Saturday, August 19, 2017

Saturday's News Links

[Reuters] Summer rumblings could herald a stormy fall for U.S. stocks

[Reuters] Nervous Japanese hold drill in case North Korea fires missiles over them

[Bloomberg] Terror in Spain Shows Islamic State Is Down Not Out

[WSJ] Steve Bannon, Controversial Aide to Trump, Exits White House Staff

[FT] In charts: The rise and rise of China’s tech trinity

Weekly Commentary: Crisis of Confidence

Global markets are indicating heightened vulnerability. Thursday trading saw the S&P500 decline 1.54%, the second biggest decline of 2017. The session also saw the junk bond market under pressure. A notable $2.19bn of junk fund outflows this week spurred the headline, “Risk Exodus Gets Real With Biggest Fund Redemptions in 6 Months.” Currency markets are increasingly unstable. The euro traded to 1.1838 on Monday and fell to a trading low of 1.1662 on Thursday. The dollar/yen rose to 110.95 on Wednesday before reversing course to a near nine-month low of 108.60 during Friday trading. Gold traded to $1,300 in early Friday trading, the high going back to the election. Early-week market relief over the North Korean situation quickly shifted to unease over festering domestic issues.

August 16 – Wall Street Journal (Gabriel Wildau): “One of the most influential analysts of China’s financial system believes that bad debt is $6.8tn above official figures and warns that the government’s ability to enforce stability has allowed underlying problems to go unchecked. Charlene Chu built her reputation as China banking analyst at credit rating agency Fitch, where she was among the earliest to warn of risks from rising debt, especially in the country’s shadow banking system… In her latest report, Ms Chu estimates that bad debt in China’s financial system will reach as much as Rmb51tn ($7.6tn) by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above. That estimate implies a bad-debt ratio of 34%, well above the official 5.3% ratio for those two categories at the end of June… ‘What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities,’ she said. ‘The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.’”

As is typical, China’s Credit expansion slowed during the month of July. Growth in Total Aggregate Social Finance declined to about $180bn. New loans increased $124bn, the slowest rise since last November - but still stronger-than-expected and much larger than July 2016. In a data point to follow closely, loans to households (mostly mortgages) slowed from June’s strong pace. Shadow banking contracted during June (first since October), although y-o-y growth remained a robust 16.5%. At 9.2%, y-o-y "money" supply growth was the slowest in decades.

It’s worth mentioning that Chinese data generally disappointed this week. Retail sales (up 10.4%) were down marginally from June and were below estimates (10.8%). Growth in Fixed Investment (8.3%) and Industrial Production (6.4%) were similarly down m-o-m and below forecasts.

August 13 – Bloomberg: “China’s home sales grew last month at the slowest pace in more than two years amid regulators’ moves to rein in soaring prices. The value of new homes sold rose 4.3% to 779 billion yuan ($117bn) in July from a year earlier… The increase is the smallest since March 2015, when the home market started to take off on policies to encourage demand from buyers.”

There is significant uncertainty associated with Chinese Credit and economic prospects. Through July, the growth in Total Aggregate Social Finance is tracking 20% above 2016’s record level. The first-half boom in Chinese Credit growth – especially household mortgage borrowings – goes a long way in explaining economic resiliency. There are certainly indications that Chinese officials are increasingly concerned with overall system Credit growth, but there is also the view that no tough measures will be adopted that would risk instability heading into this fall’s communist party gathering.

August 15 – Financial Times (Tom Mitchell): “China’s economy will grow faster than expected over the next three years because of the government’s reluctance to rein in ‘dangerous’ levels of debt, the International Monetary Fund warned… In an annual review of the world’s second-largest economy, IMF staff said China’s annual economic growth would average 6.4% in 2018-20, compared with a previous estimate of 6%. The IMF is also predicting that the Chinese economy will expand 6.7% this year, up from its earlier forecast of 6.2% growth. The Chinese government, which pledged to double the size of the economy between 2010 and 2020, has tolerated a rapid run-up in debt in order to meet its target. ‘The [Chinese] authorities will do what it takes to attain the 2020 GDP target,’ the IMF said. As a result, the IMF now expects China’s non-financial sector debt to exceed 290% of GDP by 2022, compared with 235% last year. The fund had previously estimated that debt levels would stabilise at 270% of GDP over the next five years.”

Looking out past the next few months, there’s significant uncertainty associated with Chinese policymaking, finance and economic performance. And before we segue to the mess in Washington, there are as well major near-term uncertainties with respect to global monetary management. There were indications this week that both the ECB and Federal Reserve lack the confidence and consensus necessary to communicate a plan for unwinding what have been years of unprecedented monetary stimulus. It’s not confidence inspiring.

August 17 – Wall Street Journal (Todd Buell): “The European Central Bank is wary of pulling the plug too soon on its large bond-buying program, and worried that any move in that direction will push the euro higher, the accounts of its latest meeting showed… The comments suggest that ECB President Mario Draghi will move with immense caution as he approaches two major public appearances in the coming weeks…”

August 17 – Bloomberg (Craig Torres): “Federal Reserve officials are looking under the hood of their most basic inflation models and starting to ask if something is wrong. Minutes from the July 25-26 Federal Open Market Committee meeting showed a revealing debate over why the economy isn’t producing more inflation in a time of easy financial conditions, tight labor markets and solid economic growth. The central bank has missed its 2% price goal for most of the past five years. Still, a majority of FOMC participants favor further rate increases. The July minutes showed an intensifying debate over whether that is the right policy response. ‘These minutes to me were troubling,’ said Ward McCarthy, chief financial economist at Jefferies… ‘They don’t have their confidence in their policy decisions; and they don’t have confidence that they can provide the right kind of guidance.’”

August 16 – Wall Street Journal (David Harrison): “New doubts over sagging inflation in the past few months are driving a split at the Federal Reserve about the timing of the next increase in interest rates. The internal debate raises the possibility that the Fed could deviate from its plans for a third rate increase this year. Soft inflation has bedeviled Fed officials, forcing them to pull back on plans to raise rates multiple times in 2015 and 2016. Minutes from the July 25-26 meeting released Wednesday reveal growing concern among some officials that recent soft inflation numbers could be a sign that something has fundamentally changed in the economy, leading them to suggest holding off on raising rates again for the time being.”

China is in an historic Bubble, and this has created extraordinary uncertainty for the future. Global central banks have been engaged in an unprecedented and prolonged monetary inflation, and this has created extraordinary uncertainty for the future. An important facet of the problem is that years of extreme monetary stimulus have ensured that way too much “money” has gravitated to highly speculative global securities and derivatives markets. This has profoundly distorted inflationary dynamics throughout the securities markets as well as in the global economy overall.

Central bankers are increasingly perplexed as to how to proceed with normalization. While markets remain convinced that monetary policies globally will stay loose indefinitely, I believe indecision at the major central banks creates uncertainties that will increasingly weigh on risk-taking (especially with leverage). Watch the currencies. With the backdrop set, let’s move on to Washington.

The Trump Administration now confronts a full-fledged Crisis of Confidence. Even Republican supporters are calling for radical change. And it would at this point appear that some degree of radical departure will be required for the President to muster enough support to move forward with his agenda. I assume the administration will adopt a razor-sharp focus on tax cuts and reform in an attempt to stabilize a sinking ship.

As for the stock market, this week saw the “Trump Rally” conveniently morph into the “Cohn Rally.” Rumors of a Gary Cohn departure were said to be behind market selling pressure. It would be shocking to see Cohn abandoned Washington. He may now be the second most powerful individual in the country, with the most powerful enveloped in mayhem.

Importantly, “Risk Off” is gathering some momentum. Over recent years we’ve witnessed the markets repeatedly disregard – or at least downplay – major political developments. For the most part, markets were this week resilient in the face of a distressing and rapidly deteriorating political landscape. So far, the monetary and economic backdrops have remained constructive.

This week saw a stronger-than-expected reading in the Empire Manufacturing Index. Monthly Retail Sales were stronger-than-expected, as was the National Home Builders Housing Market Index (although Starts and Permits lagged). The weekly Bloomberg Consumer Comfort index rose to the highest level since 2001. The Bloomberg National Economy Expectations index surged back to near multi-year highs.

It’s worth noting that 10-year Treasury yields declined less than four basis points during Thursday’s stock market swoon. For a week that saw U.S. risk markets under some pressure and the VIX spike for the second straight week, it was notable that Treasury yields rose slightly. This should raise concerns that Treasuries may no longer provide much of a hedge during the next bout of “Risk Off.” And if Treasury gains are limited in the event of “Risk Off,” what are the ramifications for an overheated corporate debt marketplace?

Unprecedented risk has accumulated across the markets over the past nine years. “Money” has flooded into passive strategies that are essentially a speculation that the bull market – in equities and corporate Credit – will run unabated. Myriad derivatives strategies have flourished, with the proliferation of many products that are essentially writing market insurance (“flood insurance during a drought”).

Markets have experience “flash crashes” in the recent past, so I assume there will be more. For good reason, market participants these days presume that central banks will use their balance sheets to ensure that markets remain abundantly liquid. At the same time, the reality is that global central bankers have limited policy tools available in the event of market instability. The downside of delaying policy normalization (for years) is that we’re in the late innings of a global Bubble yet rates remain at or near zero around the globe. Central banks have little room to cut interest-rates, while pressure builds to wind down extraordinary balance sheet operations.

I am somewhat reminded of when accounting fraud issues precluded Fannie and Freddie from providing the MBS marketplace a liquidity backstop. It was a pivotal development, though market players were content to ignore ramifications for several years. With booming markets anticipating liquidity abundance indefinitely, it wasn’t until the 2008 de-leveraging episode that the absence of the GSE backstop bid mattered.

I don’t want to get too far ahead of myself here, but it’s worth noting that bank CDS has begun to price in rising risk. For the most part, CDS price reversals are modest and come from multi-year lows. But bank CDS risk has been increasing now for going on a month. And on a global basis, it’s kind of the same old potential problem children that have experienced the biggest gains – Dexia, Deutsche Bank, Societe Generale, UBS, BNP Paribas and Credit Suisse. Some of the big European banks saw CDS rise to two month highs this week. U.S. banks are now also seeing a modest rise in CDS prices, in many cases ending the week at one-month highs. It’s worth noting as well that the broker/dealer equities index (XBD) declined more than 2% Thursday and was hit 1.4% for the week. Japan’s TOPIX Bank Index dropped 2.4% this week.

August 15 – Financial Times (Eric Platt): “Amazon sealed the year’s fourth-largest corporate bond sale on Tuesday as the technology and online retail group locked in $16bn to fund its takeover of premium grocer Whole Foods… The company, founded by Jeff Bezos, borrowed the $16bn across seven tranches, ranging from three- to 40-year maturities. Orders for the multibillion-dollar deal climbed to nearly $49bn as banks closed their books…”

I’ll also be closely monitoring indicators of corporate Credit risk. According to Dealogic, August’s $110 billion of U.S. corporate debt sales pushed y-t-d issuance to $1.2 TN. And while corporate debt prices for the most part held their own this week, spreads have widened meaningfully from July. Even the investment-grade market is indicating a changing backdrop.

