Credit Bubble Bulletin

Friday, October 19, 2018

Weekly Commentary: Moscovici and the National Team

From the perspective of monitoring an unfolding global crisis, things turned only more concerning this week. The Shanghai Composite declined to 2,450 in early Friday trading, the low since November 2014 - and down almost 26% y-t-d. Across the globe in Europe, Italian 10-year yields jumped to 3.80% in early-Friday trading, the high going back to January 2014. The spread between Italian and German 10-year sovereign yields surged to as high as 340bps, the widest spread since March 2013.

October 19 - Reuters (Samuel Shen, Andrew Galbraith and Noah Sin): "China's regulators lined up to rally market confidence on Friday with new rules, measures and words of comfort… Vice Premier Liu He, who oversees the economy and the financial sector, supplemented regulators' moves by saying the recent stock market slump 'provides good investment opportunity…' Earlier in the day, the securities regulator, central bank and banking and insurance regulator all pledged steps to bolster market sentiment… Friday's announcements were largely aimed at putting a floor under the tumbling stock market."

"With pressure mounting and anxiety setting in, China's stock markets are anticipating the comeback of the 'national team,'" read the opening sentence of an early-Friday morning article from Beijing-based business media group Caixin. Sure enough, the Shanghai Composite rallied 4.1% off morning lows to close the session up 2.6%. The ChiNext growth index surged 5.6% from its opening level to gain 3.7% for the day. Friday's afternoon rally, however, couldn't erase the week's losses. The Shanghai Composite ended this week down another 2.2%. ChiNext's Friday melt-up reduced the week's losses to 1.5%.

October 19 - Reuters (Massimiliano Di Giorgio): "European Economics Commissioner Pierre Moscovici said on Friday he wanted to reduce tensions with Italy over its 2019 budget, adding it was important to see how Rome responded to the Commission's objections to the fiscal plan. Speaking at a news conference after a two-day visit to Rome, Moscovici said Brussels shared Italy's declared goals of boosting growth and cutting debt, and reiterated that no decision had yet been taken over the budget. He said he wanted to 'reduce tensions and maintain a constructive dialogue' with Italian authorities…"

At least for a few hours, Commissioner Moscovici's comments quelled tensions in the Italian (and European) bond market. After trading as high as 3.80% early in Friday's session, yields then sank 32 bps to end the week at 3.48%. Italy's bank index rallied almost 5% off intraday lows to end the session down 0.4% - and the week down 2.9%. Italy's MIB equities index rallied 2.0% to end the day little changed (down 0.9% for the week).

It's worth noting that Spain's 10-year yields ended the week up six bps to 1.73%, trading this week to the highest yields since March 2017. Things were looking dicey early Friday, as Spanish yields jumped to 1.82%. This briefly pushed the Spanish to German sovereign yield spread to 140 bps, the wide since March 2017. Portuguese yields traded as high as 2.11% Friday morning, with the spread to bunds widening to 170 bps (widest since May). Portuguese yields ended the week at 2.01%.

European debt markets dodged a bullet. After trading down to about 39 bps early Friday, German bund yields ended the week four bps lower at 0.46%. Friday afternoon's bond rally pushed Italian yields down nine bps for the week to 3.47%. Portuguese yields ended the week two bps lower and French yields three bps lower. Moscovici saved the day, reversing what appeared to have the makings of a problematic de-leveraging episode and blowout in European periphery yield spreads.

October 17 - Bloomberg: "China's broadest measure of new credit jumped in September, exceeding all estimates, as officials changed the dataset to reflect surging bond issuance amid steps to encourage investment in infrastructure. Aggregate financing stood at 2.21 trillion yuan ($319bn) in September… That compares with an estimated 1.55 trillion yuan… The central bank revised the calculation for aggregate financing for a second time this year, adding in local government special bond issuance. That took the total in August to 1.93 trillion yuan, from 1.52 trillion yuan previously. New yuan loans stood at 1.38 trillion yuan, versus a projected 1.36 trillion yuan and 1.28 trillion yuan the previous month. Broad M2 money supply increased 8.3%, from 8.2% in August. China's policy makers have stepped up their efforts to increase credit supply…"

It is not only the Europeans galvanized to quash intensifying Crisis Dynamics. China's September Credit data was an eye-opener. "Aggregate financing" jumped to 2.210 TN RMB, or $319 billion, with system Credit continuing its ongoing double-digit annual expansion (10.6%). September growth was about 40% above estimates and a 45% jump from August (growth is typically stronger in September). This puts system Credit growth (excluding national government borrowings) for the first nine months of 2018 at $2.087 TN, down about 10% from comparable 2017. After a huge September, Q3 Credit growth ran slightly ahead of Q3 2017.

Chinese officials again adjusted the composition of aggregate financing data, which now includes local government bond issuance. According to Bloomberg (Chang Shu and Justin Jimenez) "netting out the new sub-component…, the figure comes in… lower than the consensus forecast." September saw enormous issuance of "special local government bonds" (apparently for infrastructure spending), more than offsetting the ongoing contraction of "shadow" lending. Barely positive for the month, net Corporate Bond Issuance slowed notably.

New bank loans came in at about $200bn, only somewhat above estimates. Year-to-date, new loans are running 18% above comparable 2017. Consumer (chiefly mortgage) borrowings remained quite strong, at $108bn in September. This puts y-t-d consumer borrowings 18.2% above comparable '17.

October 15 - Bloomberg (Chris Anstey): "China's moves to boost liquidity in an effort to safeguard economic growth are eroding the country's yield premium over the U.S., putting 'renewed pressure' on the yuan, according to Citigroup... 'Going by its latest policy moves, China has likely halted or even abandoned its financial-deleveraging program' amid the trade war with the U.S., Liu Li-Gang, chief China economist at Citigroup…, wrote... The People's Bank of China has pumped 3.4 trillion yuan ($492bn) into the banking system so far this year through regular open-market operations and cuts in lenders' required reserve ratios, Citigroup estimates."

Beijing these days faces a very serious dilemma managing system Credit. As has over the years become quite the pernicious habit, officials are responding to heightened Bubble Fragility by aggressively stimulating system Credit. They would surely favor the expansion of productive Credit, but increasingly it appears they'll take lending growth wherever they can get it. Portends trouble.

A few of the more obvious problems: 1) Especially with the crackdown on "shadow" finance, Beijing now pushes enormous quantities of risky late-cycle Credit into an already bloated and vulnerable banking system. 2) Stimulus measures are prolonging late-cycle excess throughout increasingly fragile mortgage and apartment Bubbles. 3) China risks stirring further consumer price inflation momentum. September's 2.5% y-o-y CPI rise was exceeded only one month going back to 2013. 4) The size and characteristics of China's runaway Credit expansion pose escalating risk to their already vulnerable currency.

October 14 - Reuters (Clare Jim): "China's property developers usually look forward to the months dubbed 'Golden September and Silver October' as the high season for new home sales. This year is proving to be different. Instead, they are feeling a chill and one major realtor has warned that 'winter' is coming as developers struggle to maintain sales momentum despite gimmicky promotions and discounts. After almost two years of local and central government measures to calm the red-hot market, more signs are emerging that the property sector, a major pillar of China's economic health, is finally slowing down… 'There's downward pressure on home prices especially in third and fourth-tier cities,' said Nomura chief China economist Ting Lu. 'They have been previously rising on stimulus policies for two to three years and now they have reached a peak.'"

October 16 - Financial Times (Tom Hancock): "A wave of protests by Chinese homeowners against falling property prices in several cities has raised fears of a downturn in the country's real estate market, adding to pressure on Beijing to stimulate the economy. Homeowners in Shanghai and other large cities took to the streets this month to demand refunds on their homes after property developers cut prices on new properties to stimulate sales. In Shanghai, dozens of angry homeowners descended on the sales office of a complex that offered 25% discounts to demand refunds, causing clashes that damaged the sales office, according to online reports that were quickly removed by censors. Similar protests have been reported in the large cities of Xiamen and Guiyang as well as several smaller cities."

Keep in mind that these are China's inaugural mortgage and housing Bubbles. Borrowers have never experienced a nationwide downturn. Neither have bankers; same for regulators. A housing bust would pose risk to social stability, not to mention the banking system and economy. Chinese officials over the years have tried about everything to rein in the Bubble. They were just never willing to inflict the degree of pain necessary to break inflationary psychology. They mistakenly cultivated the perception apartment prices only rise, and Beijing will always act to support the market. Now they face a gargantuan Bubble with limited options.

The easy bet is that Beijing will see few alternatives than to adopt only more aggressive reflationary measures (they "worked," after all, in the U.S. and elsewhere!). But will China enjoy the latitude to pull it off? There's a question well worth pondering: "Is China 'emerging' or 'developed'?" Emerging economies invariably lose the flexibility for aggressive Credit expansion and system reflation. Over recent months, we've watched Argentina hike rates to 60% and Turkey to 24%. Other EM central banks raised rates more moderately, all measures to stem the risk of disorderly currency collapse.

Will China retain the flexibility to set low interest rates, to aggressively expand Credit along with adopting other reflationary measures? Or is China, the "King of EM," facing the prospect of a destabilizing currency crisis? A scenario where China is forced to hike rates to support the renminbi would be so destabilizing for its apartment Bubble and banking system that it's difficult to contemplate. That leaves international reserve holdings, capital controls and a rather pressing question: How much "hot money" (and leverage) has gravitated to China's high-yielding instruments?

When I ponder China's incredibly bloated banking sector, its historic apartment Bubble, its local government debt issues, massive future national government borrowings - and likely one of the most maladjusted economies ever - unfortunately I don't see a stable currency in China's future.

October 16 - Financial Times (Don Weinland): "China could be facing a 'debt iceberg with titanic credit risks' following a boom in infrastructure projects by local governments around the country, S&P Global has warned. Local governments may have accrued a debt pile hidden off their balance sheet as high as Rmb30tn to Rmb40tn ($4.3tn to $5.8tn) following 'rampant' growth in borrowings, the rating agency estimated. The mounting debt in so-called local government financing vehicles, or LGFVs, hit an 'alarming' 60% of China's gross domestic product at the end of last year and was expected to lead to increasing defaults at companies connected to regional authorities… Richard Langberg, an analyst at S&P, said there are Chinese cities with 'hundreds' of the local financing vehicles across the country. While defaults at a handful of smaller LGFVs could be handled by the financial sector, 'if they start to let the bigger ones go then we are getting into uncharted territory,' he said."

October 16 - Bloomberg: "The rout in Chinese equities is throwing the spotlight on $613 billion of shares pledged as collateral for loans. Loans extended to company founders and other major investors who pledged their shareholdings as collateral emerged as a popular financing channel in recent years. But given the losses in equities -- Shenzhen's stock benchmark is down 33% in 2018 -- there's a growing risk that brokerages will be forced to sell the shares, accelerating the downturn. At least 36 companies have seen pledged shares liquidated by brokerages since the start of June, more than triple the 10 in the first five months of the year… At least two firms announced after Monday's close that their shares were at risk of forced selling… 'There's a liquidity crisis in the stock market, and pledged shares are again starting to sound the alarm,' said Yang Hai, analyst at Kaiyuan Securities Co. 'If there are no real policies to cure the array of problems and ailments in our market, no one will be willing to take the risk.'"

Reports say a meeting is being arranged between President Trump and Chinese President Xi Jinping at the coming G20 meeting, tentatively for November 29th. Much could unfold by then. The mid-terms are now just two weeks from Tuesday. And it is especially challenging to look out six weeks and contemplate the status of global markets. "Risk off" has gained significant momentum around the globe.

With their stock market in a tailspin, one might expect the Chinese to be rather motivated to adopt conciliatory language and work toward progress on the trade front. Yet there's another scenario that is not as obvious - and certainly not comforting: Mr. Xi and Chinese leadership may feel they have been betrayed and mocked. They distrust the Trump administration, now recognizing their true objective is not trade as much as it is containing China's ascending financial, economic, technological, military and geopolitical power. They are livid that the administration would adopt such a belligerent approach and relish in China's financial distress. A new Cold War has commenced. It would be a zero-sum battle of rival superpowers.

The administration clearly believes they have the Chinese right where they want them. President Trump is quick to note the big decline in China's stock market. For a number of years now, I've feared a major consequence of a bursting Bubble would be the Chinese blaming "foreigners" (chiefly the U.S. and Japan) for their hardship. I just never imagined it would be so straightforward for Beijing to directly link a cause and effect.

The Chinese Bubble is again at the precipice. The last comparable episode, back in late-2015/early-2016, unfolded in a different global backdrop. China implemented additional stimulus measures, while the ECB and BOJ boosted QE and the Fed postponed "normalization". For the most part, rates were near zero globally and bond yields were declining. Pricing pressures were still leaning disinflationary. Global risk markets were neither as inflated nor as fragile as now.

That crisis episode saw the PBOC employ $100s of billions of reserves to stabilize the Chinese currency, in a global backdrop approaching $2.0 TN of annualized central bank liquidity injections. Back then, China was facing a relatively stronger economy and a booming apartment Bubble inclined for "Terminal Phase" excess.

The Chinese have considerably less flexibility today. The burst EM Bubble poses major financial and economic risks for a much more fragile Chinese system. At about $3.0 TN, China's international reserves are down a (mere) trillion from 2014 highs. And pushing more Credit, investment and speculation into Chinese housing at this "Terminal Phase" is a perilous proposition.

