, the fastest pace of accumulation since 2014…"
The problem, also noted by the WSJ: "Emerging-market central banks used roughly $57 billion in foreign reserves in June, which would rank as the largest monthly intervention since late 2016…" Brazil is said to have burned through $44 billion to support its faltering currency. EM reserve data will be monitored closely over the coming weeks and months. Dwindling reserves will incite a rush to the exits.
There's been considerable market focus on recent woes in Brazil, Turkey and Argentina. But from a more global systemic perspective, I would at this point focus on heavily indebted Asia. Interestingly, Asian currencies were down again this week. The Chinese renminbi declined 0.7%, the Japanese yen 1.7%, the South Korean won 0.7%, the Singapore dollar 0.6%, and the Thai baht 0.5%. Over the past month, the renminbi is down 4.4%, the won 4.1%, the baht 3.5%, the Indonesia rupiah 3.2% and the Singapore dollar 2.2%.
The unfolding trade war is indeed a major issue for EM, arriving at a most inopportune juncture. Financial conditions have already tightened meaningfully throughout Asian markets, though I would contend that the issue goes much beyond trade. Let's start with a China Credit Bubble update:
Total Aggregate Finance expanded $176 billion during June, up from May's $115 billion but 16% below estimates. Aggregate Finance grew $1.36 TN during the first-half, about 18% below comparable 2017. The growth in Bank Loans surged $274 billion in June, up from May's $175 billion to the strongest expansion since January. Meanwhile, key "shadow banking" components contracted. At $106 billion, growth in Household (chiefly mortgage) borrowings remained strong.
June's jump in Chinese bank lending surely emboldens those with the view that Beijing has everything in control - that Chinese officials will adeptly commandeer the financial system to ensure sufficient Credit growth and liquidity. It likely won't be that simple. Chinese banks and corporations have issued enormous quantities of marketable debt over recent years, a significant portion denominated in dollars. Moreover, a massive bank lending campaign at this stage of the cycle will not be confidence inspiring.
It's also worth reminding readers than China's international reserve holdings have declined about $900 billion from 2014 highs to $3.112 TN. China now faces the dilemma that their maladjusted economic system will require several trillion ($) of annual Credit growth. Yes, Beijing can dictate lending from state-directed financial institutions. But aggressive reflationary measures risk spurring capital flight and currency turmoil. A disorderly devaluation would be highly problematic for those on the wrong side of dollar-denominated debt.
July 12 - Bloomberg (Lianting Tu and Finbarr Flynn): "A rout in China's dollar-denominated junk bonds is getting worse as mounting defaults send traders running for cover. Rising trade tensions are also adding to longer-existing difficulties created by the nation's push to cut excessive leverage. Junk bonds from China have been more volatile this year than such securities from all of Asia. The average yield for the nation's speculative-rated notes has surged to 10.5%, the highest since 2015, according to ICE BofAML indexes. Few expect a rebound anytime soon."
July 12 - Bloomberg (Andy Mukherjee): "Donald Trump has made Asian high-yield investors nervous wrecks. First, there are the obvious casualties of his trade war against China. Lenovo Group Ltd.'s bonds are down to 87.4 cents on the dollar from more than 100 cents at the start of the year. Then there's the collateral damage of his greenback-boosting, late-cycle fiscal stimulus, which is making investors worried about Asian currency weakness. Indonesian notes are swimming in a sea of red ink… Liquidity in Asian high yield is so bad that, after a little haggling, a bond quoted at 94 cents on the dollar can be had for 91 cents. Sellers are panicking."
After widening 120 bps in four weeks, Asian high-yield spreads on Wednesday were at their widest level since the Chinese mini-crisis back in Q1 2016. China CDS ended last Friday's trading at a 13-month high (73bps). As noted above, the rout over the past two months has left Chinese junk yields at the highs since early-2015.
"[US Treasury] Yield Curve at its Flattest Since August 2007," was a Friday evening Financial Times (Joe Rennison) headline. "The measure is an important signal for investors of when the Federal Reserve may curtail its policy tightening and is also seen as a warning of a coming recession if it turns negative, which last happened in 2006."
I viewed the flat yield curve back in 2007 as more of a warning of Bubble Fragility than an indicator of imminent recession. But with U.S. mortgage finance at the epicenter of the Bubble back then, the bursting Bubble coincided with an abrupt end to Credit expansion and economic growth. I view today's flat Treasury curve as again signaling Bubble Fragility. The big difference, however, is that global (as opposed to U.S.) finance is at today's Bubble epicenter. Heightened fragility in China, Asia and EM, more generally, risks global financial turmoil and economic vulnerability.
The unusual backdrop is creating quite a dilemma for the Federal Reserve. Cracks in the Global Bubble's "Periphery" are putting downward pressure on Treasury yields, in the process loosening U.S. financial conditions in the face of cautious Fed rate increases. The booming U.S. economy at this point beckons for restrictive monetary conditions, yet a more hawkish Fed risks spurring a dollar melt-up and full-fledged EM financial crisis.
The GSCI commodities index sank 3.6% this week. Copper dropped another 1.7%, boosting y-t-d declines to 16%. Zinc fell 5.7% this week, lead 5.6%, Aluminum 2.4% and Platinum 2.1%. WTI Crude dropped 3.8%. In the agriculture commodities, Soybeans dropped 6.7%, Corn 4.9%, Wheat 3.5%, Sugar 4.8% and Coffee 3.8%.
From the currencies to market yields and yield curves to commodities, markets are signaling trouble ahead. The great irony is that Cracks at the Global Periphery now work to prolong "Terminal Phase Excess" at the "Periphery of the Core" - certainly including higher risk U.S. corporate Credit. And booming debt markets feed highly speculative equities and assets Bubbles right along with an overheated U.S. Bubble Economy. After years of Easy Street, central banking has turned into quite a hard challenge.
July 10 - Bloomberg (Danielle DiMartino Booth): "Much has been made of the degradation of the $7.5 trillion U.S. corporate debt market. High yield offers too little, well, yield. And 'high grade' now requires air quotes to account for the growing dominance of bonds rated BBB, which is the lowest rung on the investment-grade ladder before dropping into 'junk' status. And then there's the massive market for leveraged loans, where covenants protecting investors have all but disappeared. How does that break down? Corporate bonds rated BBB now total $2.56 trillion, having surpassed in size the sum of higher-rated debentures, which total $2.55 trillion, according to Morgan Stanley. Put another way, BBB bonds outstanding exceed by 50% the size of the entire investment grade market at the peak of the last credit boom, in 2007… In 2000, when BBB bonds were a mere third of the market, net leverage (total debt minus cash and short term investments divided by earnings before interest, taxes, depreciation and amortization) was 1.7 times. By the end of last year, the ratio had ballooned to 2.9 times."
For the Week:
The S&P500 rallied 1.5% (up 4.8% y-t-d), and the Dow jumped 2.3% (up 1.2%). The Utilities fell 1.0% (down 0.5%). The Banks increased 0.2% (down 2.0%), and the Broker/Dealers added 0.5% (up 3.4%). The Transports gained 0.7% (down 0.6%). The S&P 400 Midcaps increased 0.3% (up 5.0%), and the small cap Russell 2000 slipped 0.4% (up 9.9%). The Nasdaq100 advanced 2.3% (up 15.3%). The Semiconductors declined 0.6% (up 7.0%). The Biotechs rose 2.2% (up 21.2%). With bullion down $14, the HUI gold index sank 3.2% (down %).
Three-month Treasury bill rates ended the week at 1.90%. Two-year government yields rose four bps to 2.58% (up 70bps y-t-d). Five-year T-note yields added a basis point to 2.73% (up 52bps). Ten-year Treasury yields slipped a basis point to 2.83% (up 42bps). Long bond yields were unchanged at 2.93% (up 19bps). Benchmark Fannie Mae MBS yields declined one basis point to 3.56% (up 56bps).
Greek 10-year yields fell 10 bps to 3.83% (down 24bps y-t-d). Ten-year Portuguese yields dropped seven bps to 1.73% (down 21bps). Italian 10-year yields sank 16 bps to 2.55% (up 54bps). Spain's 10-year yields declined five bps to 1.26% (down 30bps). German bund yields rose five bps to 0.34% (down 9bps). French yields dipped two bps to 0.62% (down 17bps). The French to German 10-year bond spread narrowed seven to 28 bps. U.K. 10-year gilt yields added a basis point to 1.27% (up 8bps). U.K.'s FTSE equities index increased 0.6% (down 0.3%).
Japan's Nikkei 225 equities index rallied 3.7% (down 0.7% y-t-d). Japanese 10-year "JGB" yields increased one basis point to 0.04% (down 1bp). France's CAC40 gained 1.0% (up 2.2%). The German DAX equities index increased 0.4% (down 2.9%). Spain's IBEX 35 equities index fell 1.7% (down 3.1%). Italy's FTSE MIB index slipped 0.2% (up 0.2%). EM equities were mixed. Brazil's Bovespa index gained 2.1% (up 0.3%), while Mexico's Bolsa fell 1.2% (down 1.9%). South Korea's Kospi index rallied 1.7% (down 6.3%). India’s Sensex equities index jumped 2.5% (up 7.3%). China’s Shanghai Exchange recovered 3.1% (down 14.4%). Turkey's Borsa Istanbul National 100 index sank 8.9% (down 22.1%). Russia's MICEX equities index was little changed (up 11.2%).
Investment-grade bond funds saw outflows of $2.859 billion, while junk bond funds had inflows of $1.852 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.53% (up 50bps y-o-y). Fifteen-year rates gained three bps to 4.02% (up 73bps). Five-year hybrid ARM rates jumped 12 bps to 3.86% (up 58bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.56% (up 45bps).
Federal Reserve Credit last week declined $9.1bn to $4.251 TN. Over the past year, Fed Credit contracted $176bn, or 4.0%. Fed Credit inflated $1.440 TN, or 51%, over the past 297 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.7bn last week to $3.405 TN. "Custody holdings" were up $82.9bn y-o-y, or 2.5%.
M2 (narrow) "money" supply gained $8.3bn last week to a record $14.141 TN. "Narrow money" gained $622bn, or 4.6%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits rose $8.3bn, while Savings Deposits declined $8.0bn. Small Time Deposits gained $3.2bn. Retail Money Funds added $2.2bn.
Total money market fund assets jumped $28.9bn to $2.851 TN. Money Funds gained $224bn y-o-y, or 8.5%.
Total Commercial Paper rose $10.0bn to $1.075 TN. CP gained $114bn y-o-y, or 11.9%.
Currency Watch:
The U.S. dollar index gained 0.8% to 94.677 (up 2.8% y-t-d). For the week on the upside, the South African rand increased 1.5%, the Mexican peso 0.8% and the Brazilian real 0.3%. For the week on the downside, the Swedish krona declined 1.8%, the Japanese yen 1.7%, the Swiss franc 1.2%, the New Zealand dollar 1.1%, the Norwegian krone 1.1%, the South Korean won 0.7%, the Canadian dollar 0.6%, the Singapore dollar 0.6%, the euro 0.5%, the British pound 0.5% and the Australian dollar 0.1%. The Chinese renminbi declined 0.73% versus the dollar this week (down 2.76% y-t-d).
Commodities Watch:
July 12 - Bloomberg (Robert Burgess): "Plunge, tumble and rout are overused by the financial media to describe a market in decline, but such superlatives would not be out of place to describe what's happening to commodities. The Bloomberg Commodity Index of 25 raw materials ranging from oil to copper to cattle dropped as much as 2.80% on Wednesday, the most since 2014, before closing at its lowest level since December. That brought the gauge's decline to 8.88% from this year's peak in late May."
July 11 - Reuters (Manolo Serapio Jr): "Copper, zinc and lead prices slumped to their weakest in about a year and other metals also sank in a broad selloff on Wednesday after the United States raised the stakes in a trade war with China with threats of more tariffs. The Trump administration said it would slap 10% tariffs on another $200 billion worth of Chinese imports, raising fears the festering trade dispute between the world's two biggest economies could hit global growth."
July 11 - MarketWatch (Myra P. Saefong and Sarah McFarlane): "Oil futures finished sharply lower Wednesday, with the U.S. benchmark registering its sharpest daily slump in about 13 months as fears of flagging demand and renewed production from Libya overshadowed a report showing the biggest weekly drop in domestic crude supplies in nearly two years. August WTI crude, the U.S. benchmark, fell $3.73, or 5%, to $70.38 a barrel…"
The Goldman Sachs Commodities Index sank 3.6% (up 4.7% y-t-d). Spot Gold lost 1.1% to $1,241 (down 4.7%). Silver dropped 1.6% to $15.815 (down 7.8%). Crude dropped $2.79 to $77.01 (up 18%). Gasoline was little changed (up 17%), while Natural Gas sank 3.7% (down 7%). Copper dropped 1.7% (down 16%). Wheat fell 3.5% (up 16%). Corn sank 4.9% (up 1%).
Trump Administration Watch:
July 11 - Bloomberg (Brendan Scott and Enda Curran): "U.S. President Donald Trump is pushing his trade conflict with China toward a point where neither side can back down. By Aug. 30, as the U.S. nears mid-term elections vital for Trump's legislative agenda, the White House will be ready to impose 10% tariffs on $200 billion of Chinese-made products, ranging from clothing to television parts to refrigerators. The levies announced Tuesday -- together with some $50 billion already in the works -- stand to raise import prices on almost half of everything the U.S. buys from the Asian nation. China has seven weeks to make a deal or dig in and try to outlast the U.S. leader. President Xi Jinping, facing his own political pressures to look tough, has vowed to respond blow-for-blow."
July 11 - Bloomberg (Saleha Mohsin, Jenny Leonard, Jennifer Jacobs and Andrew Mayeda): "High-level trade talks between the U.S. and China have ground to a halt as the Trump administration threatens to escalate a trade war that shows little sign of abating, according to five people familiar… The countries held three rounds of formal negotiations since May, led by U.S. Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross and Vice Premier Liu He in China. But communications between senior members of the Trump and Xi administrations have petered out, and there's no immediate plan to restart the formal talks…"
July 6 - Wall Street Journal (Bob Davis): "The U.S. economy's strength is emboldening the Trump administration to play hardball in its trade offensive against China. Tariffs tend to be economic downers with an impact like sales taxes, which push up costs for consumers and businesses and slow growth. But so far it is tough to argue that the spat with China is having a broad macroeconomic impact. Economic output in the second quarter is estimated by many economists to have expanded at a 4% annual rate or more, roughly twice the pace of the nine-year-old expansion."
July 7 - Associated Press: "High-level talks between the United States and North Korea appeared to hit a snag… as Pyongyang said a visit by U.S. Secretary of State Mike Pompeo had been 'regrettable' and accused Washington of making 'gangster-like' demands to pressure the country into abandoning its nuclear weapons. The statement from the North came just hours after Pompeo wrapped up two days of talks with senior North Korean officials without meeting North Korean leader Kim Jong Un…"
July 9 - Reuters (Susan Heavey and David Brunnstrom): "President Donald Trump suggested on Monday that China might be seeking to derail U.S. efforts aimed at denuclearizing North Korea, but said he was confident that North Korean leader Kim Jong Un would uphold a pact the two agreed last month."
July 10 - Reuters (Jeff Mason, Robin Emmott, Alissa de Carbonnel): "U.S. President Donald Trump accused Germany on Wednesday of being a 'captive' of Russia due to its energy reliance, before a NATO summit where he pressed allies to more than double defense spending. Having lambasted NATO members for failing to reach a target of spending 2% of national income on defense, Trump told fellow leaders in Brussels he would prefer a goal of 4%, similar to U.S. levels, officials said."
Federal Reserve Watch:
July 11 - Wall Street Journal (Nick Timiraos): "The boost to U.S. economic growth from recent tax cuts and spending increases, together with more-stable price pressures, has made Federal Reserve officials comfortable with raising interest rates more than they anticipated earlier this year. Among them is Federal Reserve Bank of Chicago President Charles Evans… In an interview Monday, he said he is now comfortable with one or two more Fed rate increases this year, following on the central bank's two moves so far this year. 'The economy seems so strong it seems natural that businesses and consumers can live with' slightly higher interest rates, he said… Mr. Evans's comments echo those of Fed governor Lael Brainard, another once-prominent advocate for a slow pace of rate increases who has recently shifted toward warning against the dangers of letting the economy overheat."
July 12 - CNBC (Michael Sheetz): "Members of the Federal Reserve are telegraphing two more rate hikes this year, with Federal Open Market Committee voting member Loretta Mester… repeating the central bank's expectation for the next six months. 'The economy can certainly handle two more increases this year,' Mester, the president of the Cleveland branch of the Fed, said… 'We could end up getting behind if we don't keep moving things up, so I'm very comfortable, if the economy stays on the path it's going that we move rates up as appropriate this year.'"
July 11 - Reuters (Howard Schneider and Lindsay Dunsmuir): "Federal Reserve officials are scouring new niches of the financial markets to find signals accurate enough to warn the central bank when it is time to stop hiking interest rates before they risk tipping the economy into a recession… New research from staff economists Eric Engstrom and Steven Sharpe, presented at the Fed's June meeting, suggests that some of the traditional warning signs of recession, such as the gap in interest rates between 10-year and 2-year Treasuries, may not be as powerful as analysis that focuses on shorter term rates."
U.S. Bubble Watch:
July 12 - Bloomberg (Reade Pickert): "The U.S. budget deficit widened by 16% to $607 billion three-quarters of the way through Donald Trump's first full fiscal year as president, as spending accelerated faster than revenue. The shortfall in the nine months through June was larger than the $523 billion gap in the same period of fiscal 2017… Revenue rose to $2.54 trillion in the period, up 1.3% from a year earlier. Spending rose 3.9% to $3.15 trillion."
July 11 - Reuters (Richard Leong): "The U.S. economy is growing at a 3.9% annualized rate in the second quarter following the latest data on domestic wholesale inventory and producer prices, the Atlanta Federal Reserve's GDPNow forecast model showed…"
July 8 - CNBC (Michael Ivanovitch): "America's foreign trade deficits on goods transactions are getting worse. After an increase of 7.7% in 2017, those deficits were growing in the first five months of this year at an almost identical annual rate. Particularly disappointing is the fact that there is no progress at all in bringing trade deficits down with the European Union and China. The deficit with those two large economic systems came in at $218 billion during the January-May period, accounting for nearly two-thirds (64%) of America's total trade gap. That deficit was 11.3% more than recorded over the same interval of last year…"
July 11 - Reuters (Lucia Mutikani): "U.S. producer prices increased more than expected in June amid gains in the cost of services and motor vehicles, leading to the biggest annual increase in 6-1/2 years… The producer price index for final demand climbed 0.3% last month after rising 0.5% in May. That pushed the annual increase in the PPI to 3.4%, the largest rise since November 2011, from 3.1% in May."
July 12 - Reuters: "U.S. consumer prices barely rose in June, but the underlying trend continued to point to a steady buildup of inflation pressures… Consumer Price Index edged up 0.1% as gasoline price increases moderated and apparel prices fell. The CPI rose 0.2% in May. In the 12 months through June, the CPI increased 2.9%, the biggest gain since February 2012… Excluding the volatile food and energy components, the CPI rose 0.2%, matching May's gain. That lifted the annual increase in the so-called core CPI to 2.3%, the largest rise since January 2017…"
July 10 - Financial Times (Andrew Edgecliffe-Johnson): "Stock buyback announcements by US companies smashed records in the second quarter, feeding the debate over how boardrooms are spending their windfall from the Republican tax cuts… The almost $437bn in buyback plans announced in the three months to June 30 eclipsed the previous quarterly record of $242bn, which was set just three months earlier, according to TrimTabs… 'Corporate America's actions suggest that most of the benefits of the corporate tax cut will flow to investors in general and top corporate executives in particular,' TrimTabs said."
July 8 - Wall Street Journal (Rachel Louise Ensign): "Business borrowing is picking up, a welcome relief for banks and a sign of strength for the U.S. economy. Preliminary second-quarter data from the Federal Reserve indicate the year-over-year growth rate of business loans rose to 5.5% in late June from less than 1% near the end of 2017. The upturn marks the reversal of a prolonged slump in business-loan growth that began in earnest about two years ago. The rebound reflects increased confidence at companies."
July 9 - Associated Press: "Americans increased their borrowing in May at the fastest pace in a year and a half, boosted by a big increase in credit card borrowing. Consumer debt rose $24.5 billion in May after an increase of $10 billion in April… It was the biggest monthly increase since a rise of $24.8 billion in November 2016. The category that includes credit cards climbed $16.3 billion in May after increasing by $5 billion in April."
July 12 - Bloomberg (Alex Tanzi and Wei Lu): "The financial burden of living in coastal neighborhoods reveals itself quickly in the Bloomberg study. San Francisco, Seattle, Portland, Jacksonville, and the Bridgeport-Stamford-Norwalk, Connecticut area rounded out the top five areas with the fastest increase in mortgage payments… Slightly over 10% of all metro areas saw rents rising faster than inflation. In three locations, rents increased by more than 5%. Overall, eight of the top 20 most expensive markets are in California, with three of them among the 100 largest metro areas in the U.S. San Jose, San Francisco and Los Angeles are the three priciest markets… In nine metro regions, aggregate housing costs breached 50% of income."
July 11 - CNBC (Diana Olick): "A slight increase in the number of homes for sale may be helping to juice the mortgage market. After falling for two straight weeks, mortgage application volume rose 2.5% last week… Mortgage applications to purchase a home jumped 7% for the week and were 8% higher than the same week one year ago. Potential homebuyers have been blocked by a severe shortage of homes for sale this year, but more listings have been coming on the market."
July 6 - CNBC (Matt Rosoff): "The average price of a house bought in San Francisco rose by $205,000 in the first half of 2018, the largest six-month increase in history… The average house in the city limits now costs $1.62 million. Condo prices also rose by $71,000, which is a significantly slower pace of change than in past years, but still comes in at a startling $1.21 million. This is a direct outgrowth of the current tech boom in Silicon Valley, which shows no signs of slowing down."
July 10 - CNBC (Scott Cohn): "Seattle-area real estate agent Jerry Martin said he first entered the business in 1977, which means he remembers the days of double-digit mortgage rates and multiple booms and busts. That includes the bubble in 2006 and 2007 and the historic collapse that followed. None of that, he said, quite compares to the 'craziness' that has been going on lately. 'It would not be unreasonable for a three-bedroom, one-and-three-quarter bath, 1,500-square-foot home to go on the market and within the hour or two you're looking at multiple offers,' he told CNBC. 'We've had situations where 20, 30 offers were coming in on a piece of property.' The Washington state housing market is the hottest in the country. Prices increased nearly 4% in the first quarter…"
July 12 - Bloomberg (Prashant Gopal): "Got a million bucks to spend on a new home? Good. Just don't expect a palace. The starting price for the most expensive 5% of U.S. residential properties sold in April was at least $1 million in more than half the luxury markets Realtor.com analyzed for its latest report. Sales of million-dollar-plus real estate jumped 25% from April of last year… That's the biggest sales increase in high-end homes since January 2014 and more than twice this January's pace."
July 9 - Wall Street Journal (Ryan Dezember and Laura Kusisto): "Wall Street is betting that more well-off Americans will want to be renters. Financiers who loaded up on homes after the housing bust for pennies on the dollar are buying yet more-despite home prices in many markets being at all-time highs. The number of homes purchased by major investors in 2017 was at least 29,000, up 60% from the previous year, estimates Amherst Capital Management LLC…"
July 10 - Reuters (Lucia Mutikani): "More American workers voluntarily quit their jobs in May, …a sign of confidence in the labor market that economists say will soon boost wage growth. That lifted the quits rate one-tenth of a percentage point to 2.4%, the highest since April 2001."
July 8 - CNBC (Matt Lavietes): "In late June, employees at Salesforce.com completed a task that's becoming common in Silicon Valley. They protested. Thousands of tech workers from top companies, including Google, Amazon and Microsoft, have recently led large-scale internal rebellions against their employers. The wave of employee outrage is largely over the use of companies' technology in controversial government contracts - from facial recognition software sold to law enforcement, to drone technology for the military and work with U.S. Immigration and Customs Enforcement."
China Watch:
July 12 - Reuters (Yawen Chen): "China's commerce ministry said on Thursday that China has not been in touch with the United States about restarting trade negotiations and said complaints about forced technology transfers and IP theft are unacceptable. China does not want a trade war, but it does not fear one and would fight if necessary, ministry spokesman Gao Feng told reporters…"
July 11 - Financial Times (Keyu Jin): "As the US-China trade dispute ramps up, with the announcement of $200bn-worth of new tariffs on Chinese imports, Beijing is savouring a quote from Mao Zedong. In a contest with a foe of great strength, Mao said, 'injuring all of a man's 10 fingers is not as effective as chopping off one, and routing 10 enemy divisions is not as effective as annihilating one of them'. China is adopting the same strategy in dealing with rising trade tensions. The concern in Beijing is that this trade war is not really about surpluses or unfair practices, but about Chinese aspiration. In the Bill Clinton era, the US viewed China as a 'constructive strategic partner'. The administration of George W Bush saw the Chinese as 'responsible stakeholders', while Barack Obama sought to build a relationship with Beijing based on 'mutual respect'. But by the time of the Trump administration's first national security strategy, …China had become the US's principal 'competitor'. So what does 'chopping off one finger' signify in this context? It means focusing on pain points; going after a narrow set of products in the US, goods which have easy substitutes readily available in other markets - soyabeans from South America, for instance."
July 8 - Reuters: "China's offshore dollar debt crackdown could boomerang on the faltering yuan. Officials are moving to curb overseas currency bond issuance by Chinese firms, in particular indebted real estate developers. This could put more downward pressure on the exchange rate, and possibly on the country's $3.1 trillion foreign exchange reserves. The National Development and Reform Commission… said last month that real estate firms should issue new dollar-denominated bonds primarily to repay existing debt. Thomson Reuters IFR also reported that officials are giving oral guidance to private issuers restricting short-term dollar bond issues."
July 12 - Bloomberg (Ben Bartenstein and Giulia Morpurgo): "Donald Trump's tariff barrage pushed Chinese markets into their worst selloff since a shocking currency devaluation three years ago. The offshore yuan fell the most since August 2015…, as the White House said it's ready to impose 10% tariffs on $200 billion of Chinese-made products. Beijing said it would be forced to retaliate, describing the move as 'totally unacceptable.' Meanwhile, the iShares China Large-Cap exchange-traded fund extended a two-day slide to 2.5%. 'It's going to be difficult to find some place to hide," said David Lebovitz, global strategist at JPMorgan Asset Management… China can allow the currency to weaken a bit further, but at some point it will step in as too much weakness would be counterproductive, according to him."