I feel compelled to offer brief comments on the sad state of our great nation. Sure, the stock market is close all-time highs and unemployment is at multi-year lows. Business and consumer confidence are strong, which is understandable considering the prolonged Bubble period. That there are such widespread feelings of acrimony and animosity - and that our country can be so bitterly divided - in the midst of today’s economic/market backdrop must be alarming to anyone paying attention. I hate to think of the environment after the Bubble bursts – the type of hostility and insecurity that would seem to ensure an epic bear market.

It’s almost unbelievable that the November election offered a choice between about the two most divisive figures in American politics. It’s as if there are two completely divergent and irreconcilable views of how the world works, how the economy should operate and the role of the federal government. Somehow we’ve gotten to the point where there cannot even be a civil discussion – let alone a meeting of the minds - on the most basic issues.

As has become a popular (Daniel Moynihan) quote to recite, “Everyone is entitled to their own opinions, but they are not entitled to their own facts.” These days, facts are in dispute and they’re often disputed hatefully. Okay, let’s assume the Administration does see some legislative success. What happens after the mid-terms?

It’s too easy to blame the political class. Yet politicians do what politicians do. There should be little doubt that the boom and bust dynamics experienced over recent decades have taken a toll on our nation’s social and economic fabric. And while many want to blame “globalization,” I believe much that we label “globalization” would be more accurately understood as fallout from years of unfettered global finance. Could NAFTA have been so destabilizing to U.S. manufacturing without endless cheap finance flooding into Mexico (and EM more generally). How dominant would China be today without essentially limitless amounts of virtually free “money” to finance over-investment the likes of which the world has never experienced?

I strongly believe that unfettered finance has been instrumental in the long period of U.S. deindustrialization – the transformation from a manufacturing powerhouse into an experiment in a consumption and services-based economic structure. Bubbling securities markets and booming Wall Street finance were integral to this fateful structural shift.

Millions of skilled jobs have been lost, replaced by millions of service sector positions where workers can toil for years and still possess skills of only marginal value. It’s now been decades of malinvestment and structural impairment. There has been profound overinvest in almost all things consumption related, which impinges both economic productivity and wage growth. Unimaginable monetary stimulus has spurred asset inflation and spending, but we’re now left with a historic Bubble and only deeper structural maladjustment.

Understandably, much of the population feels they’ve been shortchanged or even cheated. The ongoing inequitable redistribution of wealth becomes only more conspicuous as those fortunate enough to participate in the Bubble accumulate incredible wealth. There’s a general sense that the system is unfair and untrustworthy. Too many citizens no longer trust Washington and Wall Street, and they’re as well losing trust in our institutions more generally. There’s tremendous deep-seated anger for large groups of citizens that feel cheated and marginalized. Two-decades of spectacular boom and bust dynamics have left a tremendous amount of damage.

It’s all been so frustratingly predictable. Certainly not for the first time in history, the scourge of unsound money and inflationism has been so subtle that it goes virtually undetected. Instead of being appreciated as the root cause of economic, social, political and geopolitical trouble, monetary inflation is viewed as integral to the solution. Just a little more – just one more round of monetary inflation will do the trick and we’ll get back to normal. Right… It ensures hopeless addiction – with tremendous collateral damage. It was a troubling week where the absurdity of it all seemed on full display.


For the Week:

The S&P500 slipped 0.6% (up 8.3% y-t-d), and the Dow declined 0.8% (up 9.7%). The Utilities gained 1.2% (up 10.9%). The Banks dipped 0.6% (up 1.6%), and the Broker/Dealers fell 1.4% (up 9.3%). The Transports lost 1.1% (up 0.6%). The S&P 400 Midcaps dropped 1.1% (up 1.9%), and the small cap Russell 2000 fell 1.2% (unchanged). The Nasdaq100 declined 0.7% (up 19.1%), while the Morgan Stanley High Tech index added 0.6% (up 24%). The Semiconductors increased 0.5% (up 18.2%). The Biotechs dropped 1.2% (up 23.2%). With bullion down $5, the HUI gold index declined 0.7% (up 7.8%).

Three-month Treasury bill rates ended the week at 99 bps. Two-year government yields added a basis point to 1.31% (up 12bps y-t-d). Five-year T-note yields gained two bps to 1.76% (down 17bps). Ten-year Treasury yields increased one basis point to 2.19% (down 25bps). Long bond yields slipped a basis point to 2.78% (down 29bps).

Greek 10-year yields rose seven bps to 5.76% (down 145bps y-t-d). Ten-year Portuguese yields fell eight bps to 2.77% (down 97bps). Italian 10-year yields were unchanged at 2.03% (up 22bps). Spain's 10-year yields jumped 10 bps to 1.56% (up 18bps). German bund yields gained three bps to 0.41% (up 21bps). French yields rose three bps to 0.71% (up 3bps). The French to German 10-year bond spread was little changed at 30 bps. U.K. 10-year gilt yields increased three bps to 1.09% (down 15bps). U.K.'s FTSE equities index added 0.2% (up 2.5%).

Japan's Nikkei 225 equities index fell 1.3% (up 1.9% y-t-d). Japanese 10-year "JGB" yields declined three bps to 0.03% (down 1bp). France's CAC40 advanced 1.1% (up 5.2%). The German DAX equities index gained 1.3% (up 6.0%). Spain's IBEX 35 equities index increased 1.0% (up 11.1%). Italy's FTSE MIB index jumped 2.2% (up 13.4%). EM equities were mostly higher. Brazil's Bovespa index jumped 2.2% (up 14.1%), and Mexico's Bolsa increased 0.8% (up 11.9%). South Korea's Kospi rallied 1.7% (up 16.4%). India’s Sensex equities index rose 1.1% (up 18.4%). China’s Shanghai Exchange jumped 1.9% (up 5.3%). Turkey's Borsa Istanbul National 100 index added 0.2% (up 37.2%). Russia's MICEX equities index declined 0.7% (down 13.5%).

Junk bond mutual funds saw outflows of $2.188 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.89% (up 46bps y-o-y). Fifteen-year rates dipped two bps to 3.16% (up 42bps). The five-year hybrid ARM rate rose two bps to 3.16% (up 42bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 4.07% (up 46bps).

Federal Reserve Credit last week added $1.4bn to $4.430 TN. Over the past year, Fed Credit declined $8.4bn. Fed Credit inflated $1.619 TN, or 58%, over the past 249 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.5bn last week to $3.333 TN. "Custody holdings" were up $129bn y-o-y, or 4.0%.

M2 (narrow) "money" supply last week expanded $7.3bn to $13.619 TN. "Narrow money" expanded $694bn, or 5.4%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits dropped $46.6bn, while Savings Deposits jumped $49.6bn. Small Time Deposits added $1.2bn. Retail Money Funds rose $1.3bn.

Total money market fund assets gained $12.6bn to $2.706 TN. Money Funds fell $23bn y-o-y (0.1%).

Total Commercial Paper rose $7.3bn to $988bn. CP declined $25bn y-o-y, or 2.4%.

Currency Watch:

The U.S. dollar index gained 0.4% to 93.43 (down 8.8% y-t-d). For the week on the upside, the South African rand increased 2.4%, the Brazilian real 1.5%, the Canadian dollar 0.7%, the Mexican peso 0.7%, the Australian dollar 0.4%, the Norwegian krone 0.3%, and the South Korean won 0.3%. On the downside, the British pound declined 1.1%, the euro 0.5%, the Swiss franc 0.3% and the Singapore dollar 0.1%. The Chinese renminbi declined 0.1% versus the dollar this week (up 4.12% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 0.6% (down 4.5% y-t-d). Spot Gold dipped 0.4% to $1,284 (up 11.4%). Silver slipped 0.4% to $17.00 (up 6.4%). Crude declined 31 cents to $48.51 (down 10%). Gasoline recovered 0.7% (down 3%), while Natural Gas dropped 3.0% (down 23%). Copper rose 1.7% (up 18%). Wheat sank 5.2% (up 9%). Corn dropped 2.4% (up 4%).

Trump Administration Watch:

August 16 – Wall Street Journal (Peter Nicholas, Siobhan Hughes and Michael C. Bender): “President Donald Trump’s comments faulting both sides in Saturday’s deadly white nationalist protest in Virginia rattled his staff and risk setting back his policy agenda in Congress, lawmakers and administration aides said. Mr. Trump’s top economic adviser, Gary Cohn, was upset by the remarks and the trajectory of a news conference Tuesday that was supposed to showcase the White House’s infrastructure plans, aides said. Instead, the event was dominated by Mr. Trump’s fiery commentary about the violence in Charlottesville that left one person dead.”

August 15 – Wall Street Journal (Andrew Browne): “By ordering his first trade action against Beijing, while amping up pressure on Chinese leaders to rein in Pyongyang’s nuclear menace, U.S. President Donald Trump is bringing to a head two of the most intractable problems that bedevil U.S.-China relations. There are hints that Mr. Trump’s hard-nosed strategy could be having an impact—at least in the near-term. After repeated North Korean threats to launch missiles toward the U.S. Pacific territory of Guam, Pyongyang suddenly backed away from that threat Tuesday. And China has signed on to U.N. sanctions that will slash North Korea’s already meager foreign revenues by another $1 billion. But Mr. Trump’s strategy comes with risks; each issue—trade and North Korea—is volatile enough to upend the relationship. Mismanaged, one could ignite a trade war, the other trigger scenarios that could lead to military conflict.”

August 14 – CNBC (Jacob Pramuk): “President Donald Trump on Monday signed a memorandum that could lead to a trade investigation of alleged Chinese theft of intellectual property. The measure directs U.S. Trade Representative Robert Lighthizer to look into options to protect U.S. intellectual property. It does not take any specific action against China at this point. ‘We will safeguard the copyrights, patents, trademarks, trade secrets and other intellectual property that is so vital to our security and to our prosperity,’ Trump said. He added, ‘This is just the beginning.’”

August 14 – Reuters (Michael Martina): “China will take action to defend its interests if the United States damages trade ties, the Ministry of Commerce said…, after U.S. President Donald Trump authorized an inquiry into China's alleged theft of intellectual property. Trump's move, the first direct trade measure by his administration against China, comes at a time of heightened tension over North Korea's nuclear ambitions, though it is unlikely to prompt near-term change in commercial ties. U.S. Trade Representative Robert Lighthizer will have a year to look into whether to launch a formal investigation of China's policies on intellectual property, which the White House and U.S. industry groups say are harming U.S. businesses and jobs.”

August 15 – Reuters (Balazs Koranyi): “The United States… laid down a tough line for modernizing the North American Free Trade Agreement, demanding major changes to the pact that would reduce U.S. trade deficits with Mexico and Canada and increase U.S. content for autos. Speaking at the start of the talks in Washington, U.S. President Donald Trump's top trade adviser, Robert Lighthizer, said Trump was not interested in ‘a mere tweaking’ of the 23-year-old pact, which he blames for hundreds of thousands of job losses to Mexico. ‘We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement,’ Lighthizer, the U.S. Trade Representative, said in an opening statement.”

August 14 – Reuters: “Industry groups and other sectors of society are gearing up to fight proposed changes to the personal income tax. Proposed changes to the personal tax code have already stirred opposition from real estate agents, home builders, mortgage lenders and charities. U.S. Congress members are focused during their August recess on finding ways to lower the corporate tax rate.”

