Monday, July 24, 2017

Monday Evening Links

[Bloomberg] Tech Shares Rise as Dollar Stabilizes, Oil Gains: Markets Wrap

[Bloomberg] Investors Shy Away From T-Bill Auction With Debt Ceiling Looming

[CNBC] Echoes of 1994 bond meltdown stoke market's Fed fear

[FT] Fed likely to signal it is on course for tighter monetary policy

[FT] Wall St banks’ borrowing premium hits lowest since financial crisis

[FT] Weak global inflation is a mystery investors must unlock

[WSJ] China Prepares for a Crisis Along North Korea Border

Monday's News Links

[Bloomberg] U.S. Stocks Fluctuate as Dollar Weakens, Oil Gains: Markets Wrap

[Bloomberg] Oil Rises as Saudi Arabia Pledges Deep Cut to August Exports

[Reuters] Federal Reserve now faces prospect of global monetary policy tightening

[Bloomberg] Draghi's Master Plan Keeps Summer Rates Volatility Suppressed

[CNBC] Market movers this week: Get ready for the Fed, housing reports and earnings

[Reuters] China's debt specter could haunt Fed's policy meetings

[Bloomberg] Traders Fear Hard Landing in Emerging Markets

[Bloomberg] Banks That Funded HNA's $40 Billion Spending Spree Halt New Loans

[Reuters] After $50 billion deal spree, China's HNA sets out to clear ownership questions

[NYT] U.S. Inflation Remains Low, and That’s a Problem

[NYT] In China, Herd of ‘Gray Rhinos’ Threatens Economy

[FT] Two top Wall Street chiefs celebrate $314m share bonanza

[FT] Have they really fixed financial instability?

[FT] Bond funds attract $355bn in first five months of 2017

[FT] Bond bubble brews as central banks retreat from QE

Saturday, July 22, 2017

Saturday's News Links

[Bloomberg] Japan Pictures Likely Show Melted Fukushima Fuel for First Time

[NYT] In China, Silicon Valley Giants Confront New Walls

[WSJ] U.S. Message to China: Hands Off Our Companies

[Spiegel] Germany Debates Tougher Stance Against Turkey

Weekly Commentary: New Age Mandate

A journalist’s question during Mario Draghi’s ECB post-meeting press conference: “…There was a sharp reaction from financial markets to your Sintra speech. You must have looked at the Fed experience of 2013. Is there any concern in the Governing Council that the so-called tantrum or a similar reaction can happen in the eurozone when you start discussing changes in your stance?”

Draghi: “I won’t comment on market reactions, but let me give you the bottom line of our exchanges: basically, inflation is not where we want it to be, and where it should be. We are still confident that it will gradually get there, but it isn’t there yet, and that’s why the Governing Council reiterated the forward guidance, the asset purchase programme, the interest rates and all this package of monetary accommodation; and reiterated that the present very substantial monetary accommodation is still necessary. Let me read the introductory statement: ‘Therefore a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.’

Draghi continued: “But let me just make clear one thing: after a long time, we are finally experiencing a robust recovery, where we only have to wait for wages and prices to move towards our objective. Now, the last thing that the Governing Council may want is actually an unwanted tightening of the financing conditions that either slows down this process or may even jeopardise it; and that’s why we retain the second bias, or let’s call it, reaction function. ‘If the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.’ And I think the Governing Council has given enough evidence that when flexibility is needed to achieve its objectives, it has been very able to find all that was needed. So that’s why we keep this bias.

This exchange gets to the heart of a momentous issue. Recall the swift market reaction to “hawkish” Draghi’s comments from Sintra (June 26-28 ECB Forum on Central Banking) and, soon after, ECB officials expressing that markets had misinterpreted his remarks. Markets this week were awaiting “dovish” clarification. Draghi soundly beat expectations.

The above (astute) question referred to the Fed’s 2013 “taper tantrum” experience. While it received scant attention at the time, Bernanke’s - “The Fed will push back against a tightening of financial conditions” - response to incipient market instability proved a pivotal extension to his historic monetary experiment. In hindsight, this was the chairman’s vague introduction of a New Age Mandate: Central Banks Will Underpin Risk Embracement Throughout the Financial Markets. The Fed was prepared to employ aggressive stimulus measures in the event of self-reinforcing risk aversion and resulting marketplace liquidity issues. The Federal Reserve was signaling that it was ready to respond quickly to de-risking/de-leveraging dynamics – over time profoundly impacting risk-taking and securities and derivatives pricing throughout the markets.

No longer would the Federal Reserve confine market-supporting measures to crisis backdrops. Apparently no reason not to upgrade the Fed put to 24/7. Their liquidity backstop was to ensure that selling momentum was not allowed to materialized. Sure enough, Bernanke’s New Mandate was a huge hit in the marketplace (S&P500 up more than 50% since 2013) and has been readily adopted by central bankers around the globe, certainly including Draghi’s ECB. So few detractors. And typical of government “mandates,” once adopted they’re almost impossible to repeal.

“Will push back against a tightening of financial conditions” explains at least a few so-called “conundrums.” Why is the VIX (and risk premia more generally) so low? Why are sovereign yields remaining near historic lows despite the Fed raising rates and other central banks planning to do the same? How can equities ignore mounting political and geopolitical risks?

If central banks have become so keen to protect markets from risk aversion, why shouldn’t the cost of market “insurance” remain extraordinarily low. Why wouldn’t speculators gravitate to products fashioned to profit from providing myriad forms of market risk mitigation (hawking flood insurance during a drought)? And, importantly, as Bubble risks escalate, why would sovereign yields around the globe not discount the high probability that central banks will at some point be called upon to make good on their New Mandate – i.e. respond to faltering Bubbles with aggressive new QE programs with enormous quantities of bonds/securities to purchase?

I am reminded of chairman Greenspan’s asymmetrical policy approach – aggressively slashing rates when markets falter, while quite cautiously increasing rates while loose conditions fuel destabilizing excess. The Greenspan Fed’s policy approach during the nineties provided a competitive advantage to U.S. securities markets. This “advantage” was a powerful magnet attracting global speculative flows, inflows instrumental in fueling “king dollar” distortions.

I refer to Mario Draghi as “the world’s most important central banker.” He these days holds command over the markets’ preeminent liquidity backstop - in the most explicit terms. The Yellen Fed, raising rates and discussing balance sheet normalization, lacks the readiness enjoyed by Draghi. As such, the Fed now takes a backseat when it comes to the competitive advantage Draghi confers upon European securities markets.

In his press conference, Draghi refused to bite when questioned about the strong euro. This was taken as a lack of concern – and the euro surged.  I expect Draghi is monitoring euro strength with increasing concern, though he prefers not to publicly challenge the currency market. I also assume he is skeptical of euro strength, expecting Fed policy normalization to be dollar positive. Perhaps he doesn’t at this point fully appreciate the degree to which his market backstop underpins the euro, especially with a more dovish Yellen Fed and increasingly combustible Washington.

Italian 10-year yields sank 22bps this week to 2.07%. The Italian government borrowing for 10 years at about 2% is today’s poster child for wildly distorted markets and inflated securities values. Spanish yields dropped 20 bps this week to 1.45%, and Portuguese yields fell 24 bps to 2.91%. Now down 180 bps y-t-d, Greek 10-year yields ended the week at 5.22%. Draghi’s “whatever it takes” has worked wonders, especially for European periphery debt markets.

It’s worth mentioning that Germany’s DAX equities index sank 3.1% this week. France’s CAC 40 fell 2.3%, with major equities indices down 2.1% in Spain and 1.4% in Italy. European equities have been a hot, crowd-favorite trade – and this week took their turn for a bout of Crowded Trade Punishment. Draghi’s explicit liquidity backdrop provided a competitive advantage for the euro, as well as for European debt compared to European equities.

Draghi’s predecessor, Jean-Claude Trichet, had it right with his “I will not pre-commit to anything.” The Trichet ECB appreciated that pre-committing on policy would spur financial speculation and distortions. Trichet’s resolve on such an important issue must have been at least partially a reaction to Fed policymaking – and how Greenspan’s penchant for signaling the future course of policy cultivated destabilizing hedge fund and derivatives leveraged speculation. It’s ironic that Draghi not only discarded “will not pre-commit to anything,” he adopted the Greenspan and Bernanke approach but in a more audacious scheme.

There is no doubt that central bank liquidity backstops have promoted speculation, securities leveraging and derivatives market excess/distortions. I also believe they have been instrumental in bolstering passive/index investing at the expense of active managers. Who needs a manager when being attentive to risk only hurts relative performance? And the greater the risk associated with these Bubbles – in leveraged speculation, derivatives and passive trend-following – the more central bankers are compelled to stick with ultra-loose policies and liquidity backstops.