July 8 - Financial Times (Gabriel Wildau and Yizhen Jia): "China is retreating from a policy that has channelled about $1tn in subsidies to homebuyers since 2016, a reversal that has sent tremors through the country's residential property market amid broader concerns about a housing bubble. Mainland property shares have tumbled since an executive from China Development Bank said… this month that CDB was tightening loan approvals for the subsidy programme. CDB, the state-owned policy bank with $2.4tn in assets, is the main source of loans for China's slum redevelopment policy, which began as a lending programme to support urban renewal but evolved into cash payments for displaced residents."
July 10 - Wall Street Journal (Jacky Wong): "China's crackdown on shadow banking has caused some high-profile blowups. Now it's driving the country's car makers off course. One big target for Beijing has been the proliferation of peer-to-peer lending platforms-total transactions on these ballooned to 2.8 trillion yuan ($423bn) last year, more than 10 times the total in 2014… The worry is that such platforms have become a hotbed for embezzlement, or could simply run out of money. Local media reported dozens of them collapsing in the past few months alone. About 20% of the platforms in existence last year disappeared in the first half… New rules introduced late last year to tame growth in P2P lending seem to be hitting the auto sector now."
July 9 - Reuters (Lusha Zhang and Elias Glenn): "China's producer inflation accelerated to a six-month high in June… The producer price index (PPI) …rose by a stronger-than-expected 4.7% in June from a year earlier, compared with a 4.1% increase in May… The consumer price index (CPI) rose 1.9% in June from a year earlier, in line with expectations for a slight pick-up from May's gain of 1.8%."
July 10 - Bloomberg: "For a lens on how China's stock market rout is affecting companies and brokerages, consider Hubei Broadcasting & Television Information Network Co.'s recent convertible bond sale. The… operator of a digital television network sought to sell 1.7 billion yuan ($256 million) of six-year securities, but investors only subscribed for about two-thirds of the offering… The sole bookrunner, Zhongtai Securities Co., ended up buying the remaining notes, putting the brokerage on the hook for losses… The deal underlines the funding pressures that are squeezing Chinese companies, with convertible debt -- once so popular with investors that gains were all but guaranteed -- becoming a harder sell as stocks languish near two-year lows."
July 11 - Bloomberg: "International investors have long fretted over the inflated credit scores Chinese domestic rating firms assign to local bonds. This latest example shows their worry may be well justified. Yields on coal producer Zhongrong Xinda Group Co.'s yuan bond maturing in August surged to 335%... amid concern defaults by its shareholder and business partner Wintime Energy Co. will hurt the company's operations. Yet United Ratings still has a AAA score on Zhongrong Xinda and many of its bonds including the one due next month."
EM Watch:
July 10 - Wall Street Journal (Christopher Whittall, Yeliz Candemir and Ira Iosebashvili): "Global investors who were once eager to buy any dip in emerging markets are now backing away, fearing that a big tumble could herald more weakness ahead… Global money that flowed into developing countries last year is slowing considerably. Flows into emerging market stocks and bonds have been $59.7 billion this year, down from $167.6 billion in the same time in 2017… A stronger dollar and higher yields in the U.S. have made it more difficult for investors to ignore shortcomings in countries like Turkey, where external debt stands at 53.4% of gross domestic product…"
July 11 - Financial Times (Laura Pitel and Adam Samson): "Turkish equities, bonds and the lira took a hammering on Wednesday as President Recep Tayyip Erdogan predicted a fall in interest rates and investors fretted over the health of the country's economy. Asked about a slide in the Turkish lira since he announced his new cabinet at the start of the week, the newly re-elected Turkish president told journalists that a combined treasury and finance ministry headed by his son-in-law 'will of course do whatever is necessary', according to Hurriyet newspaper… Turkey must find about $200bn a year in foreign financing - most of it in the form of short-term 'hot money' flows - to fund the current account deficit as well as maturing debt."
July 10 - Wall Street Journal (Julie Wernau and Ira Iosebashvili): "Emerging markets could become collateral damage in an escalating trade conflict where the U.S. is squaring off against China and Europe. The first tariffs levied by the U.S. and China went into effect Friday, but worries over the trade spat have already rippled through a broad range of emerging markets, hurting prices for stocks, bonds and currencies from Indonesia to Brazil. Export-dependent Asian economies may be especially vulnerable, and major stock markets in the region have tumbled in recent weeks. A significant portion of U.S.-bound exports from countries like Malaysia, South Korea and Thailand pass through China, thanks to its central role in the global supply chain."
July 10 - Financial Times (Laura Pitel): "Recep Tayyip Erdogan has gained the power to appoint the governor of Turkey's central bank and hundreds of other senior officials, unnerving markets as the country's new executive presidency comes into force. The Turkish leader issued his first set of presidential decrees just hours after being sworn into office, triggering the transition to a muscular system of governance that Mr Erdogan has sought for years."
July 10 - Financial Times (Laura Pitel): "From the moment he entered politics just three years ago, it was clear that Berat Albayrak would not be constrained by the limits of his official energy brief. As the son-in-law of President Recep Tayyip Erdogan, the former business executive soon found himself setting out the Turkish government's position on military operations, joining high level overseas visits and accompanying his wife's father on the campaign trail. Few expected, however, that Mr Erdogan would be bold enough to put his 40-year-old protégé in sole charge of the economy at a time of mounting concerns about its health."
July 10 - New York Times (Peter S. Goodman): "Looming like a fortress over the Black Sea, Istanbul's new airport has been engineered to provoke awe, underscoring Turkey's desire to reclaim its imperial glory. The project is expected to cost nearly $12 billion and carve six runways across a swath of land as big as Manhattan. When completed in a decade, the complex is supposed to transport some 200 million people a year, dwarfing all rivals as the busiest airport on the planet. But the airport has also become a symbol of a less savory aspect of Turkey's modern-day incarnation: its reckless disregard for arithmetic and the independence of critical government institutions. Together, they have placed the nation at growing risk of sliding into a financial crisis. In a global economy increasingly plagued by worries… Turkey may present the most immediate cause for alarm."
July 8 - BBC: "Turkey has sacked another 18,000 state workers, in the latest purge triggered by a failed coup two years ago. Those dismissed include soldiers, police and academics. A TV channel and three newspapers have also been closed. Since the coup attempt the government has fired more than 125,000 people, introduced emergency rule and clamped down on the media and the opposition."
July 12 - Bloomberg (Lilian Karunungan, Jasmine Ng and Abhishek Vishnoi): "For Mark Mobius, there may be worse to come even after the U.S. fired new shots in its trade war with China: a further 10% drop in emerging-market stocks and a global financial crisis. 'There's no question we'll see a financial crisis sooner or later because we must remember we're coming off from a period of cheap money,' the veteran investor in developing nations said… 'There's going to be a real squeeze for many of these companies that depended upon cheap money to keep on going.'"
Central Bank Watch:
July 9 - Financial Times (Claire Jones): "Mario Draghi has delivered a bullish assessment of the eurozone's economic prospects, saying monetary stimulus undertaken by policymakers had been and would continue to be 'very effective' in boosting growth and inflation. The European Central Bank chief told lawmakers at the European Parliament… that the measures - which include negative interest rates and a €2.4tn bond-buying programme - would boost growth and inflation… The ECB is starting to unwind the strategy measures, which were unleashed in 2014 and 2015 to counter the threat of weak growth triggering a severe bout of deflation."
July 9 - Bloomberg (Piotr Skolimowski and Alexander Weber): "Mario Draghi said the improvement in euro-area inflation is on a self-sustained path as he struck a confident tone that the European Central Bank can withdraw its stimulus despite the rising specter of a global trade war. Addressing European Parliament lawmakers, the ECB president urged the region's governments to lead by example by pushing back against creeping protectionism, which he singled out as the main risk for the area's economic expansion."
July 12 - Financial Times (Claire Jones): "The eurozone's central bankers are set to call time on the expansion of their €2.5tn bond buying spree later this year because they are increasingly convinced the region's economy is now strong enough to take the slow withdrawal of some of their crisis era support, according to accounts of the European Central Bank's June policy vote. The ECB's governing council voted unanimously to lower the amount of bonds it buys each month under its landmark quantitative easing programme from €30bn to €15bn in September, before ending the purchases for good after December…. Rates will remain on hold at their current record lows of zero for the main refinancing rate and minus 0.4% for the deposit rate 'at least through the summer of 2019'."
July 11 - Reuters (Larry King): "European Central Bank policymakers are split over when the ECB might raise interest rates next year, with some saying an increase is possible as early as July 2019 and others ruling out a move until autumn, according to several sources… Some expressed annoyance with an overly dovish message by ECB President Mario Draghi that pushed rate hike expectations to December, a date hawks consider too late."
July 7 - Wall Street Journal (Tom Fairless): "The decision on who will succeed Mario Draghi as European Central Bank president is still a year away, but the jockeying for position is already under way. The 19 countries that use the euro are preparing for a delicate political dance that will decide who will steer the eurozone economy away from years of easy-money policies. The favorite, Jens Weidmann, the conservative president of Germany's central bank, risks becoming a lightning rod for criticism of the nation's dominance of the $14 trillion currency bloc."
The Institute of International Finance is out with their latest data that, unfortunately, is not made available in detail to the general public. Global debt ended the first quarter at a record $247 Trillion, or 318% of GDP. Even after a decade of historic Credit inflation, global debt continues to expand at ("Terminal Phase") double-digit rates (11.1% y-o-y).
Global debt growth accelerated during the first quarter to $8.0 Trillion - and surged $30 Trillion over just the past five quarters. In a single data point not to be disregarded, Global Debt Has Expanded (a difficult to fathom) $150 Trillion, or 150%, Over the Past Ten Years. Actually, the trajectory of Bubble-period Credit expansion may seem rather familiar. It's been, after all, a replay of the reckless U.S. mortgage Credit episode, only on a much grander global scale.
July 10 - Financial Times (Jonathan Wheatley): "The amount of debt in the world increased by nearly $25tn in the year to the end of March, piling more pressure on a global financial system already struggling to deal with rising US interest rates, widening spreads for borrowers and a strengthening US dollar. The Institute of International Finance… said total debts owed by households, governments and financial and non-financial corporations amounted to $247.2tn at the end of March, up from $222.6tn a year earlier and an increase of nearly $8tn in the first quarter alone. 'The increase in the level of debt, both in absolute terms and relative to GDP, against a backdrop of tightening financial conditions, is, of course, a cause for concern,' said Hung Tran, the IIF's executive managing director… The IIF said the debts of non-financial corporations in EMs rose $1.5tn in the first quarter to $31.5tn, the equivalent of 94.4% of GDP…"
A few notable quotes from press reports:
"With global growth losing some momentum and becoming more divergent, and U.S. rates rising steadily, worries about credit risk are returning to the fore - including in many mature economies," the IIF said.
"Non-financial borrowers in the corporate sector, in the household sector, in the government sector having very high debt levels, will find it very costly and difficult to refinance and borrow more in order to sustain investment and consumption going forward. That is really causing growth to falter, so what I term headwinds to growth." IIF Executive Managing Director Hung Tran.
"For many emerging markets, which rely heavily on bank financing, higher borrowing costs for banks could be passed through to the corporate and household sectors, so something of a hidden risk in terms of this floating rate borrowing," said IIF Senior Director Sonja Gibbs.
Bloomberg (Alexandre Tanzi): "Government debt has risen most sharply in Brazil, Saudi Arabia, Nigeria and Argentina, according to the report. Of the four, U.S. dollar refinancing risk is particularly high for Argentina and Nigeria, where over three-quarters of redemptions will be in dollars. About $900 billion is in U.S. dollar-dominated emerging bonds/syndicated loans that will mature by 2020…"
July 10 - Yahoo Finance (Dion Rabouin): "'The pace is indeed a cause for concern,' IIF's Executive Managing Director Hung Tran told Yahoo… 'The problem with the pace and speed is if you borrow or if you lend very quickly … the quality of the credit tends to suffer.' That means more governments, businesses and individuals have been borrowing that could have trouble paying the money back. 'The quality of creditworthiness has declined sharply,' Tran added… Sonja Gibbs, IIF's senior director of the global capital markets department, noted that there was an increased risk of sovereign debt crises in a select few developed markets as a result of the increase of debt and financing costs. 'Government debt is higher than it was prior to the crisis and corporate debt as well,' Gibbs said… Gibbs added that the United States' debt growth was particularly worrisome, given that it has now grown to more than 100% of GDP. With the increases in spending from President Donald Trump and Congress, the U.S. will now have funding needs of 25% of its GDP. 'The U.S. really stands out here because … a lot of that is the expanding budget deficit as well as maturing debt,' Gibbs said. 'That's a lot of financing need affecting the market.'"
U.S. government debt surpassed 100% of GDP during the quarter. Japanese government debt-to-GDP ended the quarter at 224%, the euro area at 101%, the UK at 105% and the emerging markets to 48% of GDP.
To see non-productive U.S. government debt, the foundational "Core" of global finance, inflate so rapidly should be quite distressing. Worse yet, extreme Credit excess is systematic, as debt balloons also at the "Periphery". From my analytical perspective, we're witnessing catastrophic, all-encompassing "Terminal Phase" excess. The first quarter saw emerging market debt rise by $2.5 trillion, or about 18% annualized, to a record $58.5 TN. EM Non-financial Corporate debt surged $1.5 TN, or about 25% annualized, to $31.5 TN - and now exceeds 94% of GDP. One big final blow-off setting the stage for crisis.
From the FT (Jonathan Wheatley): "'The emerging market bond market has grown tremendously over the past decade but trading volumes have not kept pace,' said Sonja Gibbs, senior director at the IIF. 'When you combine a rising rate environment, stronger dollar and low levels of liquidity, you have a recipe for volatility and the exacerbation of any periods of market strain.'"
My thesis holds that the global Bubble has been pierced at the "Periphery." Not atypically, this follows on the heels of remarkable "Terminal Phase Excess," including phenomenal Credit growth and massive "hot money" inflows. The "hot money" has now reversed; de-risking/de-leveraging dynamics are taking hold. Market complacency is at least partially explained by the sizable reserves the emerging markets have accumulated over recent years, resources the marketplace sees available for stabilizing currencies and Credit systems.
July 9 - Wall Street Journal (Chelsey Dulaney): "Emerging-market central banks are tapping a roughly $6 trillion stash of foreign-exchange reserves as they struggle to contain deepening currency declines. Policymakers across the developing world built up foreign reserve buffers over the past year, capitalizing on investor interest in higher-yielding emerging market assets as global growth remained sanguine. In the first five months of 2018, the central banks added $114 billion to their reserves, the fastest pace of accumulation since 2014…"
The problem, also noted by the WSJ: "Emerging-market central banks used roughly $57 billion in foreign reserves in June, which would rank as the largest monthly intervention since late 2016…" Brazil is said to have burned through $44 billion to support its faltering currency. EM reserve data will be monitored closely over the coming weeks and months. Dwindling reserves will incite a rush to the exits.
There's been considerable market focus on recent woes in Brazil, Turkey and Argentina. But from a more global systemic perspective, I would at this point focus on heavily indebted Asia. Interestingly, Asian currencies were down again this week. The Chinese renminbi declined 0.7%, the Japanese yen 1.7%, the South Korean won 0.7%, the Singapore dollar 0.6%, and the Thai baht 0.5%. Over the past month, the renminbi is down 4.4%, the won 4.1%, the baht 3.5%, the Indonesia rupiah 3.2% and the Singapore dollar 2.2%.
The unfolding trade war is indeed a major issue for EM, arriving at a most inopportune juncture. Financial conditions have already tightened meaningfully throughout Asian markets, though I would contend that the issue goes much beyond trade. Let's start with a China Credit Bubble update:
Total Aggregate Finance expanded $176 billion during June, up from May's $115 billion but 16% below estimates. Aggregate Finance grew $1.36 TN during the first-half, about 18% below comparable 2017. The growth in Bank Loans surged $274 billion in June, up from May's $175 billion to the strongest expansion since January. Meanwhile, key "shadow banking" components contracted. At $106 billion, growth in Household (chiefly mortgage) borrowings remained strong.
June's jump in Chinese bank lending surely emboldens those with the view that Beijing has everything in control - that Chinese officials will adeptly commandeer the financial system to ensure sufficient Credit growth and liquidity. It likely won't be that simple. Chinese banks and corporations have issued enormous quantities of marketable debt over recent years, a significant portion denominated in dollars. Moreover, a massive bank lending campaign at this stage of the cycle will not be confidence inspiring.
It's also worth reminding readers than China's international reserve holdings have declined about $900 billion from 2014 highs to $3.112 TN. China now faces the dilemma that their maladjusted economic system will require several trillion ($) of annual Credit growth. Yes, Beijing can dictate lending from state-directed financial institutions. But aggressive reflationary measures risk spurring capital flight and currency turmoil. A disorderly devaluation would be highly problematic for those on the wrong side of dollar-denominated debt.
July 12 - Bloomberg (Lianting Tu and Finbarr Flynn): "A rout in China's dollar-denominated junk bonds is getting worse as mounting defaults send traders running for cover. Rising trade tensions are also adding to longer-existing difficulties created by the nation's push to cut excessive leverage. Junk bonds from China have been more volatile this year than such securities from all of Asia. The average yield for the nation's speculative-rated notes has surged to 10.5%, the highest since 2015, according to ICE BofAML indexes. Few expect a rebound anytime soon."
July 12 - Bloomberg (Andy Mukherjee): "Donald Trump has made Asian high-yield investors nervous wrecks. First, there are the obvious casualties of his trade war against China. Lenovo Group Ltd.'s bonds are down to 87.4 cents on the dollar from more than 100 cents at the start of the year. Then there's the collateral damage of his greenback-boosting, late-cycle fiscal stimulus, which is making investors worried about Asian currency weakness. Indonesian notes are swimming in a sea of red ink… Liquidity in Asian high yield is so bad that, after a little haggling, a bond quoted at 94 cents on the dollar can be had for 91 cents. Sellers are panicking."
After widening 120 bps in four weeks, Asian high-yield spreads on Wednesday were at their widest level since the Chinese mini-crisis back in Q1 2016. China CDS ended last Friday's trading at a 13-month high (73bps). As noted above, the rout over the past two months has left Chinese junk yields at the highs since early-2015.
"[US Treasury] Yield Curve at its Flattest Since August 2007," was a Friday evening Financial Times (Joe Rennison) headline. "The measure is an important signal for investors of when the Federal Reserve may curtail its policy tightening and is also seen as a warning of a coming recession if it turns negative, which last happened in 2006."
I viewed the flat yield curve back in 2007 as more of a warning of Bubble Fragility than an indicator of imminent recession. But with U.S. mortgage finance at the epicenter of the Bubble back then, the bursting Bubble coincided with an abrupt end to Credit expansion and economic growth. I view today's flat Treasury curve as again signaling Bubble Fragility. The big difference, however, is that global (as opposed to U.S.) finance is at today's Bubble epicenter. Heightened fragility in China, Asia and EM, more generally, risks global financial turmoil and economic vulnerability.
The unusual backdrop is creating quite a dilemma for the Federal Reserve. Cracks in the Global Bubble's "Periphery" are putting downward pressure on Treasury yields, in the process loosening U.S. financial conditions in the face of cautious Fed rate increases. The booming U.S. economy at this point beckons for restrictive monetary conditions, yet a more hawkish Fed risks spurring a dollar melt-up and full-fledged EM financial crisis.
The GSCI commodities index sank 3.6% this week. Copper dropped another 1.7%, boosting y-t-d declines to 16%. Zinc fell 5.7% this week, lead 5.6%, Aluminum 2.4% and Platinum 2.1%. WTI Crude dropped 3.8%. In the agriculture commodities, Soybeans dropped 6.7%, Corn 4.9%, Wheat 3.5%, Sugar 4.8% and Coffee 3.8%.
From the currencies to market yields and yield curves to commodities, markets are signaling trouble ahead. The great irony is that Cracks at the Global Periphery now work to prolong "Terminal Phase Excess" at the "Periphery of the Core" - certainly including higher risk U.S. corporate Credit. And booming debt markets feed highly speculative equities and assets Bubbles right along with an overheated U.S. Bubble Economy. After years of Easy Street, central banking has turned into quite a hard challenge.
July 10 - Bloomberg (Danielle DiMartino Booth): "Much has been made of the degradation of the $7.5 trillion U.S. corporate debt market. High yield offers too little, well, yield. And 'high grade' now requires air quotes to account for the growing dominance of bonds rated BBB, which is the lowest rung on the investment-grade ladder before dropping into 'junk' status. And then there's the massive market for leveraged loans, where covenants protecting investors have all but disappeared. How does that break down? Corporate bonds rated BBB now total $2.56 trillion, having surpassed in size the sum of higher-rated debentures, which total $2.55 trillion, according to Morgan Stanley. Put another way, BBB bonds outstanding exceed by 50% the size of the entire investment grade market at the peak of the last credit boom, in 2007… In 2000, when BBB bonds were a mere third of the market, net leverage (total debt minus cash and short term investments divided by earnings before interest, taxes, depreciation and amortization) was 1.7 times. By the end of last year, the ratio had ballooned to 2.9 times."
For the Week:
The S&P500 rallied 1.5% (up 4.8% y-t-d), and the Dow jumped 2.3% (up 1.2%). The Utilities fell 1.0% (down 0.5%). The Banks increased 0.2% (down 2.0%), and the Broker/Dealers added 0.5% (up 3.4%). The Transports gained 0.7% (down 0.6%). The S&P 400 Midcaps increased 0.3% (up 5.0%), and the small cap Russell 2000 slipped 0.4% (up 9.9%). The Nasdaq100 advanced 2.3% (up 15.3%). The Semiconductors declined 0.6% (up 7.0%). The Biotechs rose 2.2% (up 21.2%). With bullion down $14, the HUI gold index sank 3.2% (down %).
Three-month Treasury bill rates ended the week at 1.90%. Two-year government yields rose four bps to 2.58% (up 70bps y-t-d). Five-year T-note yields added a basis point to 2.73% (up 52bps). Ten-year Treasury yields slipped a basis point to 2.83% (up 42bps). Long bond yields were unchanged at 2.93% (up 19bps). Benchmark Fannie Mae MBS yields declined one basis point to 3.56% (up 56bps).
Greek 10-year yields fell 10 bps to 3.83% (down 24bps y-t-d). Ten-year Portuguese yields dropped seven bps to 1.73% (down 21bps). Italian 10-year yields sank 16 bps to 2.55% (up 54bps). Spain's 10-year yields declined five bps to 1.26% (down 30bps). German bund yields rose five bps to 0.34% (down 9bps). French yields dipped two bps to 0.62% (down 17bps). The French to German 10-year bond spread narrowed seven to 28 bps. U.K. 10-year gilt yields added a basis point to 1.27% (up 8bps). U.K.'s FTSE equities index increased 0.6% (down 0.3%).
Japan's Nikkei 225 equities index rallied 3.7% (down 0.7% y-t-d). Japanese 10-year "JGB" yields increased one basis point to 0.04% (down 1bp). France's CAC40 gained 1.0% (up 2.2%). The German DAX equities index increased 0.4% (down 2.9%). Spain's IBEX 35 equities index fell 1.7% (down 3.1%). Italy's FTSE MIB index slipped 0.2% (up 0.2%). EM equities were mixed. Brazil's Bovespa index gained 2.1% (up 0.3%), while Mexico's Bolsa fell 1.2% (down 1.9%). South Korea's Kospi index rallied 1.7% (down 6.3%). India’s Sensex equities index jumped 2.5% (up 7.3%). China’s Shanghai Exchange recovered 3.1% (down 14.4%). Turkey's Borsa Istanbul National 100 index sank 8.9% (down 22.1%). Russia's MICEX equities index was little changed (up 11.2%).
Investment-grade bond funds saw outflows of $2.859 billion, while junk bond funds had inflows of $1.852 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.53% (up 50bps y-o-y). Fifteen-year rates gained three bps to 4.02% (up 73bps). Five-year hybrid ARM rates jumped 12 bps to 3.86% (up 58bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.56% (up 45bps).
Federal Reserve Credit last week declined $9.1bn to $4.251 TN. Over the past year, Fed Credit contracted $176bn, or 4.0%. Fed Credit inflated $1.440 TN, or 51%, over the past 297 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.7bn last week to $3.405 TN. "Custody holdings" were up $82.9bn y-o-y, or 2.5%.
M2 (narrow) "money" supply gained $8.3bn last week to a record $14.141 TN. "Narrow money" gained $622bn, or 4.6%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits rose $8.3bn, while Savings Deposits declined $8.0bn. Small Time Deposits gained $3.2bn. Retail Money Funds added $2.2bn.
Total money market fund assets jumped $28.9bn to $2.851 TN. Money Funds gained $224bn y-o-y, or 8.5%.
Total Commercial Paper rose $10.0bn to $1.075 TN. CP gained $114bn y-o-y, or 11.9%.
Currency Watch:
The U.S. dollar index gained 0.8% to 94.677 (up 2.8% y-t-d). For the week on the upside, the South African rand increased 1.5%, the Mexican peso 0.8% and the Brazilian real 0.3%. For the week on the downside, the Swedish krona declined 1.8%, the Japanese yen 1.7%, the Swiss franc 1.2%, the New Zealand dollar 1.1%, the Norwegian krone 1.1%, the South Korean won 0.7%, the Canadian dollar 0.6%, the Singapore dollar 0.6%, the euro 0.5%, the British pound 0.5% and the Australian dollar 0.1%. The Chinese renminbi declined 0.73% versus the dollar this week (down 2.76% y-t-d).
Commodities Watch:
July 12 - Bloomberg (Robert Burgess): "Plunge, tumble and rout are overused by the financial media to describe a market in decline, but such superlatives would not be out of place to describe what's happening to commodities. The Bloomberg Commodity Index of 25 raw materials ranging from oil to copper to cattle dropped as much as 2.80% on Wednesday, the most since 2014, before closing at its lowest level since December. That brought the gauge's decline to 8.88% from this year's peak in late May."
July 11 - Reuters (Manolo Serapio Jr): "Copper, zinc and lead prices slumped to their weakest in about a year and other metals also sank in a broad selloff on Wednesday after the United States raised the stakes in a trade war with China with threats of more tariffs. The Trump administration said it would slap 10% tariffs on another $200 billion worth of Chinese imports, raising fears the festering trade dispute between the world's two biggest economies could hit global growth."