China Bubble Watch:

August 14 – Wall Street Journal (Anjani Trivedi): “All roads in Beijing’s deleveraging efforts lead to its banks. China’s central bank—increasingly becoming the one all-powerful financial regulator—said it would begin reclassifying the fastest-growing source of banks’ wholesale funding from the first quarter of next year. So-called negotiable certificates of deposits (NCDs), a type of money-market instrument that came into existence just three years ago, have grown almost 60% in the past year to 8.4 trillion yuan ($1.26 trillion) in July. The new rule is supposed curb Chinese banks’ ability to expand their balance sheets rapidly using these short-term financing tools. Funding has become a difficult task for China’s banks. The traditional deposit base has been fleeing to higher-yielding investment products while capital markets have made raising debt punitive. So NCDs have been all the rage. Of the 1.6 trillion yuan issued in July, small and midsize banks issued the bulk of the volume and half of all NCDs are issued by a dozen such banks.”

August 15 – Bloomberg: “China’s giant shadow banking industry shrank for the first time in nine months during July -- evidence Beijing’s campaign to quash risks to the financial system may be starting to bear fruit. At the same time, however, traditional forms of lending are seeing a renaissance. Net corporate bond issuance has been jumping as non-financial corporations opt for cheaper sources of finance than borrowing in the shadow banking sector, where costs have surged amid the government crackdown. As China stares down a twice-a-decade leadership re-shuffle later this year, President Xi Jinping has made financial-sector stability a top priority.”

August 14 – Bloomberg: “China’s economy showed further signs of entering a second-half slowdown, as curbs on property, excess borrowing and industrial overcapacity began to bite. Industrial output rose 6.4% from a year earlier in July, versus a median projection of 7.1% and June’s 7.6%. Retail sales expanded 10.4% from a year earlier, compared with a projection of 10.8% and 11% in June. Fixed-asset investment in urban areas rose 8.3% from a year earlier in the first seven months, versus a forecast 8.6% rise.”

August 14 – Bloomberg: “Nearly two months after reports about Chinese regulators’ scrutiny of the country’s top dealmakers, the concerns have left a mark in the local bond market, where one of those companies is facing yields double the national average. Yields on onshore securities without put or call options of Dalian Wanda Commercial Properties Co., which has an AAA rating onshore, are above 9%... That compares with the average 4.55% yield on top-rated notes due in three years from all corporate borrowers in the country. It’s also higher than the 5.8% average yield on three-year notes with AA- ratings, considered junk in China.”

August 16 – Bloomberg: “Yu’E Bao, the world’s biggest money-market fund, still has potential to grow more even after it expanded at the fastest half-year pace in three years in the first six months of 2017, according to Fitch… The Chinese fund is sold on the mobile-payment platform Alipay, offered by Alibaba Group Holding Ltd.’s financial affiliate, which is controlled by Jack Ma. The billionaire founder of Alibaba has promoted Alipay for everything from grocery shopping to settling restaurant bills. That’s spurred growth of Yu’E Bao, which gives users a way to stash away savings with no minimum investment or time frame. Yu’E Bao has 1.4 trillion yuan ($210bn) of assets under management… It has beaten the average returns for money-market funds in the nation for much of this year, further boosting its allure, according to Fitch analyst Huang Li.”

Central Bank Watch:

August 16 – Reuters (Balazs Koranyi): “European Central Bank President Mario Draghi will not deliver a new policy message at the U.S. Federal Reserve's Jackson Hole conference, two sources familiar with the situation said, tempering expectations for the bank to start charting the course out of stimulus. An ECB spokesman said that Draghi will focus on the theme of the symposium, fostering a dynamic global economy, in his Aug. 25 remarks, while the sources added that he was keen to hold off on the policy discussion until the autumn… Expectations for the speech had been building in recent weeks with investors pointing to next Friday's event as the likely kick off in the ECB's debate how to recalibrate monetary policy given solid growth, rapidly falling unemployment but persistently weak underlying inflation.”

August 15 – Financial Times (Claire Jones): “The European Central Bank faces a legal challenge over its €2tn quantitative easing programme after Germany’s highest court said the measures may violate EU law. The country’s constitutional court said on Tuesday that it would refer a case launched against QE to the European Court of Justice. It said there were indications that decisions about the programme overstepped the ECB’s mandate and contravened a ban on purchasing bonds directly from governments, known as monetary financing. ‘In the view of the [court] significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank,’ the court said… ‘It is doubtful whether the [purchase of government bonds under QE] is compatible with the prohibition of monetary financing.’”

Global Bubble Watch:

August 15 – Financial Times (Kate Allen and Keith Fray): “Leading central banks now own a fifth of their governments’ total debt, a sign of the scale of the challenge they will face in unwinding unprecedented stimulus measures deployed over the past decade. Since the financial crisis emerged, the world’s biggest central banks have carried out large-scale purchases of bonds and other securities in a bid to boost the global economy by driving down borrowing costs for households and businesses. In total, the six central banks that have embarked on quantitative easing over the past decade — the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, along with the Swiss and Swedish central banks — now hold more than $15tn of assets, …more than four times the pre-crisis level. Of this, more than $9tn is government bonds — one dollar in every five of the $46tn total outstanding debt owed by their governments.”

August 14 – Financial Times (Leo Lewis): “There was a time when a US president threatening ‘fire and fury’ and footage of children practising nuclear drills might have hit the Nikkei 225 harder than a 2% dip. But that was before the Bank of Japan’s addiction to exchange traded funds (ETFs). There is no enigma here. Last week, when Japanese investors might reasonably have taken fright, the BoJ unleashed a test launch of its own — a record-breaking grab of more than $2bn of Japanese equity ETFs in 52 hours. That adds to a BoJ share portfolio whose book value passed $127bn at the end of June…”

August 13 – Bloomberg: “China’s surging commodity prices are sending a warning signal on inflation. That should be negative for bonds, but the debt market seems unruffled. As futures on steel reinforcement bars surged to their highest level since 2013 in Shanghai last week, joining copper and aluminum at multi-year highs, bonds barely registered. A Bank of America index of the Chinese debt market was little changed, continuing a trend that’s left it steady in the quarter, even as commodity prices look to be stirring.”

August 15 – Bloomberg (Greg Quinn and Erik Hertzberg): “Canada’s benchmark home price fell by the most in nearly a decade last month as Toronto led a fourth straight decline in sales. The nationwide benchmark home price declined 1.5% to C$607,100 ($476,000) from June… In Toronto, the country’s largest city, the price fell 4.7% on the month.”

August 14 – Bloomberg (Michael Heath): “Australia’s central bank renewed its focus on mounting household debt, even as the outlook for the nation’s economy improved, according to the minutes of this month’s policy decision… The main change is one of emphasis after the Reserve Bank of Australia removed the labor market and added household balance sheets -- where debt is currently at a record 190% of income -- to its key areas of concern alongside the residential property market.”

Fixed Income Bubble Watch:

August 15 – Wall Street Journal (Sam Goldfarb): “Amazon.com Inc. sold $16 billion of bonds… to help fund its purchase of Whole Foods Market Inc., meeting strong demand from investors as it made a rare trip to the debt market. Amazon sold a $3.5 billion 10-year bond at a 0.9-percentage-point yield-premium to Treasurys, below the 1.1-percentage-point guidance set by underwriters earlier in the day... The e-commerce giant benefited from similarly favorable price adjustments across six other maturities, ranging from three-years to 40-years, the person said. In its entirety, the sale added up to the fourth-largest U.S. corporate bond deal of the year…”

August 17 – Bloomberg (Natasha Doff): “Investors overseeing about $1.1 trillion have been cutting exposure to the world’s riskiest corporate debt as rates grind too low to compensate for potential risks. Even after a selloff last week amid rising tensions between the U.S. and North Korea, a Bloomberg Barclays index of global junk bonds still yields 5.3%, 100 bps below the average for the past five years. High-yield corporate debt has been one of the biggest beneficiaries of central stimulus… The danger now is that higher Federal Reserve interest rates and the European Central Bank tapering will reverse the trend.”

August 14 – Bloomberg (Nabila Ahmed, Sally Bakewell, Molly Smith, and Claire Boston): “Have we finally reached peak credit markets? It’s a question that big names like BlackRock, DoubleLine and Pimco have been asking during this seemingly endless summer of debt. Signs of froth are everywhere. U.S. high-grade companies, which have already sold almost $1 trillion of bonds this year, are on track to break old issuance records. By some measures, corporate America is deeper in debt than ever before. Junk bonds, yielding on average just 5.8%, have fallen close to post-crisis lows. And on Friday, investors lined up in droves to provide $1.8 billion in financing to Elon Musk’s unprofitable electric carmaker, Tesla Inc. -- and at interest rates that few could have envisioned a couple of years ago.”

Federal Reserve Watch:

August 16 – Wall Street Journal (David Harrison): “New doubts over sagging inflation in the past few months are driving a split at the Federal Reserve about the timing of the next increase in interest rates. The internal debate raises the possibility that the Fed could deviate from its plans for a third rate increase this year. Soft inflation has bedeviled Fed officials, forcing them to pull back on plans to raise rates multiple times in 2015 and 2016. Minutes from the July 25-26 meeting released Wednesday reveal growing concern among some officials that recent soft inflation numbers could be a sign that something has fundamentally changed in the economy, leading them to suggest holding off on raising rates again for the time being.”

August 14 – Bloomberg (Jeanna Smialek): “Federal Reserve Bank of New York President William Dudley said it isn’t unreasonable to expect the central bank to announce plans in September to start trimming its balance sheet and said he supports another interest-rate increase this year if the economy evolves as he expects. ‘I would expect -- I would be in favor of doing another rate hike later this year’ if the economy holds up, Dudley said…”

August 14 – Wall Street Journal (Ben Eisen): “The market is once again second-guessing whether the Federal Reserve can lift rates again this year. The yield on the two-year Treasury note… fell to 1.29% from its early-July level of 1.41%, the highest since 2008. In the fed funds futures market, where traders wager on the path of the Fed’s policy rate, there was a 36% chance of at least one more rate increase by the end of the year, down from 54% a month ago…”

August 16 – Financial Times (Sam Fleming): “One of the Federal Reserve’s top policymakers has attacked attempts to reverse the post-crisis drive for tougher regulation, calling efforts to loosen constraints on banks ‘dangerous and extremely short-sighted’. Stanley Fischer, the vice-chairman of the Fed’s board of governors, said… there are troubling signs of a drive to return to the status quo that preceded it. While he endorsed efforts to ease up on small banks, he said political pressure in Washington to curtail regulatory burdens on large institutions was very hazardous. Republican politicians have been urging a loosening of some capital and liquidity requirements on financial institutions, arguing that they are hampering firms’ ability to lend… ‘I am worried that the US political system may be taking us in a direction that is very dangerous… It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude. And now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really, extremely dangerous and extremely short-sighted. One can understand the political dynamics of this thing, but one cannot understand why grown intelligent people reach the conclusion that [you should] get rid of all the things you have put in place in the last 10 years.’”