For too long China needed to rein in Credit growth. They made an attempt. Not surprisingly, the results have been unsatisfying. The risk of Bubble implosion has now incited yet another round of stimulus measures. But Bubble risk is indomitable, risk that expands parabolically during the "Terminal Phase." I believe there are a number of important factors - domestic and international, economic and financial - working against Beijing's current stabilization efforts. Chinese officials might be at the cusp of finally losing control. The Trump administration provides a most convenient scapegoat.

For the Week:

The S&P500 was about unchanged (up 3.5% y-t-d), and the Dow recovered 0.4% (up 2.9%). The Utilities surged 3.0% (up 3.2%). The Banks declined 0.7% (down 6.5%), while the Broker/Dealers gained 0.9% (down 1.0%). The Transports slipped 0.5% (down 1.6%). The S&P 400 Midcaps were unchanged (down 1.5%), while the small cap Russell 2000 slipped 0.3% (up 0.4%). The Nasdaq100 declined 0.7% (up 11.1%). The Semiconductors fell 2.2% (down 2.2%). The Biotechs dipped 0.6% (up 15.7%). With bullion rising $9, the HUI gold index gained 1.5% (down 19.1%).

Three-month Treasury bill rates ended the week at 2.26%. Two-year government yields gained five bps to 2.91% (up 102bps y-t-d). Five-year T-note yields rose three bps to 3.05% (up 84bps). Ten-year Treasury yields added three bps to 3.19% (up 79bps). Long bond yields rose four bps to 3.38% (up 64bps). Benchmark Fannie Mae MBS yields gained five bps to 4.01% (up 101bps).

Greek 10-year yields declined five bps to 4.33% (up 26bps y-t-d). Ten-year Portuguese yields slipped two bps to 2.02% (up 8bps). Italian 10-year yields fell nine bps to 3.48% (up 147bps). Spain's 10-year yields rose six bps to 1.74% (up 17bps). German bund yields fell four bps to 0.46% (up 3bps). French yields declined three bps to 0.84% (up 5bps). The French to German 10-year bond spread widened a basis point to 38 bps. U.K. 10-year gilt yields fell six bps to 1.58% (up 39bps). U.K.'s FTSE equities index recovered 0.8% (down 8.3%).

Japan's Nikkei 225 equities index declined 0.7% (down 1.0% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.15% (up 10bps). France's CAC40 slipped 0.2% (down 4.3%). The German DAX equities index increased 0.3% (down 10.6%). Spain's IBEX 35 equities index was little changed (down 11.5%). Italy's FTSE MIB index declined 0.9% (down 12.7%). EM equities were mixed. Brazil's Bovespa index gained another 1.6% (up 10.2%), while Mexico's Bolsa was unchanged (down 3.9%). South Korea's Kospi index slipped 0.3% (down 12.6%). India's Sensex equities index fell 1.2% (up 0.8%). China's Shanghai Exchange dropped 2.2% (down 22.9%). Turkey's Borsa Istanbul National 100 index slipped 0.2% (down 16.4%). Russia's MICEX equities index fell 2.4% (up 11.1%).

Investment-grade bond funds saw outflows of $54 million, while junk bond funds saw inflows of $447 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined five bps to 4.85% (up 97bps y-o-y). Fifteen-year rates slipped three bps to 4.26% (up 107bps). Five-year hybrid ARM rates increased three bps to 4.10% (up 93bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.84% (up 73bps).

Federal Reserve Credit last week increased $2.2bn to $4.139 TN. Over the past year, Fed Credit contracted $278bn, or 6.6%. Fed Credit inflated $1.328 TN, or 47%, over the past 311 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $11.0bn last week to $3.433 TN. "Custody holdings" were up $71bn y-o-y, or 2.0%.

M2 (narrow) "money" supply dropped $33.2bn last week to $14.237 TN. "Narrow money" gained $473bn, or 3.4%, over the past year. For the week, Currency was little changed. Total Checkable Deposits rose $16bn, while Savings Deposits sank $58.4bn. Small Time Deposits added $1.7bn. Retail Money Funds gained $4.1bn.

Total money market fund assets declined $14.9bn to $2.873 TN. Money Funds gained $129bn y-o-y, or 4.7%.

Total Commercial Paper dropped $19.5bn to $1.083 TN. CP gained $21bn y-o-y, or 2.0%.

Currency Watch:

October 18 - Bloomberg: "Positions for foreign-exchange purchases on the Chinese central bank's balance sheet last month fell the most since January 2017, reflecting faster capital outflows and more intense official intervention as the yuan weakened. The stockpile shrank 119.4 billion yuan ($17.2bn) to 21.4 trillion yuan… The yuan depreciated more than 8% in the six months through September, and hit its lowest since January 2017 on Thursday after the U.S. Treasury stopped short of naming China a currency manipulator in a report overnight."

October 16 - Bloomberg (Eric Lam): "The drop in the dollar's share of global central-bank reserves in the latest reading was probably influenced by the Trump administration's moves against Russia, according to Goldman Sachs… The Central Bank of Russia probably sold about $85 billion of its $150 billion of U.S. assets during the second quarter after America imposed sanctions… in April, said Zach Pandl, co-head of global FX and emerging-market strategy… President Donald Trump has emphasized the use of unilateral tariff hikes and sanctions in international diplomacy, affecting countries from China to Iran. While the second-quarter shift may end up being a blip, it does showcase risks to the degree of dominance that the greenback continues to command in global reserves stemming from sanctions, the Goldman analysis suggests."

The U.S. dollar index added 0.5% to 95.713 (up 3.9% y-t-d). For the week on the upside, the Brazilian real increased 1.8%, the New Zealand dollar 1.3%, the South African rand 0.7% and the Australian dollar 0.1%. For the week on the downside, the Mexican peso declined 2.2%, the Canadian dollar 0.6%, the British pound 0.6%, the Norwegian krone 0.6%, the euro 0.4%, the Swedish krona 0.3%, the Japanese yen 0.3% and the South Korean won 0.1%. The Chinese renminbi declined 0.10% versus the dollar this week (down 6.09% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 0.9% (up 7.3% y-t-d). Spot Gold gained 0.7% to $1,227 (down 5.8%). Silver was little changed at $14.65 (down 14.6%). Crude dropped $2.39 to $69.12 (up 14%). Gasoline fell 1.7% (up 7%), while Natural Gas jumped 3.3% (up 10%). Copper declined 1.2% (down 16%). Wheat dipped 0.5% (up 21%). Corn fell 1.8% (up 5%).

Market Dislocation Watch:

October 18 - Financial Times (Mehreen Khan): "Brussels responded to Italy's rule-busting budget plan in record time and it packs a punch. It took the European Commission just over 48 hours to formally warn Rome that its spending plans for 2019 represented a break with previous budget promises on a scale that was 'unprecedented in the history of the Stability and Growth Pact'. The letter was hand-delivered… to finance minister Giovanni Tria after a meeting in Rome on Thursday. The commission's rebuke is the first formal warning in a process that could end up with Italy facing financial punishment - from Brussels and the markets - if Rome's populists don't back down. Matteo Salvini and Luigi Di Maio's coalition has until noon on Monday to reply."

October 17 - Bloomberg (Katherine Greifeld): "There's never been a more profitable time for U.S. investors to ditch Treasuries and go abroad. By now, everyone knows Treasuries have been a lousy bet. But because of a quirk in the way currency markets work, there's even less reason for investors to park their money in U.S. government bonds. Those with dollars to spare can lock in historically high returns in Europe and Japan, even though yields in the two markets are among the lowest in the developed world. In fact, dollar investors are getting paid more than ever to enter a trade that takes the currency risk out of their euro-based returns. As a result, they can earn what amounts to 3.8% a year from ultra low-yielding 10-year German bunds… Aside from Italy, hedged U.S. investors would have done better putting their money into the bonds of any developed nation this year rather than Treasuries."

October 18 - Reuters (Richard Leong): "Several measures of U.S. short-term borrowing costs rose sharply on Thursday, suggesting money markets may see more volatility as the Federal Reserve signals interest rates have further to climb in a robust economy. The sudden jump in the benchmark London interbank offered rate, or LIBOR, and a price drop in a futures contract connected to it caught many market participants by surprise. 'What a mess at the front end of the rates market today,' said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott… 'It may be related to the plumbing in financial markets that is not readily apparent.'"

October 14 - Financial Times (Chris Flood): "New business growth has slowed markedly for most of the leading providers of exchange traded funds this year even before the sell-off across global equity markets gathered pace last week. Net inflows for BlackRock have fallen by half to $85.8bn in the first nine months of 2018, compared with the same period last year… New ETF business growth for Vanguard… has dropped by about a third to $68bn. State Street, the third largest ETF manager, is on track for another disappointing year after a lacklustre showing in 2017, which was only saved by a stampede by investors into US equities in the fourth quarter."

October 18 - CNBC (Thomas Franck): "Goldman Sachs CEO David Solomon said… he believes part of October's steep stock sell-off was the result of programmatic trading. 'There's no question when you look at last week, some of the selling is the result of programmatic selling because as volatility goes up, some of these algorithms force people to sell,' Solomon told CNBC's Wilfred Frost. 'Market structure can, at times, contribute to volatility and one of the things that we're spending a bunch of time thinking about at the firm is how changes in market structure over the course of the last 10 years will affect market activity.'"

Trump Administration Watch:

October 12 - Wall Street Journal (Michael C. Bender, Gordon Lubold, Kate O'Keeffe and Jeremy Page): "The Trump administration is moving deliberately to counter what the White House views as years of unbridled Chinese aggression, taking aim at military, political and economic targets in Beijing and signaling a new and potentially much colder era in U.S.-China relations. In the first 18 months of the administration, ties between the world's two biggest powers were defined by negotiations over how to restrain North Korea and ways to rebalance trade. Those high-profile endeavors masked White House preparations for a more hard-nosed stance with Beijing… Interviews with senior White House officials and others in government make clear that recent volleys in what appears a new Cold War aren't the exception to President Trump's China policy. They are exactly what the administration wants…"

October 15 - Bloomberg (Jennifer Epstein): "President Donald Trump threatened to impose another round of tariffs on China and warned that Chinese meddling in U.S. politics is a 'bigger problem' than Russian involvement in the 2016 election. Asked in an interview with CBS's '60 Minutes' whether he wants to push China's economy into a depression, Trump said 'no' before comparing the country's stock-market losses since the tariffs first launched to those in 1929, the start of the Great Depression in the U.S."

October 18 - CNBC (Fred Imbert): "Larry Kudlow, the director of the National Economic Council, went after China… for digging in its heels in trade talks with the U.S. 'They are unfair traders. They are illegal traders. They have stolen our intellectual property,' Kudlow said at the Detroit Economic Club… 'China has not responded positively to any of our asks.' 'America has the greatest technology in the world; it is the backbone of our economy,' he said. 'China can't seem to do that, so they steal it. We can't allow that.'"

October 17 - New York Times (Alan Rappeport and Keith Bradsher): "Fresh off securing trade agreements with South Korea, Canada and Mexico, President Trump is embarking on a new plan: refashioning the Trans-Pacific Partnership to his liking through a flurry of bilateral trade deals. Mr. Trump, who pulled the United States out of the trade pact with 11 other countries that he has called a 'rape of our country,' is now looking to forge deeper trade ties with several of the nations in the alliance, as well as the European Union and the United Kingdom. But while the Trans-Pacific Partnership was aimed at encouraging China to make the extensive economic and structural overhauls that would someday win it a place in the trade pact, Mr. Trump views these new bilateral agreements as a way to contain Beijing's growing economic, geopolitical and territorial ambitions."

October 17 - Wall Street Journal (Kate Davidson): "President Trump reiterated his complaints that the Federal Reserve is raising short-term interest rates too fast, calling the U.S. central bank 'my biggest threat.' 'It's independent so I don't speak to him, but I'm not happy with what he's doing, because it's going too fast," Mr. Trump said in an interview with the Fox Business Network, referring to Fed Chairman Jerome Powell, whom he nominated last year. 'You looked at the last inflation numbers, they're very low,' he said while arguing for a slower increase in interest rates."

October 17 - Reuters (Jonathan Spicer): "White House economic advisor Larry Kudlow said… that U.S. President Trump was not demanding a policy change at the Federal Reserve after Trump heaped more criticism on the Fed on Tuesday, calling rising U.S. interest rates his 'biggest threat.' In what has emerged as a pattern recently, the administration official sought the day after Trump's comments to tamp down the unusual presidential criticism of the U.S. central bank, saying that Trump actually largely agreed with the Fed. 'He is not interfering with their independence,' Kudlow said…"

October 14 - Reuters (Arshad Mohammed): "White House economic adviser Larry Kudlow… played down the U.S. stock market drop as a normal correction and said President Donald Trump had some concern the Federal Reserve may be raising interest rates too fast but respected its independence. 'I think the background is very positive for the stock market and I think, as I said, corrections come and go and people should ... stay very calm over these things, they are quite normal,' Kudlow told the 'Fox News Sunday with Chris Wallace' program…"

Federal Reserve Watch:

October 17 - Bloomberg (Christopher Condon): "Federal Reserve officials stepped deeper into a debate over how high to push interest rates, as a majority favored an eventual and temporary move above the level they deem neutral for the economy in the long run. The clearest summary of policy makers' views, unusually, appeared not in the minutes to the Sept. 25-26 policy meeting… but in the accompanying notes to officials' most recent economic projections. 'A substantial majority of participants expected that the year-end 2020 and 2021 federal funds rate would be above their estimates of the longer-run rate,' according to the document."