July 11 - MarketWatch (Myra P. Saefong and Sarah McFarlane): "Oil futures finished sharply lower Wednesday, with the U.S. benchmark registering its sharpest daily slump in about 13 months as fears of flagging demand and renewed production from Libya overshadowed a report showing the biggest weekly drop in domestic crude supplies in nearly two years. August WTI crude, the U.S. benchmark, fell $3.73, or 5%, to $70.38 a barrel…"
The Goldman Sachs Commodities Index sank 3.6% (up 4.7% y-t-d). Spot Gold lost 1.1% to $1,241 (down 4.7%). Silver dropped 1.6% to $15.815 (down 7.8%). Crude dropped $2.79 to $77.01 (up 18%). Gasoline was little changed (up 17%), while Natural Gas sank 3.7% (down 7%). Copper dropped 1.7% (down 16%). Wheat fell 3.5% (up 16%). Corn sank 4.9% (up 1%).
Trump Administration Watch:
July 11 - Bloomberg (Brendan Scott and Enda Curran): "U.S. President Donald Trump is pushing his trade conflict with China toward a point where neither side can back down. By Aug. 30, as the U.S. nears mid-term elections vital for Trump's legislative agenda, the White House will be ready to impose 10% tariffs on $200 billion of Chinese-made products, ranging from clothing to television parts to refrigerators. The levies announced Tuesday -- together with some $50 billion already in the works -- stand to raise import prices on almost half of everything the U.S. buys from the Asian nation. China has seven weeks to make a deal or dig in and try to outlast the U.S. leader. President Xi Jinping, facing his own political pressures to look tough, has vowed to respond blow-for-blow."
July 11 - Bloomberg (Saleha Mohsin, Jenny Leonard, Jennifer Jacobs and Andrew Mayeda): "High-level trade talks between the U.S. and China have ground to a halt as the Trump administration threatens to escalate a trade war that shows little sign of abating, according to five people familiar… The countries held three rounds of formal negotiations since May, led by U.S. Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross and Vice Premier Liu He in China. But communications between senior members of the Trump and Xi administrations have petered out, and there's no immediate plan to restart the formal talks…"
July 6 - Wall Street Journal (Bob Davis): "The U.S. economy's strength is emboldening the Trump administration to play hardball in its trade offensive against China. Tariffs tend to be economic downers with an impact like sales taxes, which push up costs for consumers and businesses and slow growth. But so far it is tough to argue that the spat with China is having a broad macroeconomic impact. Economic output in the second quarter is estimated by many economists to have expanded at a 4% annual rate or more, roughly twice the pace of the nine-year-old expansion."
July 7 - Associated Press: "High-level talks between the United States and North Korea appeared to hit a snag… as Pyongyang said a visit by U.S. Secretary of State Mike Pompeo had been 'regrettable' and accused Washington of making 'gangster-like' demands to pressure the country into abandoning its nuclear weapons. The statement from the North came just hours after Pompeo wrapped up two days of talks with senior North Korean officials without meeting North Korean leader Kim Jong Un…"
July 9 - Reuters (Susan Heavey and David Brunnstrom): "President Donald Trump suggested on Monday that China might be seeking to derail U.S. efforts aimed at denuclearizing North Korea, but said he was confident that North Korean leader Kim Jong Un would uphold a pact the two agreed last month."
July 10 - Reuters (Jeff Mason, Robin Emmott, Alissa de Carbonnel): "U.S. President Donald Trump accused Germany on Wednesday of being a 'captive' of Russia due to its energy reliance, before a NATO summit where he pressed allies to more than double defense spending. Having lambasted NATO members for failing to reach a target of spending 2% of national income on defense, Trump told fellow leaders in Brussels he would prefer a goal of 4%, similar to U.S. levels, officials said."
Federal Reserve Watch:
July 11 - Wall Street Journal (Nick Timiraos): "The boost to U.S. economic growth from recent tax cuts and spending increases, together with more-stable price pressures, has made Federal Reserve officials comfortable with raising interest rates more than they anticipated earlier this year. Among them is Federal Reserve Bank of Chicago President Charles Evans… In an interview Monday, he said he is now comfortable with one or two more Fed rate increases this year, following on the central bank's two moves so far this year. 'The economy seems so strong it seems natural that businesses and consumers can live with' slightly higher interest rates, he said… Mr. Evans's comments echo those of Fed governor Lael Brainard, another once-prominent advocate for a slow pace of rate increases who has recently shifted toward warning against the dangers of letting the economy overheat."
July 12 - CNBC (Michael Sheetz): "Members of the Federal Reserve are telegraphing two more rate hikes this year, with Federal Open Market Committee voting member Loretta Mester… repeating the central bank's expectation for the next six months. 'The economy can certainly handle two more increases this year,' Mester, the president of the Cleveland branch of the Fed, said… 'We could end up getting behind if we don't keep moving things up, so I'm very comfortable, if the economy stays on the path it's going that we move rates up as appropriate this year.'"
July 11 - Reuters (Howard Schneider and Lindsay Dunsmuir): "Federal Reserve officials are scouring new niches of the financial markets to find signals accurate enough to warn the central bank when it is time to stop hiking interest rates before they risk tipping the economy into a recession… New research from staff economists Eric Engstrom and Steven Sharpe, presented at the Fed's June meeting, suggests that some of the traditional warning signs of recession, such as the gap in interest rates between 10-year and 2-year Treasuries, may not be as powerful as analysis that focuses on shorter term rates."
U.S. Bubble Watch:
July 12 - Bloomberg (Reade Pickert): "The U.S. budget deficit widened by 16% to $607 billion three-quarters of the way through Donald Trump's first full fiscal year as president, as spending accelerated faster than revenue. The shortfall in the nine months through June was larger than the $523 billion gap in the same period of fiscal 2017… Revenue rose to $2.54 trillion in the period, up 1.3% from a year earlier. Spending rose 3.9% to $3.15 trillion."
July 11 - Reuters (Richard Leong): "The U.S. economy is growing at a 3.9% annualized rate in the second quarter following the latest data on domestic wholesale inventory and producer prices, the Atlanta Federal Reserve's GDPNow forecast model showed…"
July 8 - CNBC (Michael Ivanovitch): "America's foreign trade deficits on goods transactions are getting worse. After an increase of 7.7% in 2017, those deficits were growing in the first five months of this year at an almost identical annual rate. Particularly disappointing is the fact that there is no progress at all in bringing trade deficits down with the European Union and China. The deficit with those two large economic systems came in at $218 billion during the January-May period, accounting for nearly two-thirds (64%) of America's total trade gap. That deficit was 11.3% more than recorded over the same interval of last year…"
July 11 - Reuters (Lucia Mutikani): "U.S. producer prices increased more than expected in June amid gains in the cost of services and motor vehicles, leading to the biggest annual increase in 6-1/2 years… The producer price index for final demand climbed 0.3% last month after rising 0.5% in May. That pushed the annual increase in the PPI to 3.4%, the largest rise since November 2011, from 3.1% in May."
July 12 - Reuters: "U.S. consumer prices barely rose in June, but the underlying trend continued to point to a steady buildup of inflation pressures… Consumer Price Index edged up 0.1% as gasoline price increases moderated and apparel prices fell. The CPI rose 0.2% in May. In the 12 months through June, the CPI increased 2.9%, the biggest gain since February 2012… Excluding the volatile food and energy components, the CPI rose 0.2%, matching May's gain. That lifted the annual increase in the so-called core CPI to 2.3%, the largest rise since January 2017…"
July 10 - Financial Times (Andrew Edgecliffe-Johnson): "Stock buyback announcements by US companies smashed records in the second quarter, feeding the debate over how boardrooms are spending their windfall from the Republican tax cuts… The almost $437bn in buyback plans announced in the three months to June 30 eclipsed the previous quarterly record of $242bn, which was set just three months earlier, according to TrimTabs… 'Corporate America's actions suggest that most of the benefits of the corporate tax cut will flow to investors in general and top corporate executives in particular,' TrimTabs said."
July 8 - Wall Street Journal (Rachel Louise Ensign): "Business borrowing is picking up, a welcome relief for banks and a sign of strength for the U.S. economy. Preliminary second-quarter data from the Federal Reserve indicate the year-over-year growth rate of business loans rose to 5.5% in late June from less than 1% near the end of 2017. The upturn marks the reversal of a prolonged slump in business-loan growth that began in earnest about two years ago. The rebound reflects increased confidence at companies."
July 9 - Associated Press: "Americans increased their borrowing in May at the fastest pace in a year and a half, boosted by a big increase in credit card borrowing. Consumer debt rose $24.5 billion in May after an increase of $10 billion in April… It was the biggest monthly increase since a rise of $24.8 billion in November 2016. The category that includes credit cards climbed $16.3 billion in May after increasing by $5 billion in April."
July 12 - Bloomberg (Alex Tanzi and Wei Lu): "The financial burden of living in coastal neighborhoods reveals itself quickly in the Bloomberg study. San Francisco, Seattle, Portland, Jacksonville, and the Bridgeport-Stamford-Norwalk, Connecticut area rounded out the top five areas with the fastest increase in mortgage payments… Slightly over 10% of all metro areas saw rents rising faster than inflation. In three locations, rents increased by more than 5%. Overall, eight of the top 20 most expensive markets are in California, with three of them among the 100 largest metro areas in the U.S. San Jose, San Francisco and Los Angeles are the three priciest markets… In nine metro regions, aggregate housing costs breached 50% of income."
July 11 - CNBC (Diana Olick): "A slight increase in the number of homes for sale may be helping to juice the mortgage market. After falling for two straight weeks, mortgage application volume rose 2.5% last week… Mortgage applications to purchase a home jumped 7% for the week and were 8% higher than the same week one year ago. Potential homebuyers have been blocked by a severe shortage of homes for sale this year, but more listings have been coming on the market."
July 6 - CNBC (Matt Rosoff): "The average price of a house bought in San Francisco rose by $205,000 in the first half of 2018, the largest six-month increase in history… The average house in the city limits now costs $1.62 million. Condo prices also rose by $71,000, which is a significantly slower pace of change than in past years, but still comes in at a startling $1.21 million. This is a direct outgrowth of the current tech boom in Silicon Valley, which shows no signs of slowing down."
July 10 - CNBC (Scott Cohn): "Seattle-area real estate agent Jerry Martin said he first entered the business in 1977, which means he remembers the days of double-digit mortgage rates and multiple booms and busts. That includes the bubble in 2006 and 2007 and the historic collapse that followed. None of that, he said, quite compares to the 'craziness' that has been going on lately. 'It would not be unreasonable for a three-bedroom, one-and-three-quarter bath, 1,500-square-foot home to go on the market and within the hour or two you're looking at multiple offers,' he told CNBC. 'We've had situations where 20, 30 offers were coming in on a piece of property.' The Washington state housing market is the hottest in the country. Prices increased nearly 4% in the first quarter…"
July 12 - Bloomberg (Prashant Gopal): "Got a million bucks to spend on a new home? Good. Just don't expect a palace. The starting price for the most expensive 5% of U.S. residential properties sold in April was at least $1 million in more than half the luxury markets Realtor.com analyzed for its latest report. Sales of million-dollar-plus real estate jumped 25% from April of last year… That's the biggest sales increase in high-end homes since January 2014 and more than twice this January's pace."
July 9 - Wall Street Journal (Ryan Dezember and Laura Kusisto): "Wall Street is betting that more well-off Americans will want to be renters. Financiers who loaded up on homes after the housing bust for pennies on the dollar are buying yet more-despite home prices in many markets being at all-time highs. The number of homes purchased by major investors in 2017 was at least 29,000, up 60% from the previous year, estimates Amherst Capital Management LLC…"
July 10 - Reuters (Lucia Mutikani): "More American workers voluntarily quit their jobs in May, …a sign of confidence in the labor market that economists say will soon boost wage growth. That lifted the quits rate one-tenth of a percentage point to 2.4%, the highest since April 2001."
July 8 - CNBC (Matt Lavietes): "In late June, employees at Salesforce.com completed a task that's becoming common in Silicon Valley. They protested. Thousands of tech workers from top companies, including Google, Amazon and Microsoft, have recently led large-scale internal rebellions against their employers. The wave of employee outrage is largely over the use of companies' technology in controversial government contracts - from facial recognition software sold to law enforcement, to drone technology for the military and work with U.S. Immigration and Customs Enforcement."
China Watch:
July 12 - Reuters (Yawen Chen): "China's commerce ministry said on Thursday that China has not been in touch with the United States about restarting trade negotiations and said complaints about forced technology transfers and IP theft are unacceptable. China does not want a trade war, but it does not fear one and would fight if necessary, ministry spokesman Gao Feng told reporters…"
July 11 - Financial Times (Keyu Jin): "As the US-China trade dispute ramps up, with the announcement of $200bn-worth of new tariffs on Chinese imports, Beijing is savouring a quote from Mao Zedong. In a contest with a foe of great strength, Mao said, 'injuring all of a man's 10 fingers is not as effective as chopping off one, and routing 10 enemy divisions is not as effective as annihilating one of them'. China is adopting the same strategy in dealing with rising trade tensions. The concern in Beijing is that this trade war is not really about surpluses or unfair practices, but about Chinese aspiration. In the Bill Clinton era, the US viewed China as a 'constructive strategic partner'. The administration of George W Bush saw the Chinese as 'responsible stakeholders', while Barack Obama sought to build a relationship with Beijing based on 'mutual respect'. But by the time of the Trump administration's first national security strategy, …China had become the US's principal 'competitor'. So what does 'chopping off one finger' signify in this context? It means focusing on pain points; going after a narrow set of products in the US, goods which have easy substitutes readily available in other markets - soyabeans from South America, for instance."
July 8 - Reuters: "China's offshore dollar debt crackdown could boomerang on the faltering yuan. Officials are moving to curb overseas currency bond issuance by Chinese firms, in particular indebted real estate developers. This could put more downward pressure on the exchange rate, and possibly on the country's $3.1 trillion foreign exchange reserves. The National Development and Reform Commission… said last month that real estate firms should issue new dollar-denominated bonds primarily to repay existing debt. Thomson Reuters IFR also reported that officials are giving oral guidance to private issuers restricting short-term dollar bond issues."
July 12 - Bloomberg (Ben Bartenstein and Giulia Morpurgo): "Donald Trump's tariff barrage pushed Chinese markets into their worst selloff since a shocking currency devaluation three years ago. The offshore yuan fell the most since August 2015…, as the White House said it's ready to impose 10% tariffs on $200 billion of Chinese-made products. Beijing said it would be forced to retaliate, describing the move as 'totally unacceptable.' Meanwhile, the iShares China Large-Cap exchange-traded fund extended a two-day slide to 2.5%. 'It's going to be difficult to find some place to hide," said David Lebovitz, global strategist at JPMorgan Asset Management… China can allow the currency to weaken a bit further, but at some point it will step in as too much weakness would be counterproductive, according to him."
July 8 - Financial Times (Gabriel Wildau and Yizhen Jia): "China is retreating from a policy that has channelled about $1tn in subsidies to homebuyers since 2016, a reversal that has sent tremors through the country's residential property market amid broader concerns about a housing bubble. Mainland property shares have tumbled since an executive from China Development Bank said… this month that CDB was tightening loan approvals for the subsidy programme. CDB, the state-owned policy bank with $2.4tn in assets, is the main source of loans for China's slum redevelopment policy, which began as a lending programme to support urban renewal but evolved into cash payments for displaced residents."
July 10 - Wall Street Journal (Jacky Wong): "China's crackdown on shadow banking has caused some high-profile blowups. Now it's driving the country's car makers off course. One big target for Beijing has been the proliferation of peer-to-peer lending platforms-total transactions on these ballooned to 2.8 trillion yuan ($423bn) last year, more than 10 times the total in 2014… The worry is that such platforms have become a hotbed for embezzlement, or could simply run out of money. Local media reported dozens of them collapsing in the past few months alone. About 20% of the platforms in existence last year disappeared in the first half… New rules introduced late last year to tame growth in P2P lending seem to be hitting the auto sector now."
July 9 - Reuters (Lusha Zhang and Elias Glenn): "China's producer inflation accelerated to a six-month high in June… The producer price index (PPI) …rose by a stronger-than-expected 4.7% in June from a year earlier, compared with a 4.1% increase in May… The consumer price index (CPI) rose 1.9% in June from a year earlier, in line with expectations for a slight pick-up from May's gain of 1.8%."
July 10 - Bloomberg: "For a lens on how China's stock market rout is affecting companies and brokerages, consider Hubei Broadcasting & Television Information Network Co.'s recent convertible bond sale. The… operator of a digital television network sought to sell 1.7 billion yuan ($256 million) of six-year securities, but investors only subscribed for about two-thirds of the offering… The sole bookrunner, Zhongtai Securities Co., ended up buying the remaining notes, putting the brokerage on the hook for losses… The deal underlines the funding pressures that are squeezing Chinese companies, with convertible debt -- once so popular with investors that gains were all but guaranteed -- becoming a harder sell as stocks languish near two-year lows."
July 11 - Bloomberg: "International investors have long fretted over the inflated credit scores Chinese domestic rating firms assign to local bonds. This latest example shows their worry may be well justified. Yields on coal producer Zhongrong Xinda Group Co.'s yuan bond maturing in August surged to 335%... amid concern defaults by its shareholder and business partner Wintime Energy Co. will hurt the company's operations. Yet United Ratings still has a AAA score on Zhongrong Xinda and many of its bonds including the one due next month."
EM Watch:
July 10 - Wall Street Journal (Christopher Whittall, Yeliz Candemir and Ira Iosebashvili): "Global investors who were once eager to buy any dip in emerging markets are now backing away, fearing that a big tumble could herald more weakness ahead… Global money that flowed into developing countries last year is slowing considerably. Flows into emerging market stocks and bonds have been $59.7 billion this year, down from $167.6 billion in the same time in 2017… A stronger dollar and higher yields in the U.S. have made it more difficult for investors to ignore shortcomings in countries like Turkey, where external debt stands at 53.4% of gross domestic product…"
July 11 - Financial Times (Laura Pitel and Adam Samson): "Turkish equities, bonds and the lira took a hammering on Wednesday as President Recep Tayyip Erdogan predicted a fall in interest rates and investors fretted over the health of the country's economy. Asked about a slide in the Turkish lira since he announced his new cabinet at the start of the week, the newly re-elected Turkish president told journalists that a combined treasury and finance ministry headed by his son-in-law 'will of course do whatever is necessary', according to Hurriyet newspaper… Turkey must find about $200bn a year in foreign financing - most of it in the form of short-term 'hot money' flows - to fund the current account deficit as well as maturing debt."
July 10 - Wall Street Journal (Julie Wernau and Ira Iosebashvili): "Emerging markets could become collateral damage in an escalating trade conflict where the U.S. is squaring off against China and Europe. The first tariffs levied by the U.S. and China went into effect Friday, but worries over the trade spat have already rippled through a broad range of emerging markets, hurting prices for stocks, bonds and currencies from Indonesia to Brazil. Export-dependent Asian economies may be especially vulnerable, and major stock markets in the region have tumbled in recent weeks. A significant portion of U.S.-bound exports from countries like Malaysia, South Korea and Thailand pass through China, thanks to its central role in the global supply chain."
July 10 - Financial Times (Laura Pitel): "Recep Tayyip Erdogan has gained the power to appoint the governor of Turkey's central bank and hundreds of other senior officials, unnerving markets as the country's new executive presidency comes into force. The Turkish leader issued his first set of presidential decrees just hours after being sworn into office, triggering the transition to a muscular system of governance that Mr Erdogan has sought for years."
July 10 - Financial Times (Laura Pitel): "From the moment he entered politics just three years ago, it was clear that Berat Albayrak would not be constrained by the limits of his official energy brief. As the son-in-law of President Recep Tayyip Erdogan, the former business executive soon found himself setting out the Turkish government's position on military operations, joining high level overseas visits and accompanying his wife's father on the campaign trail. Few expected, however, that Mr Erdogan would be bold enough to put his 40-year-old protégé in sole charge of the economy at a time of mounting concerns about its health."
July 10 - New York Times (Peter S. Goodman): "Looming like a fortress over the Black Sea, Istanbul's new airport has been engineered to provoke awe, underscoring Turkey's desire to reclaim its imperial glory. The project is expected to cost nearly $12 billion and carve six runways across a swath of land as big as Manhattan. When completed in a decade, the complex is supposed to transport some 200 million people a year, dwarfing all rivals as the busiest airport on the planet. But the airport has also become a symbol of a less savory aspect of Turkey's modern-day incarnation: its reckless disregard for arithmetic and the independence of critical government institutions. Together, they have placed the nation at growing risk of sliding into a financial crisis. In a global economy increasingly plagued by worries… Turkey may present the most immediate cause for alarm."
July 8 - BBC: "Turkey has sacked another 18,000 state workers, in the latest purge triggered by a failed coup two years ago. Those dismissed include soldiers, police and academics. A TV channel and three newspapers have also been closed. Since the coup attempt the government has fired more than 125,000 people, introduced emergency rule and clamped down on the media and the opposition."
July 12 - Bloomberg (Lilian Karunungan, Jasmine Ng and Abhishek Vishnoi): "For Mark Mobius, there may be worse to come even after the U.S. fired new shots in its trade war with China: a further 10% drop in emerging-market stocks and a global financial crisis. 'There's no question we'll see a financial crisis sooner or later because we must remember we're coming off from a period of cheap money,' the veteran investor in developing nations said… 'There's going to be a real squeeze for many of these companies that depended upon cheap money to keep on going.'"
Central Bank Watch:
July 9 - Financial Times (Claire Jones): "Mario Draghi has delivered a bullish assessment of the eurozone's economic prospects, saying monetary stimulus undertaken by policymakers had been and would continue to be 'very effective' in boosting growth and inflation. The European Central Bank chief told lawmakers at the European Parliament… that the measures - which include negative interest rates and a €2.4tn bond-buying programme - would boost growth and inflation… The ECB is starting to unwind the strategy measures, which were unleashed in 2014 and 2015 to counter the threat of weak growth triggering a severe bout of deflation."
July 9 - Bloomberg (Piotr Skolimowski and Alexander Weber): "Mario Draghi said the improvement in euro-area inflation is on a self-sustained path as he struck a confident tone that the European Central Bank can withdraw its stimulus despite the rising specter of a global trade war. Addressing European Parliament lawmakers, the ECB president urged the region's governments to lead by example by pushing back against creeping protectionism, which he singled out as the main risk for the area's economic expansion."
July 12 - Financial Times (Claire Jones): "The eurozone's central bankers are set to call time on the expansion of their €2.5tn bond buying spree later this year because they are increasingly convinced the region's economy is now strong enough to take the slow withdrawal of some of their crisis era support, according to accounts of the European Central Bank's June policy vote. The ECB's governing council voted unanimously to lower the amount of bonds it buys each month under its landmark quantitative easing programme from €30bn to €15bn in September, before ending the purchases for good after December…. Rates will remain on hold at their current record lows of zero for the main refinancing rate and minus 0.4% for the deposit rate 'at least through the summer of 2019'."
July 11 - Reuters (Larry King): "European Central Bank policymakers are split over when the ECB might raise interest rates next year, with some saying an increase is possible as early as July 2019 and others ruling out a move until autumn, according to several sources… Some expressed annoyance with an overly dovish message by ECB President Mario Draghi that pushed rate hike expectations to December, a date hawks consider too late."
July 7 - Wall Street Journal (Tom Fairless): "The decision on who will succeed Mario Draghi as European Central Bank president is still a year away, but the jockeying for position is already under way. The 19 countries that use the euro are preparing for a delicate political dance that will decide who will steer the eurozone economy away from years of easy-money policies. The favorite, Jens Weidmann, the conservative president of Germany's central bank, risks becoming a lightning rod for criticism of the nation's dominance of the $14 trillion currency bloc."
Global Bubble Watch:
July 11 - Bloomberg (Shannon D. Harrington, Sally Bakewell, Christopher Cannon and Mathieu Benhamou): "Masayoshi Son and Elon Musk leveraged their dreams to the hilt. Patrick Drahi stockpiled debt to build a global cable empire. Michael Dell loaded his computer company with risky loans to buy out activists threatening his control. And a group of Chinese developers borrowed big to expand in the nation's booming property market. Call them the titans of junk. They're the headliners in a decade-long, $11 trillion corporate borrowing frenzy, fueled by central banks that flooded the global financial system with ultra-cheap money. Investors have been lending to virtually anyone willing to pay a decent yield. But now the easy money is coming to an end… For many companies, it will bring new financial pressures… Bloomberg News delved into corporate filings, debt offerings, M&A deal tables and bond indexes to find the biggest beneficiaries of this decade of loose lending. The search identified 69 companies spanning the globe that have boosted their debt levels by 50% or more in the past five years and now have at least $5 billion of debt. Together, they're sitting on almost $1.2 trillion of bonds and loans, most of it rated junk…"
Europe Watch:
July 12 - Bloomberg (Patrick Donahue): "German Chancellor Angela Merkel said European defense spending and trade with the U.S. are separate issues, rejecting a link made by President Donald Trump. Merkel's comments came at the end of a North Atlantic Treaty Organization summit marked by the U.S. president's renewed demands for European NATO allies, and Germany in particular, to pay a greater share of the alliance's defense spending. At a news conference in Brussels on Thursday, Trump again appeared to link European willingness to be forthcoming on defense spending to U.S. trade conflicts with the European Union."
July 8 - Financial Times (Kate Allen and Claire Jones): "A widely watched measure of eurozone capital flows suggests that Italy's debts to the European Central Bank are set to hit €500bn this summer, reflecting the eurozone's persistent financial imbalances. The country's Target 2 balance - the difference between incoming and outgoing cross-border payments - is €480bn in the red and growing rapidly… Meanwhile, Germany's Target 2 surplus is on track to reach €1tn. Target 2 was set up by the ECB and eurozone national central banks to allow banks to make large payments to one another quickly. More than 1,700 banks use it to transact with one another."
July 10 - Bloomberg (Patrick Donahue and Birgit Jennen): "German Chancellor Angela Merkel praised China for opening up to foreign investment, drawing a contrast with trade conflicts burdening both countries' relations with the U.S. Merkel's positive take followed a meeting on Monday in Berlin with Chinese Prime Minister Li Keqiang, who presented himself as an ally in her defense of rules-based global trade. They also agreed that they want to preserve a nuclear accord with Iran that President Donald Trump has ditched."