U.S. Bubble Watch:

August 13 – Financial Times (Chris Flood): “Record-breaking inflows into exchange traded funds this year are fuelling fears that the tide of money surging into passive investment is helping to inflate a bubble in the US stock market… Investors have ploughed $391bn into ETFs in the first seven months of 2017, already surpassing last year’s record annual inflow of $390bn, according to ETFGI… The ETF industry has attracted almost $2.8tn in new business since the start of 2008, coinciding with one of the longest bull runs in US stock market history. The US benchmark S&P 500 index hit an all-time high on August 8, up 267% since its post financial-crisis low in March 2009… ‘When the management of assets is on autopilot, as it is with ETFs, then investment trends can go to great excess,’ said Howard Marks, co-founder of Oaktree Capital.’”

August 15 – Reuters (Jonathan Spicer): “Americans' debt level notched another record high in the second quarter, after having earlier in the year surpassed its pre-crisis peak, on the back of modest rises in mortgage, auto and credit card debt, where delinquencies jumped. Total U.S. household debt was $12.84 trillion in the three months to June, up $552 billion from a year ago… The proportion of overall debt that was delinquent, at 4.8%, was on par with the previous quarter. However a red flag was raised over the transitions of credit card balances into delinquency, which the New York Fed said ‘ticked up notably.’”

August 15 – Bloomberg (Adam Tempkin): “Amid all the reflection on the 10-year anniversary of the start of the subprime loan crisis, here’s a throwback that investors could probably do without. There’s a section of the auto-loan market -- known in industry parlance as deep subprime -- where delinquency rates have ticked up to levels last seen in 2007, according to… Equifax. ‘Performance of recent deep subprime vintages is awful,’ Equifax said… ‘We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two,’ Chief Economist Amy Crews Cutts said… ‘In deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.’”

August 16 – Bloomberg (Michelle Jamrisko): “U.S. housing starts stumbled in July on an abrupt slowdown in apartment construction and a modest decline in single-family homebuilding that shows the industry will do little to spur the economy… Residential starts decreased 4.8% to a 1.16 mln annualized rate (est. 1.22 mln). Multifamily home starts slumped 15.3%, one-family down 0.5%. Permits, a proxy for future construction, fell 4.1% to 1.22 mln rate.”

August 15 – Bloomberg (Michelle Jamrisko): “Sentiment among American homebuilders unexpectedly increased to a three-month high as builders saw greater prospects for industry demand despite elevated material costs and shortages of labor and lots, according to… the National Association of Home Builders/Wells Fargo. Builders’ Housing Market Index increased to 68 (est. 64) from 64 in July. Measure of six-month sales outlook rose to 78 from 73. Index of current sales climbed to 74 after 70.”

August 15 – CNBC (Diana Olick): “The cost of housing is rising at a fast clip, and nowhere is it more apparent than in the market for newly built homes. Sales there are rising, but only on the higher end, and that is leaving the majority of entry-level buyers out of luck… While homebuilders claim they are trying to target the high demand from entry-level buyers, the numbers simply don't show that. More affordable homes, those priced under $200,000, made up 44% of the market in 2010. Today, they are just 16% of new, for-sale construction… During the same period, the share of newly built homes priced between $200,000 and $400,000 has grown to 55% from 43%. Going even further up the price scale, the share of new homes priced above $400,000 has more than doubled to 29% of the market from 13%.”

August 14 – Bloomberg (Luke Kawa): “U.S. stocks have been able to hit fresh highs this year despite a dearth of demand from a key source of buying. Share repurchases by American companies this year are down 20% from this time a year ago, according to Societe Generale global head of quantitative strategy Andrew Lapthorne. Ultra-low borrowing costs had encouraged large firms to issue debt to buy back their own stock, thereby providing a tailwind to earnings-per-share growth. ‘Perhaps over-leveraged U.S. companies have finally reached a limit on being able to borrow simply to support their own shares,’ writes Lapthorne. Repurchase programs account for the lion’s share of net inflows into U.S. equities during this bull market.”

Europe Watch:

August 14 – Reuters (Gernot Heller): “German Finance Minister Wolfgang Schaeuble said… that the European Central Bank's ultra-loose monetary policy would come to an end in the foreseeable future, but interest rates would remain low. Regarding the end of the period of low interest rates, Schaeuble said: ‘There are signs that it is gradually getting better.’ Speaking at an campaign rally ahead of a Sept. 24 election, the veteran conservative said: ‘No one seriously disputes that interest rates are rather too low for the strength of the German economy and the exchange rate of the euro, which is rising now.’ Schaeuble said most people expected the ECB to take a further step at a September meeting towards gradually quitting its very expansive monetary policy.”

Japan Watch:

August 13 – Bloomberg (Keiko Ujikane): “Japan’s economy grew for a sixth straight quarter, extending the longest expansion in more than a decade, as a strong pick-up in demand at home compensated for softer exports. Gross domestic product increased by an annualized 4.0% in the three months ended June 30 (estimate +2.5%), compared with a revised 1.5% in the previous quarter.”

August 16 – Wall Street Journal (Peter Landers): “Amid a welter of conflicting views over North Korea, there is one reliable standby. Japan’s prime minister has agreed with President Donald Trump, every time. Shinzo Abe is the type of leader to repeat talking points in measured words, while Mr. Trump is known for issuing aggressive statements unpredictably. On substance, however, they are in the same place… ‘I think highly of President Trump’s commitment toward the security of allies,’ Mr. Abe said Tuesday after a 30-minute phone call with the president, the ninth time the two leaders have spoken by telephone since Mr. Trump’s inauguration. The two have also met three times this year in person…”

EM Bubble Watch:

August 16 – Financial Times (Adam Samson): “Investors in exchange-traded funds have garnered increasing sway over emerging-market stocks and bonds, Citigroup said…, underscoring the swelling importance to global markets of passive instruments. ETFs that track EM assets now have almost $250bn dollars under management, with $196bn in equities and $48bn in fixed income... That represents close to a fifth of total emerging-market mutual fund AUM. Just two years ago, the figure was just above 12%. The figures highlight how the boom in passive investing is not limited just to developed markets that have more liquid assets. In fact, the sixth-biggest ETF by assets tracks emerging markets stocks… ‘ETF flows themselves increasingly representative of asset class sentiment as a whole,’ notes Citi’s Luis Costa.”

Geopolitical Watch:

August 16 – CNBC (Justina Crabtree): “While the world has focused on North Korea, the globe's two biggest emerging economies are squaring off over their shared border. China and India's borderlands, though geographically desolate and inhospitable, have been a hot spot for increasing military tension in recent months. The two giants are wrestling more broadly for hegemony in Asia, and given that both are equipped with nuclear weapons, the situation could escalate. ‘Both sides stand to lose tremendously, economically speaking, should this boil over into an actual war,’ wrote Asia analysts Shailesh Kumar and Kelsey Broderick at consulting firm Eurasia Group.”

August 15 – Reuters: “Indian and Chinese soldiers were involved in an altercation in the western Himalayas on Tuesday, Indian sources said, further raising tensions between the two countries, which are already locked in a two-month standoff in another part of the disputed border. A source in New Delhi, who had been briefed on the military situation on the border, said soldiers foiled a bid by a group of Chinese troops to enter Indian territory in Ladakh, near the Pangong lake.”

August 15 – Reuters: “Iran could abandon its nuclear agreement with world powers ‘within hours’ if the United States imposes any more new sanctions, Iranian President Hassan Rouhani said… If America wants to go back to the experience (of imposing sanctions), Iran would certainly return in a short time - not a week or a month but within hours - to conditions more advanced than before the start of negotiations,’ Rouhani told a session of parliament… Iran says new U.S. sanctions breach the agreement it reached in 2015 with the United States, Russia, China and three European powers in which it agreed to curb its nuclear work in return for the lifting of most sanctions.”

Thursday, August 17, 2017

Thursday Evening Links

[Bloomberg] Asia Stocks to Drop on Spain Attack, Trump Turmoil: Markets Wrap

[Bloomberg] Markets Roiled as Tension Mounts Over Trump Stance: Markets Wrap

[CNBC] Dow drops 200 points, led by Cisco; concerns grow Republican agenda will be derailed

[Bloomberg] ECB Searches for Stimulus Flexibility as End of QE Approaches

[WSJ] The ECB’s Good-News Problem: the Euro

[FT] Cautious markets focus on Trump and central banks

[FT] Tillerson says US is prepared to use force against North Korea

[Bloomberg] July Was the 2nd Hottest Month in Recorded History

Thursday's News Links

[Bloomberg] Stocks Fall, Bonds Gain Amid Rising Policy Concern: Markets Wrap

[Bloomberg] Fed Starts to Wonder If Cornerstone Inflation Model Still Works

[Bloomberg] ECB Officials Expressed Concern Over Risk of Euro Overshoot

[Bloomberg] The 48 Frantic Hours Before CEOs Broke With Trump

[Bloomberg] The Growing List of Money Managers Cutting Their Exposure to Junk Bonds

[Bloomberg] World's Biggest Money-Market Fund to Get Even Bigger, Fitch Says

[Reuters] South Korea's Moon says North Korean nuclear-tipped ICBM is a 'red line'

[CNBC] Forget North Korea — here's the other Asia flashpoint that has analysts worried

[Reuters] U.S. says joint S.Korea war games not on the negotiating table

[Reuters] China military criticizes 'wrong' U.S. moves on Taiwan, S.China Sea

[WSJ] Trump’s Remarks Rattle His Staff, Threaten Agenda

[WSJ] Fed Officials Split Over Timing of Next Rate Increase

[WSJ] ECB Worried by Euro Strength, Toyed With Changing Forward Guidance

[FT] Prominent China debt bear warns of $6.8tn in hidden losses

[FT] The perils of calling the peak of the equities bull run

Wednesday, August 16, 2017

Wednesday Evening Links

[Bloomberg] U.S. Stocks Pare Gains, Dollar Falls on CEO Rebuke: Markets Wrap

[Bloomberg] Trump Ends Business Councils as CEOs Turn Against President

[Reuters] Fed policymakers grow more worried about weak inflation: minutes

[CNBC, Cox] Fed minutes: Central bank split over path of rate hikes

[Reuters] Fed's Mester says U.S. rate hikes should continue despite weak inflation

[Bloomberg] Chinese Demand Pushes the Market for Asia's Dollar Bonds Toward $1 Trillion

[FT] Fed divided on start to balance sheet unwinding

Wednesday's News Links

[Bloomberg] U.S. Stocks Rise as Investors Await Fed Minutes: Markets Wrap

[Bloomberg] Fed Minutes May Show Battle Lines Hardening Over Soft Inflation

[CNBC] This is what the markets are looking for from the Fed Wednesday

[Reuters] ECB's Draghi will not deliver fresh policy steer at Jackson Hole: sources