After all, who will be on the other side of the trade when all this unwinds? Who will buy when The Crowd moves to hedge/short bursting Bubbles? This is a huge problem. Central bankers have become trapped in policies that promote risk-taking, leveraging and hedging at this precarious late-stage of an historic Global Bubble. These days, central bankers cannot tolerate a “tightening of financial conditions,” and they will have a difficult time convincing speculative markets otherwise.

Speaking of credibility issues…

July 20 – Bloomberg: “China’s deleveraging campaign is taking on its toughest target yet: the public sector itself. While up to now policy makers have focused on a build-up of liabilities at smaller banks and big private-sector companies, President Xi Jinping has made clear that local government authorities and China’s behemoth state-owned enterprises too must restrain borrowing. Xi’s comments at a top financial-regulatory gathering last weekend were the latest signal of determination to head off any future destructive debt-bubble deflation. It’s perhaps the hardest leverage nut to crack, because Communist Party officials have for decades risen through the ranks by borrowing to fund growth -- whether at local authority levels or atop an SOE monopoly… ‘Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more thorough campaign,’ said Helen Qiao, chief greater China economist at Bank of America Merrill Lynch in Hong Kong. ‘We will see more measures being rolled out in the second half of 2017 and 2018,’ she said… ‘Focusing on cutting excess leverage in real economy, instead of in the financial sector’ came as a surprise to some, said Zhu Haibin, chief China economist at JPMorgan… in Hong Kong. ‘Cutting leverage means the gap between credit growth and nominal GDP growth will narrow -- but that could have knock-on risks and drag on economic growth itself.’”

It’s helpful to remind ourselves that the Chinese have limited experience with runaway Credit Bubbles. This is their – borrowers, lenders, regulators and officials – first experience with a mortgage finance Bubble. They’ve never had to contend with overseeing the world’s biggest banks (involved in all kinds of things all over the place). They’ve never had small banks borrow Trillions in the inter-bank lending market. So-called “shadow banking” has never been such a powerful force – throughout the markets and real economy. The Chinese have limited experience with “repo” financing and the murky world of derivatives. They are new to corporate debt securities boom and bust cycles. They’ve never had to contemplate complex counter-party issues where the counter-parties have become massive global financial players.

For years now, I’ve chronicled Chinese policymakers taking a way too timid approach to managing mounting Credit Bubble excess. In the process, they brought new meaning to Greenspan’s “asymmetrical:” timid little baby steps against colossal financial and economic maladjustment, only to resort vehemently to the heavy hand of central control when Bubbles begin to falter.

Chinese officials appear more serious this time – though markets have over years become accustomed to not taking “tightening” measures seriously. Beijing’s policy approach has been incongruous. They’ve employed various measures to tighten mortgage lending. More recently, officials have attempted to rein in “shadow” lending and some of the more conspicuous areas of financial excess (i.e. insurance and global M&A). At the same time, from a macro level Beijing has promoted the ongoing rapid money and Credit growth necessary to meet official GDP targets. To be sure, efforts to restrain Bubbles and systemic risk while spurring massive monetary inflation were never going to end successfully.

Repeating the above quote from BofA China economist Helen Qiao: “Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more thorough campaign.” And from JPMorgan economist Zhu Haibin: “Focusing on cutting excess leverage in real economy, instead of in the financial sector came as a surprise to some…” Well, at this point, Chinese officials are confronting a harsh reality: there are few alternatives left. Systemic risk has only mushroomed in spite of myriad tightening measures and policy approaches.

China is on course for $3.5 TN of Credit growth this year – with a trajectory that is as precarious as it is unsustainable. If they do in fact take the necessary more systemic approach to containing Credit excess, it’ll be a new ballgame in China and globally. Yet at this point officials are not taken seriously. That officials did not act with more resolve in previous tightening attempts creates the dilemma that only harsh measures will now suffice. Global markets met President Xi and other’s pronouncements this week with a giant yawn. The expectation is that dramatic measures will not be imposed prior this autumn’s Communist Party National Conference.

I’m reminded of the Rick Santelli central banker refrain, “What are you afraid of?” Yellen and Draghi seemingly remain deeply concerned by latent market fragilities. How else can one explain their dovishness in the face of record securities prices and global economic resilience. A headline caught my attention Thursday: “Bonds: ECB Gives ‘Green Light' to Summer Carry Trades, BofA says.” It’s been another huge mistake to goose the markets this summer with major challenges unfolding this fall – waning central bank stimulus, Credit tightening in China and who knows what in Washington and with global geopolitics.

For the Week:

The S&P500 added 0.5% (up 10.4% y-t-d), while the Dow slipped 0.3% (up 9.2%). The Utilities jumped 2.5% (up 8.7%). The Banks fell 1.6% (up 3.2%), while the Broker/Dealers gained 1.5% (up 12.9%). The Transports sank 2.8% (up 4.7%). The S&P 400 Midcaps gained 0.5% (up 6.8%), and the small cap Russell 2000 rose 0.5% (up 5.8%). The Nasdaq100 gained 1.4% (up 21.8%), and the Morgan Stanley High Tech index advanced 1.4% (up 26.4%). The Semiconductors added 0.3% (up 22.2%). The Biotechs jumped 3.0% (up 31%). With bullion gaining $26, the HUI gold index rallied 3.5% (up 5.2%).

Three-month Treasury bill rates ended the week at 114 bps. Two-year government yields slipped two bps to 1.34% (up 15bps y-t-d). Five-year T-note yields declined six bps to 1.80% (down 12bps). Ten-year Treasury yields fell nine bps to 2.24% (down 21bps). Long bond yields dropped 11 bps to 2.81% (down 26bps).

Greek 10-year yields declined six bps to 5.22% (down 180bps y-t-d). Ten-year Portuguese yields dropped 24 bps to 2.91% (down 84bps). Italian 10-year yields sank 22 bps to 2.07% (up 26bps). Spain's 10-year yields fell 20 bps to 1.45% (up 7bps). German bund yields declined nine bps to 0.51% (up 30bps). French yields fell 11 bps to 0.75% (up 7bps). The French to German 10-year bond spread narrowed two bps to 24 bps. U.K. 10-year gilt yields fell 14 bps to 1.18% (down 6bps). U.K.'s FTSE equities index gained 1.0% (up 4.3%).

Japan's Nikkei 225 equities index was little changed (up 5.2% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.07% (up 3bps). France's CAC40 fell 2.2% (up 5.3%). The German DAX equities index sank 3.1% (up 6.6%). Spain's IBEX 35 equities index fell 2.1% (up 11.5%). Italy's FTSE MIB index declined 1.3% (up 10.2%). EM equities were mixed. Brazil's Bovespa index lost 1.1% (up 7.4%), while Mexico's Bolsa added 0.8% (up 13.0%). South Korea's Kospi gained 1.5% (up 20.9%). India’s Sensex equities index was about unchanged (up 20.3%). China’s Shanghai Exchange increased 0.5% (up 4.3%). Turkey's Borsa Istanbul National 100 index rose 1.6% (up 36.7%). Russia's MICEX equities index dropped 1.8% (down 13.8%).

Junk bond mutual funds saw inflows surge to $2.221 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell seven bps to 3.96% (up 51bps y-o-y). Fifteen-year rates declined six bps to 3.23% (up 48bps). The five-year hybrid ARM rate dropped seven bps to 3.21% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.06% (up 35bps).

Federal Reserve Credit last week expanded $13.7bn to $4.440 TN. Over the past year, Fed Credit declined $1.2bn. Fed Credit inflated $1.630 TN, or 58%, over the past 245 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.3bn last week to $3.319 TN. "Custody holdings" were up $90.9bn y-o-y, or 2.8%.

M2 (narrow) "money" supply last week surged $87.5bn to a record $13.615 TN. "Narrow money" expanded $770bn, or 6.0%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits fell $21.9bn, while Savings Deposits jumped $106.7bn. Small Time Deposits added $0.8bn. Retail Money Funds were little changed.

Total money market fund assets declined $9.9bn to $2.617 TN. Money Funds fell $98bn y-o-y (3.6%).

Total Commercial Paper rose $9.8bn to $970.4bn. CP declined $82.8bn y-o-y, or 7.9%.

Currency Watch:

The U.S. dollar index dropped 1.4% to 93.858 (down 8.3% y-t-d). For the week on the upside, the Norwegian krone increased 2.1%, the Swiss franc 1.9%, the euro 1.7%, the New Zealand dollar 1.5%, the South Korean won 1.3%, the Japanese yen 1.3%, the Brazilian real 1.2%, the Australian dollar 1.1%, the South African rand 0.9%, the Canadian dollar 0.8%, the Swedish krona 0.8%, and the Singapore dollar 0.7%. On the downside, the British pound declined 0.8% and the Mexican peso fell 0.5%. The Chinese renminbi increased 0.13% versus the dollar this week (up 2.63% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.6% (down 6.9% y-t-d). Spot Gold gained 2.1% to $1,255 (up 8.9%). Silver rallied 3.3% to $16.457 (up 3%). Crude declined 77 cents to $45.77 (down 15%). Gasoline added 0.2% (down 6%), while Natural Gas slipped 0.3% (down 21%). Copper gained 1.2% (up 9%). Wheat fell 2.3% (up 22%). Corn gained 1.0% (up 12%).