July 10 - ActionForex.com: "Italian European Affairs Minister Paolo Savona warned… that the country had to be ready for 'all eventualities' on its Eurozone membership. He told a panel in the Senate that 'we may find ourselves in a position where it's not we who decide but others.' Hence, 'my position regarding a Plan B … is that we have to be ready for all eventualities.'"
July 10 - Financial Times (Claire Jones): "House prices across the eurozone are rising at their fastest since before the global financial crisis, forcing the region's banks to squeeze the supply of credit to would-be mortgage holders. …House prices in the 19-member currency area rose 4.5% in the year to the first quarter of 2018 - a level last seen in early 2007. Five countries - Latvia, Slovenia, Ireland, Portugal and Slovakia - saw double-digit price rises."
Brexit Watch:
July 9 - Bloomberg (Thomas Penny, Kitty Donaldson, Robert Hutton and Timothy Ross): "Prime Minister Theresa May battled to stave off a full-blown crisis after three ministers quit within 24 hours to protest her Brexit plan. The resignation of Foreign Secretary Boris Johnson, the face of the campaign to leave the European Union in 2016, compounded the chaos in government following the departures of Brexit Secretary David Davis and his deputy late Sunday."
Fixed Income Bubble Watch:
July 12 - Bloomberg (Sally Bakewell): "Wall Street's junk war is heating up. On one side are major banks, which are diving back into high-risk corporate lending now that U.S. regulators have loosened up. On the other are so-called shadow lenders -- private equity shops, boutique banks and other financial players that muscled in on this business when regulators restrained the big banks five years ago. The result: ever-growing competition to provide junk-rated debt used in corporate takeovers. It could turn out to be a 'race to the bottom,' said Frank Ossino, a senior portfolio manager at Newfleet Asset Management… For the $2.3 trillion-plus market in junk bonds and leveraged loans, the question is whether all this competition ultimately brings new, greater risks."
Leveraged Speculator Watch:
July 11 - Bloomberg (Dani Burger): "The dog days of summer have arrived for quants. Systematic traders who tie their fortunes to the ebbs and flows of stock markets are experiencing some of their worst returns in eight years… Factor investing -- which slices and dices equities based on traits like profitability and price volatility -- has buckled while the broader market has stayed afloat. For example, AQR Capital Management LLC's $1.9 billion mutual fund, one of the largest in the sector, last month nursed its steepest loss since inception. It's all adding insult to injury for quants struggling to make money this year as equity volatility awakens and economic angst builds… A market-neutral version of value -- which bets on companies priced cheaply while offsetting the broader market --rounded off its worst quarter since 2011. Meanwhile, momentum, which bets on the highest fliers like tech stocks, saw its biggest monthly drawdown in more than two years… Only 17% of large-cap active quant mutual funds outperformed the Russell 1000 index in June, the worst monthly showing in more than eight years…"
July 9 - Wall Street Journal (Mengqi Sun): "Hedge funds have long touted their ability to do better when things turn volatile. But they lagged behind the S&P 500 for the first half of 2018 despite market swings tied to trade policy tensions and interest rate increases. A widely followed hedge-fund index maintained by data research company HFR dropped 0.46% in June… The index rose .81% in the first two quarters, which is lower than the 2.65% return on the S&P 500… The only large category of hedge funds that posted an increase in June were funds that seek to capitalize on mergers and acquisitions… Those that specialized in stock picking and macroeconomic analysis posted declines."
Geopolitical Watch:
July 7 - Reuters (Phil Stewart, Idrees Ali and Jess Macy Yu): "Two U.S. warships passed through the Taiwan Strait on Saturday on a voyage that will likely be viewed in the self-ruled island as a sign of support by President Donald Trump amid heightened tension with China… Washington has no formal ties with Taiwan but is bound by law to help it defend itself and is the island's main source of arms. China regularly says Taiwan is the most sensitive issue in its ties with the United States."
July 11 - Bloomberg (Shannon D. Harrington, Sally Bakewell, Christopher Cannon and Mathieu Benhamou): "Masayoshi Son and Elon Musk leveraged their dreams to the hilt. Patrick Drahi stockpiled debt to build a global cable empire. Michael Dell loaded his computer company with risky loans to buy out activists threatening his control. And a group of Chinese developers borrowed big to expand in the nation's booming property market. Call them the titans of junk. They're the headliners in a decade-long, $11 trillion corporate borrowing frenzy, fueled by central banks that flooded the global financial system with ultra-cheap money. Investors have been lending to virtually anyone willing to pay a decent yield. But now the easy money is coming to an end… For many companies, it will bring new financial pressures… Bloomberg News delved into corporate filings, debt offerings, M&A deal tables and bond indexes to find the biggest beneficiaries of this decade of loose lending. The search identified 69 companies spanning the globe that have boosted their debt levels by 50% or more in the past five years and now have at least $5 billion of debt. Together, they're sitting on almost $1.2 trillion of bonds and loans, most of it rated junk…"
Europe Watch:
July 12 - Bloomberg (Patrick Donahue): "German Chancellor Angela Merkel said European defense spending and trade with the U.S. are separate issues, rejecting a link made by President Donald Trump. Merkel's comments came at the end of a North Atlantic Treaty Organization summit marked by the U.S. president's renewed demands for European NATO allies, and Germany in particular, to pay a greater share of the alliance's defense spending. At a news conference in Brussels on Thursday, Trump again appeared to link European willingness to be forthcoming on defense spending to U.S. trade conflicts with the European Union."
July 8 - Financial Times (Kate Allen and Claire Jones): "A widely watched measure of eurozone capital flows suggests that Italy's debts to the European Central Bank are set to hit €500bn this summer, reflecting the eurozone's persistent financial imbalances. The country's Target 2 balance - the difference between incoming and outgoing cross-border payments - is €480bn in the red and growing rapidly… Meanwhile, Germany's Target 2 surplus is on track to reach €1tn. Target 2 was set up by the ECB and eurozone national central banks to allow banks to make large payments to one another quickly. More than 1,700 banks use it to transact with one another."
July 10 - Bloomberg (Patrick Donahue and Birgit Jennen): "German Chancellor Angela Merkel praised China for opening up to foreign investment, drawing a contrast with trade conflicts burdening both countries' relations with the U.S. Merkel's positive take followed a meeting on Monday in Berlin with Chinese Prime Minister Li Keqiang, who presented himself as an ally in her defense of rules-based global trade. They also agreed that they want to preserve a nuclear accord with Iran that President Donald Trump has ditched."
July 10 - ActionForex.com: "Italian European Affairs Minister Paolo Savona warned… that the country had to be ready for 'all eventualities' on its Eurozone membership. He told a panel in the Senate that 'we may find ourselves in a position where it's not we who decide but others.' Hence, 'my position regarding a Plan B … is that we have to be ready for all eventualities.'"
July 10 - Financial Times (Claire Jones): "House prices across the eurozone are rising at their fastest since before the global financial crisis, forcing the region's banks to squeeze the supply of credit to would-be mortgage holders. …House prices in the 19-member currency area rose 4.5% in the year to the first quarter of 2018 - a level last seen in early 2007. Five countries - Latvia, Slovenia, Ireland, Portugal and Slovakia - saw double-digit price rises."
Brexit Watch:
July 9 - Bloomberg (Thomas Penny, Kitty Donaldson, Robert Hutton and Timothy Ross): "Prime Minister Theresa May battled to stave off a full-blown crisis after three ministers quit within 24 hours to protest her Brexit plan. The resignation of Foreign Secretary Boris Johnson, the face of the campaign to leave the European Union in 2016, compounded the chaos in government following the departures of Brexit Secretary David Davis and his deputy late Sunday."
Fixed Income Bubble Watch:
July 12 - Bloomberg (Sally Bakewell): "Wall Street's junk war is heating up. On one side are major banks, which are diving back into high-risk corporate lending now that U.S. regulators have loosened up. On the other are so-called shadow lenders -- private equity shops, boutique banks and other financial players that muscled in on this business when regulators restrained the big banks five years ago. The result: ever-growing competition to provide junk-rated debt used in corporate takeovers. It could turn out to be a 'race to the bottom,' said Frank Ossino, a senior portfolio manager at Newfleet Asset Management… For the $2.3 trillion-plus market in junk bonds and leveraged loans, the question is whether all this competition ultimately brings new, greater risks."
Leveraged Speculator Watch:
July 11 - Bloomberg (Dani Burger): "The dog days of summer have arrived for quants. Systematic traders who tie their fortunes to the ebbs and flows of stock markets are experiencing some of their worst returns in eight years… Factor investing -- which slices and dices equities based on traits like profitability and price volatility -- has buckled while the broader market has stayed afloat. For example, AQR Capital Management LLC's $1.9 billion mutual fund, one of the largest in the sector, last month nursed its steepest loss since inception. It's all adding insult to injury for quants struggling to make money this year as equity volatility awakens and economic angst builds… A market-neutral version of value -- which bets on companies priced cheaply while offsetting the broader market --rounded off its worst quarter since 2011. Meanwhile, momentum, which bets on the highest fliers like tech stocks, saw its biggest monthly drawdown in more than two years… Only 17% of large-cap active quant mutual funds outperformed the Russell 1000 index in June, the worst monthly showing in more than eight years…"
July 9 - Wall Street Journal (Mengqi Sun): "Hedge funds have long touted their ability to do better when things turn volatile. But they lagged behind the S&P 500 for the first half of 2018 despite market swings tied to trade policy tensions and interest rate increases. A widely followed hedge-fund index maintained by data research company HFR dropped 0.46% in June… The index rose .81% in the first two quarters, which is lower than the 2.65% return on the S&P 500… The only large category of hedge funds that posted an increase in June were funds that seek to capitalize on mergers and acquisitions… Those that specialized in stock picking and macroeconomic analysis posted declines."
Geopolitical Watch:
July 7 - Reuters (Phil Stewart, Idrees Ali and Jess Macy Yu): "Two U.S. warships passed through the Taiwan Strait on Saturday on a voyage that will likely be viewed in the self-ruled island as a sign of support by President Donald Trump amid heightened tension with China… Washington has no formal ties with Taiwan but is bound by law to help it defend itself and is the island's main source of arms. China regularly says Taiwan is the most sensitive issue in its ties with the United States."
Friday Evening Links
[BloombergQ] Stocks Edge Higher; Treasuries Rise, Dollar Falls: Markets Wrap
[Reuters] Fed emphasizes 'solid' U.S economic growth, repeats gradual approach
[CNBC] Trump reportedly considers tapping emergency oil supplies to tame crude prices
[FT] Yield curve at its flattest since August 2007
[Reuters] Fed emphasizes 'solid' U.S economic growth, repeats gradual approach
[CNBC] Trump reportedly considers tapping emergency oil supplies to tame crude prices
[FT] Yield curve at its flattest since August 2007
Friday's News Links
[Reuters] Global stocks rally before earnings, trade war jolt boosts dollar
[Reuters] Oil falls for second week as supply concerns ease
[Reuters] Euro, yuan dip as U.S.-China trade fears boost dollar
[BloombergQ] China Trade Surplus With U.S. Hits Record as Tensions Rise
[Reuters] China's June exports jump, surplus with U.S. at record high
[BloombergQ] Trump Is Misjudging China’s Resolve on Trade
[BloombergQ] Powell Faces a Delicate Balance in Testimony to Congress
[BloombergQ] Guggenheim's Minerd Says Trade War Devastating for U.S., China
[NYT] As Trade War Persists, Mnuchin Says China Talks Have ‘Broken Down’
[WSJ] Inflation Is Eating Away Worker Wage Gains
[WSJ] Investors Bet on Higher Rates as U.S. Inflation Firms
[WSJ] China’s Land Grab Could End Badly
[WSJ] Fear of Missing Out Drives Stock Performance
[FT] Beijing hopes for a backlash against Donald Trump’s trade policy
[FT] China’s globalisation paradox
[Reuters] Oil falls for second week as supply concerns ease
[Reuters] Euro, yuan dip as U.S.-China trade fears boost dollar
[BloombergQ] China Trade Surplus With U.S. Hits Record as Tensions Rise
[Reuters] China's June exports jump, surplus with U.S. at record high
[BloombergQ] Trump Is Misjudging China’s Resolve on Trade
[BloombergQ] Powell Faces a Delicate Balance in Testimony to Congress
[BloombergQ] Guggenheim's Minerd Says Trade War Devastating for U.S., China
[NYT] As Trade War Persists, Mnuchin Says China Talks Have ‘Broken Down’
[WSJ] Inflation Is Eating Away Worker Wage Gains
[WSJ] Investors Bet on Higher Rates as U.S. Inflation Firms
[WSJ] China’s Land Grab Could End Badly
[WSJ] Fear of Missing Out Drives Stock Performance
[FT] Beijing hopes for a backlash against Donald Trump’s trade policy
[FT] China’s globalisation paradox
Thursday, July 12, 2018
Thursday Evening Links
[Reuters] Technology stocks, industrials boost Wall Street
[BloombergQ] U.S. Budget Deficit Jumps First Nine Months of Fiscal Year
[Reuters] U.S. government posts $75 billion deficit in June
[BloombergQ] Bond Traders Are Flummoxed by ‘Slumpflation’
[CNBC] The housing shortage may be turning, warning of a price bubble
[Reuters] Fed's escape from crisis holdings could hit dead end
[BloombergQ] Harker Says He's Comfortable If Inflation Overshoots Fed Target
[Reuters] U.S. accuses North Korea of U.N. sanctions breach, demands end to fuel sales
[NYT] Hedge Funds Should Be Thriving Right Now. They Aren’t.
[NYT] The New Toll of Student Debt in 3 Charts
[WSJ] China’s Effort to Control Debt Loses Steam
[FT] US Treasury market structure could pose systemic risk — report
[FT] Fed chair Powell predicts ‘significant’ boost for US economy
[BloombergQ] U.S. Budget Deficit Jumps First Nine Months of Fiscal Year
[Reuters] U.S. government posts $75 billion deficit in June
[BloombergQ] Bond Traders Are Flummoxed by ‘Slumpflation’
[CNBC] The housing shortage may be turning, warning of a price bubble
[Reuters] Fed's escape from crisis holdings could hit dead end
[BloombergQ] Harker Says He's Comfortable If Inflation Overshoots Fed Target
[Reuters] U.S. accuses North Korea of U.N. sanctions breach, demands end to fuel sales
[NYT] Hedge Funds Should Be Thriving Right Now. They Aren’t.
[NYT] The New Toll of Student Debt in 3 Charts
[WSJ] China’s Effort to Control Debt Loses Steam
[FT] US Treasury market structure could pose systemic risk — report
[FT] Fed chair Powell predicts ‘significant’ boost for US economy
Wednesday, July 11, 2018
Thursday's News Links
[BloombergQ] Stocks Rally as Trade Nerves Settle; Yen Slides: Markets Wrap
[BloombergQ] China's Yuan Sinks Past Key Level, Will Test PBOC's Resolve
[Reuters] Consumer prices rise at the fastest pace in 6 years
[BloombergQ] Americans Burdened by Increasing Housing Costs, Slow Wage Gains
[BloombergQ] China, U.S. Hint at Chance for Talks After Trump's Tariff Threat
[Reuters] China says has not been in touch with U.S. about restarting trade talks
[CNBC] China slams 'US extortion tricks,' digs in heels as it vows to aid businesses hurt by tariffs
[CNBC] Fed official: 'We could end up getting behind if we don’t keep moving things up'
[Reuters] Goodbye inverted yield curve? Fed looks for alternative signals to guide policy
[BloombergQ] The Rout in Commodities Can No Longer Be Ignored
[BloombergQ] Merkel Rejects Trump's Link Between EU Trade, Defense Spending
[Reuters] As Trump amps up trade war, China plays nice with foreign investors
[WSJ] Chinese Yuan Steadies After Large Drop in Official Rate
[FT] Eurozone economy has strength to stomach QE withdrawal, says ECB
[FT] China and the world: how Beijing spreads the message
[FT] Bear market in eurozone banks signals growth challenge for region
[FT] Economic reform risks being the loser in Brazil’s election
[BloombergQ] China's Yuan Sinks Past Key Level, Will Test PBOC's Resolve
[Reuters] Consumer prices rise at the fastest pace in 6 years
[BloombergQ] Americans Burdened by Increasing Housing Costs, Slow Wage Gains
[BloombergQ] China, U.S. Hint at Chance for Talks After Trump's Tariff Threat
[Reuters] China says has not been in touch with U.S. about restarting trade talks
[CNBC] China slams 'US extortion tricks,' digs in heels as it vows to aid businesses hurt by tariffs
[CNBC] Fed official: 'We could end up getting behind if we don’t keep moving things up'
[Reuters] Goodbye inverted yield curve? Fed looks for alternative signals to guide policy
[BloombergQ] The Rout in Commodities Can No Longer Be Ignored
[BloombergQ] Merkel Rejects Trump's Link Between EU Trade, Defense Spending
[Reuters] As Trump amps up trade war, China plays nice with foreign investors
[WSJ] Chinese Yuan Steadies After Large Drop in Official Rate
[FT] Eurozone economy has strength to stomach QE withdrawal, says ECB
[FT] China and the world: how Beijing spreads the message
[FT] Bear market in eurozone banks signals growth challenge for region
[FT] Economic reform risks being the loser in Brazil’s election
Wednesday Evening Links
[Reuters] Wall Street drops on escalating U.S.-China trade war
[BloombergQ] Trump's Trade War Sinks China's Yuan Most Since 2015 Devaluation
[MarketWatch] U.S. oil sees steepest one-day percentage decline in more than a year
[BloombergQ] Trade Storm Batters Commodities With Tariffs Threatening Growth
[Reuters] Atlanta Fed raises U.S. second quarter GDP view to 3.9 percent
[BloombergQ] Trump’s Turned Asia Junk Investors Into Nervous Nellies
[BloombergQ] Mobius Says Trade War Is Just a Warm-Up Act for Financial Crisis
[CNBC] Republicans appear helpless to stop Trump's trade war
[WSJ] This Time Around, Chinese Consumer Products Would Face Tariffs
[FT] China presses on America’s pain points in the trade war
[FT] Tariff drama is just a sideshow to China’s slowing growth
[FT] Markets batter Turkey as Erdogan predicts interest rate fall
[BloombergQ] Trump's Trade War Sinks China's Yuan Most Since 2015 Devaluation
[MarketWatch] U.S. oil sees steepest one-day percentage decline in more than a year
[BloombergQ] Trade Storm Batters Commodities With Tariffs Threatening Growth
[Reuters] Atlanta Fed raises U.S. second quarter GDP view to 3.9 percent
[BloombergQ] Trump’s Turned Asia Junk Investors Into Nervous Nellies
[BloombergQ] Mobius Says Trade War Is Just a Warm-Up Act for Financial Crisis
[CNBC] Republicans appear helpless to stop Trump's trade war
[WSJ] This Time Around, Chinese Consumer Products Would Face Tariffs
[FT] China presses on America’s pain points in the trade war
[FT] Tariff drama is just a sideshow to China’s slowing growth
[FT] Markets batter Turkey as Erdogan predicts interest rate fall
Tuesday, July 10, 2018
Wednesday's News Links
[BloombergQ] New Tariffs Roil Stocks, Metals as Dollar Climbs: Markets Wrap
[Reuters] Stock futures drop after U.S. threatens more China tariffs
[Reuters] China shares, yuan stumble after U.S. threatens more tariffs
[Reuters] Zinc, copper hit 1-year lows on fresh U.S. tariff threat
[Reuters] Turkey dollar bonds fall, yield spreads rises
[Reuters] China says will hit back after U.S. proposes fresh tariffs on $200 billion in goods
[Reuters] U.S. producer prices rise on services, motor vehicles
[Reuters] U.S. ramps up trade row with China, threatens new tariffs
[CNBC] Homebuyers fuel jump in mortgage applications, as more listings finally emerge
[Reuters] ECB policymakers split on meaning of `through summer', and on timing of rate hike
[Reuters] At NATO, abrasive Trump lashes Germany for being Russian 'captive'
[NYT] How Trump’s Trade War Went From 18 Products to 10,000
[WSJ] Stronger Economy Brings More Fed Officials on Board With Rate-Rise Plans
[FT] Upturn in global debt to pile pressure on emerging markets
[FT] Investors fret as Erdogan’s son-in-law takes economic reins
[FT] Washington’s move on China’s ZTE may be just a warm-up act
[FT] The 'marginal buyers' in credit are neither marginal nor buyers
[Reuters] Stock futures drop after U.S. threatens more China tariffs
[Reuters] China shares, yuan stumble after U.S. threatens more tariffs
[Reuters] Zinc, copper hit 1-year lows on fresh U.S. tariff threat
[Reuters] Turkey dollar bonds fall, yield spreads rises
[Reuters] China says will hit back after U.S. proposes fresh tariffs on $200 billion in goods
[Reuters] U.S. producer prices rise on services, motor vehicles
[Reuters] U.S. ramps up trade row with China, threatens new tariffs
[CNBC] Homebuyers fuel jump in mortgage applications, as more listings finally emerge
[Reuters] ECB policymakers split on meaning of `through summer', and on timing of rate hike
[Reuters] At NATO, abrasive Trump lashes Germany for being Russian 'captive'
[NYT] How Trump’s Trade War Went From 18 Products to 10,000
[WSJ] Stronger Economy Brings More Fed Officials on Board With Rate-Rise Plans
[FT] Upturn in global debt to pile pressure on emerging markets
[FT] Investors fret as Erdogan’s son-in-law takes economic reins
[FT] Washington’s move on China’s ZTE may be just a warm-up act
[FT] The 'marginal buyers' in credit are neither marginal nor buyers
Tuesday Evening Links
[CNBC] US futures slip as Trump administration seeks tariffs on $200 billion in Chinese goods
[BloombergQ] U.S. Moves Forward on Proposed $200 Billion China Tariff List
[CNBC] Trump administration announces list of tariffs on $200 billion in Chinese goods
[Reuters] U.S. stocks rise on earnings optimism; dollar gains
[Politico] Trump readies tariffs on another $200B in Chinese goods
[Reuters] U.S. job quits rate hits 17-year high; labor market tightening
[BloombergQ] Chart of Century Gives Powell Gloomy Glimpse of Trade-War World
[CNBC] The hottest housing market in the US is up 13% and now may be headed for a crash
[BloombergQ] Employers Are Calling All Workers Off the Benches
[WSJ] U.S. Unveils Additional Tariffs on $200 Billion More in Chinese Imports
[WSJ] Trade Conflict Ripples Through Emerging Markets
[WSJ] Chinese Auto Sales Run Into a Lending Roadblock
[FT] US companies’ share buyback plans smash record
[FT] China policymakers keep debt investors guessing
[FT] Erdogan tries to defy economic orthodoxy
[BloombergQ] U.S. Moves Forward on Proposed $200 Billion China Tariff List
[CNBC] Trump administration announces list of tariffs on $200 billion in Chinese goods
[Reuters] U.S. stocks rise on earnings optimism; dollar gains
[Politico] Trump readies tariffs on another $200B in Chinese goods
[Reuters] U.S. job quits rate hits 17-year high; labor market tightening
[BloombergQ] Chart of Century Gives Powell Gloomy Glimpse of Trade-War World
[CNBC] The hottest housing market in the US is up 13% and now may be headed for a crash
[BloombergQ] Employers Are Calling All Workers Off the Benches
[WSJ] U.S. Unveils Additional Tariffs on $200 Billion More in Chinese Imports
[WSJ] Trade Conflict Ripples Through Emerging Markets
[WSJ] Chinese Auto Sales Run Into a Lending Roadblock
[FT] US companies’ share buyback plans smash record
[FT] China policymakers keep debt investors guessing
[FT] Erdogan tries to defy economic orthodoxy
Monday, July 9, 2018
Tuesday's News Links
[BloombergQ] Stocks Edge Higher Before Earnings; Euro Declines: Markets Wrap
[Reuters] Oil rises to $79 a barrel on Norway strike, Libyan disruption
[Action Forex] Italian eurosceptic Savona urged to be ready for all eventualities on Euro membership
[Reuters] China June producer inflation hits six-month high, consumer inflation up slightly
[NPR] Trade War With China Heats Up, But Tariff Effects Are Already Rippling Across U.S.
[CNBC] Market rally the ‘last hurrah’ – investors should sell now, warns Guggenheim investment chief
[BloombergQ] Erdogan's New Dynasty Makes Turkey Uninvestable
[New York Times] In an Uncertain Global Economy, Turkey May Be the Most at Risk
[WSJ] What the Stuttering Corporate Bond Market Means for Stocks
[WSJ] Investors Fear Turkish Currency Crisis as Erdogan Tightens Grip
[WSJ] Hedge Funds Are Having a Volatile 2018
[FT] Erdogan gains power to appoint Turkey’s central bank governor
[FT] Eurozone house prices rise at fastest pace since financial crisis
[Reuters] Oil rises to $79 a barrel on Norway strike, Libyan disruption
[Action Forex] Italian eurosceptic Savona urged to be ready for all eventualities on Euro membership
[Reuters] China June producer inflation hits six-month high, consumer inflation up slightly
[NPR] Trade War With China Heats Up, But Tariff Effects Are Already Rippling Across U.S.