[Bloomberg] U.S. Housing Starts Fell in July on Apartment Building Slowdown

[Reuters] As NAFTA talks begin, Trump's 'America First' agenda looms large

[Bloomberg] Iron Ore Risks Keeling Over as Slowing China Drives Reversal

[Reuters] India, China soldiers involved in border altercation: Indian sources

[Politico] The Real Reason North Korea Is Threatening Guam

[WSJ] Trump’s Loyal Sidekick on North Korea: Japan’s Shinzo Abe

[FT] Fed’s Fischer attacks moves to unwind regulations

[FT] Emerging-market assets ‘increasingly influenced’ by ETF investors – Citi

Tuesday, August 15, 2017

Tuesday Evening Links

[Bloomberg] Asian Shares Mixed, Korea Advances as Calm Returns: Markets Wrap

[Bloomberg] U.S. Stocks Dip Slightly as Korea Threat Recedes: Markets Wrap

[Reuters] Americans' debt level notches a new record high

[CNBC] As housing affordability weakens, more buyers are left out in the cold

[Bloomberg] ‘Deep’ Subprime Car Loans Hit Crisis-Era Milestone

[Bloomberg] Homebuilder Sentiment in U.S. Reaches Three-Month High in August

[Bloomberg] ‘Ominous’ Sign for Stocks Seen by Bank of America in Fund Survey

[Bloomberg] Canadian Home Prices Tumble the Most Since 2008 Recession

[Reuters] Iran could quit nuclear deal in 'hours' if new U.S. sanctions imposed: Rouhani

[FT] Central banks holding a fifth of their governments’ debt

[FT] IMF warns China over ‘dangerous’ levels of debt

[FT] German judges refer case on ECB’s QE stimulus to European court

Tuesday's News Links

[Bloomberg] Dollar Extends Gain After Retail Data; Bonds Drop: Markets Wrap

[Bloomberg] Broad-Based Advance in U.S. Retail Sales Shows Solid Spending

[Reuters] U.S. import prices rebound after two straight monthly declines

[Bloomberg] ECB's QE Questioned by German Judges Asking for EU Review

[Reuters] Schaeuble: ECB to quit ultra-loose monetary policy in foreseeable future

[Reuters] China says it will defend interests if U.S. harms trade ties

[Reuters] North Korea's Kim holds off on Guam missile plan; Seoul says will prevent war by all means

[Bloomberg] As China's Shadow Banking Takes a Hit, the Cash Flows Elsewhere

[CNBC] Domestic demand keeps Germany driving euro zone economy in Q2

[Bloomberg] Australia's Central Bank Renews Alert on Mounting Household Debt

[WSJ] The ‘Fire and Fury’ Crisis: Trump Risks a Backfire Over China and North Korea

Monday, August 14, 2017

Monday Evening Links

[Bloomberg] Stocks Surge, Havens Retreat as Korea Fears Wane: Markets Wrap

[CNN] Kim reviews Guam strike plan as Mattis issues stark warning

[Reuters] North Korea's Kim puts army on alert; U.S. warns it can intercept missile

[CNBC] Trump signs measure on Chinese trade practices, says it's 'just the beginning'

[Reuters] Trump orders China IP probe as business groups urge caution

[Bloomberg] Fed's Dudley Says He Still Favors Another Rate Hike in 2017

[Bloomberg] U.S. Stock Buybacks Are Plunging

[Bloomberg] China's Stability at Stake as the Next Generation of Money Men Rises

[Bloomberg] China's Economic Speed Bump May Reignite Corporate Bond Defaults

[Bloomberg] Wanda's Bonds Trade Like They're Junk Despite AAA China Rating

[Reuters] Korea tensions ease slightly as U.S. officials play down war risks

[WSJ] Trump Signs Order Increasing Trade Pressure on China

[FT, Wilbur Ross] American genius is under attack from China

[FT] Japan’s ETF addiction stores up risk for the future

Monday's News Links

[Bloomberg] Stocks Bounce and Havens Drop as Korea Fears Abate: Markets Wrap

[Bloomberg] After a Summer Bond Binge, Signs of Angst Are Growing in the Market

[Bloomberg] China's Economic Growth Dials Back

[Reuters] US tax change proposals anger builders, real estate agents, charities

[Bloomberg] China's Property Slowdown Means Peak of Growth Cycle Has Passed

[Bloomberg] China Home Sales Grow at Slowest Pace in More Than Two Years

[Reuters] Chinese state newspaper says Trump trade probe will 'poison' relations

[Reuters] China's real estate investment growth slowed in July from June, as government curbs continued

[WSJ] Skepticism Mounts (Again) About the Next Fed Rate Hike

[WSJ] China Sets Its Banks on Scramble for Funding

[WSJ] Margin Pressure Ahead for U.S. Companies

[FT] Trump aides seek to placate China ahead of trade move

Saturday, August 12, 2017

Saturday's News Links

[Bloomberg] Trump Is Ready to Turn Up the Heat on China Over IP Transfers

[Bloomberg] China's Xi Seeks to Calm North Korea Tensions in Call With Trump

[Politico] Trump's China trade crackdown coming Monday

[Reuters] Trump reportedly plans to call for China intellectual property probe on Monday

[Reuters] In call with Trump, China's Xi urges restraint over North Korea

[Reuters] Minutes from missiles, Guam islanders get to grips with uncertain fate

[Bloomberg] India's Military Said to Increase Alert Along Tense China Border

Weekly Commentary: Doubled-Down

The real trouble with this world of ours in not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.” G.K Chesterton

The S&P500 rose to a record 2,490.87 during Tuesday’s session at about the same time the VIX was trading down to 9.52. The DJIA reached a record 22,179 during Tuesday trading. At 5,973, the Nasdaq100 (NDX) was on track mid-day Tuesday for a record close. Tuesday saw the bank index (BKX) trade to a five-month high, with the broker/dealers (XBD) just shy of all-time highs.

"North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen. He has been very threatening ... and as I said they will be met with fire, fury and, frankly, power, the likes of which this world has never seen before."

The initial market reaction to President Trump’s Tuesday afternoon “fire and fury” comment was anything but dramatic. Market players have grown accustomed to bombast – apparently even when it concerns potential nuclear war. The S&P500 ended the session down about one-quarter of a percent. The VIX rose but only to 11.5. The bond market barely budged, though the already jittery currencies showed some instability.

Instead of dialing back his comments, the President Doubled-Down. The markets took notice. By Thursday the VIX had surged about 70% to trade above 17 (“Biggest weekly gain since December 2015”). U.S. and global stocks were under pressure. Junk bonds were getting hit (worst two-day decline of 2017), and even investment-grade corporates were under some pressure. In a rather unbullish development, U.S. bank stocks (BKX) sank 3.6% for the week. Broader U.S. equities indices were under pressure, with the mid-caps down 2.3% and the small-caps 2.7% lower.

All in all, it was an interesting – perhaps enlightening – week in the markets. At least for the week, the U.S. dollar was notable for weakness in the face geopolitical uncertainty. The yen (up 1.4%) and Swiss franc (up 1.1%) enjoyed some of their traditional safe haven appeal. Speaking of safe havens, Gold surged $31, or 2.4%. European equities trade poorly. German stocks dropped 2.3%, with previous high-flyers Spain (down 3.5%) and Italy (down 2.7%) under significant pressure. Italian 10-year sovereign spreads (to bunds) widened 10 bps.

August 9 – Wall Street Journal (Colin Barr): “Ten years ago this Wednesday, the first glimpses of the global financial crisis came into view. The French bank BNP Paribas froze three investment funds, saying a lack of trading in subprime securities made valuing them impossible. The bond market seized up, rattling investors and central bankers who previously soft-pedaled the notion that the U.S. housing bust would hit the economy. Aug. 9, 2007, marked the beginning of the most far-reaching economic disruption since World War II. The events that Thursday made clear that subprime-lending excesses wouldn’t be ‘contained,’ as Ben Bernanke, then Federal Reserve chairman, had predicted just months earlier. Yet few people appreciated the scope of the disaster that would unfold over the next 18 months.”

It’s simply difficult to believe 10 years have passed since the beginning of the so-called “worst financial crisis since the Great Depression.” It’s not beyond imagination to believe historians might look back to this week’s “fire and fury” as the start of the worst crisis in generations.

August 7 – Financial Times (John Authers and Alan Smith): “After the credit crisis began to unfold in the summer of 2007, many on Wall Street and in the City of London complained it was unprecedented and had been impossible to see coming. They were wrong. Speculative bubbles are rooted deep in human nature, and have been widely studied. History’s most famous bubble took root in the Netherlands almost four centuries ago — for tulips. The common elements to speculative bubbles are: An exciting and new ‘disruptive’ technology that is difficult to value in the short term, and whose long-term value is uncertain. Easy liquidity of markets so that shares or other securities can change hands quickly. The provision of cheap credit to pay for it. These classic elements were visible in, for example, canals and railroads, which both enjoyed speculative bubbles in the 19th century: In the 20th century, economic history was marked by a series of huge bubbles in critical markets. All followed almost identical patterns, and had a serious economic impact.”

The opening quote above – one of my old favorites – comes from Peter Bernstein’s classic “Against the Gods – The Remarkable Story of Risk.” The view that financial innovation and enlightened policymaking had tamed risk grew stronger throughout the nineties and then the mortgage finance Bubble period. Each crisis surmounted only emboldened New Age thinking. Monetary stimulus coupled with derivatives and sophisticated financial engineering ensured that virtually any type of risk could supposedly be hedged away. And as the mortgage Bubble began inflating precariously, a powerful view took hold that “Washington would never allow a national housing bust.” The GSEs, MBS, ABS, repo, CDOs and derivatives, Credit insurance – all things mortgage finance Bubble - enjoyed implicit government backing.

The 2008/09 financial crisis should have concluded an incredible era of dangerous risk misperceptions and flawed calculations. But the Federal Reserve and global central bankers Doubled-Down. Instead of the markets reverting back to more traditional (stable) views of risk, massive QE liquidity injections, zero rates and aggressive market liquidity backstops pushed risk analysis and perceptions only deeper into New Age Fallacy.

These days there’s virtually little in the way of risk that central bankers and government policymakers can’t address. Central banks became willing to fight risk aversion by directly inflating risk market prices, while simultaneously devaluing safe haven assets (with zero rates and inflationary policies). They could eradicate liquidity risk with promises of open-ended QE and the willingness to “push back against a tightening of financial conditions.” Policymakers also learned the value of concerted efforts to manage liquidity, manipulate prices, backstop markets and stabilize currency markets on a global basis.

Over time, markets began to appreciate the even political and geopolitical risks had been tamed. The 2012 “European” crisis demonstrated the new post-crisis reality that financial, economic and political risks would be met first and foremost by “whatever it takes” from central bankers and their electronic printing presses. Essentially any potential risk would ensure lower rates and more “money” printing for longer. It became clear that there was only one way to bet in the markets: with central bankers.

Yet one festering risk remained seemingly outside the purview of our inflationist central banks: geopolitical uncertainty. But even here things became clouded by a world inundated with “money” and surging securities markets. The global Bubble championed cooperation. With economic and financial fragility a global phenomenon, it was basically in each country’s interest to act in ways supportive of the global recovery. Of course, promote the securities markets! And it was also not the time to embark on geopolitically risky endeavors. Indeed, a global consensus developed to use economic/financial sanctions to dissuade countries from unconstructive behavior (i.e. Russia and Iran).