Trump Administration Watch:

July 20 – Bloomberg (Greg Farrell and Christian Berthelsen): “The U.S. special counsel investigating possible ties between the Donald Trump campaign and Russia in last year’s election is examining a broad range of transactions involving Trump’s businesses as well as those of his associates, according to a person familiar with the probe… The investigation also has absorbed a money-laundering probe begun by federal prosecutors in New York into Trump’s former campaign chairman Paul Manafort… The president told the New York Times on Wednesday that any digging into matters beyond Russia would be out of bounds. Trump’s businesses have involved Russians for years, however, making the boundaries fuzzy.”

July 19 – Reuters (Amanda Becker and Susan Cornwell): “As their seven-year effort to repeal and replace Obamacare derailed in the U.S. Senate, Republicans faced the prospect of doing the once unthinkable: working with Democrats to make fixes to former President Barack Obama's 2010 healthcare law. Bipartisan breakthroughs would likely come in the form of individual bills targeted at issues such as stabilizing insurance markets or lowering prescription drug costs. A wholesale overhaul of healthcare, senators say, is a bridge too far for the two parties, locked for years in an ideological battle on that issue and many others.”

July 18 – Wall Street Journal (Richard Rubin and Kate Davidson): “House Republicans are unveiling an ambitious fiscal plan on Tuesday to rewrite the tax code, revamp medical malpractice laws, change federal employees’ retirement benefits and partially repeal the Dodd-Frank financial regulations—all in one bill that wouldn’t require any votes from Democrats to pass. The strategy, embedded in the House GOP fiscal 2018 budget, faces political and procedural obstacles, including many of the same ones that derailed the party’s health-care bill in the Senate. For instance, Republicans will have a narrow margin in the Senate and will have to comply with budgetary rules that restrict which policies can be included.”

July 19 – Bloomberg (Andrew Mayeda and Saleha Mohsin): “The brief honeymoon between the world’s two largest economies appears to be over. Three months ago, President Donald Trump had warm words for his Chinese counterpart Xi Jinping after the two leaders bonded at Trump’s Mar-a-Lago resort in Florida. Within weeks, the Trump administration was touting early wins in talks with China, including more access for U.S. beef and financial services as well as help in trying to rein in North Korea. Now, the two sides can barely agree how to describe their disagreements.”

July 17 – Reuters (Roberta Rampton): “President Donald Trump promised… he would take more legal and regulatory steps during the next six months to protect American manufacturers, lashing out against trade deals and trade practices he said have hurt U.S. companies. Trump climbed into an American-made fire truck parked behind the White House, took a swing with a baseball bat in the Blue Room, and briefly donned a customized Stetson cowboy hat in front of cheering manufacturing company executives from all 50 states gathered to hear him praise their products. ‘I want to make a pledge to each and every one of you: No longer are we going to allow other countries to break the rules, steal our jobs and drain our wealth,’ Trump said.”

July 17 – Politico (Nancy Cook and Andrew Restuccia): “Peter Navarro, one of the White House’s top trade advisers, is widely viewed throughout the West Wing and Capitol Hill as a prickly personality with extreme policy ideas. But he has nonetheless emerged as an influential force in the White House who appeals to President Donald Trump’s protectionist impulses… His clout, dating back to the campaign, has informed the president’s thinking on everything from NAFTA to new lumber tariffs to potential trade restrictions on steel and aluminum. A former economics professor…, Navarro has a well-established reputation as an academic with hardline views on the threat that China poses to the U.S.”

July 14 – Reuters (Howard Schneider): “The budget deficit for President Donald Trump’s first two years in office will be nearly $250 billion higher than initially estimated due to a shortfall in tax collections and a mistake in projecting military healthcare costs, budget chief Mick Mulvaney reported… In a mid-year update to Congress, Mulvaney, director of the Office of Management and Budget, revised the estimates supplied in late May when the Trump administration submitted its first spending plan. Since then, Mulvaney said, the deficit projected for the current fiscal year has increased by $99 billion, or 16.4%, to $702 billion. For 2018, the deficit will be $149 billion more than first expected, increasing by 33% to $589 billion.”

China Bubble Watch:

July 17 – Bloomberg: “China’s economy grew faster than expected in the second quarter, putting the nation on track to meet its growth target this year and giving backing to officials in their campaign to corral oncoming financial risk. Data showing that the world’s second-largest economy expanded 6.9% in the second quarter… was released hours after the Communist Party’s People’s Daily newspaper warned of potential ‘gray rhinos’ -- highly probable, high-impact threats that people should see coming, but often don’t. In China’s case it’s the relentless buildup of risks caused by the debt-fueled investment that’s contributing to growth, a development tackled by a major meeting of top leaders in Beijing at the weekend. Until now, regulators have homed in on financial-sector excesses; that probe is now widening to debt in the broader economy, a shift that prompted a sell-off in domestic stocks.”

July 15 – New York Times (Keith Bradsher): “China’s top leaders have gathered every five years since 1997 for a National Financial Work Conference. At past gatherings, they have created entire regulatory agencies and rearranged the rules for huge markets, almost overnight. So economists and regulators have been almost breathlessly speculating about this summer’s work conference. Would the regulatory commissions overseeing the banking, securities and insurance industries be merged into the central bank? Would the legal definition of securities be broadened to shed some regulatory daylight on widespread activities like shadow banking, peer-to-peer online investment networks and off-balance-sheet wealth management products? But the actual results of the two-day work conference… were much more, well, modest, to put it politely. The biggest accomplishment of the conference appeared to be an announcement that a commission would be established under the auspices of the cabinet. The commission would meet regularly to discuss issues of financial stability.”

July 18 – Bloomberg: “China’s push to rein in financial risks is rippling through the economy, with regulators targeting everything from corporate acquisitions to returns on the savings products banks sell to yield-hungry consumers. On Tuesday, Bloomberg reported that the banking regulator had told lenders to lower interest rates on wealth-management products, a popular vehicle for domestic savers, after yields in the $4 trillion industry jumped in past months. Officials also extended their campaign against risky overseas acquisitions… The two developments dovetail with the theme of the past weekend’s top-level financial conference in Beijing: As President Xi Jinping prepares for a twice-a-decade leadership transition this fall, authorities will take a dim view of anything that clashes with their efforts to contain risks in the financial sector. The central bank will take a lead role in administering a cabinet-level regulatory committee that was unveiled at the conference. ‘The message from the leadership last weekend was very clear -- financial stability is now regarded as an important element of national security,’ said Raymond Yeung, the Hong Kong-based chief economist at Australia & New Zealand Banking Group Ltd.”

July 16 – Bloomberg: “For investors, possibly the most important thing that happened in China during the weekend was a closed-door conference on regulation that could set the scene for the financial sector’s next five years. Many details remain unclear. The most concrete decision out of the meeting so far is President Xi Jinping’s announcement of the creation of a cabinet-level committee to coordinate financial oversight - a task currently divided among four regulators including the People’s Bank of China. The National Financial Work Conference convenes twice a decade, yet officials follow its edicts for years to come… ‘Xi’s decision to ramp up the regulatory powers of the PBOC and to establish a commission to oversee financial stability and development reflects the increasing financial sector vulnerabilities in the Chinese financial system,’ said Rajiv Biswas, Asia-Pacific Chief Economist at IHS Markit… ‘The Chinese government wants to prevent a financial crisis in China that could create shock waves in the domestic economy and create a rising risk of social unrest.’”

July 18 – Reuters (Adam Jourdan): “China's banking regulator will tighten control over risks in the financial markets, work more closely with the central bank and other regulators, and ‘resolutely follow’ the leadership of a newly-formed financial stability committee… The China Banking Regulatory Commission's comments come after President Xi Jinping said… that the central bank would take a bigger role with a Financial Stability and Development Committee to be set up under the State Council. Beijing sees financial security as a vital part of national security and has been looking to crack down on risky behavior in the financial markets, such as insurers selling high-risk products and companies taking on excessive debt. The China Banking Regulatory Commission (CBRC) said… it would strengthen controls to avoid financial risks, including those related to liquidity, credit and shadow banking. It said there was a ‘step-by-step’ plan to reduce ‘chaos’ in the market, without giving details.”