[CNBC] Market rally the ‘last hurrah’ – investors should sell now, warns Guggenheim investment chief
[BloombergQ] Erdogan's New Dynasty Makes Turkey Uninvestable
[New York Times] In an Uncertain Global Economy, Turkey May Be the Most at Risk
[WSJ] What the Stuttering Corporate Bond Market Means for Stocks
[WSJ] Investors Fear Turkish Currency Crisis as Erdogan Tightens Grip
[WSJ] Hedge Funds Are Having a Volatile 2018
[FT] Erdogan gains power to appoint Turkey’s central bank governor
[FT] Eurozone house prices rise at fastest pace since financial crisis
Monday Evening Links
[BloombergQ] U.S. Stocks Rally as Dollar Gains, Treasuries Slip: Markets Wrap
[MarketWatch] Turkish lira sells off sells off after Erdogan appoints son-in-law as finance minister
[Reuters] U.S. bond prices fall as stocks gain for third straight day
[AP] US consumer borrowing up $24 billion in May
[BloombergQ] Merkel Lauds China's Market Opening in Trade Rebuff to Trump
[BloombergQ] Trade Wars Risk Sparking Mass Currency Devaluations
[CNBC] Homeowners are sitting on a record amount of cash – and not tapping it
[BloombergQ] May Fights to Contain Brexit Crisis After Key Ministers Quit
[BloombergQ] Draghi Says Improving Euro-Area Inflation Appears Self-Sustained
[BloombergQ] Turkey Strips Government of Role in Naming Central Bank Chief
[Reuters] Turkey's Erdogan names son-in-law finance minister in new cabinet
[BloombergQ] Emerging-Market Carry Trade Makes Comeback
[Reuters] Trump suggests China might be interfering in U.S.-North Korea talks
[WSJ] House Money: Wall Street Is Raising More Cash Than Ever for Its Rental-Home Gambit
[FT] Draghi delivers bullish assessment of eurozone economic prospects
[FT] Trump hits out at Germany ahead of Nato summit
[MarketWatch] Turkish lira sells off sells off after Erdogan appoints son-in-law as finance minister
[Reuters] U.S. bond prices fall as stocks gain for third straight day
[AP] US consumer borrowing up $24 billion in May
[BloombergQ] Merkel Lauds China's Market Opening in Trade Rebuff to Trump
[BloombergQ] Trade Wars Risk Sparking Mass Currency Devaluations
[CNBC] Homeowners are sitting on a record amount of cash – and not tapping it
[BloombergQ] May Fights to Contain Brexit Crisis After Key Ministers Quit
[BloombergQ] Draghi Says Improving Euro-Area Inflation Appears Self-Sustained
[BloombergQ] Turkey Strips Government of Role in Naming Central Bank Chief
[Reuters] Turkey's Erdogan names son-in-law finance minister in new cabinet
[BloombergQ] Emerging-Market Carry Trade Makes Comeback
[Reuters] Trump suggests China might be interfering in U.S.-North Korea talks
[WSJ] House Money: Wall Street Is Raising More Cash Than Ever for Its Rental-Home Gambit
[FT] Draghi delivers bullish assessment of eurozone economic prospects
[FT] Trump hits out at Germany ahead of Nato summit
Sunday, July 8, 2018
Monday's News Links
[BloombergQ] Stocks Climb Before Earning Season; Dollar Weakens: Markets Wrap
[Reuters] Chinese stocks have best day in two years, yuan firms despite tariff blow
[Reuters] Oil prices climb on global demand, U.S. sanctions on Iran
[Politico] Trump’s trade war was decades in the making
[Reuters] Pain and pressure: market turmoil pushes some China funds to the brink
[Reuters] Sea of red in Treasury market may signal bond boom is over
[BloombergQ] After Years of Easing, Meet Quantitative Tightening: QuickTake
[CNBC] The US is facing soaring trade deficits, but rising energy prices are a bigger danger
[Reuters] China's offshore debt crackdown adds outflow risk
[Reuters] BOJ's Kuroda expresses resolve to keep ultra-easy monetary policy
[NYT] Inside China’s Dystopian Dreams: A.I., Shame and Lots of Cameras
[WSJ] U.S. Exporters Will Be a Surprise Loser From Tariff Fight
[WSJ] Central Banks Try to Bolster Their Currencies. It’s Not Always Working
[WSJ] Business-Loan Drought Ends for Banks
[WSJ] Wage Gains Threaten to Squeeze Retail, Industrial Profits
[FT] Italy’s debts to European Central Bank near €500bn
[FT] China scales back property subsidies, adding to growth concerns
[FT] UK government in disarray as Davis resigns as Brexit secretary
[Reuters] Chinese stocks have best day in two years, yuan firms despite tariff blow
[Reuters] Oil prices climb on global demand, U.S. sanctions on Iran
[Politico] Trump’s trade war was decades in the making
[Reuters] Pain and pressure: market turmoil pushes some China funds to the brink
[Reuters] Sea of red in Treasury market may signal bond boom is over
[BloombergQ] After Years of Easing, Meet Quantitative Tightening: QuickTake
[CNBC] The US is facing soaring trade deficits, but rising energy prices are a bigger danger
[Reuters] China's offshore debt crackdown adds outflow risk
[Reuters] BOJ's Kuroda expresses resolve to keep ultra-easy monetary policy
[NYT] Inside China’s Dystopian Dreams: A.I., Shame and Lots of Cameras
[WSJ] U.S. Exporters Will Be a Surprise Loser From Tariff Fight
[WSJ] Central Banks Try to Bolster Their Currencies. It’s Not Always Working
[WSJ] Business-Loan Drought Ends for Banks
[WSJ] Wage Gains Threaten to Squeeze Retail, Industrial Profits
[FT] Italy’s debts to European Central Bank near €500bn
[FT] China scales back property subsidies, adding to growth concerns
[FT] UK government in disarray as Davis resigns as Brexit secretary
Sunday's News Links
[Reuters] Europe to be united, strong if U.S. raises more tariffs: France
[CNBC] Silicon Valley firms are facing a rise in anger from a new source: Their own employees
[BBC] Turkey purges more workers ahead of Erdogan swearing-in
[WSJ] How Regulators Averted a Debacle in Credit-Default Swaps
[WSJ] Stock Buybacks Are Booming, but Share Prices Aren’t Budging
[FT] Can US equities ride out rising trade tensions?
[CNBC] Silicon Valley firms are facing a rise in anger from a new source: Their own employees
[BBC] Turkey purges more workers ahead of Erdogan swearing-in
[WSJ] How Regulators Averted a Debacle in Credit-Default Swaps
[WSJ] Stock Buybacks Are Booming, but Share Prices Aren’t Budging
[FT] Can US equities ride out rising trade tensions?
Saturday, July 7, 2018
Saturday's News Links
[BloombergQ] The Trade War Is On: Timeline of How We Got Here and What’s Next
[AP] Analysis: Trade rocks already unstable US-China relations
[CNBC] San Francisco house prices grew the fastest ever in the first half of 2018 as the tech boom shows no signs of slowing
[Reuters] China's H2 GDP growth seen easing to around 6.6 pct - official think tank
[AP] North Korea Foreign Ministry says talks with Pompeo 'regrettable,' accuses US of unilateral demands for denuclearization
[Reuters] North Korea says resolve for denuclearisation may falter but Pompeo lauds progress
[Reuters] U.S. warships pass through Taiwan Strait amid heightened tensions with Beijing
[Spiegel] Inside the Battle that Almost Brought Down Merkel
[WSJ] U.S. Economic Strength Gives Trump Leeway in Trade Fight With China
[WSJ] Jockeying Begins to Take European Central Bank’s Reins From Draghi
[FT] China hits back at ‘trade bullying’ Trump
[AP] Analysis: Trade rocks already unstable US-China relations
[CNBC] San Francisco house prices grew the fastest ever in the first half of 2018 as the tech boom shows no signs of slowing
[Reuters] China's H2 GDP growth seen easing to around 6.6 pct - official think tank
[AP] North Korea Foreign Ministry says talks with Pompeo 'regrettable,' accuses US of unilateral demands for denuclearization
[Reuters] North Korea says resolve for denuclearisation may falter but Pompeo lauds progress
[Reuters] U.S. warships pass through Taiwan Strait amid heightened tensions with Beijing
[Spiegel] Inside the Battle that Almost Brought Down Merkel
[WSJ] U.S. Economic Strength Gives Trump Leeway in Trade Fight With China
[WSJ] Jockeying Begins to Take European Central Bank’s Reins From Draghi
[FT] China hits back at ‘trade bullying’ Trump
Friday, July 6, 2018
Weekly Commentary: BIS Annual Economic Report (for posterity)
With attention focused on unfolding trade wars and summer vacations, the release of the Bank of International Settlement (BIS) Annual Report garnered scant notice (with the exception of Gillian Tett's Thursday FT article, "Holiday Trading Lull Flashes Red for Financiers").
From the BIS: "It is now 10 years since the Great Financial Crisis (GFC) engulfed the world. At the time, following an unparalleled build-up of leverage among households and financial institutions, the world's financial system was on the brink of collapse. Thanks to central banks' concerted efforts and their accommodative stance, a repeat of the Great Depression was avoided. Since then, historically low, even negative, interest rates and unprecedentedly large central bank balance sheets have provided important support for the global economy and have contributed to the gradual convergence of inflation towards objectives."
As we near the 10-year financial crisis anniversary, I would approach back slapping with caution. The key issue today is not whether central bank post-Bubble reflationary policies avoided a repeat of the Great Depression. Rather, did the unprecedented concerted - and protracted - global central bank response increase the likelihood of a more destabilizing future crisis - one where the dark forces of global depression might prove difficult to escape?
I'm not interested in bashing the BIS. They strive to have a balanced approach. Yet when reading through their insightful annual report it's apparent that major holes remain in the contemporary central banking analytical framework. To their Credit, they do recognize the unprecedented buildup of global debt and imbalances. In my view, however, they fail to appreciate how central bankers these days continue fighting the last war.
One of the report's five sections discusses, "The financial Sector: post-crisis adjustment and pressure points." The theme is the successful implementation of concerted measures to boost the safety and soundness of the global financial system through increased bank capital and liquidity buffers. There is some attention to "asset managers," but for the most part potential financial risks are viewed through a traditional lens.
It's been my view, going back to 2009's aggressive reflationary measures, that central bankers failed to learn key lessons from the mortgage finance Bubble period. My biggest frustration revolved around the Fed's fateful decision to target mortgage Credit for system reflation - and then their complete neglect of prudent oversight of mortgage lending and mortgage-related financial intermediation, leverage and speculation. Indeed, they fashioned powerful incentives to borrowing, lend, build, speculate, leverage and intermediate risk - and then looked away.
Even as a self-reinforcing boom took hold, the policy mindset fixated on the nineties crisis period and the view that the Fed must move quite cautiously in removing accommodative measures. When the mortgage boom overheated, the Fed remained too timid to risk removing the punchbowl. Worse yet, as the Bubble inflated the markets turned increasingly confident that the Fed would resort to unconventional measures.
Over the past decade, global central bankers have incentivized risk-taking, speculation and leveraging in the securities and derivatives markets. Yet the so-called "macroprudential" focus has been on banking system capital, leverage and liquidity - fighting the last war. Ensure the securities and derivatives markets get all lathered up - and look away.
BIS: "At least until recently, global financial conditions remained very easy. In fact, they loosened further even as US monetary policy proceeded along its very gradual and well anticipated normalisation path… Importantly, credit spreads have been unusually compressed, often at or even below pre-GFC levels, and the corresponding markets appear to have become increasingly illiquid. Moreover, for most of the year under review the US dollar depreciated, supporting buoyant financial conditions especially in EMEs, which post-crisis have borrowed heavily in that currency and during the past year saw strong portfolio inflows."
The BIS report includes interesting data and charts. One of the more dramatic charts is "USD-denominated credit to EME non-bank borrowers," where EM dollar borrowings more than doubled since the crisis to a staggering $3.6 TN. "These trends mean the EMEs have become more exposed to an appreciation of the dollar and to reversals in international investors' risk appetite, as recent evens confirmed… Meanwhile, the greater participation of foreign investors in local currency markets compared with pre-crisis might not necessarily act as a stabilizing factor, as it may expose EMEs to a greater risk of capital flight."
I saw no reference in the BIS report to "hedge funds," "carry trades," or leveraged speculation more generally. I would be much less concerned if I believed actual investors were on the other side of historic EM debt growth.
For obvious reasons (i.e. their own data), the BIS doesn't partake in the fanciful notion of "deleveraging." "Public debt has risen to new peacetime highs in both advanced and emerging market economies." After ending 2007 at a problematic 179% of global GDP, debt over the next nine years rose to 217% of GDP. BIS data are broken into Advanced Economies and Emerging Economies. Not surprisingly, EM debt has led the charge during this cycle, having surged from 113% to 176% of GDP. No slouch, Advanced Economies debt has inflated from 233% to 266% of GDP.
BIS: "In some countries largely spared by the GFC, for quite some time there have been signs of a build-up of financial imbalances. This is because, in contrast to countries at the heart of the turmoil, no private sector deleveraging has taken place, so that the financial expansion has continued. The signs of imbalances have taken the form of strong increases in private sector credit, often alongside similar increases in property prices - the tell-tale sign of the expansion phase of domestic financial cycles, qualitatively similar to those observed pre-crisis in the economies that subsequently ran into trouble."
"Against this backdrop, a number of developments could lead to the materialisation of risks… In all of them, financial factors seem destined to play a prominent role, either as a trigger or as an amplifying mechanism. Indeed, the role of financial forces in business fluctuations has grown substantially since the early 1980s, when financial liberalisation took hold… One possible trigger of an economic slowdown or downturn could be an escalation of protectionist measures… A second possible trigger could be a sudden decompression of historically low bond yields or snapback in core sovereign market yields, notably in the United States… A third trigger could be a more general reversal in risk appetite…"
The BIS report includes an interesting section, "A Tightening Paradox?"
BIS: "In fact, until at least the first quarter of 2018, no tightening of financial conditions accompanied the normalisation of US monetary policy; it was only well into the second quarter that any appreciable tightening was seen, particularly in EMEs… From December 2015, when the United States started tightening, until late May of this year, two-year US Treasury yields rose in line with higher policy rates… But the yield on the 10-year Treasury note increased by only around 70 bps, while very long-term yields traded sideways. Importantly, the S&P 500 surged by over 30%, and corporate credit spreads narrowed, in the high-yield segment by more than 250 bps. The Federal Reserve Bank of Chicago's National Financial Conditions Index (NFCI) trended down to a 24-year trough last year before rebounding slightly this year, in line with several other financial condition gauges."
This section includes 12 separate bar charts comparing characteristics of the past three tightening periods, 1994/95, 2004/06 and "Current." To summarize, this cycle has seen the Fed raise rates less; bond yields generally rise less; stocks go up a lot more; high-yield spreads collapse like never before; investment-grade spreads narrow like never before; and local currency EM bond spreads collapse like never before. Perhaps most telling, the last chart shows $200 billion flowing into EM stocks and bonds during the current "tightening", up from about $40 billion and "NA" during the previous two cycles.
BIS: "There are several possible reasons for monetary policy's limited impact on financial conditions. These include factors unrelated to the policy itself, large and growing central bank balance sheets outside the United States, and possibly the gradual and predictable nature of the normalisation… The large-scale asset purchase programmes of the major central banks outside the United States may have offset the impact of the Fed's monetary policy normalisation… Finally, the gradualism and predictability of the tightening may also have played a role. Gradualism is especially called for when there is high uncertainty about the economic context and monetary transmission, as currently. In such a situation, this can help avoid undesirable financial and economic responses. Yet a high degree of gradualism and predictability may also dilute the impact of policy tightening."
"…Gradualism and predictability could induce search-for-yield and risk-taking behaviour, further compressing risk premia and boosting asset prices. Moreover, market participants could interpret gradualism and predictability as signalling that central banks wish to prevent sharp market moves, thereby providing implicit insurance for risky position-taking."
And this finds us closing in on a critical issue: After years of straying down the path of manipulating market perceptions and prices, it has turned into a monumental challenge to get markets to return to even a semblance of normal (self-adjusting and correcting) operations. History repeats. Once the Fed targeted mortgage Credit for post-"tech" Bubble reflationary measures, markets correctly presumed the Federal Reserve would adopt a hands-off approach. The Bubble would be left to inflate, with the Fed loath to risk popping a Bubble of its own creation - unwilling to quash progressively powerful asset market inflationary psychology.
Markets for years now have presumed central bankers would not dare risk popping global securities and derivatives market Bubbles. After all, the Bernanke Fed (followed by Draghi, Kuroda and others) specifically targeted inflating securities markets for system reflation. The Fed's ultra-gradualist approach to "normalization" has only worked to confirm the markets' faith that these Bubbles could run indefinitely. Gradualism has again fanned increasingly powerful market inflationary psychology. In the process, global markets became one unprecedented playground for leveraged speculation. Fed funds - securities speculation funding costs - remains below 2% in the U.S., while short rates are near zero or below for much of the world.
BIS: "The current backdrop for monetary policy normalisation is unprecedented in a number of important respects. Historically, interest rates in advanced economies, real and nominal, have never stayed this low for this long and central bank balance sheets have never swelled as large in peacetime. The long spell of multi-pronged policy accommodation may have left lasting marks on the macro-financial landscape, making policy effects harder to assess."
With equities rising on the initial day of Trump Tariffs (and retaliation), market pundits were proclaiming trade war risk was "already baked into stock prices." Wishful thinking, to be sure. From my vantage point, it was just another payrolls rally. Occurring on the first Friday of the month/quarter, the payroll data often spark an unwind of options positions maturing two weeks later.
The release of June jobs data corresponded with prospects for the first day of Trump Tariffs, ensuring ample hedging activity coming into Friday trading. And as the unwind of hedges spurred a market rally, pressure intensified on short positions more generally. The Goldman Sachs Most Short Index jumped (another) 1.4% Friday (up 3.4% for the week), again outperforming the general market. Betting against put buyers and short sellers has been a lucrative endeavor. But let's not mistake this speculative dynamic for sound fundamental underpinnings or healthy market behavior.
Trade wars appear poised to unfold over coming weeks and months, if not years. President Trump has threatened $500 billion of tariffs if China retaliates. China's initial response was measured. The game of chicken has commenced, although speculative markets are content to see minimal short-term economic risk. Surely, cooler heads will prevail. Nothing crazy prior to the midterms.
Meanwhile, Fed minutes presented a more hawkish FOMC, concerned by protectionist measures but increasingly focused on an overheated U.S. economy. Probably more interesting, there were some hawkish comments out of the ECB (Weidmann, Praet). This helped stabilize the euro (up 0.5%), with the weaker dollar spurring a relief rally in EM currencies, bonds and stocks. The rally in EM triggered the unwind of hedges and short covering in U.S. and developed markets.
Not uncharacteristically, U.S. non-farm payroll data evoke delusions of goldilocks. At this point, I doubt relatively contained wage growth will be holding the Fed back. Plus, the more important dynamics continue to unfold in overseas markets. China's Shanghai Composite sank another 3.5% this week, boosting y-t-d losses to 16.9%. China's CSI Midcap 200 dropped 5.1% and the CSI 500 small caps fell 4.2%. The ChiNext growth stock index sank 4.1%. Major indices in South Korea and Taiwan were both down better than 2%. Japan's Nikkei fell 2.3%. Copper sank 4.7%. Chinese real estate/apartment Bubble worries? In fixed income, German bund yields declined another basis point to a mere 29 bps. Ten-year Treasury yields fell four bps to 2.82%
It does not take a crazy imagination to envisage a global crisis beyond the scope of 2008/09. For one, Chinese and EM Bubbles barely missed a beat back then. A full-fledged global depression would require a synchronized global Bubble, replete with systematic Credit excess, economic maladjustment, and deeply systemic global imbalances. A backdrop conducive to fragility and crisis would include inflated asset markets on a global basis, policy-induced market misperceptions and egregious speculative excess. Well, it's all there.
I never bought into the 2008 vs. 1929 comparisons. The next crisis, perhaps. If you think the risk of a debilitating trade war is high today, just wait until Bubbles start popping. And is it reasonable to anticipate that countries actively engaged in heated trade disputes will empower their central bankers to quietly go off somewhere and develop a master plan for rescuing markets and the global financial system? Will swap lines between the Fed and PBOC be politically tolerable? It is a much more complicated world today than back in 2008.
We're approaching the 10-year anniversary of the "Great Financial Crisis." This fall will also mark 20 years since the Russia/LTCM fiasco and the "committee to save the world." Too many committees, bailouts and reflations have nurtured just the backdrop for acute global financial, economic and geopolitical crisis. I wouldn't bet on central bankers being capable of maintaining control. Future historians might look back and identify this as a pivotal week. But will they appreciate that protectionism and trade wars are but a symptom? When will it be recognized that central banks are much more the problem than the solution?
For the Week:
The S&P500 rallied 1.5% (up 3.2% y-t-d), and the Dow increased 0.8% (down 1.1%). The Utilities surged 2.4% (up 0.5%). The Banks recovered 0.4% (down 0.4%), while the Broker/Dealers were little changed (up 2.9%). The Transports gained 1.2% (down 1.3%). The S&P 400 Midcaps jumped 1.9% (up 4.7%), and the small cap Russell 2000 surged 3.1% (up 10.3%). The Nasdaq100 jumped 2.4% (up 12.7%). The Semiconductors rose 2.7% (up 7.7%). The Biotechs surged 5.4% (up 18.6%). With bullion up $2, the HUI gold index rallied 2.7% (down 6.8%).
Three-month Treasury bill rates ended the week at 1.90%. Two-year government yields added a basis point to 2.54% (up 65bps y-t-d). Five-year T-note yields slipped two bps to 2.72% (up 51bps). Ten-year Treasury yields declined four bps to 2.82% (up 42bps). Long bond yields fell six bps to 2.93% (up 19bps). Benchmark Fannie Mae MBS yields declined three bps to 3.57% (up 57bps).
Greek 10-year yields were unchanged at 3.93% (down 15bps y-t-d). Ten-year Portuguese yields added two bps to 1.80% (down 14bps). Italian 10-year yields gained three bps to 2.72% (up 70bps). Spain's 10-year yields dipped one basis point to 1.31% (down 26bps). German bund yields declined one basis point to 0.29% (down 14bps). French yields fell two bps to 0.64% (down 14bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields declined a basis point to 1.27% (up 8bps). U.K.'s FTSE equities index slipped 0.3% (down 0.9%).
Japan's Nikkei 225 equities index fell 2.3% (down 4.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.03% (down 2bps). France's CAC40 gained 1.0% (up 1.2%). The German DAX equities index recovered 1.5% (down 3.3%). Spain's IBEX 35 equities index surged 2.9% (down 1.4%). Italy's FTSE MIB index rallied 1.4% (up 0.3%). EM equities were mixed. Brazil's Bovespa index jumped 3.1% (down 1.8%), and Mexico's Bolsa rose 2.8% (down 0.8%). South Korea's Kospi index fell 2.3% (down 7.9%). India’s Sensex equities index increased 0.7% (up 4.7%). China’s Shanghai Exchange sank 3.5% (down 16.9%). Turkey's Borsa Istanbul National 100 index rose 2.3% (down 14.4%). Russia's MICEX equities jumped 2.2% (up 11.2%).
From the BIS: "It is now 10 years since the Great Financial Crisis (GFC) engulfed the world. At the time, following an unparalleled build-up of leverage among households and financial institutions, the world's financial system was on the brink of collapse. Thanks to central banks' concerted efforts and their accommodative stance, a repeat of the Great Depression was avoided. Since then, historically low, even negative, interest rates and unprecedentedly large central bank balance sheets have provided important support for the global economy and have contributed to the gradual convergence of inflation towards objectives."
As we near the 10-year financial crisis anniversary, I would approach back slapping with caution. The key issue today is not whether central bank post-Bubble reflationary policies avoided a repeat of the Great Depression. Rather, did the unprecedented concerted - and protracted - global central bank response increase the likelihood of a more destabilizing future crisis - one where the dark forces of global depression might prove difficult to escape?
I'm not interested in bashing the BIS. They strive to have a balanced approach. Yet when reading through their insightful annual report it's apparent that major holes remain in the contemporary central banking analytical framework. To their Credit, they do recognize the unprecedented buildup of global debt and imbalances. In my view, however, they fail to appreciate how central bankers these days continue fighting the last war.
One of the report's five sections discusses, "The financial Sector: post-crisis adjustment and pressure points." The theme is the successful implementation of concerted measures to boost the safety and soundness of the global financial system through increased bank capital and liquidity buffers. There is some attention to "asset managers," but for the most part potential financial risks are viewed through a traditional lens.
It's been my view, going back to 2009's aggressive reflationary measures, that central bankers failed to learn key lessons from the mortgage finance Bubble period. My biggest frustration revolved around the Fed's fateful decision to target mortgage Credit for system reflation - and then their complete neglect of prudent oversight of mortgage lending and mortgage-related financial intermediation, leverage and speculation. Indeed, they fashioned powerful incentives to borrowing, lend, build, speculate, leverage and intermediate risk - and then looked away.
Even as a self-reinforcing boom took hold, the policy mindset fixated on the nineties crisis period and the view that the Fed must move quite cautiously in removing accommodative measures. When the mortgage boom overheated, the Fed remained too timid to risk removing the punchbowl. Worse yet, as the Bubble inflated the markets turned increasingly confident that the Fed would resort to unconventional measures.
Over the past decade, global central bankers have incentivized risk-taking, speculation and leveraging in the securities and derivatives markets. Yet the so-called "macroprudential" focus has been on banking system capital, leverage and liquidity - fighting the last war. Ensure the securities and derivatives markets get all lathered up - and look away.
BIS: "At least until recently, global financial conditions remained very easy. In fact, they loosened further even as US monetary policy proceeded along its very gradual and well anticipated normalisation path… Importantly, credit spreads have been unusually compressed, often at or even below pre-GFC levels, and the corresponding markets appear to have become increasingly illiquid. Moreover, for most of the year under review the US dollar depreciated, supporting buoyant financial conditions especially in EMEs, which post-crisis have borrowed heavily in that currency and during the past year saw strong portfolio inflows."
The BIS report includes interesting data and charts. One of the more dramatic charts is "USD-denominated credit to EME non-bank borrowers," where EM dollar borrowings more than doubled since the crisis to a staggering $3.6 TN. "These trends mean the EMEs have become more exposed to an appreciation of the dollar and to reversals in international investors' risk appetite, as recent evens confirmed… Meanwhile, the greater participation of foreign investors in local currency markets compared with pre-crisis might not necessarily act as a stabilizing factor, as it may expose EMEs to a greater risk of capital flight."
I saw no reference in the BIS report to "hedge funds," "carry trades," or leveraged speculation more generally. I would be much less concerned if I believed actual investors were on the other side of historic EM debt growth.
For obvious reasons (i.e. their own data), the BIS doesn't partake in the fanciful notion of "deleveraging." "Public debt has risen to new peacetime highs in both advanced and emerging market economies." After ending 2007 at a problematic 179% of global GDP, debt over the next nine years rose to 217% of GDP. BIS data are broken into Advanced Economies and Emerging Economies. Not surprisingly, EM debt has led the charge during this cycle, having surged from 113% to 176% of GDP. No slouch, Advanced Economies debt has inflated from 233% to 266% of GDP.
BIS: "In some countries largely spared by the GFC, for quite some time there have been signs of a build-up of financial imbalances. This is because, in contrast to countries at the heart of the turmoil, no private sector deleveraging has taken place, so that the financial expansion has continued. The signs of imbalances have taken the form of strong increases in private sector credit, often alongside similar increases in property prices - the tell-tale sign of the expansion phase of domestic financial cycles, qualitatively similar to those observed pre-crisis in the economies that subsequently ran into trouble."