A relatively benign geopolitical backdrop unfolded – with economic expansion the focal point for most leading developed and developing nations. The focus on investment, trade and attracting global flows spurred a generally cooperative post-crisis backdrop, with nations seeking active participation within the global community. Of course, the major central banks were dominating the New Global Order. And with the monetary bonanza train having left the station, it was imperative not to be left behind. In their efforts to inflate securities markets and economies, global central bankers as well fostered a relatively quiescent period geopolitically. There were small countries that refused to participate, but they were irrelevant to the global financial and geopolitical backdrop.

With finance, the markets, economies and geopolitics so well-controlled, there should be little mystery surrounding meager risk premiums, record global stock prices and a VIX index below 10. It was certainly not sustainable, yet central bankers had succeeded in almost fully harnessing risk.

Let me try to explain why North Korea is potentially a huge market issue. It’s a small and irrelevant country financially and economically. Not only does it choose not to cooperate in the New Global Order, it would take great pride in being disruptive. And, most importantly, it has nukes as well as having made major strides recently in ICBM technologies.

Risks associated with North Korea are well outside the comfortable purview of central bank monetary management/manipulation – and they’re potentially catastrophic. The big problem is that market perceptions, behaviors, structures and prices have for going on a decade now been distorted by central bank’s dominance over all things risk. Disregarding risk has been consistently rewarded to the point where markets have been forced to disregard potentially catastrophic risks, including a nuclear confrontation with North Korea. Moreover, years of market risk distortions have deeply impacted the structure of the marketplace (i.e. the ETF complex, derivatives and speculating directly on risk metrics).

Going into the Presidential election, I believed markets would face significant selling pressure in the event of a surprising Donald Trump victory. It was clear from the campaign that a President Trump would be unconventional and not bound by traditional mores and behavior. He would be unpredictable like no President in modern times. And Trump was going to be tough, and likely bombastic and impulsive. No matter what, he would take great pains in doing things his way. For an already divided nation and a world of festering geopolitical instability, a Trump presidency came with extraordinary uncertainty and risk. As it turned out, over-liquefied and speculative markets were in the mood to disregard risk.

Let’s pray there’s a very low probability of a military confrontation with North Korea. Hopefully, over time some diplomatic solution will be found where North Korea halts development of nuclear and ICBM technologies. But I would argue that even this best-case scenario is problematic for the markets.

Key market vulnerabilities are being exposed. There’s always a major problem for highly inflated and speculative markets when it comes to hedging against risk – especially this type of undefinable risk. Indeed, this week provided a wake-up call for those that have been making a fortune writing variations of risk (“flood”) insurance during a period of over-liquefied financial markets (a risk “drought”). And the upshot of this mania in the “insurance” market has created a seemingly endless supply of cheap risk protection – readily available hedging vehicles that have kept players aggressively speculating throughout the markets.

I appreciated a Friday article by Gillian Tett of the Financial Times: “The Next Crash Risk is Hiding in Plain Sight.”

Sometimes, market shocks occur because investors have taken obviously risky bets — just look at the tech bubble in 2001. But other crises do not involve risk-seeking hedge funds, or products that are evidently dangerous. Instead, there is a ticking time bomb that is hidden in plain sight, in corners of the financial system that seem so dull, safe or technically complex that we tend not to focus attention on them. In the 1987 stock market crash, for example, the time bomb was the proliferation of so-called portfolio insurance strategies — a product that was supposed to be boring because it appeared to protect investors against losses. In the 1994 bond market shock, the shocks were caused by interest rate swaps, which had previously been ignored because they were (then) considered geeky.”

Tett doesn’t believe the “financial system faces an imminent threat of another ‘boring’ time bomb causing havoc.” Her article did, however, mention the $4.0 TN ETF industry. And Marko Kolanovic, a senior JPMorgan strategist, estimates that “passive and quantitative investors now account for about 60% of the US equity asset management industry, up from under 30% a decade ago.”

When it comes to today’s global government finance Bubble, I would argue that “ticking time bombs” are more associated with risk misperceptions and “moneyness” (on an unprecedented global scale) rather than exotic debt instruments and egregious leverage. The collapse in the mortgage finance Bubble was not about subprime – but with the unappreciated risks embedded within Trillions of perceived pristine “AAA” mortgage securities and derivatives. The subprime crisis was in full bloom ten years ago today. Yet the S&P500 went on to all-time highs, with the systemic crisis not unfolding until about a year later.

Importantly, subprime tumult was the upshot of initial de-risking and de-leveraging behavior. The more sophisticated market operators began to respond to a deteriorating macro backdrop and escalating risk. Their moves to de-risk altered the market liquidity and pricing backdrops that led eventually to systemic crisis. As is typically the case, full-fledged systemic crisis erupted where price and liquidity risks were perceived to be minuscule – with a crisis of confidence in the money markets. In the case of 2008, panic unfolded in (the belly of the beast) the “repo” market.

Hopefully the North Korean situation will be resolved relatively quickly – perhaps mediated by the Russians and Chinese. A quick resolution would allow the markets to remain in this phenomenal backdrop of risk ignorance. But the longer this drags out the more problematic it becomes for the markets. This unfolding geopolitical crisis illuminates a major type of risk that’s been disregarded in the marketplace. If this illumination initiates de-risking/de-leveraging dynamics, this could mark an important inflection point for the risk markets. Rather than just waiting to see how this plays out, I would expect the more sophisticated players to take some risk off the table.

It’s worth noting that safe haven Treasury bonds rallied little in the face of a bout of “Risk Off” behavior. Not much “hedging” value left there. And in the event of a major military escalation, I’m not convinced that derivatives markets will function effectively. Reducing risk may (for a change) require liquidating holdings - stocks and corporate debt. And losses in equities and corporates would test the unprecedented trend-following flows that have chased inflating securities markets.

For a number of years now, I’ve referred to the “Moneyness of Risk Assets” issue – the perception of central bank-ensured safety and liquidity - that has been instrumental in Trillions of flows into ETFs and other “passive” strategies. It is Here Where the Wildness Lies in Wait. I wouldn’t bet on a continuation of low market volatility.


For the Week:

The S&P500 declined 1.4% (up 9.0% y-t-d), and the Dow fell 1.1% (up 10.6%). The Utilities slipped 0.3% (up 9.5%). The Banks sank 3.6% (up 2.1%), and the Broker/Dealers lost 2.9% (up 10.9%). The Transports declined 0.8% (up 1.7%). The S&P 400 Midcaps dropped 2.3% (up 3.0%), and the small cap Russell 2000 sank 2.7% (up 1.3%). The Nasdaq100 lost 1.2% (up 19.9%), and the Morgan Stanley High Tech index fell 1.7% (up 23.3%). The Semiconductors declined 1.2% (up 17.6%). The Biotechs dropped 2.9% (up 24.7%). With bullion surging $31, the HUI gold index rallied 3.2% (up 8.5%).

Three-month Treasury bill rates ended the week at 102 bps. Two-year government yields declined six bps to 1.30% (up 11bps y-t-d). Five-year T-note yields dropped seven bps to 1.74% (down 18bps). Ten-year Treasury yields fell seven bps to 2.19% (down 26bps). Long bond yields declined six bps to 2.79% (down 28bps).

Greek 10-year yields rose 10 bps to 5.51% (down 151bps y-t-d). Ten-year Portuguese yields slipped a basis point to 2.85% (down 89bps). Italian 10-year yields added a basis point to 2.03% (up 22bps). Spain's 10-year yields dipped three bps to 1.46% (up 8bps). German bund yields dropped nine bps to 0.38% (up 18bps). French yields fell seven bps to 0.68% (unchanged). The French to German 10-year bond spread widened two to 30 bps. U.K. 10-year gilt yields sank 11 bps to 1.06% (down 17bps). U.K.'s FTSE equities index sank 2.7% (up 2.3%).

Japan's Nikkei 225 equities index declined 1.1% (up 3.2% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.06% (up 2bps). France's CAC40 dropped 2.7% (up 4.1%). The German DAX equities index fell 2.3% (up 4.6%). Spain's IBEX 35 equities index sank 3.5% (up 10%). Italy's FTSE MIB index lost 2.7% (up 11%). EM equities were mostly lower. Brazil's Bovespa index added 0.7% (up 11.8%), while Mexico's Bolsa declined 1.3% (up 11%). South Korea's Kospi sank 3.2% (up 14.5%). India’s Sensex equities index dropped 3.4% (up 17.2%). China’s Shanghai Exchange lost 1.6% (up 3.4%). Turkey's Borsa Istanbul National 100 index fell 1.5% (up 36.9%). Russia's MICEX equities index slipped 0.4% (down 12.9%).

Junk bond mutual funds saw inflows of $124 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped three bps to 3.90% (up 45bps y-o-y). Fifteen-year rates were unchanged at 3.18% (up 42bps). The five-year hybrid ARM rate slipped a basis point to 3.14% (up 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.03% (up 45bps).

Federal Reserve Credit last week increased $2.2bn to $4.428 TN. Over the past year, Fed Credit expanded $0.5bn. Fed Credit inflated $1.618 TN, or 58%, over the past 248 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt expanded $2.9bn last week to $3.316 TN. "Custody holdings" were up $136bn y-o-y, or 4.2%.

M2 (narrow) "money" supply last week declined $8.7bn to $13.612 TN. "Narrow money" expanded $695bn, or 5.4%, over the past year. For the week, Currency increased $2.0bn. Total Checkable Deposits fell $6.8bn, and Savings Deposits declined $5.1bn. Small Time Deposits added $0.7bn. Retail Money Funds increased $0.8bn.

Total money market fund assets jumped $33.05bn to $2.693 TN. Money Funds fell $51.3bn y-o-y (1.9%).

Total Commercial Paper jumped $10.6bn to $980.2bn. CP declined $43bn y-o-y, or 4.2%.

Currency Watch:

August 9 – New York Times (Peter S. Goodman): “It is the closest thing to a certainty in the global economy. When trouble flares and anxiety mounts, people who manage money traditionally entrust it to a seemingly indomitable refuge, the American dollar. Yet on Wednesday, in the hours after President’s Trump’s threat to unleash ‘fire and fury’ on North Korea if it continued to menace the United States, global investors sold the dollar. The same dynamic played out in June, as Saudi Arabia and other Arab nations imposed an embargo on Qatar, delivering a fraught crisis to the oil-rich Persian Gulf. And the dollar dipped in July after President Vladimir V. Putin of Russia expelled 755 American diplomats, ratcheting up tensions between the two nuclear powers. Since the beginning of the year, the dollar has surrendered nearly 8% against a basket of major currencies.”

The U.S. dollar index declined 0.5% to 93.069 (down 9.1% y-t-d). For the week on the upside, the yen increased 1.4%, the Swiss franc 1.1%, the euro 0.4%, the Swedish krona 0.3%, the Mexican peso 0.3% and the Norwegian krone 0.2%. On the downside, the Brazilian real declined 1.9%, the South Korean won 1.6%, the New Zealand dollar 1.3%, the Australian dollar 0.4%, the Canadian dollar 0.3%, the British pound 0.2% and the South African rand 0.1%. The Chinese renminbi increased 1.0% versus the dollar this week (up 4.22% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.4% (down 3.9% y-t-d). Spot Gold jumped 2.4% to $1,289 (up 11.9%). Silver rallied 5.0% to $17.07 (up 6.8%). Crude fell 76 cents to $48.82 (down 9%). Gasoline dropped 2.0% (down 4%), while Natural Gas rallied 7.5% (down 20%). Copper added 0.9% (up 16%). Wheat rallied 2.7% (up 15%). Corn declined 1.6% (up 7%).