July 15 – Financial Times (Tom Mitchell): “Xi Jinping instructed China’s state-owned enterprises to lower their debt levels but stopped short of announcing the creation of a new financial super-regulator to rein in mounting risks in the sector, as some had expected. ‘Deleveraging at SOEs is of the utmost importance,’ the Chinese president said at this weekend’s National Financial Work Conference, which convenes only once every five years. He added that the country’s financial officials must also ‘get a grip’ on so-called ‘zombie’ enterprises kept alive by infusions of cheap credit. Vigilance against mounting financial risks has become the top policy priority for Mr Xi, who wants to ensure economic and social stability in the run-up to a Communist party congress that will mark the beginning of his second five-year term.”

July 17 – Bloomberg: “China plans to cut off some funding for billionaire Wang Jianlin’s Dalian Wanda Group Co. after concluding the conglomerate breached restrictions for overseas investments… The scrutiny could rein in Wang’s ambitious attempt to create a global entertainment empire, including Hollywood production companies and a giant cinema chain he’s built up through acquisitions from the U.S. to the U.K. Six investments… were found to have violations... The retaliatory measures will include banning banks from providing Wanda with financial support linked to these projects and barring the company from selling those assets to any local companies… The move is an unprecedented setback for the country’s second-richest man, who has announced more than $20 billion of deals since the beginning of 2016. By targeting one of the nation’s top businessmen, the government is escalating its broader crackdown on capital outflows and further chilling the prospects of overseas acquisitions…”

July 17 – Bloomberg: “Home prices surged in China’s smaller cities even as property curbs dragged down values in Beijing and Shanghai in June, highlighting the challenge for authorities trying to limit bubble risks. New-home prices… rose month-on-month in 60 of 70 cities… That compared with 56 in May. In Beijing, prices fell 0.4%, the biggest decline in two years, and in Shanghai the decline was 0.2%. That compared with increases in some smaller cities, such as Bengbu in Anhui, where the gain was about 2%, translating into a 17% increase from a year earlier. Restrictions in bigger cities are spurring buying in smaller ones, underscoring the challenge China’s leaders face as they seek to cool asset bubbles and contain risks ahead of a party reshuffle later this year.”

July 18 – Financial Times (Gabriel Wildau): “China’s small-cap stocks touched a two-and-a-half-year low on Tuesday, as investors lost their appetite for speculative bets on frothy sectors like technology. Launched in 2009, the Shenzhen-based ChiNext is modelled on Wall Street’s Nasdaq as a home for start-up companies in emerging sectors. Information technology makes up almost 40% of ChiNext by market capitalisation, offering an attractive contrast with the Shanghai bourse, which is weighted towards old-economy stalwarts like banks, property developers and manufacturers.”

Europe Watch:

July 17 – Reuters (Vikram Subhedar and Valentina Za): “Italian banks could take 10 years to reduce their level of non-performing loans (NPLs) to the European average, Morgan Stanley said…, adding that setting up a ‘bad bank’ could help. A recession that ended in 2014 saddled Italian banks with 349 billion euros ($400bn) in impaired debts, one third of Europe's total, while a clogged judicial system and sluggish economic growth made it tough to recover non-performing debts. But a series of state-led steps involving capital injections and a plan to bailout Monte dei Paschi, the world’s oldest bank, have provided some relief.”

Central Bank Watch:

July 20 – Wall Street Journal (Evelyn Cheng): “The European Central Bank delayed discussion over whether to wind down its giant bond-buying program, underlining a recent tone of caution from global policy makers as they fight weak inflation. ECB President Mario Draghi on Thursday welcomed a ‘robust’ economic recovery in the 19-nation eurozone, but warned that stronger growth wasn’t yet translating into higher consumer prices. ‘We need to be persistent and patient because we aren’t there yet,’ Mr. Draghi said… The bank will discuss the future of bond purchases, known as quantitative easing, in the fall, he said. ‘Basically inflation is not where we want it to be and where it should be.’ The ECB mirrored a message of caution emanating from other major central banks, which are struggling to understand why prices aren’t picking up more rapidly despite robust economic growth.”

July 19 – Financial Times (Mehreen Khan): “Investors are back in thrall to global central banks. A shift in communication from policymakers in the eurozone and UK has prompted money managers to raise concerns about the threat to bond markets from any central bank missteps. Just under half of investors surveyed by Bank of America Merrill Lynch (48%) think global monetary policy has become ‘too stimulative’ for a brightening world economy – the highest proportion since April 2011. The shift in investor sentiment towards low interest rates across the developed world comes after the European Central Bank has begun tentative shifts in its communication over its stimulus measures. European markets were roiled at the end of June after Mario Draghi, ECB president, hinted at a change at the central bank’s bond buying scheme which has been running since March 2015.”

Global Bubble Watch:

July 19 – Wall Street Journal (Steven Russolillo): “Stock markets go up and down: It is a fact of life. Except in 2017. Three major stock-market benchmarks in the U.S., Europe and Asia have avoided pullbacks this year, commonly defined as 5% declines from recent highs. Never in at least the past 30 years have all three indexes—the S&P 500, MSCI Europe and MSCI Asia-Pacific ex-Japan—gone a calendar year without falling at some point by at least 5%. In good years and bad, markets tend to fluctuate wildly, with stock indexes often falling by double-digit percentages before bouncing back. That hasn’t been the case this year, another reflection of the historically low volatility that has gripped the world. The CBOE Volatility Index, or VIX, finished Friday at its lowest since 1993. Of course, 2017 is only a little more than half over… But the last time equity markets went this deep into a year without all three of those benchmark indexes suffering at least 5% pullbacks was nearly a quarter-century ago, in 1993…”

July 17 – CNBC (Fred Imbert): “BlackRock, the world's largest asset-management firm, said… its exchange-traded funds business had a record quarter. The company said net inflows into its iShares business totaled a record $74 billion in the second quarter, pushing the unit's assets above $1.5 trillion. ‘Growth was balanced among iShares Core funds, precision exposures and financial instruments, demonstrating that ETFs are no longer used only as passive allocations, but increasingly by active investors to generate alpha in their portfolios,’ CEO Larry Fink said… ETFs now accounts for approximately 27% of BlackRock's total assets under management of $5.689 trillion.”

July 19 – Wall Street Journal (Stephanie Yang): “Oil prices are having a tough year. So are some commodity traders. Major commodity players such as banks and hedge funds have stumbled, as low volatility and a faltering oil recovery derailed returns during the first half. The S&P GSCI commodity index slumped 10.2% in that period, the worst first-half performance since 2010. Part of the troubles come from a lack of volatility this year that has made trading more challenging, traders said. Range-bound markets offer little opportunity for investors and traders to profit from major price moves and arbitrage divergences.”

July 17 – Bloomberg (Josh Wingrove and Erik Hertzberg): “Canada’s hottest housing market is definitely cooling down. Total home sales in Greater Toronto dropped to 5,977 in June, the lowest level since 2010 and down 15.1% from the month prior... Average prices are down 14.2% since March -- the fastest 3-month decline in the history of the data back to 1988 -- while the ratio of sales to new listings sits at its lowest level since 2009. The June data comes after a series of measures by policy makers to tighten access to the market -- and before the Bank of Canada hiked its benchmark interest rate last week, the first increase since 2010…”

July 17 – Reuters (Andrea Hopkins): “Resales of Canadian homes fell 6.7% in June from May, the largest monthly drop since 2010 and the third straight monthly decline as Toronto sales plunged… The industry group said actual sales… were down 11.4% from June 2016, while home prices were up 15.8% from a year earlier…”

July 20 – CNBC (Evelyn Cheng): “Just as many on Wall Street are warming up to bitcoin, one of the lone financial analysts who forecast a surge when the digital currency was just six cents now has an extremely negative view. ‘A bearish trifecta — the Elliott wave pattern, optimistic psychology and even fundamentals in the form of blockchain bottlenecks — will lead to the collapse of today's crypto-mania,’ analyst Elliott Prechter wrote in the July 13 edition of The Elliott Wave Theorist… The price activity and manic sentiment that led to present prices have dwarfed even the Tulip mania of nearly 400 years ago… The success of Bitcoin has spawned 800-plus clones (alt-coins) and counting, most of which are high-tech, pump-and-dump schemes.’ ‘Nevertheless, investors have eagerly bid them up,’ Prechter added.”

Fixed Income Bubble Watch:

July 18 – Financial Times (Peter Wells and Jennifer Hughes): “Japanese companies have tapped bond markets for record amounts this year, taking advantage of investors’ continued demand for yield amid a wider boom in the region’s dollar debt markets. Companies have sold $195.3bn worth of yen and dollar-denominated bonds so far this year, according to Dealogic. That puts the market 10% ahead of this point in 2016, and surpasses the previous year-to-date record of $187bn set in 2012. The surge has been driven by a rise in sales of dollar-denominated bonds, which at $59.8bn are running at almost twice their level of five years ago — a trend echoed across the region’s markets.”