"Against this backdrop, a number of developments could lead to the materialisation of risks… In all of them, financial factors seem destined to play a prominent role, either as a trigger or as an amplifying mechanism. Indeed, the role of financial forces in business fluctuations has grown substantially since the early 1980s, when financial liberalisation took hold… One possible trigger of an economic slowdown or downturn could be an escalation of protectionist measures… A second possible trigger could be a sudden decompression of historically low bond yields or snapback in core sovereign market yields, notably in the United States… A third trigger could be a more general reversal in risk appetite…"
The BIS report includes an interesting section, "A Tightening Paradox?"
BIS: "In fact, until at least the first quarter of 2018, no tightening of financial conditions accompanied the normalisation of US monetary policy; it was only well into the second quarter that any appreciable tightening was seen, particularly in EMEs… From December 2015, when the United States started tightening, until late May of this year, two-year US Treasury yields rose in line with higher policy rates… But the yield on the 10-year Treasury note increased by only around 70 bps, while very long-term yields traded sideways. Importantly, the S&P 500 surged by over 30%, and corporate credit spreads narrowed, in the high-yield segment by more than 250 bps. The Federal Reserve Bank of Chicago's National Financial Conditions Index (NFCI) trended down to a 24-year trough last year before rebounding slightly this year, in line with several other financial condition gauges."
This section includes 12 separate bar charts comparing characteristics of the past three tightening periods, 1994/95, 2004/06 and "Current." To summarize, this cycle has seen the Fed raise rates less; bond yields generally rise less; stocks go up a lot more; high-yield spreads collapse like never before; investment-grade spreads narrow like never before; and local currency EM bond spreads collapse like never before. Perhaps most telling, the last chart shows $200 billion flowing into EM stocks and bonds during the current "tightening", up from about $40 billion and "NA" during the previous two cycles.
BIS: "There are several possible reasons for monetary policy's limited impact on financial conditions. These include factors unrelated to the policy itself, large and growing central bank balance sheets outside the United States, and possibly the gradual and predictable nature of the normalisation… The large-scale asset purchase programmes of the major central banks outside the United States may have offset the impact of the Fed's monetary policy normalisation… Finally, the gradualism and predictability of the tightening may also have played a role. Gradualism is especially called for when there is high uncertainty about the economic context and monetary transmission, as currently. In such a situation, this can help avoid undesirable financial and economic responses. Yet a high degree of gradualism and predictability may also dilute the impact of policy tightening."
"…Gradualism and predictability could induce search-for-yield and risk-taking behaviour, further compressing risk premia and boosting asset prices. Moreover, market participants could interpret gradualism and predictability as signalling that central banks wish to prevent sharp market moves, thereby providing implicit insurance for risky position-taking."
And this finds us closing in on a critical issue: After years of straying down the path of manipulating market perceptions and prices, it has turned into a monumental challenge to get markets to return to even a semblance of normal (self-adjusting and correcting) operations. History repeats. Once the Fed targeted mortgage Credit for post-"tech" Bubble reflationary measures, markets correctly presumed the Federal Reserve would adopt a hands-off approach. The Bubble would be left to inflate, with the Fed loath to risk popping a Bubble of its own creation - unwilling to quash progressively powerful asset market inflationary psychology.
Markets for years now have presumed central bankers would not dare risk popping global securities and derivatives market Bubbles. After all, the Bernanke Fed (followed by Draghi, Kuroda and others) specifically targeted inflating securities markets for system reflation. The Fed's ultra-gradualist approach to "normalization" has only worked to confirm the markets' faith that these Bubbles could run indefinitely. Gradualism has again fanned increasingly powerful market inflationary psychology. In the process, global markets became one unprecedented playground for leveraged speculation. Fed funds - securities speculation funding costs - remains below 2% in the U.S., while short rates are near zero or below for much of the world.
BIS: "The current backdrop for monetary policy normalisation is unprecedented in a number of important respects. Historically, interest rates in advanced economies, real and nominal, have never stayed this low for this long and central bank balance sheets have never swelled as large in peacetime. The long spell of multi-pronged policy accommodation may have left lasting marks on the macro-financial landscape, making policy effects harder to assess."
With equities rising on the initial day of Trump Tariffs (and retaliation), market pundits were proclaiming trade war risk was "already baked into stock prices." Wishful thinking, to be sure. From my vantage point, it was just another payrolls rally. Occurring on the first Friday of the month/quarter, the payroll data often spark an unwind of options positions maturing two weeks later.
The release of June jobs data corresponded with prospects for the first day of Trump Tariffs, ensuring ample hedging activity coming into Friday trading. And as the unwind of hedges spurred a market rally, pressure intensified on short positions more generally. The Goldman Sachs Most Short Index jumped (another) 1.4% Friday (up 3.4% for the week), again outperforming the general market. Betting against put buyers and short sellers has been a lucrative endeavor. But let's not mistake this speculative dynamic for sound fundamental underpinnings or healthy market behavior.
Trade wars appear poised to unfold over coming weeks and months, if not years. President Trump has threatened $500 billion of tariffs if China retaliates. China's initial response was measured. The game of chicken has commenced, although speculative markets are content to see minimal short-term economic risk. Surely, cooler heads will prevail. Nothing crazy prior to the midterms.
Meanwhile, Fed minutes presented a more hawkish FOMC, concerned by protectionist measures but increasingly focused on an overheated U.S. economy. Probably more interesting, there were some hawkish comments out of the ECB (Weidmann, Praet). This helped stabilize the euro (up 0.5%), with the weaker dollar spurring a relief rally in EM currencies, bonds and stocks. The rally in EM triggered the unwind of hedges and short covering in U.S. and developed markets.
Not uncharacteristically, U.S. non-farm payroll data evoke delusions of goldilocks. At this point, I doubt relatively contained wage growth will be holding the Fed back. Plus, the more important dynamics continue to unfold in overseas markets. China's Shanghai Composite sank another 3.5% this week, boosting y-t-d losses to 16.9%. China's CSI Midcap 200 dropped 5.1% and the CSI 500 small caps fell 4.2%. The ChiNext growth stock index sank 4.1%. Major indices in South Korea and Taiwan were both down better than 2%. Japan's Nikkei fell 2.3%. Copper sank 4.7%. Chinese real estate/apartment Bubble worries? In fixed income, German bund yields declined another basis point to a mere 29 bps. Ten-year Treasury yields fell four bps to 2.82%
It does not take a crazy imagination to envisage a global crisis beyond the scope of 2008/09. For one, Chinese and EM Bubbles barely missed a beat back then. A full-fledged global depression would require a synchronized global Bubble, replete with systematic Credit excess, economic maladjustment, and deeply systemic global imbalances. A backdrop conducive to fragility and crisis would include inflated asset markets on a global basis, policy-induced market misperceptions and egregious speculative excess. Well, it's all there.
I never bought into the 2008 vs. 1929 comparisons. The next crisis, perhaps. If you think the risk of a debilitating trade war is high today, just wait until Bubbles start popping. And is it reasonable to anticipate that countries actively engaged in heated trade disputes will empower their central bankers to quietly go off somewhere and develop a master plan for rescuing markets and the global financial system? Will swap lines between the Fed and PBOC be politically tolerable? It is a much more complicated world today than back in 2008.
We're approaching the 10-year anniversary of the "Great Financial Crisis." This fall will also mark 20 years since the Russia/LTCM fiasco and the "committee to save the world." Too many committees, bailouts and reflations have nurtured just the backdrop for acute global financial, economic and geopolitical crisis. I wouldn't bet on central bankers being capable of maintaining control. Future historians might look back and identify this as a pivotal week. But will they appreciate that protectionism and trade wars are but a symptom? When will it be recognized that central banks are much more the problem than the solution?
For the Week:
The S&P500 rallied 1.5% (up 3.2% y-t-d), and the Dow increased 0.8% (down 1.1%). The Utilities surged 2.4% (up 0.5%). The Banks recovered 0.4% (down 0.4%), while the Broker/Dealers were little changed (up 2.9%). The Transports gained 1.2% (down 1.3%). The S&P 400 Midcaps jumped 1.9% (up 4.7%), and the small cap Russell 2000 surged 3.1% (up 10.3%). The Nasdaq100 jumped 2.4% (up 12.7%). The Semiconductors rose 2.7% (up 7.7%). The Biotechs surged 5.4% (up 18.6%). With bullion up $2, the HUI gold index rallied 2.7% (down 6.8%).
Three-month Treasury bill rates ended the week at 1.90%. Two-year government yields added a basis point to 2.54% (up 65bps y-t-d). Five-year T-note yields slipped two bps to 2.72% (up 51bps). Ten-year Treasury yields declined four bps to 2.82% (up 42bps). Long bond yields fell six bps to 2.93% (up 19bps). Benchmark Fannie Mae MBS yields declined three bps to 3.57% (up 57bps).
Greek 10-year yields were unchanged at 3.93% (down 15bps y-t-d). Ten-year Portuguese yields added two bps to 1.80% (down 14bps). Italian 10-year yields gained three bps to 2.72% (up 70bps). Spain's 10-year yields dipped one basis point to 1.31% (down 26bps). German bund yields declined one basis point to 0.29% (down 14bps). French yields fell two bps to 0.64% (down 14bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields declined a basis point to 1.27% (up 8bps). U.K.'s FTSE equities index slipped 0.3% (down 0.9%).
Japan's Nikkei 225 equities index fell 2.3% (down 4.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.03% (down 2bps). France's CAC40 gained 1.0% (up 1.2%). The German DAX equities index recovered 1.5% (down 3.3%). Spain's IBEX 35 equities index surged 2.9% (down 1.4%). Italy's FTSE MIB index rallied 1.4% (up 0.3%). EM equities were mixed. Brazil's Bovespa index jumped 3.1% (down 1.8%), and Mexico's Bolsa rose 2.8% (down 0.8%). South Korea's Kospi index fell 2.3% (down 7.9%). India’s Sensex equities index increased 0.7% (up 4.7%). China’s Shanghai Exchange sank 3.5% (down 16.9%). Turkey's Borsa Istanbul National 100 index rose 2.3% (down 14.4%). Russia's MICEX equities jumped 2.2% (up 11.2%).
Investment-grade bond funds saw inflows of $171 million, while junk bond funds had outflows of $1.729 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined three bps to 4.52% (up 56bps y-o-y). Fifteen-year rates fell five bps to 3.99% (up 77bps). Five-year hybrid ARM rates sank 13 bps to 3.74% (up 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.58% (up 48bps).
Federal Reserve Credit last week dropped $12.6bn to $4.260 TN. Over the past year, Fed Credit contracted $167bn, or 3.8%. Fed Credit inflated $1.449 TN, or 52%, over the past 296 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.8bn last week to $3.396 TN. "Custody holdings" were up $79.7bn y-o-y, or 2.4%.
M2 (narrow) "money" supply expanded $14.9bn last week to a record $14.133 TN. "Narrow money" gained $584bn, or 4.3%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits declined $6.5bn, while Savings Deposits jumped $16.6bn. Small Time Deposits added $3.3bn. Retail Money Funds were little changed.
Total money market fund assets slipped $3.3bn to $2.822 TN. Money Funds gained $195bn y-o-y, or 7.4%.
Total Commercial Paper dropped $20.1bn to $1.065 TN. CP gained $118bn y-o-y, or 12.5%.
Currency Watch:
July 4 - Bloomberg (Gregor Hunter): "The sharpest decline in China's currency since policy makers devalued the yuan in 2015 has seen little of the capital-flight panic that gripped markets back then. How long the calm lasts depends in part on the effectiveness of controls put in place last time. This time around, the yuan's 3.6% slide since mid-June has been accompanied mainly by an outflow of cash from foreign, rather than domestic, investors, analysts say… Chinese operators face tight constraints -- ranging from official scrutiny of trade invoices to detailed justification for certain overseas transactions -- put in place years ago to stem an exodus of funds. The cost of the 2015-16 shore-up-the-yuan campaign was high: the central bank burned through $1 trillion of foreign-exchange reserves, and took some criticism in international forums for how it managed the exchange rate."
The U.S. dollar index declined 0.6% to 93.963 (up 2.0% y-t-d). For the week on the upside, the Mexican peso increased 4.6%, the Swedish krona 2.5%, the South African rand 1.9%, the Norwegian krone 1.5%, the New Zealand dollar 0.9%, the British pound 0.6%, the euro 0.5%, the Canadian dollar 0.4%, the Brazilian real 0.4%, the Australian dollar 0.3%, the Singapore dollar 0.3%, the Japanese yen 0.3% and the Swiss franc 0.1%. For the week on the downside, the South Korean won declined 0.1%. The Chinese renminbi declined 0.33% versus the dollar this week (down 2.05% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.2% (up 8.7% y-t-d). Spot Gold recovered 0.2% to $1,255 (down 3.7%). Silver slipped 0.6% to $16.069 (down 6.3%). Crude declined 45 cents to $73.80 (up 22%). Gasoline fell 1.9% (up 17%), and Natural Gas dropped 2.1% (down 3%). Copper sank 4.7% (down 14%). Wheat rallied 2.8% (up 21%). Corn added 0.5% (up 6%).
Trump Administration Watch:
July 5 - CNBC (Chloe Aiello): "President Donald Trump said on Thursday tariffs on $34 billion worth of Chinese goods will kick-in at 12:01 a.m. EST on Friday morning. Another $16 billion are expected to go into effect in two weeks, he said. Aboard Air Force One on his way to a rally in Montana, Trump told reporters he would also consider imposing additional tariffs on $500 billion in Chinese goods, should Beijing retaliate. First '34, and then you have another 16 in two weeks and then as you know we have 200 billion in abeyance and then after the 200 billion we have 300 billion in abeyance. Ok? So we have 50 plus 200 plus almost 300,' Trump said."
July 5 - Bloomberg: "The world's two largest economies are set Friday to slide deeper into a trade conflict that's roiled markets and cast a shadow over the global growth outlook. In Beijing, policy makers are digging in for what could be a protracted fight -- one in which they say they won't be the aggressor. If the U.S. begins imposing additional steep tariffs on Chinese imports as of Friday, then Beijing is poised to respond in kind. With further tit-for-tat levies already threatened, this week could mark the start of a new and damaging phase. The U.S. imposition of tariffs on $34 billion of China's exports will not only hurt China, but America itself and the rest of the world, Gao Feng, China's Commerce Ministry spokesman, said… Beijing's retaliatory tariffs will become effective 'immediately' after the U.S. acts…"
July 5 - Reuters (Elias Glenn and Christian Shepherd): "The United States is 'opening fire' on the world with its threatened tariffs, China warned…, saying no one wants a trade war but it will respond the instant U.S. measures go into effect, as Beijing ramped up the rhetoric in the heated dispute. The Trump administration's tariffs on $34 billion of Chinese imports are due to go into effect at 0401 GMT on Friday, which is just after midday in Beijing."
July 2 - CNBC (Silvia Amaro): "The United States could get a new round of retaliatory tariffs worth as much as $300 billion, if it moves ahead with new duties on European cars, the Financial Times reported. In a written statement to the U.S. Department of Commerce, seen by the news publication, the EU set out clear plans to respond to potential U.S. duties on European cars. …European leaders are getting more convinced that President Donald Trump will put new tariffs on European cars."
July 4 - Bloomberg (Patrick Donahue, Arne Delfs and Birgit Jennen): "German Chancellor Angela Merkel raised the specter of the global financial crisis as she warned of potential fallout from a trade war with the U.S., saying tariffs on European cars would be 'much more serious' than levies on steel and aluminum… Faced with President Donald Trump's threat to target U.S. imports of cars from Europe, German and French government officials plan to meet next week in Paris to coordinate strategy. 'The international financial crisis, which ensured that we now act in the framework of the G-20, would never have been resolved so quickly, despite the pain, if we hadn't cooperated in a multilateral fashion in the spirit of comradeship,' Merkel said… 'This has to happen.'"
July 1 - The Hill (Niv Elis): "President Trump spent the first year of his presidency singing the praises of the stock market, which rose precipitously in anticipation of GOP tax cuts and business-friendly deregulation. Nearly seven months into 2018, Trump barely mentions the markets anymore… During his first full year in office, Trump tweeted the phrase 'stock market' 46 times, almost once a week. Since Jan. 26, when the market topped out at 2,872 and headed into a correction, Trump has only tweeted about it twice."
June 30 - MarketWatch (Greg Robb): "It has been a long time -the early 1990s in fact- since a White House tried to influence Federal Reserve policy the way Trump economic advisor Larry Kudlow did on Friday. In an interview with Fox Business Network, Kudlow jawboned the Fed, saying: 'My hope is that the Fed, under its new management, understands that more people working and faster economic growth do not cause inflation.' 'My hope is that they understand that and that they will move very slowly,' he added. It was the senior advisers to President George Bush, particularly Treasury Secretary Nicholas Brady, who pushed the Fed to cut rates at a faster pace in the run-up to the recession that lasted from July 1990 until March 1991."
July 1 - CNBC (Fred Imbert): "President Donald Trump said… he wants to wait until after the midterm elections to move forward on a new NAFTA deal with Mexico and Canada, with the parties locked in tough negotiations. The Congressional midterms are scheduled for Nov. 6, with Democrats poised to gain seats in the House, and possibly retake a majority. Separately, trade tensions between the three NAFTA principals have increased recently, with the U.S. slapped import tariffs on Mexican and Canadian steel and aluminum imports."
July 1 - Axios (Jonathan Swan): "Axios has obtained a leaked draft of a Trump administration bill - ordered by the president himself - that would declare America's abandonment of fundamental World Trade Organization rules. Why it matters: The draft legislation is stunning. The bill essentially provides Trump a license to raise U.S. tariffs at will, without congressional consent and international rules be damned. The details: The bill, titled the 'United States Fair and Reciprocal Tariff Act,' would give Trump unilateral power to ignore the two most basic principles of the WTO and negotiate one-on-one with any country:"
July 3 - Reuters (Jeff Mason and Jan Strupczewski): "U.S. President Donald Trump warned the World Trade Organization on Monday that 'we'll be doing something' if the United States is not treated properly, just hours after the European Union said that U.S. automotive tariffs would hurt its own vehicle industry and prompt retaliation. Trump, speaking to reporters during a meeting with Dutch Prime Minister Mark Rutte at the White House, said, 'The WTO has treated the United States very, very badly and I hope they change their ways.'
Federal Reserve Watch:
July 5 - CNBC (Jeff Cox): "Federal Reserve officials worry that letting the U.S. economy run too strong could cause major problems down the road if left unchecked, according to minutes from the most recent central bank meeting. Some members expressed 'concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn,' the meeting summary… As a result, almost all officials at the central bank believe they should continue to raise interest rates on a regular basis."
July 3 - CNBC (Richard Bove): "Washington and the nation are very focused on the fact that Supreme Court Justice Anthony Kennedy has resigned, leaving the high court vulnerable to ideological change. Not really focused upon as much is an offhand remark made by Larry Kudlow, the director of the National Economic Council... Mr. Kudlow suggested that he hoped that the Federal Reserve would raise interest rates very slowly. While one might agree or disagree with Mr. Kudlow's remark…, what is of greater interest is that he made the statement. It breaks a precedent that presidents… have followed for more than two and half decades - i.e., the independence of the Federal Reserve would be respected. Mr. Kudlow understands that he is changing policy. What's more, he undoubtedly understands that the While House can, and I believe will, take total control of the Federal Reserve. It is very possible that monetary policy will become a political, not an economic or financial decision."
July 1 - Wall Street Journal (Nick Timiraos): "After the last recession, the Federal Reserve built up a mammoth $4.5 trillion portfolio of mostly mortgage and Treasury securities in an effort to boost financial markets and the economy. The sum was about equal in value to the total economic output of Japan, the world's third largest economy. Officials could soon take up an important debate about how much to let that portfolio shrink. Last year, they started a program to let securities in the portfolio mature without reinvesting the proceeds in other securities, putting it on a path to shrink to $3 trillion by 2020. Some officials are now wondering if they can end this 'run-off' process sooner than planned and manage monetary policy with a larger portfolio in the long run."
U.S. Bubble Watch:
July 5 - Financial Times (Jason Cummins): "In Newton's First Law, an object in motion stays in motion until a force acts upon it. Under new leadership, the Federal Reserve's monetary policy strategy appears to be following the same logic. In his June press conference, chairman Jay Powell said the Fed would raise interest rates until 'we get a sense that the economy is reacting badly'. The latest numbers suggest the US economy is doing anything but reacting badly. The unemployment rate declined to 3.75%, a 48-year low... Consumer prices rose 2.3% in May from a year earlier. Excluding volatile food and energy categories, core personal consumption expenditures inflation moved up to 2%, matching the Fed's target for the first time in more than six years. Despite downside risks from trade tension, these trends look set to continue. Monetary policy is still expansionary on top of the sizeable fiscal expansion that will build in the coming years. The labour market is poised to get tighter and put continued upward pressure on inflation."
July 5 - CNBC (Fred Imbert): "Private payrolls grew at a disappointing rate last month as businesses struggled to find enough new hires, ADP and Moody's Analytics said… Jobs in the U.S. grew by 177,000 in June…, while economists… expected a gain of 190,000. June also marked the fourth straight month of jobs growth below 200,000… 'Business' number one problem is finding qualified workers,' Mark Zandi, chief economist at Moody's Analytics, said… 'At the current pace of job growth, if sustained, this problem is set to get much worse. These labor shortages will only intensify across all industries and company sizes.'"
July 3 - CNBC (Diana Olick): "It is a seller's market, undeniably. The supply of homes for sale is low, demand is high, and now prices are heating up even more. But sellers today see more reasons to stay put than to profit. Home prices jumped 7.1% annually in May, according to… CoreLogic. That's the biggest jump in four years. Annual price gains had been shrinking slightly, as mortgage rates rose… They are, however, exacerbating the already critical supply shortage. 'During the first quarter, we found that about 50% of all existing homeowners had a mortgage rate of 3.75% or less,' said Frank Nothaft, chief economist for CoreLogic. "May's mortgage rates averaged a seven-year high of 4.6%, with an increasing number of homeowners keeping the low-rate loans they currently have, rather than sell and buy another home that would carry a higher interest rate."
July 2 - CNBC (Jeff Cox): "Stocks right now are hanging by a thread, boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record. Both sides are motivated by fear, as corporations find little else to do with their $2.1 trillion in cash than buy back their own shares or make deals, while individual investors head to the sidelines amid fears that a global trade war could thwart the substantial momentum the U.S. economy has seen this year. 'Corporate cash is going to find a home, and it's either going to be in buybacks, dividends or M&A activity. What it's not going to be is in capex,' said Art Hogan, chief market strategist at B. Riley FBR."
July 3 - Wall Street Journal (Maureen Farrell): "An IPO market that was left for dead just two years ago has come roaring back in 2018, with companies raising public capital at a pace rarely seen in the past two decades. So far this year, 120 companies have used initial public offerings to raise $35.2 billion on U.S. exchanges. That is the highest volume since 2014 and the fourth-busiest year-to-date on record, according to Dealogic…"
July 3 - CNBC (Patti Domm): "By the Fourth of July, drivers usually see the highest gas prices of summer in the rear-view mirror. That may not be the case this year, even though the national average is down about 14 cents from the near $3 a gallon drivers paid in late May. Consumers are paying the highest Fourth of July gasoline prices in four years."
July 3 - CNBC (Robert Frank): "Manhattan real estate had its worst second quarter since the financial crisis, with prices and sales dropping and inventory rising… Total sales in Manhattan fell 17% in the second quarter from a year ago, according to… Douglas Elliman and Miller Samuel Real Estate Appraisers and Consultants. The average sales price fell 5% to $2.1 million. Brokers blamed the decline partly on bad weather… But analysts say the market is facing bigger pressures, from a huge pipeline of new condos to a dwindling number foreigner buyers, volatile stock markets and new tax changes that make New York less attractive."
China Watch:
July 5 - Bloomberg (Brian Bremner): "Chinese President Xi Jinping has an ambitious master plan for his country's transformation into a wealthy, technology-driven global economic power. And U.S. companies need not apply. That's why the current trade rumble between the U.S. and China… is far more than just a spat over market restrictions, intellectual property rights and the epic U.S. deficit. On a deeper level, the standoff reflects an escalating economic and military rivalry between a status quo power and one of the most remarkable growth miracles in history. It's a clash between two divergent systems, (one state-directed, the other market-driven) with markedly divergent world views and national aspirations. That strategic tension seems likely to intensify, regardless of how the current brinkmanship over tariffs plays out."
July 3 - Wall Street Journal (Lingling Wei and Saumya Vaishampayan): "The yuan's rapid slide is posing a new test for Beijing as it grapples with a looming trade war, putting the central bank under pressure to revive the kind of interventions undertaken in the past to defend the currency's value. In an effort to calm jittery investors, China's central-bank chief Yi Gang… pledged to keep the yuan's exchange rate 'basically stable at a reasonable and balanced level,'… If the yuan continues to weaken in the next few trading days, government advisers and analysts say, the PBOC likely would reach into its tool kit to control the pace of decline, including tweaking the way it sets the yuan's official rate."
July 4 - Reuters (Kevin Yao): "China is comfortable with a weakening yuan, intervening only to prevent any rapid and destabilising declines or to restore market confidence, as the economy loses momentum and faces further risks from a heated trade dispute with the United States, policy insiders said. On Tuesday, as stocks sank and the yuan fell through a key psychological level of 6.7 on the dollar, traders said state-owned banks, which sometimes act on behalf of the central bank, made efforts to prop up the currency. All the same, authorities are confident they won't have to make heavy use of the official foreign exchange reserves to defend the yuan like in 2015 when stocks and the currency went into a tail spin as capital outflows accelerated…"
July 3 - Bloomberg: "China is zooming to a record year of corporate-bond defaults, with the 2018 total already more than three-quarters of the previous high even before an expected economic slowdown bites. Chinese companies have reneged on about 16.5 billion yuan ($2.5bn) of public bond payments so far this year, compared with the high of 20.7 billion yuan seen in all of 2016… Strains are set to get worse if the trends of credit-rating companies are anything to go by -- agencies including Dagong Global Rating Co. have been downgrading firms by an unprecedented margin. 'Corporate profits have worsened this year and are unlikely to improve against the backdrop of an economic slowdown,' Li Shi, general manager of the rating and bond-research department at China Chengxin International Credit Rating Co. 'Refinancing will continue to be tough as long as the crackdown on shadow banking continues.'"