Trump Administration Watch:

August 8 – Bloomberg (Jeff Daniels): “President Donald Trump's ‘fire and fury’ warning on Tuesday may contribute to mixed messages to North Korea and U.S. allies in Asia — increasing the risk of miscalculation on the Korean Peninsula, according to U.S. experts. National security and foreign policy experts say it is critical for the administration to maintain a consistent message on North Korea since wavering on different viewpoints risks alienating key allies South Korea and Japan. ‘You have a danger of miscalculation and a danger of escalation,’ said Bruce Klingner, former deputy division chief for Korea at the Central Intelligence Agency…”

August 8 – CNBC (Sarah O’Brien): “Despite facing September deadlines to increase the debt ceiling and pass a new federal budget, Republican congressional leaders have made it clear that tax reform will be their legislative priority when they return from their August recess. Yet exactly what's in their plan remains unclear. And based on a joint White House-GOP statement — which outlines a philosophical approach to changing the U.S. tax code but includes no specifics — even lawmakers are unsure what they will begin debating next month with the goal of passing a bill before the end of the year. ‘One big challenge they face is that there's no clear starting point,’ said Kyle Pomerleau, director of federal projects for the Tax Foundation.”

August 7 – New York Times (Edward D. Kleinbard): “Sometime in October, the United States is likely to default on its obligation to pay its bills as they come due, having failed to raise the federal debt ceiling… The debt ceiling is politically imposed, and the decision not to raise it, and therefore to choose to default, is also political. It’s something America has avoided in the past. This time, though, will be different. This country has hit the debt ceiling once, in 1979, and then largely by accident and only to a minor extent. But even that foot fault was estimated to cost the United States about 0.6% in higher interest costs for an indefinite period. More recently, congressional debt ceiling brinkmanship in 2011 led Standard & Poor’s to downgrade the credit rating of the United States. An increase in Treasury interest rates of just 0.2% a year would cost the government about $400 billion over the next 10 years.”

China Bubble Watch:

August 8 – Bloomberg: “China’s much-vaunted campaign to tackle its leverage problem has captured headlines this year. But to understand why they’re taking on the challenge -- and the threat it could pose to the world’s second-largest economy -- you need to dig into the mountain. Characterized in state media as the ‘original sin’ of China’s financial system, leverage has swelled over the past decade -- partly because policy makers were trying to cushion a slowdown in growth from the old normal of 10% plus. What’s fueled the leverage has been a rapid expansion in household and corporate wealth looking for higher returns in a system where bank interest rates have been held down. The unprecedented stimulus unleashed since 2008 effectively brought to life the ‘monster’ China’s leadership is now trying to tackle, says Andrew Collier, managing director of Orient Capital Research Ltd. in Hong Kong and author of ‘Shadow Banking and the Rise of Capitalism in China.’”

August 7 – Financial Times (Gabriel Wildau): “China’s capital flow turned positive in the first half of 2017, a reversal from unprecedented outflows during the previous two years that sparked worries over financial stability. Data… indicate that Beijing’s support for the renminbi and a crackdown on foreign dealmaking and other outflow channels have largely succeeded in curtailing capital flight. China ran a $16bn surplus over the first half of this year… compared with a $417bn deficit in 2016… The figures also showed that China added to its foreign exchange reserves on a valuation-adjusted basis in the second quarter for the first time since early 2014.”

August 7 – Bloomberg: “China’s foreign-exchange reserves posted a sixth straight monthly increase as the yuan strengthened and economic growth remained robust. The foreign currency stockpile climbed $23.9 billion to $3.081 trillion in July…”

August 8 – Bloomberg: “China’s producer price gains held steady on surging commodity prices, as demand stayed resilient and the government’s drive to reduce industrial capacity takes hold. Producer price index rose 5.5% in July from year earlier versus estimated 5.6%... The consumer price index increased 1.4%, versus forecast of 1.5%...”

August 9 – Financial Times (Lucy Hornby): “For China’s ruling Communist party, its foreign exchange reserves are a symbol of national strength and are a crucial buffer against economic shocks. So the alarming announcement that forex reserves had fallen below $3tn in January marked a shift in political faultlines that is only being felt this summer. As more than $1tn left the country over the previous 18 months… Technocrats in Beijing had already prepared the ground to take action. In December, they had managed to link the phrase ‘national security’ to the concept of financial risk at the annual agenda-setting economic work conference. Backed with the reserves figures, they were poised to strike against what they saw as the leading culprit — the new generation of highly acquisitive private Chinese companies. These tensions within the system have exploded into the open in the past two months with the humiliation of some of China’s best-known and most well-connected private companies…”

Central Bank Watch:

August 8 – Bloomberg (Carolynn Look): “A decade ago, the European Central Bank took its first step to becoming the euro area’s firefighter-in-chief. Its 95 billion-euro ($112bn) emergency loan to banks on Aug. 9, 2007, was the initial response to a financial crisis that would force the… institution to expand its balance sheet by trillions of euros. The ECB -- together with international peers such as the Federal Reserve and the Bank of England -- took center stage in an unprecedented battle against bank failures, recessions and sovereign-debt turmoil that changed the economic landscape and forced a complete rethink of what monetary policy can and should do. The ECB’s job was additionally hampered by an incomplete currency zone weighed down by infighting and paralysis. But with the recovery finally holding up after years of stimulus and hard-fought economic reforms, central bankers have started to contemplate a return to more normal policies. One of many milestones on that path is expected in the fall, when ECB President Mario Draghi may offer an outline of a gradual exit from a 2.3 trillion euro bond-buying plan.”

Global Bubble Watch:

August 10 – Bloomberg (Cecile Gutscher and Sid Verma): “Bitcoin and other ‘cryptocurrencies’ are big money, virtually as big as Goldman Sachs and Royal Bank of Scotland combined. The price of a single bitcoin hit an all-time high of above $3,500 this week, dragging up the value of hundreds of newer, smaller digital rivals in its wake. Now some investors fear a giant crypto-bubble may be about to burst. It has been a year of unprecedented growth for the largely unregulated market, with dozens of new currencies appearing every month in ‘Initial Coin Offerings’ or ICOs. They have achieved value almost instantly, drawing in those who are eager to get in and make a quick buck. At the start of 2017, the total value - or market cap - of all cryptocurrencies in existence was about $17.5 billion, with bitcoin making up almost 90%... It is now around $120 billion… and bitcoin makes up only 46%.”

August 9 – Financial Times (Kate Allen): “Nations have historically been the world’s best credits — but since the global financial crisis a decade ago they have been joined by a burgeoning group of supranational organisations. Syndicated debt issuance by supranationals has more than doubled in the past decade, hitting $265bn last year, according to… Dealogic. These borrowers, such as the European Investment Bank, the EU and the International Bank for Reconstruction and Development, are backed by multiple countries and so enjoy the highest possible credit ratings. Their ranks are set to increase further with the forthcoming entry into the capital markets of the Asian Infrastructure Investment Bank — dubbed by some as China’s answer to the World Bank — and the World Bank’s own planned expansion in fundraising…”

August 8 – Bloomberg (Adam Haigh and Eric Lam): “The Chinese leadership has this year made its strongest commitment yet to curb financial risks and rein in spendthrift local officials, yet the campaign has spurred barely a ripple of concern among global investors. In a recent survey, China hardly registered on the list of dangers eyed by fund managers and strategists that could threaten the ‘Goldilocks’ boom in stocks and credit around the world. That’s a big change from two years ago, when a surprise devaluation of the yuan spooked markets, all the more because it came just weeks after China’s equity bubble had started to burst.”

August 8 – Bloomberg (Natasha Rausch): “Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said investors have become too complacent as markets rallied and need to be prepared for the possibility that the Federal Reserve will follow through on its plans to raise interest rates. ‘I’m nervous about pretty much everything,’ Shepherdson said…, when asked where investors are being well-compensated for their risks. ‘There comes a point in most investment cycles where you’ve got to start thinking the return on capital is rather less important than the return of capital -- just keeping your money. Not losing anything becomes important.’ The economist acknowledged his view has been unfashionable lately as U.S. equities extended their years-long rally…”

August 9 – Bloomberg (Justina Lee): “The Hong Kong dollar carry trade, which has produced steady returns for seven straight months, suffered a rare setback on Wednesday as the currency abruptly strengthened the most since February 2016. Its 0.1% gain against the U.S. dollar may have been tiny by global standards, but it jolted investors who had positioned for declines by borrowing in Hong Kong to invest in higher-yielding American assets. The trade had been a consistent winner this year after interest rates in the U.S. rose and those in the former British colony held near rock-bottom levels. But now the tightly-managed exchange rate is turning more volatile…”

August 9 – Bloomberg (Catherine Bosley): “The Swiss National Bank’s U.S. equity holdings gained almost 5% in value to hit a fresh record in the second quarter, thanks to a buoyant stock market. The portfolio increased to $84.3 billion from $80.4 billion at the end of March…”

Fixed Income Bubble Watch:

August 8 – Bloomberg (Claire Boston): “Subprime auto loans may be suffering from higher delinquencies, but investors are still clamoring for bonds backed by the debt, according to Wells Fargo analysts. An $800 million subprime auto bond sale from Westlake Financial Services Inc. last week was priced at some of the highest valuations… since 2014… The portion of the security rated BB, or two steps below investment grade, offered the least additional yield for a deal of its size and rating on record. Demand for the offering was strong enough to increase its size from a planned $700 million. Insatiable demand for investment-grade and junk bonds has sent investors searching for better deals in the market for asset-backed securities. The newfound interest means risk premiums for structured bonds are plummeting too.”

August 10 – Bloomberg (Cecile Gutscher and Sid Verma): “When Alan Greenspan warned about a bond bubble in a recent interview, he may well have been thinking about European junk bond yields. The former Federal Reserve chairman, who famously coined the term ‘irrational exuberance,’ would find ample grist for worry looking at the average rates of euro-denominated debt rated ‘BB.’ For the first time ever, bonds issued by junk-rated companies with weaker balance sheets are trading in line with debt from the U.S. government. Meanwhile, more than 20 billion euros ($23bn) of Italian government bonds pay less than their U.S. counterparts. Bank of America Merrill Lynch strategists call it a bubble, echoing investors from Deutsche Asset Management and JPMorgan Asset Management who are scaling back their exposure to euro junk.”

August 6 – Bloomberg (Tracy Alloway): “Trading in an obscure corner of the credit-derivatives market shows that some investors are preparing for a looming sell-off in corporate bonds. About $10.3 billion worth of options on Markit’s CDX North American Investment Grade Index -- a basket of credit default swaps on 125 North American companies -- have been switching hands daily over the past week… About 80% of the volume is in put options, a bearish bet against the performance of corporate credit. The figure is more than twice the $4.9 billion in average credit-index options traded over the past year, when bearish put options averaged 65% of total volume, the bank said.”