October 17 - Reuters (Jason Lange and Pete Schroeder): "Federal Reserve policymakers are largely united on the need to raise borrowing costs further, minutes from their most recent policy meeting show, despite U.S. President Donald Trump's view that interest rate hikes have already gone too far. Every Fed policymaker backed the central bank's September decision to raise the target policy rate to between 2% and 2.25%... Participants in the Fed's rate-setting committee also 'generally anticipated that further gradual increases' in short-term borrowing costs 'would most likely be consistent' with the kind of continued economic expansion, labor market strength, and firm inflation that most of them are anticipating…"

October 18 - Reuters (Jonathan Spicer): "The Federal Reserve should continue with its gradual rate hikes but must be prepared to slow the tightening if U.S. productivity breaks out of a several-year lull, as it may be poised to do, an influential Fed governor said… Randal Quarles, who rarely discusses monetary policy, painted a somewhat more optimistic picture than his colleagues on the economy's longer-term capacity, and said he favored a bit more dovish path than most others at the U.S. central bank."

October 17 - Wall Street Journal (Alan S. Blinder): "When comedian Steve Martin spoke about 'wild and crazy guys,' I'm pretty sure he was not referring to members of the Federal Open Market Committee. In fact, no one-to my knowledge-has ever called FOMC members 'wild' or 'crazy.' Until now. On Oct. 10 President Trump announced, 'I think the Fed has gone crazy.' The president's rant was based on his belief that 'the Fed is making a mistake. They are so tight.' Of course the Federal Reserve makes mistakes. What institution doesn't? Maybe it is making one now, though I don't think so. But can any sensible person call current monetary policy 'tight'? The unemployment rate stands at 3.7%, the lowest in almost 50 years. Under such circumstances, most economists would predict that inflation, which is now around the Fed's 2% target, should be rising."

October 18 - Reuters (Jennifer Ablan): "Goldman Sachs economists… said the firm remained 'comfortable' with its call for five more interest rate hikes - two more than priced in financial markets - through the end of 2019. In a note to clients, Goldman said it feels the Federal Reserve needs to generate a significant tightening in financial conditions to slow the economy to its potential growth pace sooner rather than later, and 'that this will require delivering significantly more hikes than priced in the curve.'"

October 17 - Bloomberg (Brian Chappatta): "Federal Reserve officials have finally caught on to the leveraged-loan boom. In minutes of the Federal Open Market Committee's September meeting, policy makers made explicit for the first time that they're watching for any hint of risks to financial stability stemming from the more than $1 trillion market for U.S. leveraged loans. They're late to pile on. There's been no shortage of warnings from fixed-income traders and credit analysts who track investor protections."

U.S. Bubble Watch:

October 15 - CNBC (Jacob Pramuk): "The U.S. federal budget deficit rose in fiscal 2018 to the highest level in six years as spending climbed… The deficit jumped to $779 billion, $113 billion or 17% higher than the previous fiscal period… It was larger than any year since 2012, when it topped $1 trillion. The budget shortfall rose to 3.9% of U.S. gross domestic product… Federal revenue rose only slightly, by $14 billion after Republicans chopped tax rates for corporations and most individuals. Outlays climbed by $127 billion, or 3.2%. A spike in defense spending, as well as increases for Medicaid, Social Security and disaster relief, contributed to the increase."

October 16 - CNBC (Jeff Cox): "Job openings hit a record in August, indicating companies could face more inflationary pressures ahead with a tight labor market. The vacancies level hit 7.14 million for the month, according to the Job Openings and Labor Turnover Survey, a report Federal Reserve officials watch closely… The total number of hires also reached a record of 5.78 million. Openings dwarfed the total level of workers looking for jobs, which stood at 6.23 million for that month and fell to 5.96 million in September…"

October 17 - Reuters (Aishwarya Venugopal): "Holiday hiring of more than 700,000 workers by U.S. retailers would be the largest since 2014, according to a report by a global outplacement firm, underscoring a robust economy that has seen consumer confidence at its highest in nearly two decades. Retailers have said they would add 704,000 jobs in total to their rosters ahead of the important holiday shopping season…"

October 16 - Wall Street Journal (Eliot Brown and Greg Bensinger): "As international backlash grows over Saudi Arabia's alleged involvement in the possible murder of a journalist, Silicon Valley faces a potentially unsettling fact: The kingdom is now the largest single funding source for U.S. startups. Crown Prince Mohammed bin Salman has directed at least $11 billion of Saudi money into U.S. startups since mid-2016, either directly or through SoftBank Group Corp.'s $92 billion tech-focused Vision Fund, to which the Saudis committed $45 billion… The total invested by the kingdom so far in U.S. startups is far bigger than the total raised by any single venture-capital fund. Some of tech's most prominent young companies have welcomed Saudi money, including Uber Technologies Inc., office-sharing company WeWork Cos. and augmented-reality device maker Magic Leap Inc."

October 17 - Bloomberg (Riley Griffin, Suborna Panja and Kristina D'Alessio): "While Wall Street and U.S. President Donald Trump tout news of a booming stock market and low unemployment, college students may be quick to roll their eyes. The improved economy has yet to mean higher wages for graduates already struggling to pay down massive debt… Federal student loans are the only consumer debt segment with continuous cumulative growth since the Great Recession. As the costs of tuition and borrowing continue to rise, the result is a widening default crisis… Student loans have seen almost 157% in cumulative growth over the last 11 years. By comparison, auto loan debt has grown 52% while mortgage and credit-card debt actually fell by about 1%... All told, there's a whopping $1.5 trillion in student loans out there (through the second quarter of 2018)…"

October 16 - Wall Street Journal (Laura Kusisto): "More than three-quarters of Americans now view renting as more affordable than owning a home, the latest sign that rising mortgage rates and higher home prices will continue to pressure home sales. Some 78% of people now say that renting is more affordable than owning, according to survey data to be released… by… Freddie Mac . That is up 11 percentage points from only six months ago. The survey also indicates that demand for for-sale housing could remain soft in the coming months. Some 58% of renters now say they don't currently have plans to buy a home-up from 54% in February…"

October 18 - Bloomberg (Katia Dmitrieva): "It looks like U.S. apartment and condominium builders are reacting to rising costs and a supply glut the same way: slowing down. Multifamily housing permits -- - those for buildings with two or more units -- dropped last month to the lowest level since March 2016, government figures showed Wednesday. That follows signs of an oversupply of apartments in some U.S. markets, but higher costs are also having an impact. 'The biggest issue is construction cost and within that, labor costs. Because of that, some deals just don't pencil out,' Jeanette Rice, Americas head of multifamily research at brokerage CBRE Group Inc., said…"

October 16 - CNET (Marrian Zhou): "Uber's initial public offering may be worth well over a hundred billion. The ride-hailing company has received proposals from Wall Street banks that value the company at as much as $120 billion in an IPO, according to The Wall Street Journal, which said the offering could take place early next year."

October 15 - CNBC (Lauren Hirsch): "Sears Holdings filed for bankruptcy protection early Monday after years of staying afloat through financial maneuvering and relying on billions of CEO Eddie Lampert's own money. Lampert, who has served as CEO for the past five years, will step down from that post… but remain chairman. The 125-year-old retailer, once the nation's largest, said… it was appointing Mohsin Meghji, managing partner of M-III Partners, as its chief restructuring officer. As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year."

China Watch:

October 18 - Reuters (Kevin Yao and Elias Glenn): "China's economic growth cooled to its weakest quarterly pace since the global financial crisis… The economy grew 6.5% in the third quarter from a year earlier, below an expected 6.6% rate, and slower than 6.7% in the second quarter… It marked the weakest year-on-year quarterly gross domestic product growth since the first quarter of 2009 at the height of the global financial crisis."

October 18 - Bloomberg: "There's nothing like margin calls to make a bad stock-market selloff even worse. It's a risk at the top of investors' minds in China after the nation's $3 trillion equity rout deepened on Thursday, driving the Shanghai Composite Index to a nearly four-year low. With more than $600 billion of Chinese shares pledged as collateral for loans, or about 11% of the country's market capitalization, the worry is that falling stock prices will trigger a downward spiral of forced selling. The country's top financial regulators sought to reassure investors on Friday that they're able to keep risks under control. But some stocks are more vulnerable than others. At least 144 Chinese companies have more than half their shares pledged…"

October 18 - Bloomberg: "China's top financial officials moved to shore up confidence in the country's tumbling stock market, marshaling a rare show of coordinated verbal support as the government tries to prevent a $3 trillion equity rout from infecting the world's second-largest economy. The reassuring words from leaders of China's central bank, securities watchdog, and banking and insurance regulator -- including promises of financial support for local businesses -- followed a bout of investor panic this week that sent the Shanghai Composite Index to a four-year low."

October 18 - Bloomberg: "In China's manufacturing heartland around the Pearl River Delta, Donald Trump's 10% tariffs are causing little concern. The 25% duties that loom next year are another matter. Ben Yang, a furniture maker producing contemporary designs out of his facility in Dongguan -- about 30 miles from Hong Kong -- says that if those higher charges materialize from January as planned, the U.S. share of exports from his Sunrise Furniture Co. could plunge from 90% to less than a third. 'Our major rival is Vietnam and 10 percent tariffs aren't enough to make the difference,' said Yang, 48, who supplies retailers including Rooms To Go Inc. But 25% tariffs are a worry. There will definitely be a short-term impact; Americans may have to accept higher prices.'"

October 17 - Financial Times (Lucy Hornby): "China's private entrepreneurs are shifting away from investments in favour of paying down dollar debt and keeping cash at hand to brace for an economic downturn exacerbated by the Trump administration's trade tariffs… Clients in China 'are concerned about the ongoing slowdown in the economy', 'pessimistic about the outlook for the yuan' and 'pessimistic that an increase in US tariffs from 10% to 25% in January can be averted', Mansoor Mohi-uddin, NatWest Markets' head of forex strategy, wrote after a visit to Beijing last week. Mr Mohi-uddin added that private exporters would focus their cash on repaying dollar debt, as China's loosening policy and the US Federal Reserve's tightening contributed to a weaker renminbi. Data from Refinitiv show that China's private groups are pulling back from issuing fresh dollar debt…"

October 16 - South China Morning Post (Orange Wang): "China's local governments may have accumulated 40 trillion yuan (US$6 trillion) worth of 'hidden debts' that are not reflected in official figures, which is 'a debt iceberg with titanic credit risks' to the world's second biggest economy, S&P Global Ratings said… If all that off-the-books debt - mostly borrowed by local government financing vehicles, known as LGFVs - were included in China's debt figures, the ratio of all government debt to GDP could have reached 'an alarming level' of 60% in 2017, the ratings agency said… According to official figures released by the Chinese Ministry of Finance, local governments had combined outstanding debts of 17.7 trillion yuan (US$2.5 trillion) at the end of August, although Beijing has admitted the existence of 'hidden debts' and attempted to curb unauthorised borrowing by local authorities."

October 16 - Bloomberg: "Chinese consumer inflation accelerated for a fourth month in September, with food prices jumping by the most since February, while the rise in households' non-food costs slowed. The consumer price index rose 2.5% from a year earlier… That was the same as forecast… and faster than the 2.3% report in August. The producer price index climbed 3.6%, compared with a 3.5% estimate and a 4.1% gain the previous month. There has been increasing concern about the effect of rising prices in China since the summer, with floods and animal disease forcing food prices up as rents in major cities rise."

October 18 - Reuters (Yawen Chen and Kevin Yao): "Growth in China's real estate investment eased in September and home sales fell for the first time since April, as developers dialed back expansion plans amid economic uncertainties and as additional curbs on speculative investment kicked in… Growth in real estate investment, which mainly focuses on residential but also includes commercial and office space, rose 8.9% in September from a year earlier, compared with a 9.2% rise in August…"

October 18 - Bloomberg: "China may be in an easing mode to combat slower growth, but financing conditions aren't improving for lower rated firms and they face a 'chilly winter' ahead, according to China Securities Co. Government liquidity injections haven't found its way to weaker firms as investors are still risk averse amid record defaults, said Huang Ling, managing director of China Securities, the top corporate bond underwriter in China since 2015… 'People can't buy enough of AAA bonds but it has been a tough sale for their AA peers this year,' said Huang. 'As a result of market preference, we see a higher proportion of issuance from firms rated AA+ and above, and weaker companies have to tap into all funding options to survive.'"

October 18 - Bloomberg (Carrie Hong and Denise Wee): "A Chinese solar firm has missed a debt deadline, adding to signs of strain in an industry grappling with overcapacity and tariffs. China Singyes Solar Technologies Holdings Ltd. failed to make a payment on $160 million of bonds due on Oct. 17…"

October 13 - Reuters (James Pomfret and Greg Torode): "As Hong Kong's government hews closer to Beijing, officials are taking a tough line on perceived national security threats, even deploying an elite police unit for political monitoring and surveillance - a sharp escalation in rhetoric and action. In just the last few months, the special administrative region has banned the Hong Kong National Party, which espouses separation from China, and barred some activists from standing in local elections. The Education Bureau sent all secondary schools in the Special Administrative Region letters on Sept 24 saying they must prohibit 'the penetration' of the National Party or risk prosecution."