July 4 - Bloomberg: "Signs of pressure on China's property market are deepening, with a report saying that soured loans from the industry could put 'significant stress' on banks and a state researcher warning of accumulating risks in a sector that underpins the economy. The value of bad loans from the real estate industry will increase by at least 20% this year, China Orient Asset Management Co. said… The property market will see an 'increasing correction' under heavier restrictions, leading to a rise in the non-performing loan ratio for the sector to about 1.5%, according to the survey. The report added to a chorus of warnings on the dangers mounting in the property market…"
July 5 - Bloomberg: "Chinese brokerages are sitting on more than $240 billion of loans that grow riskier by the day as the country's equity market tumbles. Extended to company founders and other major investors who pledged their shareholdings as collateral, the loans amount to 103% of Chinese brokerages' net capital, up from 16% in 2013, according to Morgan Stanley. Losses on the debt could wipe out 11% of the industry's net capital, analysts at the U.S. bank wrote… While the loans looked like safe bets as Chinese stocks marched higher over the past two years, a $2 trillion selloff since late January is rapidly eroding the value of brokerages' collateral."
July 3 - Reuters (Robin Emmott and Noah Barkin): "China is putting pressure on the European Union to issue a strong joint statement against President Donald Trump's trade policies at a summit later this month but is facing resistance, European officials said. In meetings in Brussels, Berlin and Beijing, senior Chinese officials… have proposed an alliance between the two economic powers and offered to open more of the Chinese market in a gesture of goodwill."
July 5 - Bloomberg (Venus Fang): "Another day. Another IPO. Another Chinese billionaire magically appears. Mu Rongjun, the co-founder of food-delivery behemoth Meituan Dianping, is poised to be the latest to join the club as the company announced plans to go public last month. Of the 27 billionaires to surface in Asia this year, about a third did so through initial public offerings in Hong Kong and Shenzhen, according to the Bloomberg Billionaires Index. Now the question is whether that torrid pace of wealth creation can continue as global trade tensions mount and markets struggle to hold gains."
July 4 - Bloomberg (Prudence Ho and Geraldine Amiel): "The turmoil deepened at HNA Group Co., the Chinese conglomerate that's been selling billions of dollars in assets to stay afloat, after its No. 2 executive died while touring southeastern France. Co-Chairman Wang Jian, who helped found the group more than two decades ago, fell from a height of about 15 meters (49 feet) … while having his photograph taken in the village of Bonnieux… Wang's sudden death comes as HNA, one of China's most indebted companies, is undertaking an urgent restructuring."
EM Watch:
July 3 - Bloomberg (Lyubov Pronina): "The wheels have come off emerging-market international bond sales. June issuance slumped by two-thirds versus a year earlier, capping a nine percent first-half decline in volume to $332.8 billion, according to Bloomberg data covering dollar and euro debt sales by government and companies from developing nations. The pace is unlikely to pick up in the rest of the year, according to bankers and investors… Issuance has cratered since April, the busiest month this year, with volume halving in May and again in June…"
July 2 - Bloomberg (Vivianne Rodrigues and Ben Holland): "Another election, another populist victory - but voters in Mexico yesterday went in a different direction than Europe and the U.S., choosing their first left-wing president in the nation's modern history. Andres Manuel Lopez Obrador, a 64-year-old firebrand… rode a wave of public anger over crime, corruption and poverty to deliver a crushing blow to the business-friendly parties in power for decades. While AMLO, as he is known, vowed to respect oil contracts and central bank autonomy, his procession to victory alarmed investors. Some fear his policies may spark the kind of collapse in the $1.2 trillion economy - and the region's second-largest crude producer - seen in Venezuela, Argentina and Brazil in recent years."
July 2 - Bloomberg (Nacha Cattan, Eric Martin and Amy Stillman): "Andres Manuel Lopez Obrador was elected as Mexico's first left-wing president in recent times, riding a public revolt against rampant crime, corruption and poverty and handing a crushing defeat to the business-friendly parties who've run the country for decades. Lopez Obrador's coalition also looks poised to pick up scores of seats in Congress, with some polls indicating that it may actually take a majority in both legislative chambers."
July 2 - Bloomberg (Alex Tanzi): "Brazil June IHS Markit PMI manufacturing activity dropped below 50.0 for the first time since March 2017, according to… IHS Markit Brazil Manufacturing Purchasing Managers' Index. The June index fell to 49.8 from 50.7 in May. A truck drivers' protest impacted the performance of Brazil's manufacturing industry as fewer orders were received and fewer deliveries were made. The protests hit production and increased prices."
July 3 - Bloomberg (Selcan Hacaoglu): "Turkey's consumer inflation accelerated more than expected to the highest level in nearly 15 years, heaping pressure on the central bank to raise borrowing costs and further weakening the embattled lira. The annual inflation rate rose to 15.4% in June from 12.2% the previous month as the lira's unabated slide against the dollar fueled price increases. The reading exceeded the median estimate of 13.9%... Monthly inflation was 2.6%, compared with 1.3% forecast…"
July 4 - Bloomberg (Henry Hoenig): "China may be the world's factory floor, but South Korea is the top supplier of the semiconductors that go into our laptops and cars and whatever else needs one. Now, the link between them is set to cause South Korea some pain. A global boom in demand for semiconductors has driven recent growth in Asia's exports. But the chip sector's outsize role in South Korea's exports and economic growth can cut both ways, leaving the country among the most exposed to U.S. tariffs on Chinese imports."
July 3 - CNBC (Saheli Roy Choudhury): "India's banking sector crisis has left most state lenders hamstrung with mounting levels of bad loans, investigations into fraud and restricted growth opportunities. Amid that storm, private banks are set to emerge as winners. India's public-sector financial institutions control about 70% of all banking assets in the country, but they have the highest exposure to soured loans amounting to as much as $150 billion. In fact, the 21 state-owned banks had stressed loans of about 8.26 trillion rupees ($120bn) as of Dec. 31… Private sector lenders, meanwhile, reportedly had a bad loan pile of just about 1.1 trillion rupees."
July 1 - Financial Times (Kate Allen): "Countries that are vulnerable to climate change are paying significantly more to borrow from the financial markets, according to new research, as investors price in the risks. The most vulnerable developing countries have already paid more than $40bn in additional interest payments on their governments' debt because of their exposure to climate change risks. That is set to cost them a further $168bn in the next decade, the study by academics from Imperial College Business School and SOAS University of London found. The most affected countries include Ghana, Tanzania, Kenya, Bangladesh and Vietnam."
Central Bank Watch:
July 1 - Reuters (Francesco Canepa, Frank Siebelt and Thomas Escritt): "The next head of the European Central Bank must be someone who can tighten the money taps after years of crisis-fighting and stimulus, the head of the Bundesbank Jens Weidmann said… Weidmann, seen as a leading candidate to replace Mario Draghi in November 2019, has so far avoided throwing his hat into the ring for the job, which is decided on by euro zone finance ministers. But, when asked on Sunday about the next ECB President, his comments were closely aligned with some of his own views, including his long-standing call for the bank to halt extraordinary stimulus measures and tighten monetary policy."
July 2 - Bloomberg (Karlis Salna): "Indonesia's central bank is showing its willingness to sacrifice economic growth for currency stability in its latest aggressive move on interest rates. Bank Indonesia surprised economists with a bigger-than-forecast 50 bps hike on Friday, on top of two rate increases in May aimed at halting a currency rout. That takes the benchmark rate to 5.25%... Southeast Asia's biggest economy has been among the hardest hit in the region following a sell-off in global emerging markets…"
Global Bubble Watch:
July 3 - Bloomberg (Sony Kapoor): "It is a decade since Lehman Brothers collapsed and the time of year when the markets are worried about another 'summer surprise.' No two market shocks are identical, and no one has yet mastered the timing of market crashes. However, knowing where vulnerability lies makes for better risk management, and maybe more carefree vacations. There are four main areas of worry that, taken together, suggest the global economy may be in a more fragile place than it was even at the eve of Lehman's demise a decade ago. First… there is a record level of indebtedness in the global economy. It is not just the amount of public and private debt which is worrying, but also the deterioration in average quality. There is now $63 trillion of sovereign debt outstanding, with total debt at $237 trillion, a full $70 trillion above pre-Lehman levels. There are only 11 sovereigns and only two U.S. firms left with a AAA rating… The 2007 U.S. deficit at $161 billion or 1.1% of GDP pales in comparison to this year's projection of $804 billion. America's public debt-to-GDP ratio has risen to over 105% of GDP from around 65% of GDP in 2008… In the euro zone too debt is now 20% higher, rising 60% in Spain; and Italy's public debt, already high in 2008, has now breached 130% of GDP, a full 30% higher than its 2008 level… Second, with quantitative easing having left central banks with a record $15 trillion of assets on their balance sheets, and interest rates still close to record lows, there is limited room for a robust monetary policy response to another shock… Third, the political center, which was strong in 2008, has frayed considerably in almost all major economies. Populism of both the far right and far left variety is rising… Fourth is the collapse of trust and weakening in the international order."
July 4 - Reuters (Tom Miles): "Trade barriers being erected by major economies could jeopardize the global economic recovery and their effects are already starting to show, the World Trade Organization said… in a report on trade restrictions among G20 nations. 'This continued escalation poses a serious threat to growth and recovery in all countries, and we are beginning to see this reflected in some forward-looking indicators,' WTO Director General Roberto Azevedo said…"
July 5 - Financial Times (Kate Allen): "Emerging market borrowers have had their quietest month in the bond market for nearly three years, underlining the challenge that issuers will face as markets enter a summer slowdown. Deteriorating sentiment towards emerging markets in recent months has seen EM sovereigns and corporates sell just $15bn of syndicated bonds in June, the lowest monthly total since late 2015… The second-quarter total of $132.7bn in debt sold was the slowest three-month period for three years. The widespread EM sell-off has sent the flagship JPMorgan EM bond index down 3.1% in the past three months, triggering large outflows from EM specialist funds."
July 1 - Wall Street Journal (Dana Mattioli and Dana Cimilluca): "This M&A market is zooming into record territory, helped along by factors not normally seen as big catalysts for deals: technological disruption and a court decision. There have been $2.35 trillion of deals announced globally so far in 2018, up 57% from the same period a year earlier, according to Dealogic. Should that pace continue, there would be a total of $4.8 trillion worth of mergers and acquisitions for the full year, beating the prior record of $4.3 trillion set in 2007. Like in 2007 and 2015, the second-busiest year by a hair, big deals abound. So far in 2018, there have been 25 mergers valued at $10 billion or more… That is a record for the first half of the year, surpassing the prior high-water mark of 20 set in 2007."
July 4 - Wall Street Journal (Manju Dalal): "Plunging bond prices in an obscure corner of the Asian credit markets are starting to worry investors. In recent weeks, yields on more than a dozen U.S. dollar bonds issued by Chinese local governments have surged as their prices dropped sharply on concerns of potential defaults. The issuers are known as local government financing vehicles, which in recent years took advantage of hospitable market conditions and bond investors' thirst for yield to raise money to fund things like roads, ports, factories and railway projects. There are around 90 such financing vehicles with more than $40 billion in U.S. dollar debt outstanding, roughly half of which comes due in 2019 or 2020, according to ANZ Research."
June 30 - Financial Times (Chris Flood): "Increasing concern about the effect of a possible trade war between the US and China has forced investors in equity funds to head for the exits. Investors pulled $29.7bn from equity funds in the week ended June 27, the second largest weekly outflow since the beginning of the millennium, according to… EPFR."
July 2 - Bloomberg (Emily Cadman): "Australian housing prices fell for a ninth straight month in June as tighter credit rules weigh on buyers. Property values fell 0.2% nationally last month, to be 1.3% lower than their September peak, according to CoreLogic… The decline was led by the biggest cities, with prices falling 0.3% in Sydney and 0.4% in Melbourne. Under pressure from regulators, banks have been cutting back on riskier loans such as interest-only mortgages, and getting tougher on expense and income verification."
July 3 - BBC: "Shares in mining giant Glencore sunk as much as 12% after it was ordered by US authorities to hand over documents relating to a money laundering probe. The subpoena from the US Department of Justice is in relation to compliance with the Foreign Corrupt Practices Act and money-laundering laws. It is regarding business dealings in Nigeria, Democratic Republic of Congo and Venezuela from 2007 onwards."
Europe Watch:
July 2 - Reuters (Thomas Escritt and Madeline Chambers): "German Chancellor Angela Merkel's conservatives settled a row over migration that threatened to topple her fragile governing coalition… after talks with her rebellious interior minister led him to drop his threat to resign. Emerging after five hours of talks, Horst Seehofer, leader of Bavaria's Christian Social Union (CSU), told reporters he would remain in his post after a deal with Merkel's Christian Democrats (CDU) that he said would stem illegal immigration."
July 5 - Reuters (Joseph Nasr and Thomas Escritt): "German Chancellor Angela Merkel said… she would back a lowering of EU tariffs on U.S. car imports, responding to an offer from Washington to abandon threats to impose levies on European cars in return for concessions. Merkel said any such measures would require the European Union to also lower tariffs on cars imported from countries other than the United States, otherwise the plan would not be conform to World Trade Organization rules."
June 30 - Financial Times (Wolfgang Münchau): "The EU faces two existential challenges: one from Donald Trump and one from Matteo Salvini, the leader of Italy's far-right League. The threat posed by the US president is obvious, direct and brutal. Trade tariffs for European cars will probably happen. The EU is paying a price for its over-dependence on the US as an absorber of export surpluses and for external security. But the threat posed by Mr Salvini may be more potent if not quite so direct. Since he agreed to join a coalition with the Five Star Movement, he made two politically cunning decisions: the first was to suspend the talk about an Italian euro exit. The second is to use his role as interior minister as a bully pulpit with terrifying success."
June 30 - Financial Times (Chris Flood): "Matteo Salvini, Italy's deputy prime minister and leader of the far-right League, has said next year's European elections are an opportunity to create an 'international alliance of populists' and overcome a 'Europe of the elites'. Mr Salvini, whose party has been soaring in opinion polls this year after it took the reins of government in Rome, is emerging as one of the most disruptive politicians in the EU, challenging Brussels and individual EU capitals on everything from economic policy to immigration and foreign affairs. At a political rally in Pontida…, Mr Salvini told activists, lawmakers and supporters that he was gearing up for the next political battle after taking power following Italy's general election in March."
Fixed Income Bubble Watch:
July 3 - Bloomberg (Alexandra Harris and Liz Capo McCormick): "With all the focus on the shape of the U.S. yield curve recently, fixed-income traders could be forgiven for not concentrating so much on the growing tumult in the fed funds rate. Not anymore. Rising money-market rates have forced Federal Reserve officials to take unprecedented steps to maintain control over their key policy benchmark -- and the job is about to get harder. With the Treasury continuing to ramp up bill issuance and the central bank's balance sheet unwind accelerating, the front-end is poised to take center stage… From further policy-tool adjustments, to the outlook for balance-sheet normalization, to America's debt-management strategy, the influence of short-term rates is set to reverberate through the financial system. It's forcing traders to focus on funding markets once again, just months after Libor's surge brought the usually sleepy corner of the fixed-income world roaring to the fore."
July 3 - Bloomberg (Shelly Hagan): "The U.S. corporate bond market is bracing for a flood of supply from mergers and acquisitions in the second half of the year. Borrowers will have to pay up after a first-half deluge helped wreck spreads. Sales of investment-grade bonds tied to M&A surged by 50% to $154 billion in the first half compared with the same period last year, driven by a slew of deals… That pickup in supply helped push spreads in the secondary market to the highest level in a year and a half. The trend could continue for the next six months. There's more than $1 trillion in pending M&A deals…"
July 4 - Financial Times (Alexandra Scaggs): "For the US corporate bond market, current conditions can be described with a comparison made famous in the financial crisis film Margin Call: the proverbial game of musical chairs is still on but the pace of the song has become more frenetic. This year, the corporate bond market has been defined by a marked shift away from quality with lower-rated issues outperforming bonds from companies with stronger balance sheets… Investment grade companies rated at triple B minus and higher lost 3.1% this year through to the end of June, according to ICE BofAML indices, while those rated in the junk tier (double B plus and below) have eked out a positive return of 0.1%. The divergence is even starker in the lowest triple C-rated tier of debt that makes up just 12% of the high-yield market's value."
July 1 - Financial Times (Owen Walker): "A host of large bond funds from companies such as Pictet Asset Management, Pimco and Allianz Global Investors have been butchered in the rout of emerging markets. Plunging returns and large outflows have caused some funds to lose hundreds of millions of dollars, with one AllianzGI fund shrinking by two-thirds this year. Pictet's $5.6bn Global Emerging Debt fund suffered $809m of outflows in May alone and Pimco's $2.5bn GIS Emerging Local Bond fund bled $596m the same month, according to Morningstar…"
Leveraged Speculator Watch:
July 2 - Bloomberg (Charles Stein): "Kenneth Heebner, once America's top stock-picker, has found the going tougher these days. Heebner's $768 million CGM Focus Fund fell 18% in the first half of 2018, the biggest drop among more than 900 diversified domestic equity mutual funds with at least $500 million in assets… The S&P 500 Index returned 2.7%, including reinvested dividends."
Geopolitical Watch:
July 1 - Wall Street Journal (Jonathan Cheng): "North Korea is completing a major expansion of a key missile-manufacturing plant, said researchers who have examined new satellite imagery of the site, the latest sign Pyongyang is pushing ahead with weapons programs even as the U.S. pressures it to abandon them. The facility makes solid-fuel ballistic missiles-which would be able to strike U.S. military installations in Asia with a nuclear weapon with little warning-as well as re-entry vehicles for warheads that Pyongyang might use on longer-range missiles…"
June 30 - Reuters (John Irish): "U.S. President Donald Trump will suffocate Iran's 'dictatorial ayatollahs', his close ally Rudy Giuliani said on Saturday, suggesting his move to re-impose sanctions was aimed squarely at regime change… 'I can't speak for the president, but it sure sounds like he doesn't think there is much of a chance of a change in behavior unless there is a change in people and philosophy,' Giuliani told Reuters…"
Freddie Mac 30-year fixed mortgage rates declined three bps to 4.52% (up 56bps y-o-y). Fifteen-year rates fell five bps to 3.99% (up 77bps). Five-year hybrid ARM rates sank 13 bps to 3.74% (up 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.58% (up 48bps).
Federal Reserve Credit last week dropped $12.6bn to $4.260 TN. Over the past year, Fed Credit contracted $167bn, or 3.8%. Fed Credit inflated $1.449 TN, or 52%, over the past 296 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.8bn last week to $3.396 TN. "Custody holdings" were up $79.7bn y-o-y, or 2.4%.
M2 (narrow) "money" supply expanded $14.9bn last week to a record $14.133 TN. "Narrow money" gained $584bn, or 4.3%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits declined $6.5bn, while Savings Deposits jumped $16.6bn. Small Time Deposits added $3.3bn. Retail Money Funds were little changed.
Total money market fund assets slipped $3.3bn to $2.822 TN. Money Funds gained $195bn y-o-y, or 7.4%.
Total Commercial Paper dropped $20.1bn to $1.065 TN. CP gained $118bn y-o-y, or 12.5%.
Currency Watch:
July 4 - Bloomberg (Gregor Hunter): "The sharpest decline in China's currency since policy makers devalued the yuan in 2015 has seen little of the capital-flight panic that gripped markets back then. How long the calm lasts depends in part on the effectiveness of controls put in place last time. This time around, the yuan's 3.6% slide since mid-June has been accompanied mainly by an outflow of cash from foreign, rather than domestic, investors, analysts say… Chinese operators face tight constraints -- ranging from official scrutiny of trade invoices to detailed justification for certain overseas transactions -- put in place years ago to stem an exodus of funds. The cost of the 2015-16 shore-up-the-yuan campaign was high: the central bank burned through $1 trillion of foreign-exchange reserves, and took some criticism in international forums for how it managed the exchange rate."
The U.S. dollar index declined 0.6% to 93.963 (up 2.0% y-t-d). For the week on the upside, the Mexican peso increased 4.6%, the Swedish krona 2.5%, the South African rand 1.9%, the Norwegian krone 1.5%, the New Zealand dollar 0.9%, the British pound 0.6%, the euro 0.5%, the Canadian dollar 0.4%, the Brazilian real 0.4%, the Australian dollar 0.3%, the Singapore dollar 0.3%, the Japanese yen 0.3% and the Swiss franc 0.1%. For the week on the downside, the South Korean won declined 0.1%. The Chinese renminbi declined 0.33% versus the dollar this week (down 2.05% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.2% (up 8.7% y-t-d). Spot Gold recovered 0.2% to $1,255 (down 3.7%). Silver slipped 0.6% to $16.069 (down 6.3%). Crude declined 45 cents to $73.80 (up 22%). Gasoline fell 1.9% (up 17%), and Natural Gas dropped 2.1% (down 3%). Copper sank 4.7% (down 14%). Wheat rallied 2.8% (up 21%). Corn added 0.5% (up 6%).
Trump Administration Watch:
July 5 - CNBC (Chloe Aiello): "President Donald Trump said on Thursday tariffs on $34 billion worth of Chinese goods will kick-in at 12:01 a.m. EST on Friday morning. Another $16 billion are expected to go into effect in two weeks, he said. Aboard Air Force One on his way to a rally in Montana, Trump told reporters he would also consider imposing additional tariffs on $500 billion in Chinese goods, should Beijing retaliate. First '34, and then you have another 16 in two weeks and then as you know we have 200 billion in abeyance and then after the 200 billion we have 300 billion in abeyance. Ok? So we have 50 plus 200 plus almost 300,' Trump said."
July 5 - Bloomberg: "The world's two largest economies are set Friday to slide deeper into a trade conflict that's roiled markets and cast a shadow over the global growth outlook. In Beijing, policy makers are digging in for what could be a protracted fight -- one in which they say they won't be the aggressor. If the U.S. begins imposing additional steep tariffs on Chinese imports as of Friday, then Beijing is poised to respond in kind. With further tit-for-tat levies already threatened, this week could mark the start of a new and damaging phase. The U.S. imposition of tariffs on $34 billion of China's exports will not only hurt China, but America itself and the rest of the world, Gao Feng, China's Commerce Ministry spokesman, said… Beijing's retaliatory tariffs will become effective 'immediately' after the U.S. acts…"
July 5 - Reuters (Elias Glenn and Christian Shepherd): "The United States is 'opening fire' on the world with its threatened tariffs, China warned…, saying no one wants a trade war but it will respond the instant U.S. measures go into effect, as Beijing ramped up the rhetoric in the heated dispute. The Trump administration's tariffs on $34 billion of Chinese imports are due to go into effect at 0401 GMT on Friday, which is just after midday in Beijing."
July 2 - CNBC (Silvia Amaro): "The United States could get a new round of retaliatory tariffs worth as much as $300 billion, if it moves ahead with new duties on European cars, the Financial Times reported. In a written statement to the U.S. Department of Commerce, seen by the news publication, the EU set out clear plans to respond to potential U.S. duties on European cars. …European leaders are getting more convinced that President Donald Trump will put new tariffs on European cars."
July 4 - Bloomberg (Patrick Donahue, Arne Delfs and Birgit Jennen): "German Chancellor Angela Merkel raised the specter of the global financial crisis as she warned of potential fallout from a trade war with the U.S., saying tariffs on European cars would be 'much more serious' than levies on steel and aluminum… Faced with President Donald Trump's threat to target U.S. imports of cars from Europe, German and French government officials plan to meet next week in Paris to coordinate strategy. 'The international financial crisis, which ensured that we now act in the framework of the G-20, would never have been resolved so quickly, despite the pain, if we hadn't cooperated in a multilateral fashion in the spirit of comradeship,' Merkel said… 'This has to happen.'"
July 1 - The Hill (Niv Elis): "President Trump spent the first year of his presidency singing the praises of the stock market, which rose precipitously in anticipation of GOP tax cuts and business-friendly deregulation. Nearly seven months into 2018, Trump barely mentions the markets anymore… During his first full year in office, Trump tweeted the phrase 'stock market' 46 times, almost once a week. Since Jan. 26, when the market topped out at 2,872 and headed into a correction, Trump has only tweeted about it twice."
June 30 - MarketWatch (Greg Robb): "It has been a long time -the early 1990s in fact- since a White House tried to influence Federal Reserve policy the way Trump economic advisor Larry Kudlow did on Friday. In an interview with Fox Business Network, Kudlow jawboned the Fed, saying: 'My hope is that the Fed, under its new management, understands that more people working and faster economic growth do not cause inflation.' 'My hope is that they understand that and that they will move very slowly,' he added. It was the senior advisers to President George Bush, particularly Treasury Secretary Nicholas Brady, who pushed the Fed to cut rates at a faster pace in the run-up to the recession that lasted from July 1990 until March 1991."
July 1 - CNBC (Fred Imbert): "President Donald Trump said… he wants to wait until after the midterm elections to move forward on a new NAFTA deal with Mexico and Canada, with the parties locked in tough negotiations. The Congressional midterms are scheduled for Nov. 6, with Democrats poised to gain seats in the House, and possibly retake a majority. Separately, trade tensions between the three NAFTA principals have increased recently, with the U.S. slapped import tariffs on Mexican and Canadian steel and aluminum imports."
July 1 - Axios (Jonathan Swan): "Axios has obtained a leaked draft of a Trump administration bill - ordered by the president himself - that would declare America's abandonment of fundamental World Trade Organization rules. Why it matters: The draft legislation is stunning. The bill essentially provides Trump a license to raise U.S. tariffs at will, without congressional consent and international rules be damned. The details: The bill, titled the 'United States Fair and Reciprocal Tariff Act,' would give Trump unilateral power to ignore the two most basic principles of the WTO and negotiate one-on-one with any country:"
July 3 - Reuters (Jeff Mason and Jan Strupczewski): "U.S. President Donald Trump warned the World Trade Organization on Monday that 'we'll be doing something' if the United States is not treated properly, just hours after the European Union said that U.S. automotive tariffs would hurt its own vehicle industry and prompt retaliation. Trump, speaking to reporters during a meeting with Dutch Prime Minister Mark Rutte at the White House, said, 'The WTO has treated the United States very, very badly and I hope they change their ways.'