August 8 – Bloomberg (Jennifer Surane): “Jamie Dimon is siding with the bond-market bears. ‘I do think that bond prices are high,’ the chief executive officer of JPMorgan Chase & Co. said… ‘I’m not going to call it a bubble, but I wouldn’t personally be buying 10-year sovereign debt anywhere around the world.’”

Federal Reserve Watch:

August 8 – Bloomberg (Steve Matthews and Matthew Boesler): “Two Federal Reserve officials said soft U.S. inflation was a problem as they played down the risk of market disruption when the central bank starts shrinking its balance sheet. The comments on Monday by St. Louis Fed President James Bullard and Minneapolis’s Neel Kashkari, two of the Fed’s more dovish policy makers, line up with expectations that officials will keep interest rates on hold when they meet next month and announce the start of a gradual process to trim their holdings of Treasuries and mortgage-backed securities. ‘I am ready to get going in September,’ Bullard said… arguing that the balance-sheet unwind ‘is going to be very slow and I don’t think there will be a lot of impact on the markets.’”

U.S. Bubble Watch:

August 8 – Financial Times (Robin Wigglesworth): “The inexorable uptick in the US national debt clock in midtown Manhattan, first erected in 1989 by real estate magnate Seymour Durst, will soon accelerate sharply again. The US budget deficit has been gradually crimped since the financial crisis, thanks to the economic recovery and the government reining in spending since a 2011 budget stand-off. But it has begun widening again this year, and Goldman Sachs forecasts it will top $1tn by 2020. That would be more than double the $439bn deficit in 2015. Combined with the Federal Reserve’s plans to begin pruning its balance sheet, gradually removing one of the biggest buyers of US government debt from the market, this will challenge the US Treasury’s borrowing plans.”

August 6 – Bloomberg (Cecile Vannucci): “Bets against volatility are back. Never mind strategists warning of a potential VIX rebound, or historical data showing the index tends to jump the most in August. The number of short positions on VIX futures has hit a fresh peak, and an exchange-traded fund that benefits when volatility falls just saw its biggest weekly inflows since June… That’s even as the CBOE Volatility Index hovers within 1 point of its record-low close.”

August 8 – Bloomberg (Sid Verma): “The markets are alive with the sound of ‘zzzzzz’ as the latest trading session marks yet another record low for volatility gauges. Bank of America’s MOVE Index, which gauges volatility in the U.S. Treasury market, has tumbled to an unprecedented 46.9 at the close of Monday’s trading session. The move means investors in the world’s largest bond market are shrugging off the potential for price swings, even as two titans of the industry up their bets on an uptick in U.S. inflation.”

August 7 – New York Times (Nathaniel Popper): “The cautionary words of American regulators have done little to chill a red-hot market for new virtual currencies sold by start-ups. The Securities and Exchange Commission late last month issued its first warning for the many entrepreneurs who have been raising money by creating and selling their own virtual currencies… At that point, hundreds of projects had raised more than $1 billion. Yet even after the commission said it was looking closely at projects that may violate its rules, programmers are still embarking on new offerings at a torrid pace. Most of the offerings have little legal oversight… ‘The broader detail and the silences in the report should give many people pause and that doesn’t seem to have happened yet,’ said Emma Channing, the general counsel at the Argon Group… ‘I don’t understand why everyone isn’t as concerned as I am.’ Since the guidance was released on July 25, 46 new coin offerings have been announced and an additional 204 are moving toward fund-raising…”

August 8 – Bloomberg (Martin Z Braun): “Seven years ago, California was ‘the next Greece.’ Today, the state’s bonds are trading better than AAA. As the Golden State benefits from record-breaking stock prices, Silicon Valley’s boom and a resurgent real estate market, demand for tax-exempt debt in the state with the highest top income tax rate in the U.S. is ‘insatiable,’ said Nicholos Venditti, a portfolio manager for Thornburg Investment Management. Spreads are so tight that Venditti has stopped buying California bonds for his national fund. ‘They’ve gone to a level that just seems ridiculous,’ Venditti said. ‘It just seems unsustainable for any long period of time.’ … An investor Tuesday bought about $1.1 million of state general obligation bonds maturing in six years at a yield of 1.33%, or 4.3 bps below AAA rated bonds with the same maturity. California bonds are rated AA- by S&P Global Ratings and Fitch Ratings and Aa3 by Moody’s…”

August 10 – Bloomberg (Oliver Renick): “A yawning divide is opening between the stock market’s biggest players when it comes to risk tolerance. On one side are long-only mutual fund managers, burdened with keeping up with the S&P 500 as it marched to 30 different records this year. Measured by their ownership of stocks with the highest volatility, they’re sitting on some of the most aggressive bets in three years… On the opposite end are long-short hedge funds, paid as much to dodge bear markets as they are to pile on gains. Using a value known as net leverage that counts up bets that shares will rise, they’re plumbing depths of defensiveness rarely seen since 2005. A divergence this wide has occurred just twice in the last decade…”

August 8 – New York Times (Binyamin Appelbaum): “It’s basically the opposite of a major government infrastructure program. Government spending on transportation and other public works is in decline as federal funding stagnates and state and local governments tighten their belts. Such spending equaled 1.4% of the nation’s economic output in the second quarter of 2017, the lowest level on record... In West Virginia, where President Trump on Thursday touted a vague $1 trillion infrastructure plan, public works spending has fallen for five straight years.”

August 9 – Wall Street Journal (Alison Sider): “Investors are getting nervous about the Permian. The problem? Too much natural gas. The west Texas oilfield is the epicenter of U.S. drilling activity and is expected to drive the country’s growth in oil production in the coming years. Investors have grown accustomed to companies reliably beating expectations there–producing ever greater amounts of oil and slashing costs. So they became alarmed when a handful of Permian producers reported more lackluster results last week.”

August 8 – Bloomberg (Sarah Jones): “With private equity firms sitting on a record amount of cash they’re struggling to invest, their clients are turning to exchange-traded funds for relief. BlackRock Inc. and State Street Corp., two of the world’s biggest providers of ETFs, say an increasing number of institutional investors are using their products to park money earmarked for private funds. These investors -- pension plans, foundations and endowments that are under pressure to meet obligations -- are trying to eke out an extra return on cash that would otherwise languish in a money market fund.”

Brexit Watch:

August 6 – Bloomberg (Hannah George and Cat Rutter Pooley): “U.K. consumers cut back on spending for a third month in July as house-price growth slowed sharply, dealing yet another blow to the economy… The latest figures leave both household expenditure and the property market at their weakest in more than four years. A report from IHS Markit and Visa showed that consumer spending dropped 0.8% year-on-year… Home-price increases weakened to an annual 2.1% in the past three months…”

Japan Watch:

August 7 – Reuters (Leika Kihara): “The Bank of Japan should dial back its massive stimulus before inflation hits its 2% target, a leading candidate to become the next governor said, raising questions about the efficacy of the BOJ's radical approach… The proposal by former BOJ Deputy Governor Kazumasa Iwata goes against the central bank's pledge that it will maintain its stimulus program until its elusive inflation goal is met. Calling for a change of strategy by the BOJ, Iwata criticized the central bank's price forecasts as too optimistic… His comments, the strongest criticism on the BOJ's policies to date by a former deputy governor, underscore growing concern over the strains the BOJ's prolonged ultra-easy policy is putting on the country's banks and financial market.”

EM Bubble Watch:

August 6 – Bloomberg (Ben Bartenstein): “The case against emerging markets is gaining steam in one corner of the bond world. Investors yanked out $680 million from the iShares JPMorgan USD Emerging Markets Bond exchange-traded fund last month, the biggest-ever flows reversal. Traders are concerned that after an 18-month rally, rising yields in developed markets from the U.S. to Germany could wreak havoc across emerging markets similar to the taper tantrum of 2013…”

August 7 – CNBC (Fredi Imbert): “Venezuela could face a full-fledged civil war if military support for dictator Nicolas Maduro erodes. Venezuelan authorities arrested seven men over the weekend whom they claimed took part in an attack on a military base outside of Valencia… The strike took place after a video made the rounds on social media Sunday featuring men in military fatigues calling for a rebellion against Maduro.”

Leveraged Speculation Watch:

August 9 – Bloomberg (Dani Burger): “For computerized strategies that are supposed to be making people obsolete, quants are looking decidedly human in 2017. Program-driven hedge funds are stumbling, a promising startup has closed, and once-reliable styles are showing weakening returns. A handful of investment factors, the wiring of smart-beta funds, have gone dormant. This isn’t just normal volatility confined to a single month, according to Neal Berger, the founder and chief investment officer of Eagle’s View Asset Management… Returns have been decaying for a year, suggesting the rest of the market has figured out what the robots are doing and started taking evasive action, Berger said. June was the worst month on record for Berger’s fund, as usually robust strategies lost their footing and the firm fell 2.4%. The worst pain has been among quants in the market-neutral equity space…”

Geopolitical Watch:

August 8 – CNBC (Jacob Pramuk): “North Korea has successfully created a miniaturized nuclear weapon designed to fit inside its missiles, NBC News confirmed Tuesday, citing a U.S. intelligence official… The development marks a major step in the isolated nation's push to become a nuclear power. Miniaturizing a weapon does not necessarily mean that North Korea has an accurate nuclear-equipped intercontinental ballistic missile, yet. It raises the stakes for President Donald Trump and other world leaders, who already faced difficult and limited options in dealing with Pyongyang's aggression.”

August 9 – CNBC (Christine Wang): “The Department of Defense would deploy B-1B bombers in a pre-emptive attack on North Korea if the commander-in-chief ordered such a strike, NBC News reported… The officials told NBC that the attack would originate from the Andersen Air Force Base in Guam. Multiple people told NBC that the strike would target roughly two dozen missile-launch sites in North Korea. On Tuesday, President Donald Trump said that the rogue state would face ‘fire and fury’ if it continued to threaten the United States. NBC's report comes after a state-media outlet said Pyongyang was ‘seriously considering’ an attack on Guam.”

August 9 – Reuters (Idrees Ali and Ben Blanchard): “A U.S. Navy destroyer carried out a ‘freedom of navigation operation’ on Thursday, coming within 12 nautical miles of an artificial island built up by China in the South China Sea, U.S. officials told Reuters. The operation came as President Donald Trump's administration seeks Chinese cooperation in dealing with North Korea's missile and nuclear programs and could complicate efforts to secure a common stance… China has territorial disputes with its neighbors over the area. It was the third ‘freedom of navigation operation’ or ‘fonop’ conducted during Trump's presidency.”

August 5 – PTI: “China is planning a small-scale military operation to push back Indian troops from the Doklam area within two weeks, according to a report in a state-run daily… The two countries have been locked in a standoff in the Sikkim sector since June 16 after Chinese troops began constructing a road near the Bhutan tri-junction. ‘China will not allow the military standoff between China and India in Doklam to last for too long, and there may be a small-scale military operation to expel Indian troops within two weeks,” Hu Zhiyong, a research fellow at the Institute of International Relations… was quoted… Bhutan has opposed the road saying the area belongs to Thimpu and has accused Beijing of violating agreements that aim to maintain the status quo until disputes over boundary are resolved. India says the Chinese action to construct the road was unilateral. The Sikkim sector is the only gateway to India’s northeastern states and New Delhi fears the road would allow China to cut off that access.”