EM Watch:

October 15 - Wall Street Journal (Saumya Vaishampayan and Josh Zumbrun): "Emerging markets worried about their falling currencies and investors rushing to the exits are raising interest rates and keeping a lid on spending, even though doing so is likely to hurt their long-term prospects. Central banks in developing countries including Indonesia and the Philippines have raised their official borrowing costs multiple times this year to keep up with rising rates in the U.S. Economic growth has already slowed in the Philippines from earlier in 2018. While the Indonesian economy grew at the fastest pace in more than four years in the latest quarter, the worry is that higher rates there could start to drag. Countries are making these trade-offs for fear the turmoil that has gripped emerging markets such as Turkey and Argentina could spread more broadly."

Central Bank Watch:

October 13 - Bloomberg (Jessica Shankleman and Alessandro Speciale): "Bank of England Governor Mark Carney warned against the 'weaponization' of assets in the global financial system as central bank chiefs fretted about the impact of a trade war. Speaking at the Group of 30 conference…, Carney stressed the need for investment flows to remain open, alluding to previous warnings that U.S. protectionism affects the real economy through direct channels like reduced trade flows, disrupted supply chains and higher import costs. The use of secondary sanctions in the U.S. can effectively force European firms to stop doing business with third-country parties... 'From the United Kingdom's perspective -- as the second-largest asset management home -- the commitment to openness, an open resilient platform, there's no weaponization of finance,' he told delegates."

Italy Watch:

October 18 - Bloomberg (Viktoria Dendrinou and John Follain): "European Union leaders voiced concerns over Italy's spending plans, putting pressure on the populist government in Rome to rethink its budget and avert a potential standoff with Brussels…. With Italian bond yields close to a four-year high, the prospects for the country's public finances have become a prime focus in the bloc. Prime Minister Mark Rutte said… he expressed Dutch 'concerns regarding Italy's budget plans for 2019' to his Italian counterpart Giuseppe Conte in a bilateral meeting ahead of the summit. Following that discussion, Conte said he wouldn't accept 'prejudices' regarding the Italian budget."

October 17 - Reuters (Francesco Guarascio): "Italian Prime Minister Giuseppe Conte said… he believed there was no room for changing the Italian draft budget for 2019, which the European Union worries would breach the bloc's fiscal rules and increase Italy's debt. 'We have prepared (the budget) very carefully. Therefore I think there is no room for change,' Conte told reporters on arriving to talks with his fellow EU leaders in Brussels."

Europe Watch:

October 15 - Reuters (Joseph Nasr): "German Chancellor Angela Merkel vowed… to restore trust in her government after her conservative allies suffered heavy losses in a regional election, which their far-right foes hailed as 'an earthquake' that would rock the ruling coalition. The Christian Social Union (CSU), the sister party of Merkel's own Christian Democrats (CDU), slumped to its worst result in almost 70 years in Sunday's election in Bavaria. The chancellor's other coalition partner, the centre-left Social Democrats (SPD), saw its support halved."

October 15 - Financial Times (Jim Brunsden): "Donald Tusk, the president of the European Council has warned that a no-deal Brexit 'is more likely than ever before', after negotiators hit an impasse over the weekend, but he urged 'every effort' to salvage the talks. In a letter to EU leaders ahead of a summit meeting in Brussels this week, Mr Tusk said recent negotiations with the UK have 'proven to be more complicated than some may have expected.' 'We should nevertheless remain hopeful and determined, as there is goodwill to continue these talks on both sides'."

October 17 - Reuters (Gabriela Baczynska and Daphne Psaledakis): "British Prime Minister Theresa May assured EU leaders in Brussels… that she can still reach a Brexit deal, avoiding a showdown over stalled talks as Brussels stepped up planning for a failure of negotiations… But three days after talks stalled over the Irish border "backstop", thwarting hopes of a deal at the summit, May arrived determined to stress that an accord was still on the cards."

Global Bubble Watch:

October 15 - Bloomberg (Stefania Spezzati and Sonali Basak): "The world is still full of risks for the banking industry, despite reforms put in place since the financial crisis 10 years ago. That was the main subject of discussions this weekend in Bali, where bankers gathered for the annual meeting of the Institute of International Finance. From market turmoil and trade tensions to rising leverage and the implications of Italy's rule-busting budget, challenges abound -- and, bosses said, banks need to do more to protect themselves. 'The recurring theme is that finance has been strengthened, but not quite fixed,' Fabrizio Saccomanni, chairman of UniCredit SpA and a former deputy governor of the Bank of Italy, said on one of the panels. While a lot has been done to strengthen banks' balance sheets, 'the global factors of crisis are not really under control.'"

October 15 - Reuters (Tom Miles): "Global foreign direct investment (FDI) fell by 41% to $470 billion in the first six months of this year, the lowest since 2005, preliminary figures from the United Nations trade and development agency UNCTAD showed… President Donald Trump's U.S. tax reforms were the main cause of the slump, which followed a 23% fall in 2017, as American firms repatriated a net $217 billion from foreign affiliates, UNCTAD investment chief James Zhan said. 'The investment flows are more policy-driven and less economic cycle-driven,' Zhan told a news conference… 'Overall the picture is gloomy and the prospect is not so optimistic.'"

October 18 - Wall Street Journal (Saabira Chaudhuri): "Two of the world's largest consumer-goods companies, Unilever PLC and Nestlé SA, reported stronger sales as a wave of inflation in many markets emboldened them to raise prices. The new pricing power gives a boost of confidence to the entire industry, which has struggled in recent years with fierce competition and rapidly changing consumer tastes."

October 16 - Wall Street Journal (Edward White and Christian Pfrang): "In July 2017 an analyst at Wells Fargo described Taiwan's booming foreign currency bonds as a 'match made in heaven', representing a 'meeting of the minds for issuers, investors and regulators'. Fifteen months later and those regulators, spooked by currency risks linked to the now $177bn market, will snap shut a loophole that enabled a splurge of purchases by the country's insurance companies over the past five years. 'It is a major blow,' one Taiwan banking executive involved in the previously blossoming bond deals said of the looming regulation. 'The market will become smaller.'"

Fixed Income Bubble Watch:

October 16 - CNBC (Patti Domm): "China trimmed its holdings of U.S. Treasurys in August by about $6 billion, to the lowest level since June 2017. China's holdings of Treasury bills, notes and bonds fell to $1.165 trillion, from $1.171 trillion in July, according to U.S. Treasury data. It is the third month of decline, and well below the recent high of $1.2 trillion a year earlier."

Leveraged Speculation Watch:

October 19 - New York Times (Matt Phillips): "A financial assembly line that went haywire a decade ago and contributed to an economic crisis is gearing up again on Wall Street. Back then, one of the products the banks churned out - bondlike investments based on thousands of mortgages - proved far riskier than most had understood when it turned out that the borrowers couldn't pay. The banking system froze, a financial panic ensued, and the country experienced its worst recession in decades. This time around, a similar kind of investment, called C.L.O.s, are at the heart of the boom. And that's not the only parallel: The loans are being made to risky borrowers, lending standards are dropping fast, and regulators are easing the rules."

Geopolitics Watch:

October 16 - Bloomberg (Bryce Baschuk): "U.S. and Chinese officials clashed in Geneva on Tuesday as the world's two largest economies disagreed over how to reform the global trading system. Deputy U.S. Trade Representative Dennis Shea said the World Trade Organization must confront China's trade abuses while rethinking its preferential rights as a developing nation. Chinese Ambassador Zhang Xiangchen countered that 'no one can be singled out' and that Beijing will not back any effort to undermine the WTO's basic principles. The dispute illustrates the difficulty China and the U.S. face in overcoming escalating tensions that have prompted Washington to impose tariffs on Chinese imports totaling $250 billion and similar retaliatory actions from Beijing…. 'Adequately responding to the challenges of non-market economies is nothing less than an existential matter for this institution,' Shea said… in comments delivered at the WTO."

October 14 - Reuters (Andrew Torchia and Arshad Mohammed): "Saudi Arabia on Sunday warned against threats to punish it over last week's disappearance of journalist Jamal Khashoggi, as European leaders piled on pressure and two more U.S. executives scrapped plans to attend a Saudi investor conference."

October 16 - Financial Times (Henny Sender): "A glance at the foreign-exchange markets suggests that the US dollar looks as powerful and dominant as ever. However, taking a much longer-term view suggests that this impregnable position - and the economic heft that comes with it - will come under assault. One consequence of the America First policies of US President Donald Trump will be to create a bipolar financial world, with China at one end and the US at the other. That will mean smaller financial flows between the two, and a much more robust effort from Beijing to eventually challenge the dollar's status as the world's reserve currency. That, in turn, potentially has implications for everything from the status of US Treasury securities as the safest assets in the world to how oil is priced. 'The Trump administration's 'America First' policy will encourage a long-term move away from the US dollar,' according to Christopher Wood of CLSA, the arm of Beijing-based Citic Securities, pointing to 'the growing American practice of using the dollar as a weapon via the implementation of sanctions and the like.'"

Friday Evening Links

[BloombergQ] Stocks Edge Lower as Treasuries, Greenback Fall: Markets Wrap

[Reuters] Euro, pound rally on Brexit concession; global stocks dip

[Reuters] Fed's Kaplan sees two-three more rate hikes to hit 'neutral' level

[FT] Moody’s pushes Italy’s credit rating closer to junk

[FT] Real estate loans by small banks stir fears

Thursday, October 18, 2018

Friday's News Links

[BloombergQ] U.S. Stocks Gain as Europe Struggles; Dollar Dips: Markets Wrap

[Reuters] Euro, Italian bonds sold as EU warns on Italy budget

[CNBC] Italian bond yields spike to 4-year highs as the EU slams its new budget plan

[CNBC] China markets rebound strongly after turbulent morning; GDP numbers miss forecasts

[BloombergQ] China Urges Investor Calm While Stopping Short of Market Rescue

[BloombergQ] China’s Problems Keep Piling Up With Trump, Economy, and Markets

[Reuters] China economic growth slumps to weakest since 2009, demand ebbs as trade war bites

[Reuters] China Sept industrial output weakens; investment, retail sales beat expectations

[Reuters] China's Sept property investment slows, sales fall

[BloombergQ] The Biggest Companies at Risk as China's Margin Calls Increase

[CNBC] Italy's budget crisis threatens the entire EU project, strategist says

[CNBC] Goldman CEO Solomon says part of October's market sell-off driven by programmatic trading

[NYT] Wall Street Loves These Three Letters. The Rest of Us Should Be Wary.

[NYT] China’s Economy Hits Slowest Pace in a Decade

[WSJ] China Growth Slows to 6.5%; Finance Officials Try to Soothe Worried Investors

[WSJ] Contagion Creeps Back Into Europe’s Bond Markets

[WSJ] Inflation Is Back—and Unilever, Nestlé Are Taking Advantage

[FT] Italy’s budget high noon

Thursday Evening Links

[Reuters] Wall St. slides as Saudi Arabia, Italy add to economic concerns

[Reuters] Goldman Sachs sees five more Fed rate hikes through end of 2019

[Reuters] Money markets show strain with more Federal Reserve rate rises ahead

[Reuters] Fed's Quarles eyes more dovish rate path, U.S. productivity boost

[CNBC] Larry Kudlow: China 'has not responded positively to any of our asks' in US trade talks

[CNBC] China's stock market is getting pummeled and history shows that is bad news for US markets

[BloombergQ] Authers: What the Fed Minutes Didn't Say Is What Matters

Wednesday, October 17, 2018

Thursday's News Links

[BloombergQ] Fed Minutes Weigh on Stocks, Bonds; Yuan Slips: Markets Wrap

[BloombergQ] China Stock Market Rocked by Forced Sellers; Yuan Hits Fresh Low

[Reuters] Treasuries-U.S. yields hold rise as jobless claims fall

[Reuters] Dollar at one week high after hawkish Fed minutes; Asia stocks capped

[Reuters] Despite Trump criticism, Fed sees need for more rate hikes

[BloombergQ] Fed Officials Debated Hiking Rates to Restrictive Territory

[CNBC] US doesn't call China 'currency manipulator' but keeps it on a watch list with Germany, Japan, others

[BloombergQ] Italy's Populist Budget Has Leaders Worried at Brussels Summit

[Reuters] Italy's PM defiant on budget, denies coalition rift

[BloombergQ] In China, Signs of Intervention and Outflow Emerge as Yuan Drops

[BloombergQ] China's Factory Heartland Braces for Trump's Big Tariff Hit

[NYT] Trump Embarks on Bilateral Trade Talks to Pressure China

[WSJ] Blinder: The Fed Is Anything but Crazy

[WSJ] China’s Blowout Bond Sale Is Little Comfort to Junk Issuers

[FT] China’s growth slowdown puts private sector on the defensive

[FT] What is driving the renminbi’s fall?