Federal Reserve Watch:
July 5 - CNBC (Jeff Cox): "Federal Reserve officials worry that letting the U.S. economy run too strong could cause major problems down the road if left unchecked, according to minutes from the most recent central bank meeting. Some members expressed 'concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn,' the meeting summary… As a result, almost all officials at the central bank believe they should continue to raise interest rates on a regular basis."
July 3 - CNBC (Richard Bove): "Washington and the nation are very focused on the fact that Supreme Court Justice Anthony Kennedy has resigned, leaving the high court vulnerable to ideological change. Not really focused upon as much is an offhand remark made by Larry Kudlow, the director of the National Economic Council... Mr. Kudlow suggested that he hoped that the Federal Reserve would raise interest rates very slowly. While one might agree or disagree with Mr. Kudlow's remark…, what is of greater interest is that he made the statement. It breaks a precedent that presidents… have followed for more than two and half decades - i.e., the independence of the Federal Reserve would be respected. Mr. Kudlow understands that he is changing policy. What's more, he undoubtedly understands that the While House can, and I believe will, take total control of the Federal Reserve. It is very possible that monetary policy will become a political, not an economic or financial decision."
July 1 - Wall Street Journal (Nick Timiraos): "After the last recession, the Federal Reserve built up a mammoth $4.5 trillion portfolio of mostly mortgage and Treasury securities in an effort to boost financial markets and the economy. The sum was about equal in value to the total economic output of Japan, the world's third largest economy. Officials could soon take up an important debate about how much to let that portfolio shrink. Last year, they started a program to let securities in the portfolio mature without reinvesting the proceeds in other securities, putting it on a path to shrink to $3 trillion by 2020. Some officials are now wondering if they can end this 'run-off' process sooner than planned and manage monetary policy with a larger portfolio in the long run."
U.S. Bubble Watch:
July 5 - Financial Times (Jason Cummins): "In Newton's First Law, an object in motion stays in motion until a force acts upon it. Under new leadership, the Federal Reserve's monetary policy strategy appears to be following the same logic. In his June press conference, chairman Jay Powell said the Fed would raise interest rates until 'we get a sense that the economy is reacting badly'. The latest numbers suggest the US economy is doing anything but reacting badly. The unemployment rate declined to 3.75%, a 48-year low... Consumer prices rose 2.3% in May from a year earlier. Excluding volatile food and energy categories, core personal consumption expenditures inflation moved up to 2%, matching the Fed's target for the first time in more than six years. Despite downside risks from trade tension, these trends look set to continue. Monetary policy is still expansionary on top of the sizeable fiscal expansion that will build in the coming years. The labour market is poised to get tighter and put continued upward pressure on inflation."
July 5 - CNBC (Fred Imbert): "Private payrolls grew at a disappointing rate last month as businesses struggled to find enough new hires, ADP and Moody's Analytics said… Jobs in the U.S. grew by 177,000 in June…, while economists… expected a gain of 190,000. June also marked the fourth straight month of jobs growth below 200,000… 'Business' number one problem is finding qualified workers,' Mark Zandi, chief economist at Moody's Analytics, said… 'At the current pace of job growth, if sustained, this problem is set to get much worse. These labor shortages will only intensify across all industries and company sizes.'"
July 3 - CNBC (Diana Olick): "It is a seller's market, undeniably. The supply of homes for sale is low, demand is high, and now prices are heating up even more. But sellers today see more reasons to stay put than to profit. Home prices jumped 7.1% annually in May, according to… CoreLogic. That's the biggest jump in four years. Annual price gains had been shrinking slightly, as mortgage rates rose… They are, however, exacerbating the already critical supply shortage. 'During the first quarter, we found that about 50% of all existing homeowners had a mortgage rate of 3.75% or less,' said Frank Nothaft, chief economist for CoreLogic. "May's mortgage rates averaged a seven-year high of 4.6%, with an increasing number of homeowners keeping the low-rate loans they currently have, rather than sell and buy another home that would carry a higher interest rate."
July 2 - CNBC (Jeff Cox): "Stocks right now are hanging by a thread, boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record. Both sides are motivated by fear, as corporations find little else to do with their $2.1 trillion in cash than buy back their own shares or make deals, while individual investors head to the sidelines amid fears that a global trade war could thwart the substantial momentum the U.S. economy has seen this year. 'Corporate cash is going to find a home, and it's either going to be in buybacks, dividends or M&A activity. What it's not going to be is in capex,' said Art Hogan, chief market strategist at B. Riley FBR."
July 3 - Wall Street Journal (Maureen Farrell): "An IPO market that was left for dead just two years ago has come roaring back in 2018, with companies raising public capital at a pace rarely seen in the past two decades. So far this year, 120 companies have used initial public offerings to raise $35.2 billion on U.S. exchanges. That is the highest volume since 2014 and the fourth-busiest year-to-date on record, according to Dealogic…"
July 3 - CNBC (Patti Domm): "By the Fourth of July, drivers usually see the highest gas prices of summer in the rear-view mirror. That may not be the case this year, even though the national average is down about 14 cents from the near $3 a gallon drivers paid in late May. Consumers are paying the highest Fourth of July gasoline prices in four years."
July 3 - CNBC (Robert Frank): "Manhattan real estate had its worst second quarter since the financial crisis, with prices and sales dropping and inventory rising… Total sales in Manhattan fell 17% in the second quarter from a year ago, according to… Douglas Elliman and Miller Samuel Real Estate Appraisers and Consultants. The average sales price fell 5% to $2.1 million. Brokers blamed the decline partly on bad weather… But analysts say the market is facing bigger pressures, from a huge pipeline of new condos to a dwindling number foreigner buyers, volatile stock markets and new tax changes that make New York less attractive."
China Watch:
July 5 - Bloomberg (Brian Bremner): "Chinese President Xi Jinping has an ambitious master plan for his country's transformation into a wealthy, technology-driven global economic power. And U.S. companies need not apply. That's why the current trade rumble between the U.S. and China… is far more than just a spat over market restrictions, intellectual property rights and the epic U.S. deficit. On a deeper level, the standoff reflects an escalating economic and military rivalry between a status quo power and one of the most remarkable growth miracles in history. It's a clash between two divergent systems, (one state-directed, the other market-driven) with markedly divergent world views and national aspirations. That strategic tension seems likely to intensify, regardless of how the current brinkmanship over tariffs plays out."
July 3 - Wall Street Journal (Lingling Wei and Saumya Vaishampayan): "The yuan's rapid slide is posing a new test for Beijing as it grapples with a looming trade war, putting the central bank under pressure to revive the kind of interventions undertaken in the past to defend the currency's value. In an effort to calm jittery investors, China's central-bank chief Yi Gang… pledged to keep the yuan's exchange rate 'basically stable at a reasonable and balanced level,'… If the yuan continues to weaken in the next few trading days, government advisers and analysts say, the PBOC likely would reach into its tool kit to control the pace of decline, including tweaking the way it sets the yuan's official rate."
July 4 - Reuters (Kevin Yao): "China is comfortable with a weakening yuan, intervening only to prevent any rapid and destabilising declines or to restore market confidence, as the economy loses momentum and faces further risks from a heated trade dispute with the United States, policy insiders said. On Tuesday, as stocks sank and the yuan fell through a key psychological level of 6.7 on the dollar, traders said state-owned banks, which sometimes act on behalf of the central bank, made efforts to prop up the currency. All the same, authorities are confident they won't have to make heavy use of the official foreign exchange reserves to defend the yuan like in 2015 when stocks and the currency went into a tail spin as capital outflows accelerated…"
July 3 - Bloomberg: "China is zooming to a record year of corporate-bond defaults, with the 2018 total already more than three-quarters of the previous high even before an expected economic slowdown bites. Chinese companies have reneged on about 16.5 billion yuan ($2.5bn) of public bond payments so far this year, compared with the high of 20.7 billion yuan seen in all of 2016… Strains are set to get worse if the trends of credit-rating companies are anything to go by -- agencies including Dagong Global Rating Co. have been downgrading firms by an unprecedented margin. 'Corporate profits have worsened this year and are unlikely to improve against the backdrop of an economic slowdown,' Li Shi, general manager of the rating and bond-research department at China Chengxin International Credit Rating Co. 'Refinancing will continue to be tough as long as the crackdown on shadow banking continues.'"
July 4 - Bloomberg: "Signs of pressure on China's property market are deepening, with a report saying that soured loans from the industry could put 'significant stress' on banks and a state researcher warning of accumulating risks in a sector that underpins the economy. The value of bad loans from the real estate industry will increase by at least 20% this year, China Orient Asset Management Co. said… The property market will see an 'increasing correction' under heavier restrictions, leading to a rise in the non-performing loan ratio for the sector to about 1.5%, according to the survey. The report added to a chorus of warnings on the dangers mounting in the property market…"
July 5 - Bloomberg: "Chinese brokerages are sitting on more than $240 billion of loans that grow riskier by the day as the country's equity market tumbles. Extended to company founders and other major investors who pledged their shareholdings as collateral, the loans amount to 103% of Chinese brokerages' net capital, up from 16% in 2013, according to Morgan Stanley. Losses on the debt could wipe out 11% of the industry's net capital, analysts at the U.S. bank wrote… While the loans looked like safe bets as Chinese stocks marched higher over the past two years, a $2 trillion selloff since late January is rapidly eroding the value of brokerages' collateral."
July 3 - Reuters (Robin Emmott and Noah Barkin): "China is putting pressure on the European Union to issue a strong joint statement against President Donald Trump's trade policies at a summit later this month but is facing resistance, European officials said. In meetings in Brussels, Berlin and Beijing, senior Chinese officials… have proposed an alliance between the two economic powers and offered to open more of the Chinese market in a gesture of goodwill."
July 5 - Bloomberg (Venus Fang): "Another day. Another IPO. Another Chinese billionaire magically appears. Mu Rongjun, the co-founder of food-delivery behemoth Meituan Dianping, is poised to be the latest to join the club as the company announced plans to go public last month. Of the 27 billionaires to surface in Asia this year, about a third did so through initial public offerings in Hong Kong and Shenzhen, according to the Bloomberg Billionaires Index. Now the question is whether that torrid pace of wealth creation can continue as global trade tensions mount and markets struggle to hold gains."
July 4 - Bloomberg (Prudence Ho and Geraldine Amiel): "The turmoil deepened at HNA Group Co., the Chinese conglomerate that's been selling billions of dollars in assets to stay afloat, after its No. 2 executive died while touring southeastern France. Co-Chairman Wang Jian, who helped found the group more than two decades ago, fell from a height of about 15 meters (49 feet) … while having his photograph taken in the village of Bonnieux… Wang's sudden death comes as HNA, one of China's most indebted companies, is undertaking an urgent restructuring."
EM Watch:
July 3 - Bloomberg (Lyubov Pronina): "The wheels have come off emerging-market international bond sales. June issuance slumped by two-thirds versus a year earlier, capping a nine percent first-half decline in volume to $332.8 billion, according to Bloomberg data covering dollar and euro debt sales by government and companies from developing nations. The pace is unlikely to pick up in the rest of the year, according to bankers and investors… Issuance has cratered since April, the busiest month this year, with volume halving in May and again in June…"
July 2 - Bloomberg (Vivianne Rodrigues and Ben Holland): "Another election, another populist victory - but voters in Mexico yesterday went in a different direction than Europe and the U.S., choosing their first left-wing president in the nation's modern history. Andres Manuel Lopez Obrador, a 64-year-old firebrand… rode a wave of public anger over crime, corruption and poverty to deliver a crushing blow to the business-friendly parties in power for decades. While AMLO, as he is known, vowed to respect oil contracts and central bank autonomy, his procession to victory alarmed investors. Some fear his policies may spark the kind of collapse in the $1.2 trillion economy - and the region's second-largest crude producer - seen in Venezuela, Argentina and Brazil in recent years."
July 2 - Bloomberg (Nacha Cattan, Eric Martin and Amy Stillman): "Andres Manuel Lopez Obrador was elected as Mexico's first left-wing president in recent times, riding a public revolt against rampant crime, corruption and poverty and handing a crushing defeat to the business-friendly parties who've run the country for decades. Lopez Obrador's coalition also looks poised to pick up scores of seats in Congress, with some polls indicating that it may actually take a majority in both legislative chambers."
July 2 - Bloomberg (Alex Tanzi): "Brazil June IHS Markit PMI manufacturing activity dropped below 50.0 for the first time since March 2017, according to… IHS Markit Brazil Manufacturing Purchasing Managers' Index. The June index fell to 49.8 from 50.7 in May. A truck drivers' protest impacted the performance of Brazil's manufacturing industry as fewer orders were received and fewer deliveries were made. The protests hit production and increased prices."
July 3 - Bloomberg (Selcan Hacaoglu): "Turkey's consumer inflation accelerated more than expected to the highest level in nearly 15 years, heaping pressure on the central bank to raise borrowing costs and further weakening the embattled lira. The annual inflation rate rose to 15.4% in June from 12.2% the previous month as the lira's unabated slide against the dollar fueled price increases. The reading exceeded the median estimate of 13.9%... Monthly inflation was 2.6%, compared with 1.3% forecast…"
July 4 - Bloomberg (Henry Hoenig): "China may be the world's factory floor, but South Korea is the top supplier of the semiconductors that go into our laptops and cars and whatever else needs one. Now, the link between them is set to cause South Korea some pain. A global boom in demand for semiconductors has driven recent growth in Asia's exports. But the chip sector's outsize role in South Korea's exports and economic growth can cut both ways, leaving the country among the most exposed to U.S. tariffs on Chinese imports."
July 3 - CNBC (Saheli Roy Choudhury): "India's banking sector crisis has left most state lenders hamstrung with mounting levels of bad loans, investigations into fraud and restricted growth opportunities. Amid that storm, private banks are set to emerge as winners. India's public-sector financial institutions control about 70% of all banking assets in the country, but they have the highest exposure to soured loans amounting to as much as $150 billion. In fact, the 21 state-owned banks had stressed loans of about 8.26 trillion rupees ($120bn) as of Dec. 31… Private sector lenders, meanwhile, reportedly had a bad loan pile of just about 1.1 trillion rupees."
July 1 - Financial Times (Kate Allen): "Countries that are vulnerable to climate change are paying significantly more to borrow from the financial markets, according to new research, as investors price in the risks. The most vulnerable developing countries have already paid more than $40bn in additional interest payments on their governments' debt because of their exposure to climate change risks. That is set to cost them a further $168bn in the next decade, the study by academics from Imperial College Business School and SOAS University of London found. The most affected countries include Ghana, Tanzania, Kenya, Bangladesh and Vietnam."
Central Bank Watch:
July 1 - Reuters (Francesco Canepa, Frank Siebelt and Thomas Escritt): "The next head of the European Central Bank must be someone who can tighten the money taps after years of crisis-fighting and stimulus, the head of the Bundesbank Jens Weidmann said… Weidmann, seen as a leading candidate to replace Mario Draghi in November 2019, has so far avoided throwing his hat into the ring for the job, which is decided on by euro zone finance ministers. But, when asked on Sunday about the next ECB President, his comments were closely aligned with some of his own views, including his long-standing call for the bank to halt extraordinary stimulus measures and tighten monetary policy."
July 2 - Bloomberg (Karlis Salna): "Indonesia's central bank is showing its willingness to sacrifice economic growth for currency stability in its latest aggressive move on interest rates. Bank Indonesia surprised economists with a bigger-than-forecast 50 bps hike on Friday, on top of two rate increases in May aimed at halting a currency rout. That takes the benchmark rate to 5.25%... Southeast Asia's biggest economy has been among the hardest hit in the region following a sell-off in global emerging markets…"
Global Bubble Watch:
July 3 - Bloomberg (Sony Kapoor): "It is a decade since Lehman Brothers collapsed and the time of year when the markets are worried about another 'summer surprise.' No two market shocks are identical, and no one has yet mastered the timing of market crashes. However, knowing where vulnerability lies makes for better risk management, and maybe more carefree vacations. There are four main areas of worry that, taken together, suggest the global economy may be in a more fragile place than it was even at the eve of Lehman's demise a decade ago. First… there is a record level of indebtedness in the global economy. It is not just the amount of public and private debt which is worrying, but also the deterioration in average quality. There is now $63 trillion of sovereign debt outstanding, with total debt at $237 trillion, a full $70 trillion above pre-Lehman levels. There are only 11 sovereigns and only two U.S. firms left with a AAA rating… The 2007 U.S. deficit at $161 billion or 1.1% of GDP pales in comparison to this year's projection of $804 billion. America's public debt-to-GDP ratio has risen to over 105% of GDP from around 65% of GDP in 2008… In the euro zone too debt is now 20% higher, rising 60% in Spain; and Italy's public debt, already high in 2008, has now breached 130% of GDP, a full 30% higher than its 2008 level… Second, with quantitative easing having left central banks with a record $15 trillion of assets on their balance sheets, and interest rates still close to record lows, there is limited room for a robust monetary policy response to another shock… Third, the political center, which was strong in 2008, has frayed considerably in almost all major economies. Populism of both the far right and far left variety is rising… Fourth is the collapse of trust and weakening in the international order."
July 4 - Reuters (Tom Miles): "Trade barriers being erected by major economies could jeopardize the global economic recovery and their effects are already starting to show, the World Trade Organization said… in a report on trade restrictions among G20 nations. 'This continued escalation poses a serious threat to growth and recovery in all countries, and we are beginning to see this reflected in some forward-looking indicators,' WTO Director General Roberto Azevedo said…"
July 5 - Financial Times (Kate Allen): "Emerging market borrowers have had their quietest month in the bond market for nearly three years, underlining the challenge that issuers will face as markets enter a summer slowdown. Deteriorating sentiment towards emerging markets in recent months has seen EM sovereigns and corporates sell just $15bn of syndicated bonds in June, the lowest monthly total since late 2015… The second-quarter total of $132.7bn in debt sold was the slowest three-month period for three years. The widespread EM sell-off has sent the flagship JPMorgan EM bond index down 3.1% in the past three months, triggering large outflows from EM specialist funds."
July 1 - Wall Street Journal (Dana Mattioli and Dana Cimilluca): "This M&A market is zooming into record territory, helped along by factors not normally seen as big catalysts for deals: technological disruption and a court decision. There have been $2.35 trillion of deals announced globally so far in 2018, up 57% from the same period a year earlier, according to Dealogic. Should that pace continue, there would be a total of $4.8 trillion worth of mergers and acquisitions for the full year, beating the prior record of $4.3 trillion set in 2007. Like in 2007 and 2015, the second-busiest year by a hair, big deals abound. So far in 2018, there have been 25 mergers valued at $10 billion or more… That is a record for the first half of the year, surpassing the prior high-water mark of 20 set in 2007."
July 4 - Wall Street Journal (Manju Dalal): "Plunging bond prices in an obscure corner of the Asian credit markets are starting to worry investors. In recent weeks, yields on more than a dozen U.S. dollar bonds issued by Chinese local governments have surged as their prices dropped sharply on concerns of potential defaults. The issuers are known as local government financing vehicles, which in recent years took advantage of hospitable market conditions and bond investors' thirst for yield to raise money to fund things like roads, ports, factories and railway projects. There are around 90 such financing vehicles with more than $40 billion in U.S. dollar debt outstanding, roughly half of which comes due in 2019 or 2020, according to ANZ Research."
June 30 - Financial Times (Chris Flood): "Increasing concern about the effect of a possible trade war between the US and China has forced investors in equity funds to head for the exits. Investors pulled $29.7bn from equity funds in the week ended June 27, the second largest weekly outflow since the beginning of the millennium, according to… EPFR."
July 2 - Bloomberg (Emily Cadman): "Australian housing prices fell for a ninth straight month in June as tighter credit rules weigh on buyers. Property values fell 0.2% nationally last month, to be 1.3% lower than their September peak, according to CoreLogic… The decline was led by the biggest cities, with prices falling 0.3% in Sydney and 0.4% in Melbourne. Under pressure from regulators, banks have been cutting back on riskier loans such as interest-only mortgages, and getting tougher on expense and income verification."
July 3 - BBC: "Shares in mining giant Glencore sunk as much as 12% after it was ordered by US authorities to hand over documents relating to a money laundering probe. The subpoena from the US Department of Justice is in relation to compliance with the Foreign Corrupt Practices Act and money-laundering laws. It is regarding business dealings in Nigeria, Democratic Republic of Congo and Venezuela from 2007 onwards."
Europe Watch:
July 2 - Reuters (Thomas Escritt and Madeline Chambers): "German Chancellor Angela Merkel's conservatives settled a row over migration that threatened to topple her fragile governing coalition… after talks with her rebellious interior minister led him to drop his threat to resign. Emerging after five hours of talks, Horst Seehofer, leader of Bavaria's Christian Social Union (CSU), told reporters he would remain in his post after a deal with Merkel's Christian Democrats (CDU) that he said would stem illegal immigration."
July 5 - Reuters (Joseph Nasr and Thomas Escritt): "German Chancellor Angela Merkel said… she would back a lowering of EU tariffs on U.S. car imports, responding to an offer from Washington to abandon threats to impose levies on European cars in return for concessions. Merkel said any such measures would require the European Union to also lower tariffs on cars imported from countries other than the United States, otherwise the plan would not be conform to World Trade Organization rules."
June 30 - Financial Times (Wolfgang Münchau): "The EU faces two existential challenges: one from Donald Trump and one from Matteo Salvini, the leader of Italy's far-right League. The threat posed by the US president is obvious, direct and brutal. Trade tariffs for European cars will probably happen. The EU is paying a price for its over-dependence on the US as an absorber of export surpluses and for external security. But the threat posed by Mr Salvini may be more potent if not quite so direct. Since he agreed to join a coalition with the Five Star Movement, he made two politically cunning decisions: the first was to suspend the talk about an Italian euro exit. The second is to use his role as interior minister as a bully pulpit with terrifying success."
June 30 - Financial Times (Chris Flood): "Matteo Salvini, Italy's deputy prime minister and leader of the far-right League, has said next year's European elections are an opportunity to create an 'international alliance of populists' and overcome a 'Europe of the elites'. Mr Salvini, whose party has been soaring in opinion polls this year after it took the reins of government in Rome, is emerging as one of the most disruptive politicians in the EU, challenging Brussels and individual EU capitals on everything from economic policy to immigration and foreign affairs. At a political rally in Pontida…, Mr Salvini told activists, lawmakers and supporters that he was gearing up for the next political battle after taking power following Italy's general election in March."
Fixed Income Bubble Watch:
July 3 - Bloomberg (Alexandra Harris and Liz Capo McCormick): "With all the focus on the shape of the U.S. yield curve recently, fixed-income traders could be forgiven for not concentrating so much on the growing tumult in the fed funds rate. Not anymore. Rising money-market rates have forced Federal Reserve officials to take unprecedented steps to maintain control over their key policy benchmark -- and the job is about to get harder. With the Treasury continuing to ramp up bill issuance and the central bank's balance sheet unwind accelerating, the front-end is poised to take center stage… From further policy-tool adjustments, to the outlook for balance-sheet normalization, to America's debt-management strategy, the influence of short-term rates is set to reverberate through the financial system. It's forcing traders to focus on funding markets once again, just months after Libor's surge brought the usually sleepy corner of the fixed-income world roaring to the fore."
July 3 - Bloomberg (Shelly Hagan): "The U.S. corporate bond market is bracing for a flood of supply from mergers and acquisitions in the second half of the year. Borrowers will have to pay up after a first-half deluge helped wreck spreads. Sales of investment-grade bonds tied to M&A surged by 50% to $154 billion in the first half compared with the same period last year, driven by a slew of deals… That pickup in supply helped push spreads in the secondary market to the highest level in a year and a half. The trend could continue for the next six months. There's more than $1 trillion in pending M&A deals…"
July 4 - Financial Times (Alexandra Scaggs): "For the US corporate bond market, current conditions can be described with a comparison made famous in the financial crisis film Margin Call: the proverbial game of musical chairs is still on but the pace of the song has become more frenetic. This year, the corporate bond market has been defined by a marked shift away from quality with lower-rated issues outperforming bonds from companies with stronger balance sheets… Investment grade companies rated at triple B minus and higher lost 3.1% this year through to the end of June, according to ICE BofAML indices, while those rated in the junk tier (double B plus and below) have eked out a positive return of 0.1%. The divergence is even starker in the lowest triple C-rated tier of debt that makes up just 12% of the high-yield market's value."
July 1 - Financial Times (Owen Walker): "A host of large bond funds from companies such as Pictet Asset Management, Pimco and Allianz Global Investors have been butchered in the rout of emerging markets. Plunging returns and large outflows have caused some funds to lose hundreds of millions of dollars, with one AllianzGI fund shrinking by two-thirds this year. Pictet's $5.6bn Global Emerging Debt fund suffered $809m of outflows in May alone and Pimco's $2.5bn GIS Emerging Local Bond fund bled $596m the same month, according to Morningstar…"
Leveraged Speculator Watch:
July 2 - Bloomberg (Charles Stein): "Kenneth Heebner, once America's top stock-picker, has found the going tougher these days. Heebner's $768 million CGM Focus Fund fell 18% in the first half of 2018, the biggest drop among more than 900 diversified domestic equity mutual funds with at least $500 million in assets… The S&P 500 Index returned 2.7%, including reinvested dividends."
Geopolitical Watch:
July 1 - Wall Street Journal (Jonathan Cheng): "North Korea is completing a major expansion of a key missile-manufacturing plant, said researchers who have examined new satellite imagery of the site, the latest sign Pyongyang is pushing ahead with weapons programs even as the U.S. pressures it to abandon them. The facility makes solid-fuel ballistic missiles-which would be able to strike U.S. military installations in Asia with a nuclear weapon with little warning-as well as re-entry vehicles for warheads that Pyongyang might use on longer-range missiles…"
June 30 - Reuters (John Irish): "U.S. President Donald Trump will suffocate Iran's 'dictatorial ayatollahs', his close ally Rudy Giuliani said on Saturday, suggesting his move to re-impose sanctions was aimed squarely at regime change… 'I can't speak for the president, but it sure sounds like he doesn't think there is much of a chance of a change in behavior unless there is a change in people and philosophy,' Giuliani told Reuters…"
July 5 - Reuters (Bozorgmehr Sharafedin): "The U.S. Navy stands ready to ensure free navigation and the flow of commerce, the U.S. military's Central Command said on Thursday, as Iran's Revolutionary Guards warned they would block oil shipments through the Strait of Hormuz if necessary… Rouhani and some senior military commanders have threatened in recent days to disrupt oil shipments from the Gulf countries if Washington tries to strangle Tehran's exports."
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