U.S. Bubble Watch:

July 18 – Wall Street Journal (Laura Kusisto): “Foreigners are buying U.S. homes at a record rate, helping push up prices in coveted coastal cities already squeezed by supply shortages. In all, foreign buyers and recent immigrants purchased $153 billion of residential property in the U.S. in the year ended in March, nearly a 50% jump from a year earlier, according to a National Association of Realtors report… That surpassed the previous record for foreign investment set in 2015, when foreigners purchased nearly $104 billion of U.S. residential property. The dramatic increase was unexpected given the strong U.S. dollar, turmoil in the political arena and restrictions on Chinese buyers looking to take money out of the country…”

July 18 – Reuters (Adam Jourdan and Shu Zhang): “Foreign purchases of U.S. residential real estate surged to the highest level ever in terms of number of homes sold and dollar volume. Foreign buyers closed on $153 billion worth of U.S. residential properties between April 2016 and March 2017, a 49% jump from the period a year earlier… Foreign sales accounted for 10% of all existing home sales by dollar volume and 5% by number of properties. In total, foreign buyers purchased 284,455 homes, up 32% from the previous year… Chinese buyers led the pack for the fourth straight year…”

July 17 – New York Times (Adam Nagourney and Conor Dougherty): “A full-fledged housing crisis has gripped California, marked by a severe lack of affordable homes and apartments for middle-class families. The median cost of a home here is now a staggering $500,000, twice the national cost. Homelessness is surging across the state. In Los Angeles, booming with construction and signs of prosperity, some people have given up on finding a place and have moved into vans with makeshift kitchens, hidden away in quiet neighborhoods. In Silicon Valley — an international symbol of wealth and technology — lines of parked recreational vehicles are a daily testimony to the challenges of finding an affordable place to call home.”

July 19 – Bloomberg (Michelle Jamrisko): “Residential construction ended the second quarter on a stronger note as groundbreaking on new homes rebounded in June to the fastest annualized pace in four months… Residential starts increased 8.3% to a 1.22 million annualized rate (est. 1.16 million).”

July 17 – Bloomberg (Gabrielle Coppola): “It’s classic subprime: hasty loans, rapid defaults, and, at times, outright fraud. Only this isn’t the U.S. housing market circa 2007. It’s the U.S. auto industry circa 2017. A decade after the mortgage debacle, the financial industry has embraced another type of subprime debt: auto loans. And, like last time, the risks are spreading as they’re bundled into securities for investors worldwide… In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion were, topping average pre-crisis levels, according to Wells Fargo & Co.”

July 17 – Financial Times (Joe Rennison): “A measure of loan delinquencies in bonds backed by US commercial mortgages rose by the most since July 2011 last month, according to Fitch Ratings. Loan delinquencies within an index maintained by the ratings agency moved 22 bps higher to 3.72% in June from 3.5% in May, as $1.24bn of underlying debt turned sour.”

July 18 – Reuters (Dan Freed and David Henry): “Big U.S. banks are starting to pay corporations, financial firms and rich people more to hold on to their deposits, but ordinary consumers will have to wait longer to see more than a few pennies for every $100 they stash in their accounts. Banks including JPMorgan…, Bank of America Corp, Wells Fargo & Co and PNC Financial Services Group lifted rates for sophisticated customers' deposits during the second quarter, executives said… The increases followed the Federal Reserve's decision in June to lift its key interest rate target for the third time in six months. Main Street depositors are not yet seeing the same benefits…”

July 17 – New York Times (Stacy Cowley and Jessica Silver-Greenberg): “Tens of thousands of people who took out private loans to pay for college but have not been able to keep up payments may get their debts wiped away because critical paperwork is missing. The troubled loans, which total at least $5 billion, are at the center of a protracted legal dispute between the student borrowers and a group of creditors who have aggressively pursued them in court after they fell behind on payments. Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing… Some of the problems playing out now in the $108 billion private student loan market are reminiscent of those that arose from the subprime mortgage crisis a decade ago…”

July 18 – Bloomberg (Camila Russo): “Initial coin offerings, a means of crowdfunding for blockchain-technology companies, have caught so much attention that even the co-founder of the ethereum network, where many of these digital coins are built, says it’s time for things to cool down in a big way. ‘People say ICOs are great for ethereum because, look at the price, but it’s a ticking time-bomb,’ Charles Hoskinson, who helped develop ethereum, said… ‘There’s an over-tokenization of things as companies are issuing tokens when the same tasks can be achieved with existing blockchains. People are blinded by fast and easy money.’”

Japan Watch:

July 20 – Bloomberg (Toru Fujioka): “The Bank of Japan kept its monetary stimulus program unchanged even as it pushed back the projected timing for reaching 2% inflation for a sixth time. The downgraded price outlook will raise more questions about the sustainability of the BOJ’s stimulus at time when other major central banks are turning toward normalizing their monetary policy… By again delaying the timing for hitting its price goal, the BOJ acknowledged the need to continue easing for at least several more years…”

July 17 – Bloomberg (Masahiro Hidaka and Toru Fujioka): “Some officials at the Bank of Japan are increasingly concerned about the sustainability of the BOJ’s purchases of exchange-traded funds, according to people familiar with discussions… But the chances of any change at this week’s policy meeting are low, they said… Concerns include the risk that the central bank could end up owning such large amounts of the free-floating shares of some listed companies in the Nikkei-225 Stock Average that it could seriously distort the market… Still, they say it’s unlikely the matter will be discussed in detail at the two-day policy meeting ending July 20.”

EM Bubble Watch:

July 16 – Wall Street Journal (Joe Leahy and Andres Schipani): “Michel Temer faces the fight of his political career as Brazil’s Congress considers whether the president should be tried for corruption. Mr Temer was indicted in the Supreme Court last month by the independent public prosecutors’ office after he was caught on tape allegedly discussing bribes with Joesley Batista, a former chairman of JBS, the world’s largest meatpacker. Brazil’s constitution offers special protections for politicians, making it hard to bring any one of them down… However, it is not impossible, as Dilma Rousseff, the leftwing former president, found when she was impeached last year for manipulating the budget — a move that brought Mr Temer to power. Congress is set to decide on August 2.”

Leveraged Speculation Watch:

July 18 – Bloomberg (Dakin Campbell): “Lloyd Blankfein’s roots are letting him down. Goldman Sachs Group Inc. traders turned in their worst first-half performance since Lloyd Blankfein rose from that business to become chief executive officer in 2006. Revenue from trading stocks and bonds in the first six months of 2017 tumbled 10%, dropping to the lowest level since before Blankfein took over from Hank Paulson 11 years ago. Second-quarter revenue from the fixed-income unit plunged 40%.”

July 16 – Wall Street Journal (Ryan Dezember): “A $2 billion private-equity fund that borrowed heavily to buy oil and gas wells before energy prices plunged is now worth essentially nothing, an unusual debacle that is wiping out investments by major pensions, endowments and charitable foundations. EnerVest Ltd., a Houston private-equity firm that focuses on energy investments, manages the fund. The firm raised and started investing money in 2013, when oil was trading at more than double the current price of about $45 a barrel. But the fund added $1.3 billion of borrowed money to boost its buying power. That later caused it trouble when oil prices tumbled. Now the fund’s lenders… are negotiating to take control of the fund’s assets to satisfy its debt…”

Geopolitical Watch:

July 17 – Bloomberg (Selcan Hacaoglu, Dana Khraiche, and Glen Carey): “Turkey is building up its military presence in Qatar, an adviser to President Recep Tayyip Erdogan said, in defiance of a Saudi-led bloc’s demand that the Turkish military pull out of the emirate. ‘Turkey’s steady buildup continues there, protecting the border and the security of the Qatari government,’ adviser Ilnur Cevik said… The growing Turkish military footprint further entrenches positions on either side of the Saudi-Qatar divide that broke open last month.”

Thursday, July 20, 2017

Thursday Evening Links

[Bloomberg] Stocks Gain Slightly as Trump Probe Said to Widen: Markets Wrap

[Reuters] Ryan says top U.S. officials nearing consensus on tax reform

[Bloomberg] China's Deleveraging Campaign Takes On Toughest Target Yet

[Bloomberg] BOJ's Refusal to Budge Sparks a Revival of Japanese Flow Abroad

[CNBC] Bitcoin bubble dwarfs tulip mania from 400 years ago, Elliott Wave analyst says

[Bloomberg, El-Erian] Why the ECB Decided to Stand Pat on Stimulus

[NYT] Central Bankers Play Waiting Game on Inflation

[WSJ] ECB’s Inaction Echoes Global Caution Over Weak Inflation

[Reuters] U.S. general says allies worry Russian war game may be 'Trojan horse'

Thursday's News Links

[Bloomberg] Euro Climbs as Draghi Talks Up Growth; Gold Slips: Markets Wrap

[Bloomberg] Mueller Expands Probe to Trump Business Transactions

[Bloomberg] ECB Leaves Guidance Unchanged as Anticipation for Autumn Builds

[Bloomberg] Draghi Says Officials ‘Aren't There Yet’ as ECB Keeps Stimulus

[Bloomberg] BOJ Keeps Rates Unchanged, Postpones 2% Inflation Deadline

[CNBC] US homes are now more valuable than ever

[Bloomberg] Trump's Honeymoon With China Ends as Dialogue Turns Frosty

[Reuters] U.S., China fail to agree on trade issues, casting doubt on other issues

[Bloomberg] S&P 500’s Biggest Pension Plans Face $382 Billion Funding Gap

[Bloomberg] When Will the ECB Pull Its Trillions From the Markets?