Wednesday Evening Links

[Reuters] World stocks wobble as Wall St. cuts losses; oil off after U.S. data

[Reuters] Oil prices slump after large build in U.S. stockpiles

[Reuters] Every Fed policymaker was on board for September rate hike: minutes

[Reuters] White House's Kudlow says Trump not demanding Fed policy change

[CNBC] Here's what Wall Street isn't paying attention to from the Fed

[Reuters] Italy's PM Conte sees no room to change 2019 budget plan

[BloombergQ] Apartment Permits in U.S. Hit Two-Year Low on Glut, Rising Costs

[Reuters] U.S. holiday hiring hits highest since 2014 as consumer confidence soars

[Reuters] May faces EU leaders as Brexit talks stall

[WSJ] Fed Minutes Point to Continued, Gradual Interest-Rate Increases

[WSJ] As Easy Money Wanes, Investors Scramble to Adapt

[FT] Fed defies Trump with plans for more tightening

Tuesday, October 16, 2018

Wednesday News Links

[BloombergQ] Stocks Slide as Confidence Fades; Dollar Advances: Markets Wrap

[Reuters] World stock recovery loses steam as European auto sector takes beating

[Reuters] Oil prices fall ahead of U.S. crude stocks data

[Reuters] U.S. housing starts fall more than expected in September

[BloombergQ] U.S., China Clash Over How to Solve ‘Existential’ Trade Threat

[CNBC] Weekly mortgage applications tank 7.1% as interest rates surge to a near 8-year high

[BloombergQ] Bond Traders Are Paid Big to Dump U.S. Treasuries and Go Abroad

[Reuters] China Sept new loans rebound on policy easing, more steps seen

[Reuters] Brazil's federal police asks top court to indict President Temer on graft charges

[Reuters] Pompeo meets Erdogan after talks with Saudis on missing journalist

[BloombergQ] Mueller Ready to Deliver Key Findings in His Trump Probe, Sources Say

[WSJ] Trump Complains About Rising Interest Rates, Calling the Fed ‘My Biggest Threat’

[FT] The weaponisation of the dollar is alienating many governments

[FT] China homeowners stage protests over falling prices

[FT] Italy’s ambitious budget proposals in charts

Tuesday Evening Links

[BloombergQ] U.S. Stocks Rally Most Since March as Tech Surges: Markets Wrap

[BloombergQ] Oil Rises After Industry Reports Surprise U.S. Crude Stock Draw

[CNBC] Trump says Fed is his 'biggest threat' because it is raising rates too fast

[CNBC] China Treasury holdings at their lowest in 14 months

[SCMP] China has US$6 trillion in hidden debts with ‘titanic’ credit risks, S&P says

[CNET] Uber's upcoming IPO could be worth as much as $120 billion

[WSJ] Trump Complains About Rising Interest Rates, Calling the Fed ‘My Biggest Threat’

[WSJ] Saudi Money Flows Into Silicon Valley—and With It Qualms

[WSJ] Big Jump in Americans Saying Renting Is Cheaper Than Owning

[FT] Currency sting sparks Taiwanese bond clampdown

Monday, October 15, 2018

Tuesday's News Links

[Reuters] Degree of calm returns to battered stocks; Italy helps out

[BloombergQ] Stocks Gain, Treasuries Dip as Earnings Roll In: Markets Wrap

[Reuters] Gold hovers near 2-1/2 month high as investors seek safe haven refuge

[Reuters] Oil prices rise on signs Iranian oil exports are falling further in October

[CNBC] Job openings hit record 7.136 million in August

[BloombergQ] China Consumer Inflation Accelerates, Factory Prices Slow

[Reuters] China's cooling factory-gate inflation signals waning demand

[BloombergQ] China’s Stock Rout Puts $613 Billion of Share Pledges at Risk

[CNBC] Even optimists are giving up hope of a quick resolution to the US-China trade war

[BloombergQ] Goldman Says Dollar's Reserve Position Hit by U.S. Sanction Risk

[Reuters] Pompeo meets Saudi king on Khashoggi case, Turks study 'toxic materials'

[WSJ] Don’t Blame the Fed for Jittery Markets

[FT] China faces ‘debt iceberg’ threat, warns rating agency

[FT] Saudi threat creates rare crack in US oil alliance

[FT] Italy’s budget D-Day has arrived

[BloombergSub] China Ditches Deleveraging, Posing Hit to Yuan, Citigroup Says

Monday Evening Links

[Reuters] Wall Street falls, dragged down by tech stocks

[Reuters] Safe havens rise on West-Saudi tension; world stocks fall

[Reuters] Treasuries-U.S. yields rise as supply weighs despite retail sales, geopolitics

[Reuters] Saudi Arabia preparing to admit Khashoggi was killed: CNN

[CNBC] US budget deficit expands to $779 billion in fiscal 2018 as spending surges

[Reuters] U.S. government posts widest deficit since 2012

[BloombergQ] Yellen Says Trump’s Criticism of Fed Policy Is Damaging and Unwise

[Reuters] Italy budget lowers pension age, has basic income for poor - ministers

[Reuters] Global FDI falls 41 percent in H1 2018 after Trump tax reforms - U.N.

[WSJ] U.S. Government Deficit Grew 17% in Fiscal 2018

[WSJ] Emerging-Markets Selloffs: This One Is Different

[FT] EC’s Tusk warns no-deal Brexit ‘is more likely than ever before’

Sunday, October 14, 2018

Saturday, October 13, 2018

Saturday's News Links

[Reuters] Fed official says rate hikes 'right course' for U.S. monetary policy

[Reuters] China views yuan depreciation not in its interest: Mnuchin

[Reuters] China's central bank says market to play decisive role in yuan exchange rate

[BloombergQ] Emerging Markets Brace for Pain as Fed Hikes Meet Trade War

[CNBC] Draghi to Rome: Don't expect an ECB rescue if budget talks fail

[Reuters] Italy budget debacle puts Europe back in global spotlight

[BloombergQ] Italy Is the Creeping Concern for Finance Chiefs in Bali

[CNBC] Germany's Merkel is facing a crucial test of one of her key alliances

[BloombergQ] Shelves Empty as Specter of Hyperinflation Stalks Zimbabwe

[Reuters] Trump says Saudi Arabia faces 'severe punishment' if Khashoggi was killed

[Reuters] Turkey obtains recordings of Saudi journalist's purported killing: paper

[Reuters] Heeding China's call, Hong Kong tightens grip on dissent

[NYT] Why Italy Could Be the Epicenter of the Next Financial Crisis

[WSJ] U.S. Edges Toward New Cold-War Era With China

[WSJ] In China, a Dot-Com Déjà-Vu

[FT] Geopolitical tension casts pall over IMF meeting

[FT] Saudi Arabia: a kingdom in the dock

[FT] The bond ‘spread’ strikes fear and shrugs on Italian streets

Friday, October 12, 2018

Weekly Commentary: Rude Awakening Coming

Please join Doug Noland and David McAlvany this Thursday, October 18th, at 4:00PM EST/ 2:00pm MST for the Tactical Short Q3 recap conference call, "Market Contagion is Back." Click here to register.

There's little satisfaction writing the CBB after a big down week in the markets. Motivation seems easier to come by after up weeks, perhaps my defiant streak kicking in. I find myself especially melancholy at the end of this week. There's a Rude Awakening Coming - perhaps it's finally starting to unfold.

Many will compare this week's market downdraft to the bout of market tumult back in early-February. At the time, I likened the blowup of some short volatility products to the June 2017 failure of two Bear Stearns structured Credit funds - an episode marking the beginning of the end for subprime and the greater mortgage finance Bubble. First cracks in vulnerable Bubbles. Back in 2007, it took 15 months for the initial fissure to develop into the "worst financial crisis since the Great Depression."

I posited some months back that tumult in the emerging markets marked the second phase of unfolding Crisis Dynamics. I have argued that the global government finance Bubble, history's greatest Bubble, has been pierced at the "periphery." More recently, the analytical focus has been on "Periphery to Core Crisis Dynamics." I've chronicled de-risking/deleveraging dynamics making headway toward the "Core." This week the "Core" became fully enveloped, as the unfolding global crisis entered a critical third phase.

Today's backdrop is altogether different than that of February. For one, back then "money" was flowing readily into the emerging markets - too much of it "hot money." "Risk on" was still dominant early in the year. Speculative leverage was expanding, with resulting liquidity abundance on an unprecedented global scale. With such a powerful global liquidity backdrop, a fleeting dislocation in U.S. equities proved no impediment to the hard-charging U.S. bull market. Indeed, global liquidity rushed into U.S. securities markets, fueling powerful speculation blow-off dynamics.

February market instability did, however, mark a key inflection point for risk embracement at the "Periphery." And the combination of acutely vulnerable Bubbles at the "Periphery" and blow-off dynamics at the "Core" proved highly destabilizing. The dollar rally helped push EM currencies over the cliff, while booming markets and economic activity in the U.S. pressured both the Fed and market yields. The upshot was a rather abrupt tightening of financial conditions for the emerging markets that, ironically, spurred a dangerous late-cycle Terminal Phase of speculative excess and resulting loose financial conditions in the U.S.

In stark contrast to February's robust financial conditions, the global liquidity backdrop these days is acutely fragile. Rather than the risk embracement environment from early in the year, risk aversion holds sway. On a global basis, speculative dynamics are dominated by de-risking and deleveraging. Liquidity is being destroyed instead of created, and it is anything but clear in my mind how the unfolding tightening of financial conditions would be reversed.

It is not only the speculative backdrop that has experienced momentous change. The Fed has liquidated about $250bn of its holdings since February. Both the ECB and BOJ have significantly reduced monthly QE liquidity injections from earlier in the year. The Fed has increased rates three times for a total of 75 bps. Rates were hiked to 60% in Argentina and 24% in Turkey. Throughout the emerging markets, central banks have been raising rates.

Global bond yields are much higher than in early-February. Argentine 10-year yields have surged 360 bps to 9.66%. Yields are up 685 bps in Turkey (21.1%), 340 bps in Pakistan (11.56%), 326 bps in Lebanon, 250 bps in Indonesia, 157 bps in Russia, 152 bps in Hungary, 114 bps in Brazil, 112 bps in Philippines, 105 bps in Peru, 82 bps in South Africa, 72 bps in Colombia and 56 bps in Mexico. And these are sovereign yields. Corporate debt has performed even worse, with notable weakness in Asian high-yield and dollar-denominated corporates more generally. And it's not as if European finance is sound. Italian 10-year yields have jumped 160 bps to 3.58%. This ongoing spike in global yields has certainly placed intense pressure on leveraged speculation.

Here at home, after trading as high as 3.26% in Monday's session, 10-year Treasury yields ended the week down seven bps to 3.16%. Yields were at 2.84% on February 2nd and then dropped to 2.71% during a tumultuous day for equities on February 5th. WTI crude traded down to $55 in February.

The Bloomberg Barclays US Corporate High Yield index began February at 5.78%, jumped to 6.36% by February 9th and then dropped back below 6.00% in April. And after reaching 6.54% in early July, yields declined to as low as 6.17% last Tuesday (10/2). This index saw yields surge 22 bps this week to 6.63%, the high going back to 2016.

It's my view that enormous leverage has accumulated throughout U.S. corporate Credit over this prolonged period of easy "money." It appears "Risk Off" dynamics attained important momentum in the U.S. corporate debt market this week.

October 12 - Bloomberg (Cecile Gutscher): "Nervous money managers fled from corporate bonds like never before in an exodus that outpaced stocks. Record outflows hit funds that buy investment-grade debt…, according to Bank of America Corp. strategists citing EPFR Global data. The redemptions totaled $7.5 billion in the week through Oct. 10. By comparison, investors pulled $1.4 billion from equity portfolios during the period, while government and Treasuries actually saw inflows… High-grade bond gauges have also suffered the steepest losses of all the Bloomberg Barclays indexes in this month's market meltdown."

As is generally the case, news and analysis follow market direction. With the market breaking to the downside, attention turns to the Federal Reserve and the unfolding trade war with China. Last Wednesday, with the market at record highs, pundits were celebrating the robust U.S. economy. What a difference a week makes.

I've received numerous emails over recent months questioning the supportive comments I've directed at Chairman Powell. This historic Bubble inflated throughout the watches of Drs. Greenspan, Bernanke and Yellen. Powell will surely be the scapegoat when things fall apart. The President has wasted no time in pointing fingers. It has to be the first time a central bank has been lambasted for gradually raising rates to a loco 2.25%.

October 10 - Bloomberg (Justin Sink and Shannon Pettypiece): "President Donald Trump slammed the Federal Reserve as 'going loco' for its interest-rate increases this year in comments hours after the worst U.S. stock market sell-off since February. Trump said… the market plunge wasn't because of his trade conflict with China: 'That wasn't it. The problem I have is with the Fed,' he said. 'The Fed is going wild. They're raising interest rates and it's ridiculous.' 'That's not the problem,' he said of the trade standoff. 'The problem in my opinion is the Fed,' he added. 'The Fed is going loco.' His latest criticism of the central bank began earlier Wednesday as he arrived in Pennsylvania for a campaign rally. 'They're so tight. I think the Fed has gone crazy,' the president said."

We're now, in real time, witnessing the inevitable dilemma created when a central bank falls "behind the curve." And keep in mind that rising asset prices are contemporary finance's prevailing type of inflation (inflationary manifestation). Leaving rates so low for such a long period of time was responsible for inflating myriad major Bubbles. And now central bankers face the high-risk proposition of normalizing rates in an acutely fragile Bubble backdrop. The bulls, of course, believe it would be reckless for a central bank not to reduce rates when the markets find themselves in a bit of trouble. Continuing to raise rates would be gross negligence; a show of total incompetence; and so on. President Trump wants to pin blame on Fed rate hikes, seemingly with no recollection of the "big fat ugly Bubble" he would herald on the campaign trail.

I'll assume that short rates will eventually be heading back to zero - and that more QE will be forthcoming. But that's of little help for today's increasingly illiquid markets. Markets in the near-term have a problem: central bankers are not at the edge of their seats fretting a market meltdown. Dr. Bernanke had a persistently weak stomach, fearful his entire monetary experiment would come crashing down upon him at any time. Markets were similarly confident that a risk averse chair Yellen wouldn't dare try anything that might put global markets at risk.

So inflating Bubbles were left to run wild, market participants ever confident that the greater Bubbles inflated the more averse central bankers would be to removing the punchbowl. Monetary madness stretched out for way too long. The job of returning central banking to some semblance of normality is left to Chairman Powell. It's a thankless job; winless. It is deeply unfair - and I would argue disturbing - to see him setup to be the villain. I believe deeply that monetary inflation is the enemy of the people. Responsible central banking is not.

It would not be surprising if the Fed Chairman and central bankers, more generally, are not at this point overly concerned with the current bout of market instability. After all, markets have over recent years taken these types of selloffs in stride, "buying opportunities" as markets quickly bounced back to ever-higher new records. Besides, aren't speculative markets overdue for a wakeup call? Markets fear that central bankers lack fear.

Hedging and option-related selling surely played a significant role in this week's downdraft. And with expiration next Friday, expect option-related trading to play a major role well into next week - either on the upside or down. Repeatedly we've seen expiration-week rallies destroy put value. If market strength does force a self-reinforcing reversal of hedges into expiration, the bulls will see the rally as evidence of a market on sound footing (the week was notable for the amount of bullish pontification in the face of an unbullish market reality).

But don't be fooled by fleeting option-related buy programs and the appearance of abundant liquidity. The backdrop is changing. Importantly, de-risking/deleveraging dynamics have arrived at the "Core." They have not only made it to the "Core," they've afflicted a vulnerable "Core" in a global backdrop of waning central bank liquidity, rising short-term rates and surging market yields.

"Risk Off" has become a global phenomenon - de-risking/deleveraging within a backdrop of central banks hoping to move beyond years of repeated market liquidity backstop operations. Moreover, it is a backdrop of highly divisive politics and troubling geopolitics. It is a worrying backdrop of escalating populism, nationalism and protectionism - that will matter now that markets are faltering.

I tell my wife that "it's over" just to hear her laugh. "How many times have you said that?," she'll say. With a chuckle, I respond, "This time I mean it." We shared a little laugh together, but this time I wasn't kidding. I do vividly recall thinking "it's over" in the summer of 2012, not anticipating that the Germans would tolerate Draghi's "whatever it takes" unlimited "money" printing operations. And I similarly recall thinking "it's over" with China's Bubble at the precipice in early-2016. I guess I should have anticipated China's "national team," along with a ratcheting up of QE from the BOJ and ECB and an abrupt postponement of Fed "normalization" (after one tiny baby step).

I think "It's over" because all these market bailouts ensured things turned really crazy - and I believe this time around it's going to take central bankers longer to respond. I sense little appetite for another round of concerted global "money" printing operations. The focus is on domestic issues rather than some global agenda.

And market structure has become acutely vulnerable. Trillions in perceived safe and liquid ETFs. Trillions in a hedge fund industry struggling with performance and susceptible to huge outflows. Hundreds of Trillions of derivatives susceptible to market dislocation and illiquidity. Too much derivative market "insurance" that risks fomenting an avalanche of self-feeding sell orders. And let's not forget the maladjusted U.S. economic structure that will function surprisingly poorly in a backdrop of tighter financial conditions and sinking securities markets.

In particular, it was an ominous week for the two great intertwined Bubbles, illustrated by the Shanghai Composite's and S&P500's respective 7.6% and 4.1% declines. I could go on and on, but I find it all sad and frustrating.

For the Week:

The S&P500 dropped 4.1% (up 3.5% y-t-d), and the Dow fell 4.2% (up 2.5%). The Utilities declined 1.3% (unchanged). The Banks sank 5.7% (down 5.8%), and the Broker/Dealers fell 5.4% (down 1.9%). The Transports sank 6.4% (down 1.2%). The S&P 400 Midcaps dropped 4.9% (down 1.5%), and the small cap Russell 2000 sank 5.2% (up 0.7%). The Nasdaq100 declined 3.3% (up 11.9%). The Semiconductors dropped 4.7% (unchanged). The Biotechs lost 5.0% (up 16.4%). With bullion rallying $15, the HUI gold index jumped 6.9% (down 20.3%).

Three-month Treasury bill rates ended the week at 2.22%. Two-year government yields slipped three bps to 2.85% (up 97bps y-t-d). Five-year T-note yields declined six bps to 3.01% (up 81bps). Ten-year Treasury yields fell seven bps to 3.16% (up 76bps). Long bond yields declined seven bps to 3.33% (up 59bps). Benchmark Fannie Mae MBS yields declined five bps to 3.96% (up 104bps).

Greek 10-year yields dropped 10 bps to 4.38% (up 31bps y-t-d). Ten-year Portuguese yields rose 10 bps to 2.04% (up 10bps). Italian 10-year yields jumped 15 bps to 3.58% (up 156bps). Spain's 10-year yields rose 10 bps to 1.67% (up 11bps). German bund yields dropped eight bps to 0.50% (up 7bps). French yields declined four bps to 0.87% (up 8bps). The French to German 10-year bond spread widened four bps to 37 bps. U.K. 10-year gilt yields fell nine bps to 1.63% (up 44bps). U.K.'s FTSE equities index sank 4.4% (down 9.0%).

Japan's Nikkei 225 equities index sank 4.6% (down 0.3% y-t-d). Japanese 10-year "JGB" yields slipped less than a basis point to 0.15% (up 10bps). France's CAC40 lost 4.9% (down 4.1%). The German DAX equities index sank 4.9% (down 10.8%). Spain's IBEX 35 equities index fell 3.8% (down 11.4%). Italy's FTSE MIB index sank 5.4% (down 11.9%). EM equities were mostly lower. Brazil's Bovespa index added 0.7% (up 8.5%), while Mexico's Bolsa declined 1.3% (down 3.9%). South Korea's Kospi index dropped 4.7% (down 12.4%). India's Sensex equities index gained 1.0% (up 2.0%). China's Shanghai Exchange sank 7.6% (down 21.2%). Turkey's Borsa Istanbul National 100 index rallied 1.9% (down 16.2%). Russia's MICEX equities index declined 2.0% (up 13.9%).

Investment-grade bond funds saw outflows of $360 million, and junk bond funds suffered outflows of $4.928 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates surged 19 bps to 4.90% (up 99bps y-o-y). Fifteen-year rates rose 14 bps to 4.29% (up 108bps). Five-year hybrid ARM rates gained six bps to 4.07% (up 91bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up ten bps to 4.88% (up 70bps).

Federal Reserve Credit last week declined $8.8bn to $4.137 TN. Over the past year, Fed Credit contracted $282bn, or 6.4%. Fed Credit inflated $1.326 TN, or 47%, over the past 310 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.3bn last week to $3.444 TN. "Custody holdings" were up $83.9bn y-o-y, or 2.5%.

M2 (narrow) "money" supply jumped $19.6bn last week to a record $14.286 TN. "Narrow money" gained $557bn, or 4.1%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits dropped $24.5bn, while Savings Deposits jumped $37.7bn. Small Time Deposits added $1.5bn. Retail Money Funds gained $2.9bn.

Total money market fund assets gained $16.1bn to an eight-year high $2.888 TN. Money Funds gained $147bn y-o-y, or 5.4%.

Total Commercial Paper added $1.8bn to $1.102 TN. CP gained $38bn y-o-y, or 3.6%.

Currency Watch:

October 9 - Wall Street Journal (Saumya Vaishampayan and Mike Bird): "China's effort to support its slowing economy is heaping pressure on the yuan, signaling challenges for Beijing as it tries to stimulate growth amid rising trade tensions without triggering destabilizing capital outflows. The yuan weakened beyond 6.93 per dollar this week, coming within striking distance of its lowest level since January 2017, after China moved over the weekend to free more funds for domestic banks… Interbank lending rates in Hong Kong-an offshore trading hub for the yuan-surged on Tuesday, possibly due to efforts by China's central bank to prevent the yuan from weakening too much, several analysts said. China's efforts to manage its currency are complicated by the escalating trade conflict between the U.S. and China…"

The U.S. dollar index slipped 0.4% to 95.258 (up 3.4% y-t-d). For the week on the upside, the South African rand increased 1.7%, the Brazilian real 1.5%, the Japanese yen 1.4%, the Swedish krona 1.2%, the Norwegian krone 1.0%, the New Zealand dollar 1.0%, the Australian dollar 0.9%, the euro 0.3%, the Singapore dollar 0.3% and the British pound 0.3%. For the week on the downside, the Canadian dollar declined 0.7%, the Mexican peso 0.2%, the Swiss franc 0.1% and the South Korean won 0.1%. The offshore Chinese renminbi declined 0.77% versus the dollar this week (down 6.00% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 3.2% (up 8.2% y-t-d). Spot Gold rallied 1.2% to $1,218 (down 6.5%). Silver was little changed at $14.63 (down 14.7%). Crude gave back $2.83 to $71.51 (up 18%). Gasoline sank 6.6% (up 8%), while Natural Gas was little changed (up 6%). Copper gained 1.8% (down 15%). Wheat slipped 0.7% (up 21%). Corn gained 1.5% (up 7%).

Market Dislocation Watch:

October 10 - Bloomberg (Andrew Mayeda and Saleha Mohsin): "Global finance chiefs played down the economic risks posed by the biggest U.S. stock sell-off since February, with many describing the decline as a long-awaited correction. 'The fundamentals of the U.S. economy continue to be extremely strong, I think that's why the stock market has performed as well as it has,' U.S. Treasury Secretary Steven Mnuchin told Bloomberg News at the IMF's annual meeting… 'The fact that there's somewhat of a correction given how much the market has gone up is not particularly surprising.'"

October 10 - Wall Street Journal (Editorial Board): "Ten years after the financial panic, the architects of the rescue policies are taking a victory lap. We won't relitigate the immediate panic response, some of which we supported. But there is one policy whose outcome is still uncertain: The Federal Reserve's near-decade of unprecedented zero-interest rates and bond buying. Is the October correction in stocks, including Wednesday's 3% plunge, telling us that this bill is now coming due? The final payments on any Fed monetary cycle aren't merely the results when interest rates are low and policy is easy. The verdict is clear only at the end of the cycle when the Fed has to unwind its accommodation and interest rates rise. Only then can the world see clearly whether the Fed overdid its stimulus with nasty consequences on the other end."

October 10 - Bloomberg (Gowri Gurumurthy): "Junk-bond investors are getting nervous as the financial markets sell-off spreads. Investors pulled $5.4 billion of cash out of high-yield bond funds from Oct. 4 through Tuesday, JPMorgan… wrote…, citing Lipper data. That's the biggest outflow for a similar period since a $6.3 billion drawdown in February, the second largest on record, according to the report. Exchange-traded funds led the drain…"

Trump Administration Watch:

October 11 - Bloomberg (Jennifer Jacobs and Toluse Olorunnipa): "President Donald Trump said he won't fire Federal Reserve Chairman Jerome Powell but blamed an 'out of control' U.S. central bank for the worst stock market sell-off since February. Trump also told reporters in the Oval Office Thursday morning that he knows monetary policy better than the Fed's leaders and continued criticizing them for interest-rate increases. 'The Fed is out of control,' Trump said. 'I think what they're doing is wrong.' The president added that the Fed's interest rate increases are 'not necessary in my opinion and I think I know about it better than they do.' Trump's criticisms mark a stunning departure from the practices of his recent predecessors."

October 12 - Reuters (David Lawder): "U.S. Treasury Secretary Steven Mnuchin said… that he told China's central bank chief that currency issues need to be part of any further U.S.-China trade talks and expressed his concerns about the yuan's recent weakness. Mnuchin also told Reuters in an interview that China needs to identify concrete 'action items' to rebalance the two countries' trade relationship before talks to resolve their disputes can resume."

October 12 - Reuters: "China's trade surplus with the United States surged to a record high of $34.13 billion in September, compared with $31.05 billion in August… The September surplus with the U.S. was larger than China's overall trade surplus of $31.69 billion for the month."

October 9 - Reuters (Roberta Rampton and Lisa Lambert): "President Donald Trump… repeated his threat to slap tariffs on an additional $267 billion of Chinese imports if Beijing retaliates for the recent levies and other measures the United States has imposed in an escalating trade war between the economic giants. Trump, speaking to reporters in the Oval Office, also said China is not ready to reach a deal on trade. 'China wants to make a deal, and I say they're not ready yet,' Trump said. 'I just say they're not ready yet. And we've canceled a couple of meetings because I say they're not ready to make a deal.'"

October 8 - Financial Times (Tom Mitchell and Lucy Hornby): "US officials have warned China that Donald Trump will not engage in trade talks with Xi Jinping at next month's G20 summit if Beijing does not produce a detailed list of concessions, according to three people briefed on negotiations... The Chinese, however, say they have such a list but would not present it without some guarantee of it being received in a stable political climate in Washington, including a point person with a mandate to negotiate on behalf of the Trump administration… US officials have been frustrated by what they see as Beijing's unwillingness to discuss substantive 'structural issues' related to its economic and trade policies. Beijing has been similarly irritated by the erratic approach of the Trump administration…"

October 6 - Wall Street Journal (Bob Davis): "While the White House is progressing on trade deals with allies including Canada, Mexico, Korea and Europe, its dispute with China looks increasingly intractable, with tariffs between the world's two largest economies likely cemented in place for years. In other trade fights, President Trump used tariffs as leverage to reach deals. Threatening car tariffs helped convince Canada and Mexico to concede to U.S. demands for a new North American Free Trade Agreement, the president boasted. 'Without tariffs, we wouldn't be talking about a deal,' he said… China is different. Tariffs aren't simply a negotiating tactic for the U.S., but a way to change economic incentives. The Trump trade team believes U.S. firms need protection from a predatory Chinese state, which Mr. Trump says coerces U.S. companies to fork over technologies and subsidizes Chinese firms to expand globally."