[Reuters] Japan's June export growth points to sustained economy recovery

[Bloomberg] Australia Has Largest Back-to-Back Full-Time Job Gain Since 1988

[FT] Weaker US dollar boosts appetite for carry trades in currencies

[FT] ECB meeting: can Draghi avoid a taper tantrum?

[WSJ] Defaults Remain Rare in China’s Bond Market

Wednesday, July 19, 2017

Wednesday Evening Links

[Bloomberg] Stocks Rise as S&P 500, Nasdaq Top Records Again: Markets Wrap

[Bloomberg] Debt Ceiling Concerns Start to Surface in Treasury Bills

[Bloomberg] Corporate Bond Traders Play Chicken

[Reuters] ECB to lay groundwork for autumn policy shift, avoiding market tantrum

[Reuters] BOJ to cut inflation forecasts but stand pat on policy as economy picks up

[Bloomberg] Kuroda Lingers Alone in Land of Stimulus as Peers Move On: Chart

[Bloomberg] The China SOE Reform Waiting Game

[NYT] HNA Finds Wall St.’s Enthusiasm for Big Chinese Conglomerates Is Cooling

Wednesday's News Links

[Bloomberg] Earnings Boost Stocks, Euro Retreats as ECB Meets: Markets Wrap

[Bloomberg] U.S. Housing Starts at Four-Month High Give Boost at Quarter-End

[Reuters] Senate Republicans reluctantly consider bipartisan healthcare talks

[CNBC] Mortgage applications jump 6.3% as borrowers rush to refinance

[Reuters] Time to taper? Five questions for the ECB

[CNBC] Foreigners snap up record number of US homes

[MarketWatch] The U.S. stock market is the world’s most expensive

[Politico] House Republicans to fall back on more modest spending plan

[Reuters] After China's curbs on Wanda, investors fret about fate of rivals

[Bloomberg] Greek Bond Sale Is Said to Be Delayed by IMF Debt Cap Rule

[Bloomberg] Summer's Most Common Hedge Fund Theme Is the Global Recovery

[WSJ] Where Are the Dips? The Weird, Unsettling Rise of Global Stocks This Year

[WSJ] Traders Falter in Worst First Half for Commodities Since 2010

[WSJ] America’s Farmers Turn to Bank of John Deere

[WSJ] ECB Chief Mario Draghi Expected to Reinforce Tightening Signals

[FT] Central bank action propels bond market crash worries

[NYT] Behind a Chinese Powerhouse, a Web of Family Financial Ties

[FT] Draghi faces taper test as ECB meets

Tuesday, July 18, 2017

Tuesday Evening Links

[Bloomberg] S&P 500, Nasdaq Composite Hit Records; Gold Climbs: Markets Wrap

[Bloomberg] Treasuries Soar as Big Futures Trades Show Bulls Are in Control

[Reuters] After healthcare failure, Republicans face similar divisions on tax reform

[Reuters] U.S. banks pay up for big deposits as consumers get pennies

[Bloomberg] Ethereum Co-Founder Says Crypto Coin Market Is a Time-Bomb

[Bloomberg] Wealthy Investors Are Leaving Hedge Funds for Real Estate

[WSJ] Big Jump in Foreign Buying Adds to Home-Price Pressures

[FT] Japanese groups borrow record amounts in bonds

Tuesday's News Links

[Bloomberg] Dollar Drops With Stocks as U.S. Reform Hopes Fade: Markets Wrap

[Bloomberg] Chinese Stocks Extend Steepest Retreat This Year; Sunac Plunges

[CNBC] GOP gives up on replacing Obamacare now: McConnell and Trump call for simply repealing

[Reuters] Republicans divided over next healthcare steps after new setback

[Reuters] U.S. House Republican 2018 budget ties tax reform to spending cuts

[Politico] Republicans divided on debt ceiling strategy

[Bloomberg] Goldman’s Traders Turn In Worst First Half of Blankfein’s Reign

[Bloomberg] BofA’s Interest Income Drops Even After Fed Delivers Rate Hikes

[Bloomberg] Xi's Risk-Off Push Ripples Through China With Transition Nearing

[Bloomberg] China Tells Banks to Lower Returns on Wealth Products

[Reuters] China bank watchdog to tighten risk control amid regulatory shake-up

[Bloomberg] Home Prices Surge in China's Smaller Cities as Risks Spread

[Bloomberg] Japan Central Bank's ETF Shopping Spree Is Becoming a Worry

[NYT] As Paperwork Goes Missing, Private Student Loan Debts May Be Wiped Away

[WSJ] House Republicans Set Out Plan to Rewrite Tax Code

[FT] Chinese small-caps slide to 30-month low

Monday, July 17, 2017

Monday Evening Links

[Bloomberg] Stocks Flat, Metals Rise as Markets Await Earnings: Markets Wrap

[Bloomberg] Toronto Home Sales Plummet to a Seven-Year Low

[Reuters] U.S. outlines priorities for NAFTA negotiations

[Reuters] Trump vows to protect 'Made in America' products

[FT] US CMBS delinquency rate jumps by most in nearly 6 years in June – Fitch

Monday's News Links

[Bloomberg] Data in Driving Seat as Metals Rally, Stocks Climb: Markets Wrap

[Bloomberg] Chinese Small-Caps Plunge to Lowest Level in Over Two Years

[Reuters] Oil prices firm on signs of U.S. production slowdown

[Bloomberg] New U.S. Subprime Boom, Same Old Sins: Auto Defaults Are Soaring

[CNBC] BlackRock's iShares ETF business posts record inflows, assets top $1.5 trillion

[Reuters] As London squabbles, full Brexit talks start in Brussels

[Reuters] Canada home resales drop again in June, real estate group says

[Bloomberg] China's Economy Charges On as Officials Target the Risk 'Rhino'

[Bloomberg] China Economic Expansion Exceeds Estimates on Factory Rebound

[Bloomberg] Wanda Deals in Jeopardy as China Scrutiny Mounts

[Reuters] China property investment, sales quicken in June despite government curbs

[Bloomberg] A Sense of Calm Has Descended on China's Markets. Don't Fall for It

[Bloomberg] ECB Expected to Raise Rates by the Fourth Quarter of 2018

[Reuters] Italian banks may take 10 years to fix bad debt issue: Morgan Stanley

[Politico] Trump’s trade warrior prowls the West Wing

[NYT] The Cost of a Hot Economy in California: A Severe Housing Crisis

[NYT] Predictably, China’s Year-on-Year Growth Maintains Its Steady Pace

[FT] Fears of price distortion raised over US Treasuries market

[WSJ] China’s Growth Is Still on Borrowed Time

[WSJ] Who Gets Hit Next in China’s Financial Crackdown?

[Bloomberg] Turkey Adds Troops in Qatar in Defiance of Saudi-Led Isolation

Saturday, July 15, 2017

Saturday's News LInks

[Reuters] U.S. deficits to jump $248 billion over next two years due to tax shortfall

[Reuters] China central bank to play bigger role managing financial risk: state TV

[CNBC] China closed-door policy meeting fuels speculation that it's building its financial 'super regulator'

[WSJ] Optimism in Financial Markets Fails to Show in Real Economy

Weekly Commentary: Yellen on Inflation

Global Markets rallied sharply this week. The DJIA rose 223 points to a record 21,638. The S&P500 gained 1.4% to a new all-time high. The Nasdaq100 (NDX) surged 3.2%, increasing 2017 gains to 20.0%. The Morgan Stanley High Tech Index rose 3.4% (up 24.6% y-t-d), and the Semiconductors surged 4.7% (up 21.8%).

Emerging markets were notably strong. Equities rallied 5.0% in Brazil, 5.5% in Hong Kong, 5.1% in Turkey, 2.5% in Russia, 2.2% in Mexico and 2.1% in India. The Brazilian real gained 3.2%, the Mexican peso 3.0%, the South African rand 2.7% and the Turkish lira 2.3%. Global bond markets also rallied. Yields (local currency) dropped 27 bps in Brazil, 18 bps in South Africa, 16 bps in Turkey and 22 bps in Argentina. Here at home, five-year Treasury yields dropped eight bps (to 1.87%). U.S. corporate Credit also enjoyed solid gains. Across global markets, it appeared that short positions were under pressure.