October 10 - CNBC (Tae Kim): "Treasury Secretary Steven Mnuchin has told China not to weaken its currency as the U.S. and China try to resolve their trade differences. Mnuchin told the Financial Times the Treasury Department is closely watching the currency market and wants to talk about the issue with China as part of trade discussions. 'As we look at trade issues there is no question that we want to make sure China is not doing competitive devaluations,' Mnuchin said. 'The renminbi has depreciated significantly during the year. … We are going to absolutely want to make sure that as part of any trade understanding we come to that currency has to be part of that.'"

October 7 - Financial Times (James Politi): "The Trump administration is seeking to stop the EU, UK and Japan from striking separate trade deals with China as it tries to impose economic isolation on its Asian rival. The US's revamped Nafta trade deal with Canada and Mexico includes a provision that would require its two neighbours to give notification of any trade negotiations with a 'non-market economy'. That clause could also force those countries to disclose details of any talks and allow Washington to walk away from the Nafta agreement if such a separate deal were completed."

October 10 - Wall Street Journal (Kate O'Keeffe): "Treasury officials… issued new rules requiring all foreign investors in certain deals involving critical U.S. technology to submit to national security reviews or face fines as high as the value of their proposed transactions. The new regulations, which implement a recently passed law to tighten foreign investment reviews, are more expansive than some had advocated and are likely to bring an unprecedented number of transactions into the purview of the Committee on Foreign Investment in the U.S., known as Cfius. The Treasury-led interagency committee will now require foreign investors to alert it to all deals giving them access to critical technology across 27 industries…"

Federal Reserve Watch:

October 9 - CNBC (Thomas Franck): "President Donald Trump said… that he does not like the Federal Reserve's decision to continue to hike interest rates. He also said that the United States economy does not have an inflation problem and that the central bank is moving too quickly in trying to curb price increases. 'I think we don't have to go as fast,' the president answered to a question… 'I don't want to slow it down even a little bit' when there are no signs of inflation, the president added, referring to the economy. Trump added that he has not spoken to Federal Reserve Chair Jerome Powell about the central bank's moves to raise rates."

October 12 - Bloomberg (Alister Bull): "Asked to comment on President Donald Trump's accusation that the Fed is 'crazy' for raising interest rates, Chicago Fed President Charles Evans says 'we're looking at a very strong economy, strong fundamentals, and we're adjusting the policy stance.' 'After many, many years of accommodative policy, which I have supported strongly, because inflation is now up at 2%, it's time to readjust the policy stance, at least to neutral. Let's see how the economy is performing at that point, and then we might have to do a little bit more at that point.' Evans says his estimate of the neutral interest rate that neither slows down nor speeds up the economy is in the 2.75%-3% range and the Fed may need to lift rates 'maybe 50 bps above neutral"

October 10 - Wall Street Journal (Michael S. Derby and Josh Zumbrun): "New York Fed President John Williams said he expects the Federal Reserve to return to its target interest rate to normal or neutral levels within 'the next year or so.' Mr. Williams said that once rates were at a normal level, then the Fed would be well positioned to respond to surprises-either inflationary or a softening in the economy-that may require raising or lowering rates. 'My view is our path today is getting us back to normal interest rates or neutral interest rates relatively quickly, over the next year or so… From my perspective, the most important thing we can do now is get ourselves well positioned for whatever may come… Once we're there, we're better positioned for whatever may happen. If we need to raise rates more than expected we can do that in a reasonable way. If the economy slows we can adjust to that.'"

October 8 - Reuters (John Geddie and Aradhana Aravindan): "Emerging markets were 'as prepared as they can be' for changes to U.S. monetary policy as the Federal Reserve had been as 'transparent' as possible, St. Louis Federal Reserve Bank President James Bullard said in Singapore…

U.S. Bubble Watch:

October 11 - Reuters (Richard Leong): "The U.S. economy is expanding at a 4.2% annualized rate in the third quarter, the Atlanta Federal Reserve's GDPNow forecast model showed on Wednesday, following the release of the latest data on producer prices and wholesale trade."

October 10 - CNBC (Salvador Rodriguez): "Chamath Palihapitiya, the outspoken Silicon Valley tech investor, called the start-up economy a charade on Wednesday… 'We are, make no mistake … in the middle of an enormous multivariate kind of Ponzi scheme,' said Palihapitiya, at the Launch Scale conference in San Francisco. Palihapitiya slammed the start-up cycle of raising funding rounds and spending money to boost user growth to attract bigger funding rounds. 'It's all on paper, but it looks amazing,' Palihapitiya said. 'You've been told to grow, so you're growing. You're doing your job.'"

October 10 - Reuters (Howard Schneider): "U.S. producer prices increased 0.2% in September, in line with expectations, while a revision to wholesale inventory estimates for August showed the biggest jump in nearly five years, beating forecasts. A rise in services prices offset a slight drop in prices for goods, including a 3.5% drop in gasoline prices…. In the 12 months through September, the producer price index rose 2.6%, slightly less than expected."

October 9 - Bloomberg (Liz McCormick and Alex Harris): "Democrats and Republicans have plenty at stake in the upcoming midterm elections. But it's already looking like a no-win situation for the U.S. bond market. If Democrats take the House, it raises the odds that congressional leaders will propose an infrastructure-spending bill similar in scope to President Donald Trump's original trillion-dollar proposal. And if the GOP defies expectations and holds on in Congress, tax cut 2.0 becomes more likely. In either case, the result will be debt, debt and more debt. That'd be on top of what is already a grim fiscal situation. A deluge of debt supply is set to inundate the $15.3 trillion Treasury market, just as borrowing costs rise. Not only is the U.S. budget deficit primed to swell to roughly $1 trillion by fiscal 2019 and past that in subsequent years, but the interest owed by the government is also forecast to triple in the coming decade to nearly a trillion dollars a year, according to the Congressional Budget Office. 'The current debt trajectory is already quite onerous,' said Subadra Rajappa, an interest-rate strategist at Societe Generale. 'If you keep increasing supply and auction sizes, there is a point where the bond market is going to say, 'Thanks, but no thanks.'"

October 9 - CNBC (Diana Olick): "Millennials are in their prime homebuying years, and they're used to cheap credit. So they might be in for a rude awakening as mortgage rates jump. The average rate on the 30-year fixed loan sat just below 4% a year ago, after dropping below 3.5% in 2016. It just crossed the 5% mark, according to Mortgage News Daily. That is the first time in eight years… 'Five percent is definitely an emotional level inasmuch as it scares prospective buyers about how high rates may continue to go,' said Matthew Graham, chief operating officer of MND."

October 9 - Bloomberg (Janet Lorin): "Harvard University's $39.2 billion endowment has reached a record value. So did Yale. And Brown. And Dartmouth. As many wealthy U.S. universities report bulging assets and strong investment gains for the latest fiscal year, the timing isn't ideal. Their fat coffers may draw the ire of lawmakers, some of whom view schools as hoarding their billions of dollars and have questioned their tax-exempt status. 'It makes the schools' efforts to say that they can't afford to pay the new tax a little harder to find sympathy for,' said Brian Galle, a law professor who specializes in tax at Georgetown University."

China Watch:

October 7 - Reuters (Shu Zhang and Kevin Yao): "China's central bank… announced a steep cut in the level of cash that banks must hold as reserves, stepping up moves to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States. The reserve requirement cut, the fourth by the People's Bank of China (PBOC) this year, comes as Beijing has pledged to expedite plans to invest billions of dollars in infrastructure projects… Reserve requirement ratios (RRRs) - currently 15.5% for large commercial lenders and 13.5% for smaller banks - would be cut by 100 bps…"

October 7 - Reuters (Shu Zhang, Xiangjin Zeng, Kevin Yao and Yawen Chen): "China's foreign exchange reserves fell more than expected in September to a 14-month low as the yuan currency weakened further against the dollar amid mounting trade tension with the United States. Reserves fell $22.69 billion in September to $3.087 trillion, the biggest drop since February, compared with a decline of $8.23 billion in August… Economists polled by Reuters had expected reserves to drop by $5 billion to $3.105 trillion."

October 8 - Financial Times (Lucy Hornby and Song Jung-a): "China has accused Donald Trump of engaging in 'misguided actions', laying bare the mounting tensions between the world's largest economies as their trade war threatens to escalate into a broader regional confrontation. The rebuke to the US president, made during a visit to Beijing by secretary of state Mike Pompeo, comes just days after a stinging speech by Mike Pence, in which the US vice-president accused China of meddling in the US's midterm elections. Wang Yi, the Chinese foreign minister, accused Mr Trump of 'constantly ramping up' trade disputes, 'hurting China's interest' in Taiwan and finding fault with China's domestic and external affairs 'without reason'."

October 9 - Bloomberg: "The U.S. shouldn't believe that ever higher tariffs can induce China's government to capitulate to American demands in the escalating trade dispute between the world's biggest economies, according to Chinese Commerce Minister Zhong Shan. 'There is a view in the U.S. that so long as the U.S. keeps increasing tariffs, China will back down,' Zhong said... 'The U.S. should not underestimate China's resolve and will… This unyielding nation suffered foreign bullying for many times in history, but never succumbed to it even in most difficult conditions,' Zhong wrote… 'China doesn't want a trade war, but would rise up to it should it break out.'"

October 8 - Reuters (Seng Li Peng): "China must take strong stimulus measures to support growth, with the country in a 'critical' period of stabilizing its economy, according to a commentary in the Global Times, a state-backed Chinese tabloid... The Global Times wrote that perhaps China is unable to overcome these pressures by simply continuing to fine-tune its economic policy. 'In 2008, the Chinese government announced a 4 trillion yuan ($578bn) stimulus package to fight the impact of the global financial crisis. Now, the Chinese economy is under even tougher pressure amid escalating trade friction,' it said."

October 12 - Associated Press: "China's auto sales plunged 12% in September, adding to economic challenges for the country's leaders amid a worsening tariff fight with Washington. Sales in the biggest global market fell to 2 million sedans, SUVs and minivans… Demand has weakened as economic growth cooled after Beijing tightened lending controls to rein in a debt boom. With the latest contraction, sales growth for the first three quarters of the year fell to just 0.6%, down from 2017's already anemic full-year rate of 1.4%."

October 9 - Bloomberg: "Home buyers angry that apartments are being sold for much less than they paid swamped property developers' marketing offices across China over the Golden Week holiday, demanding their money back. A sales center for Xinzhou Mansion, a project of Country Garden Holdings Co… was mobbed last Thursday, videos and pictures circulated on social media show, its windows smashed by scores of protesters throwing rocks. They're furious that Country Garden is selling units for prices around 30% lower than a year ago. Similar demonstrations took place at One Mansion in Shanghai, another of Country Garden's projects. There, apartments are going for as much as 25% less than two months earlier."

October 12 - Bloomberg (Cecile Gutscher): "With China's economy slowing, banks under
pressure to help invigorate growth are rushing to make room on their balance sheets for new lending. That's unleashed a boom in a corner of the nation's credit markets. Structured debt sales in China's interbank bond market jumped in the last quarter to a record 300 billion yuan ($44bn). Residential mortgage backed securities accounted for about 60% of issuance this year through September, from 6% in 2015…"

October 8 - Reuters (Kane W and Julie Zhu): "Chinese conglomerate HNA Group has put up for sale property assets worth at least $11 billion, according to documents seen by Reuters, accelerating a push to cut its large debt and restructure. Two sets of documents reviewed by Reuters listed more than 80 assets that HNA has either put up for sale or intends to sell, including hotels, commercial and residential buildings. They are mostly within China…"

October 10 - Bloomberg (Robert Williams and Kim Bhasin): "Chinese border guards searching travelers' suitcases for undeclared Louis Vuitton bags, Gucci loafers and Tiffany necklaces are giving luxury-goods makers their biggest scare in years. Fears of a slowdown in spending by China's consumers, who account for two-thirds of the luxury market's growth, has fueled the biggest monthly selloff in LVMH shares since 2015. At that time, the industry was wrestling with the last China-induced headache -- a crackdown on giving lavish gifts to officials in exchange for political favors. Luxury investors were already skittish, worried about whether a three-year spending boom could survive the effects of the U.S.-China trade war."

October 9 - Reuters (Seng Li Peng): "China has choked back on imports of liquefied petroleum gas (LPG) from the United States, traders and analysts said, turning to the Middle East for extra supplies amid the two countries' trade dispute."

EM Watch:

October 6 - Reuters (Gabriel Stargardter and Pedro Fonseca): "Brazil's far-right presidential candidate Jair Bolsonaro said… he would stick to his hardline agenda on guns, crime and graft in the second round of the election on Oct. 28, alarming senior statesmen and human rights advocates alike. Bolsonaro, a former Army captain and veteran lawmaker, nearly won the presidency outright on Sunday, taking 46% of votes against leftist Fernando Haddad's 29%, part of a swing to the right in Latin America's largest nation."