Markets reacted with elation to Janet Yellen’s Washington testimony – widely perceived as dovish. In particular, the chair’s timely comments on inflation were cheered throughout global securities markets. A headline from the Financial Times: “Fed Chair Yellen’s Inflation Concern Buoys Markets.” And Friday afternoon from Bloomberg: “S&P 500 Hits Record as Inflation View Turns Iffy”.

July 12 – Financial Times (Sam Fleming): “Janet Yellen acknowledged… that the US’s persistently subdued inflation could raise questions about the Federal Reserve’s current path of gradually raising interest rates and vowed to watch prices ‘very closely’ for signs they were stagnating. The Fed chair insisted it was ‘premature’ to second guess policymakers’ determination inflation was slowly headed to the central bank’s target of 2%. But her note of caution helped spark a rally in US Treasuries and equities, with investors hopeful Ms Yellen would keep the Fed’s easy money stance for longer… Ms Yellen was broadly positive about the economy’s recent performance…, stressing there had been a rebound in household spending over recent months and the Fed was still anticipating further rate increases. But she also said she was studying the low inflation numbers for signs that short-term drags on prices may not be the only factors holding it back. She added that rates may not need to be lifted a lot more to get back to a neutral stance. ‘We are watching inflation very carefully,’ Ms Yellen said... ‘I do believe part of the weakness in inflation reflects transitory factors, but well recognise that inflation has been running under our 2% objective, that there could be more going on there.’ Analysts said Ms Yellen’s remarks marked a small but significant change of thinking, putting the Fed’s path of gradually pulling back on economic stimulus in question. ‘Yellen’s statement today reveals that the Fed isn’t as sure about inflation as they led us to believe,’ said Luke Bartholomew, investment strategist at Aberdeen Asset Management.”

It’s fair to say that the whole issue of “inflation” confounds the Fed these days. Despite antiquated analytical frameworks and econometric models, the Federal Reserve is showing zero inclination to rethink its approach. At the minimum, objective policy analysis would recognize today’s nebulous link between monetary stimulus and consumer price inflation. Rational thinking would downgrade CPI as a policy guidepost, especially relative to indicators of broader price and financial stability. Still, consumer prices rising slightly below 2% have somehow become central to the argument for maintaining aggressive monetary accommodation.

The nature of economic output has fundamentally changed – from mass-produced high tech hardware, to limitless software and digitalized content, to endless pharmaceuticals and wellness to energy alternatives to, even, the proliferation of organic foods - just to get started. There is today essentially unlimited capacity to supply many of the things we now use in everyday life (sopping up purchasing power like a sponge). Much of this supply is sourced overseas, which further diminishes the traditional relationship between domestic monetary conditions and consumer price inflation.

These dynamics have unfolded over years and are well recognized in the marketplace. To be sure, ongoing tepid consumer price inflation seems to be the one view that markets hold with strong conviction. So when Yellen suggested that below target inflation would alter the trajectory of Fed “normalization,” the markets immediately took notice. When she again referred to the “neutral rate” and implied that the Fed was currently near neutral, this further signaled a Fed that has developed its own notion of what these days constitutes “normal.” Throw in that the FOMC plans to pause rate increases while gauging market reaction to its (cautious) balance sheet operations, and it has become apparent to the markets that the Fed won’t be pushing rates much higher any time soon.

We’ll wait to see if Fed officials push back against the market’s dovish interpretation of Yellen testimony. There’s certainly no conundrum. If the Fed is confused that financial conditions have loosened in the face of “tightening” measures, look in the mirror. Chair Yellen needed to choose her words carefully, especially on the subject of inflation. The markets were near all-time highs, with what has likely been a decent amount of hedging/shorting over the past month. An upside breakout risks a bout of destabilizing speculation. At the same time, there were early indications of fledgling risk aversion. Global yields had recently jumped. Weakness was notable in the periphery debt markets (i.e. Italy, EM), and even U.S. corporate Credit was hinting vulnerability.

Importantly, there was heightened market concern that a concerted effort was underway to begin removing central bank accommodation – that booming markets and stubbornly loose financial conditions might force central bankers to adopt more aggressive tightening measures.

Understandably, the markets will interpret a dovish Yellen – especially the nuanced language on the topic of inflation – as rushing to the markets’ defense. The view that the Fed won’t tolerate even a modest market pullback is, again, further emboldened. And quickly global markets will return to the view that central bankers may talk “normalization,” while their overarching anxiety for upsetting markets has diminished little.

July 12 – Bloomberg (Vivien Lou Chen): “Fed Chair Janet Yellen says that in looking at asset prices and valuations, the central bank is ‘not trying to opine on whether they’re correct’; instead, policy makers are assessing the risk of potential spillovers. As asset prices rise, there hasn’t been a substantial increase in borrowing, Yellen said. [The] financial system is strong and resilient.”

I assume chair Yellen is referring to U.S. non-financial and non-government borrowings. Clearly, central bank Credit and government borrowings have expanded spectacularly around the globe. I suspect as well there has been a major expansion in speculative leveraging and securities Credit at home and abroad.

Georgia Senator David Purdue: “Thank you for being here and for your service. I just have two quick questions. I’m very concerned about global debt. The Institute of International Finance recently reported that their estimate of total global debt is $217 trillion, or more than 300% of global GDP. Do you agree with that?”

Chair Yellen: “So, I haven’t heard that number. That could be. I don’t have that number.”

Purdue: “Of that, $60 trillion is estimated to be sovereign debt. We have about $20 trillion of the $60 trillion. With that as background, the four large central banks also have their largest historic balance sheets. Japan, China, EU and US have collectively close to approaching $20 trillion now of balance sheet size. As you talk about reducing the size of the Fed’s balance sheet, are you coordinating with these other central banks and looking at emerging market debt - particularly the $300 billion that’s coming due by the end of 2018 - relative to the size of your balance sheet here in the United States?”

Yellen: “I wouldn’t say coordinate. We try to make sure we meet regularly and discuss our policy approaches; to make sure that central banks understand how we are looking at economies and policy options. I think the major central banks understand the approach that others are taking. But trying to ask in an aggregate sense how much debt is outstanding is something we’re not doing. Our economies are in rather different situations. While we all encountered weaknesses that were sufficiently severe that Japan, the ECB, the Bank of England, the United States, we all resorted to purchases of longer-term assets to support growth. It leaves the Bank of Japan and the ECB.”

Purdue: “Are you concerned about so much of that [debt] denominated in dollars today?”

Yellen: “It is a risk. A significant amount of that is in China, but that’s not the only country where there are substantial corporate dollar-denominated debts. And certainly that is a risk that we have considered that affects the global economy.”

Senator Bob Menendez: “Let me ask you finally, how does—we see high rising levels of household debt, widening inequality, a neutral interest rate at historically low levels. To me, it’s critical that the Fed has the ability to respond in the event of another economic decline. How does below target inflation impact household debt? And what signs do you see of inflation coming close to the Fed’s 2% target, let alone exceeding it by dangerous amounts?”

Yellen: “As I said, I think the risks with respect to inflation are two-sided. But we’re very aware of the fact that inflation has been running below our 2% objective now for many years, and we’re very focused on trying to bring inflation up to our 2% objective. That’s a symmetric objective and not a ceiling. We know from periods [when] we’ve had deflation, which of course we don’t have in this country. But that is something that has a very adverse effect on debtors and can leave debtors drowned in debt. Now, we don’t have a situation nearly that serious. But it is important when we have a 2% inflation objective to make sure that we achieve it and we’re focused on doing that.”

Yellen stated during that the Fed’s inflation mandate is “symmetrical.” Yet it’s unimaginable that the FOMC would keep monetary conditions extraordinarily tight for nine years in response to CPI modestly above its 2% target?

It’s by this point abundantly clear that contemporary monetary management exerts major direct influences on the structure of asset prices, while having dubious effect on aggregate consumer prices. This now discernable dynamic creates a momentous dilemma for central banks. Especially after the worldwide adoption of the Bernanke doctrine, it’s fundamental to their approach that central banks retain the power to inflate out of trouble as necessary. Why fret debt accumulation, speculation and asset price Bubbles when central banks can always inflate the general price level, thereby reducing debt burdens and asset overvaluation?

Central bankers have a penchant for speaking in terms of “fighting the scourge of deflation.” More specifically, they view inflation as the indispensable mechanism for reflating systems out of the consequences of debt and asset Bubbles. If central bankers were to admit they don’t control “inflation,” then their policy doctrine of promoting reflationary debt growth and higher asset prices turns spurious.