October 8 - Financial Times: "Brazil has been rocked by a political earthquake: the victory of far-right former army captain Jair Bolsonaro in the first round of the country's presidential election… As the FT's chief international affairs columnist, Gideon Rachman says, the addition of Brazil to the group of states led by 'strongmen' would make a big difference. After all, the country was, until recently, seen as a model of a nation that had successfully embraced globalisation and left the dark days of authoritarianism behind it… For years, Mr Bolsonaro occasionally made headlines with his outbursts, such as when he told a leftist congresswoman that she did not 'deserve' to be raped. He once praised the leftist Venezuelan president Hugo Chávez, and said former Brazilian president Fernando Henrique Cardoso should face a firing squad for privatising state companies."

October 7 - Reuters (Tuvan Gumrukcu): "President Tayyip Erdogan said… Turkey was not facing any worrying economic problems and would not seek assistance from the International Monetary Fund, despite a currency crisis and likely economic slowdown. Turkey has 'closed the book on the IMF, not be opened again,' Erdogan said in a speech to members of his AK Party."

October 8 - Reuters: "Venezuelan consumer prices rose 488,865% in the 12 months ending in September, a member of the opposition-run congress reported on Monday, as the OPEC nation's hyperinflation continues to accelerate amid a broader economic collapse."

Central Bank Watch:

October 9 - Financial Times (Caroline Binham, Philip Stafford and Jim Brunsden): "The Bank of England has issued its starkest warning yet that up to £41tn of derivatives contracts maturing after Brexit are at risk unless European officials urgently address regulatory uncertainty. The BoE said… that clearing houses would have to tell European members such as banks to move their business or risk falling foul of European law. Ultimately EU banks would bear the cost of the disruption, the BoE warned in its quarterly statement on risks to UK financial stability, citing estimates that suggested every basis point increase in the cost of clearing interest rate swaps could cost EU businesses about €22bn a year."

Italy Watch:

October 8 - Bloomberg (John Follain): "Italian Deputy Prime Minister Matteo Salvini said Europe's real enemy is Jean-Claude Juncker and the Brussels bureaucracy that pushes budget restrictions and open borders… Sitting alongside French nationalist Marine Le Pen at an event in Rome, Salvini said that next year's European Parliamentary elections will be a showdown between those focused on creating jobs and those more concerned with imposing austerity like Juncker, the president of the European Commission, and Pierre Moscovici, the European Union's economic policy chief. 'We are against the enemies of Europe -- Juncker and Moscovici -- shut away in the Brussels bunker,' Salvini said. 'The politics of austerity of the last few years has increased Italian debt and impoverished Italy.'"

Europe Watch:

October 11 - Reuters (Paul Carrel and Jörn Poltz): "Chancellor Angela Merkel's Bavarian allies are heading for their worst showing in a state election in over 60 years, a setback that risks widening divisions within Germany's crisis-prone national government. Polls show the Christian Social Union (CSU) will win at most 35% on Sunday, losing the absolute majority with which it has controlled its southeastern heartland for most of the post-war period."

October 8 - Bloomberg (Tasos Vossos and Emma Haslett): "Europe's primary bond market suffered another blow as Dutch lender Van Lanschot Kempen NV became the fifth issuer to pull a euro-note sale in little more than a week. The bank postponed the bond sale 'due to market circumstances,' spokesman Robin Boon said… The lender planned to sell as much as 100 million euros ($115 million) of Additional Tier 1 notes…"

Global Bubble Watch:

October 9 - Reuters (David Lawder): "Global debt levels reached a record $182 trillion in 2017, having grown 50% in the previous decade, but the picture looks less grim when public assets are taken into account, the International Monetary Fund said… The IMF said a new data base in its semi-annual Fiscal Monitor report showed considerable net worth in 31 countries that account for 61% of global economic output. Assets in these countries were worth about $101 trillion, or twice their gross domestic product, with just over half the total in public corporation assets, and just under half in natural resources such as oil or mineral wealth."

October 9 - CNBC (Yen Nee Lee): "Risks are building up in the global financial system, and a further escalation in trade tensions could push the situation over the edge, the International Monetary Fund warned. Investors have appeared complacent, however, according to the IMF's latest Global Financial Stability Report… The report, published twice a year, contains the fund's assessment of global financial conditions and highlights risks in the system. Stock prices - particularly those in the U.S. - have hit record-high levels multiple times over the past year, which is an indication that investors have continued to take on risks… 'A further escalation of trade tensions, as well as rising geopolitical risks and policy uncertainty in major economies, could lead to a sudden deterioration in risk sentiment, triggering a broad-based correction in global capital markets and a sharp tightening of global financial conditions,' the fund said…"

October 8 - Bloomberg (Siddharth Verma): "Global bonds are hitting fresh milestones of misery. Strong U.S. data, a tighter-than-expected monetary trajectory, rising commodity prices and brewing wage pressures are conspiring to push Treasury yields to cycle-highs, hitting money managers of all stripes. The value of the Bloomberg Barclays Multiverse Index, which captures investment-grade and high-yield securities around the world, slumped by $916 billion last week, the most since the aftermath of Donald Trump's election victory in November 2016."

October 8 - CNBC (Yen Nee Lee): "The International Monetary Fund has cut its global growth forecasts as trade tensions between the U.S. and trading partners have started to hit economic activity worldwide. The IMF said the global economy is now expected to grow at 3.7% this year and next year - down 0.2 percentage points from an earlier forecast, according to the fund's latest World Economic Outlook report…"

October 7 - Bloomberg (Dinesh Nair): "A record wave of mergers and acquisitions could slow sharply as dealmakers get spooked by rising geopolitical concerns, according to a survey by Ernst & Young… Corporate takeover appetite is at a four-year low with only 46% of executives planning to make purchases in the next 12 months, according to a survey of more than 2,600 dealmakers across 45 countries… That's reduced from 56% of executives polled last year. 'Geopolitical, trade and tariff uncertainties have finally caused some dealmakers to hit the pause button,' Steve Krouskos, EY's global vice chair of transaction advisory services, said… 'Despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals, we can expect this year to finish with much weaker M&A than how it started.'"

October 7 - Bloomberg (Carrie Hong Annie Lee): "Asia's dollar bond sales are set to end 2018 with a whimper after a sizzling start. Next year's prospects may prove dimmer, bankers and investors say. Volatile emerging markets, trade wars and now surging U.S. Treasury yields have created a perfect storm that's battering sentiment across Asia. A Bloomberg survey expects primary issuance to slump as much as 46% in the fourth quarter and Credit Suisse Group AG expects more turbulence going into 2019 that will test borrowers' mettle."

Fixed Income Bubble Watch:

October 11 - Bloomberg (Molly Smith and Christopher Cannon): "They were once models of financial strength-corporate giants like AT&T Inc., Bayer AG and British American Tobacco Plc. Then came a decade of weak sales growth and rock-bottom interest rates, a dangerous cocktail that left many companies feeling like they had just one easy way to grow: by borrowing heaps of cash to buy competitors. The resulting acquisition binge left an unprecedented number of major corporations just a rung or two from junk credit ratings… In fact, a lot of these companies might be rated junk already if not for leniency from credit raters… Bloomberg News delved into 50 of the biggest corporate acquisitions over the last five years, and found: By one key measure, more than half of the acquiring companies pushed their leverage to levels typical of junk-rated peers. But those companies, which have almost $1 trillion of debt, have been allowed to maintain investment-grade ratings by Moody's… and S&P Global Ratings. The vast majority of the 50 deals-valued at $1.9 trillion collectively-were financed with debt. This M&A-fueled leveraging of corporate balance sheets contributed to a surge in debt rated in the bottom investment-grade tier and now represents almost half of the outstanding market…"

October 9 - New York Times (Andrew Ross Sorkin): "It is often called the nuclear option. In the trade war between the United States and China, economists and investors have long tried to game out how both sides might use their clout. In virtually all the predictions, at least until recently, they revolved around a tit-for-tat tariff war. Even in the gloomiest of doomsday scenarios, there is one weapon that has long been considered unthinkable: the Chinese, the biggest holder of United States foreign debt with more than $1 trillion, publicly taking a step back from buying United States Treasuries - or worse, dumping what they own in the open market. The very idea is typically dismissed as a waste of time to even consider, and the reason is a sort of mutually assured destruction. It would be wildly irrational in economic terms, the thinking goes. China selling Treasuries would send interest rates up and hurt the United States, but it would simultaneously severely damage the value of China's own Treasury holdings. As the industrialist J. Paul Getty famously said, 'If you owe the bank $100, that's your problem; if you owe the bank $100 million, that's the bank's problem.' In the United States-China relationship, China is very clearly the bank."

October 10 - Bloomberg (Gowri Gurumurthy): "Junk-bond investors are getting nervous as the financial markets sell-off spreads to high-yield funds. Investors pulled $5.4 billion of cash out of high-yield bond funds from Oct. 4 through Tuesday, JPMorgan… wrote… That's the biggest outflow for a similar period since a $6.3 billion drawdown in February, the second largest on record… Exchange-traded funds led the drain, with the SPDR Bloomberg Barclays High Yield Bond ETF, known as JNK, seeing the biggest withdrawal since January on Tuesday. The iShares iBoxx High Yield Corporate Bond ETF, known as HYG, last week got hit with a record single-day outflow."

Leveraged Speculation Watch:

October 8 - Wall Street Journal (Rachael Levy): "Three hedge funds have closed in less than a week as investors question a once-highflying industry plagued by weak returns. Tourbillon Capital Partners… told clients it would return money and close its main fund. Last week, Highfields Capital Management and Criterion Capital Management announced they would return billions of dollars to clients. The closures are the latest in a multiyear re-evaluation of such investment vehicles by managers and investors. Some funds have closed as skepticism has increased about the value of paying hedge fund's famously high fees…. Others have been hurt by poor performance relative to a stock market that has notched nearly a decade of gains. This year, through September, stock hedge funds on average returned 1.9% according to industry research firm HFR."

October 8 - Bloomberg: "The smart money has been one of the biggest victims in the declines sweeping through equity markets. While the S&P 500 Index fell 1% last week, stocks with the highest hedge fund or exchanged-traded fund ownership posted losses that were four times larger, a study from UBS Group AG showed. Broadly, equity returns have been inversely tied to their popularity with funds. That is, the more loved by hedge funds or ETFs, the bigger the drop."

Geopolitics Watch:

October 12 - Wall Street Journal (Editorial Board): "The disappearance of dissident Jamal Khashoggi in the Saudi consulate in Turkey last week is a debacle that could have far-reaching consequences for the Middle East and U.S. interests. President Trump has to seek a full accounting lest he lose control of his foreign-policy agenda in the region. Mr. Khashoggi entered the consulate on Oct. 2 and there is no evidence he left alive. The Turks are whispering to everyone that they have audio surveillance tapes of Mr. Khashoggi's interrogation, torture and murder, though they have released nothing to the public."

October 8 - Wall Street Journal (Jeremy Page and Michael R. Gordon): "A rare public confrontation between the top U.S. and Chinese diplomats marked a new level in the worsening relations between the world's two biggest economies and risked complicating an anticipated summit meeting between President Trump and North Korean leader Kim Jong Un. Secretary of State Mike Pompeo exchanged testy words with Foreign Minister Wang Yi in Beijing… at a critical moment for U.S.-China relations, with trade negotiations stalled, military talks halted and both sides blaming each other for a recent close encounter between their warships in the South China Sea… Mr. Wang began his meeting with Mr. Pompeo by accusing the U.S. of escalating trade friction, causing trouble over Taiwan and unjustifiably criticizing China's domestic and external policies. 'We demand that the U.S. side stop this kind of mistaken action,' Mr. Wang said."

October 9 - Bloomberg (Debby Wu): "Taiwanese leader Tsai Ing-wen cautioned China against any efforts to interfere in local elections next month, in a toughly worded speech that mirrored U.S. Vice President Mike Pence's own rebuke to Beijing. Tsai made the remarks during a National Day address in Taipei, in which she described China as a threat to the international order. The Taiwanese president used the speech to issue a warning about election meddling after her administration accused China, along with Russia and North Korea, of testing cyber-hacking techniques on the democratically run island for use elsewhere. 'We will relentlessly prosecute cases of creation and spread of untruthful information, technology leaks, sabotage of information-technology security systems, interference in elections and politics, if there is solid evidence… We will bolster cooperation with other countries to counter systematic disinformation campaign originating from certain countries.' The speech comes as tensions between Beijing and both Taipei and its main security guarantors in Washington reach their highest in years."

October 7 - Bloomberg (David Tweed): "For decades, the U.S. has guaranteed freedom of navigation in Asia's waters, patrolling the seas with a view to maintaining the principle that no sovereign state shall suffer interference from another. China's growing military prowess, combined with a dogged assertiveness over its territorial claims, is testing the old ways and providing a potential flashpoint for the two powers. That tension is felt most keenly in the South China Sea. Where is the South China Sea? Stretching from China in the north to Indonesia in the south, the waterway encompasses 1.4 million square miles, making it bigger than the Mediterranean Sea. It borders countries including Vietnam, Malaysia and Singapore to the west, and the Philippines and Brunei to the east. It's a thriving fishing zone… holds promising oil and natural gas reserves. Even more noteworthy is the vast amount of trade that transits through its waters. In 2016, that amounted to some $3 trillion, including more than 30% of the global maritime crude oil trade."

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