It has been my longstanding position that it’s not possible to inflate out of major Credit and asset Bubbles. As we’ve witnessed for years now, central bank stimulus fuels self-reinforcing speculative excess, with a resulting accumulation of speculative leverage and securities-related Credit more generally. At the same time, years of abundant cheap global liquidity work to feed overcapacity and attendant downward price pressure on many things. Rampant inflation within the Financial Sphere nurtures pricing vulnerabilities and instability throughout the Real Economy Sphere. Bubbles Inflate Only Bigger.

As such, if one accepts the reality that central banks don’t control inflation, the policy course of repeatedly inflating serial Bubbles can be viewed as risking eventual catastrophic policy failure. There’s simply no escaping the day of reckoning. This analysis certainly applies to China. Led by strong lending ($214bn), June growth in Total Social Financing jumped to $263bn. This puts first-half non-government Credit growth at $1.65 TN (up 14% from last year’s record pace), consistent with my expectation for total Chinese Credit growth this year to exceed $3.5 TN.

Along with Yellen’s testimony, China developments were likely a factor in this week’s global risk market rally. The view is taking hold that Chinese officials have at least temporarily pulled back from tightening measures, perhaps in preparation for this autumn’s 19th National Congress of the Communist Party of China.

July 12 – Wall Street Journal (Grace Zhu): “Chinese banks extended higher-than-expected volume of loans last month even as growth in the money supply continued to slow amid Beijing’s efforts to reduce leverage in its financial system. New yuan loans issued by Chinese banks surged to 1.54 trillion yuan ($226.38bn) in June, up from 1.11 trillion yuan in May… The volume was well above the 1.3 trillion yuan forecast by economists… June is typically a high point for new credit from Chinese banks’ as loan officers rush to meet quarterly targets. Beyond that, demand for credit from households—mostly for mortgages in the hot property market—remained strong, and companies too turned to banks for loans, instead of issuing bonds.”

July 12 – Financial Times (Gabriel Wildau): “China’s central bank injected $53bn into the banking system on Thursday, the latest sign that policymakers have eased up on a fierce deleveraging campaign that has caused turmoil among lenders in recent months. President Xi Jinping told the politburo in April that ‘financial security’ was a top policy priority for the year. That led the central bank to tighten liquidity, while the ambitious new banking regulator unleashed a ‘regulatory windstorm’ that sent shockwaves through the banking system. The storm appears to be passing, as the People’s Bank of China has become more generous with cash injections while the China Banking Regulatory Commission has delayed implementation of a significant new directive. ‘There are clear signs in recent weeks of monetary and supervisory tightening being eased,’ Tao Wang, co-head of Asia economics at UBS in Hong Kong, wrote…”

For the Week:

The S&P500 gained 1.4% (up 9.8% y-t-d), and the Dow rose 1.0% (up 9.5%). The Utilities added 0.6% (up 6.0%). The Banks declined 0.9% (up 4.9%), while the Broker/Dealers increased 0.8% (up 11.3%). The Transports rose 0.5% (up 7.7%). The S&P 400 Midcaps gained 1.0% (up 6.3%), and the small cap Russell 2000 increased 0.9% (up 5.3%). The Nasdaq100 jumped 3.2% (up 20.0%), and the Morgan Stanley High Tech index advanced 3.4% (up 24.6%). The Semiconductors surged 4.7% (up 21.8%). The Biotechs were little changed (up 27.1%). With bullion rallying $16, the HUI gold index recovered 3.9% (up 2.0%).

Three-month Treasury bill rates ended the week at 102 bps. Two-year government yields dipped four bps to 1.36% (up 17bps y-t-d). Five-year T-note yields declined eight bps to 1.87% (down 6bps). Ten-year Treasury yields fell five bps to 2.33% (down 11bps). Long bond yields slipped a basis point to 2.92% (down 15bps).

Greek 10-year yields fell eight bps to 5.28% (down 174bps y-t-d). Ten-year Portuguese yields slipped a basis point to 3.15% (down 59bps). Italian 10-year yields declined five bps to 2.29% (up 48bps). Spain's 10-year yields dropped eight bps to 1.65% (up 27bps). German bund yields added two bps to 0.60% (up 39bps). French yields fell eight bps to 0.86% (up 18bps). The French to German 10-year bond spread narrowed 10 bps to 26 bps. U.K. 10-year gilt yields were little changed at 1.31% (up 8bps). U.K.'s FTSE equities index added 0.4% (up 3.3%).

Japan's Nikkei 225 equities index gained 1.0% (up 5.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.083% (up 4bps). France's CAC40 gained 1.8% (up 7.7%). The German DAX equities index rose 2.0% (up 10%). Spain's IBEX 35 equities index added 1.6% (up 13.9%). Italy's FTSE MIB index jumped 2.3% (up 11.7%). EM equities posted strong gains. Brazil's Bovespa index surged 5.0% (up 8.6%), and Mexico's Bolsa rose 2.2% (up 5.3%). South Korea's Kospi gained 1.5% (up 19.2%). India’s Sensex equities index advanced 2.1% (up 20.3%). China’s Shanghai Exchange was little changed (up 3.8%). Turkey's Borsa Istanbul National 100 index surged 5.1% (up 34.6%). Russia's MICEX equities index rallied 2.5% (down 12.2%).

Junk bond mutual funds saw outflows of $1.144 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped seven bps to 4.03% (up 61bps y-o-y). Fifteen-year rates gained seven bps to 3.29% (up 57bps). The five-year hybrid ARM rate rose seven bps to 3.28% (up 52bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 4.14% (up 47bps).

Federal Reserve Credit last week slipped $0.2bn to $4.427 TN. Over the past year, Fed Credit declined $4.9bn. Fed Credit inflated $1.616 TN, or 57%, over the past 244 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.5bn last week to $3.323 TN. "Custody holdings" were up $100bn y-o-y, or 3.1%.

M2 (narrow) "money" supply last week declined $30.8bn to $13.515 TN. "Narrow money" expanded $691bn, or 5.4%, over the past year. For the week, Currency increased $0.6bn. Total Checkable Deposits jumped $43.5bn, while Savings Deposits dropped $79.9bn. Small Time Deposits added $2.6bn. Retail Money Funds gained $2.4bn.

Total money market fund assets were little changed at $2.627 TN. Money Funds fell $94bn y-o-y (3.4%).

Total Commercial Paper jumped $13.8bn to $961bn. CP declined $87bn y-o-y, or 8.3%.

Currency Watch:

July 11 – Wall Street Journal (Saumya Vaishampayan and Shen Hong): “China’s central bank is finding that some of the most stubborn yuan skeptics are lurking in its backyard. A tug of war between the People’s Bank of China and investors in the country’s domestic foreign-exchange market has played out almost daily in recent months, with the yuan consistently closing weaker than the level set by the central bank. While the central bank’s support has helped the yuan gain 2.2% against the U.S. dollar this year, after three years of declines, Chinese investors have been focusing in recent weeks on factors that could drag the currency lower in the coming months, traders say.”

The U.S. dollar index declined 0.9% to 95.153 (down 7.1% y-t-d). For the week on the upside, the Brazilian real increased 3.2%, the Australian dollar 3.0%, the Mexican peso 3.0%, the South African rand 2.7%, the Norwegian krone 2.2%, the South Korean won 1.9%, the Canadian dollar 1.8%, the British pound 1.6%, the Swedish krona 1.4%, the Japanese yen 1.2%, the New Zealand dollar 0.9%, the Singapore dollar 0.8%, the euro 0.6% and the Danish krone 0.6%. The Chinese renminbi gained 0.45% versus the dollar this week (up 2.50% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index rallied 2.2% (down 6.3% y-t-d). Spot Gold gained 1.3% to $1,229 (up 6.6%). Silver recovered 3.3% to $15.933 (down 0.3%). Crude rallied $2.31 to $46.54 (down 14%). Gasoline popped 4.1% (down 7%), and Natural Gas also jumped 4.1% (down 20%). Copper gained 1.7% (up 7%). Wheat gave back 4.5% (up 25%). Corn fell 4.1% (up 7%).

Trump Administration Watch:

July 8 – Bloomberg (Bryce Bashuk): “Group of 20 leaders agreed to address growing overcapacity and rock-bottom prices in global steel markets, bowing to pressure from the Trump administration after it threatened to impose punitive tariffs on its allies. In talks that stretched into the early hours of Saturday, U.S. officials managed to get language inserted into the communique that sets deadlines for G-20 members to address excess steel production… Countries like China will also have to be more transparent about how they subsidize domestic producers. In return, the U.S. agreed to boilerplate language reiterating the G-20’s commitment to fight protectionism. The threat of a trade war on steel hung over this week’s G-20 summit in Hamburg and those fears were compounded Friday when German Chancellor Angela Merkel said negotiations were proving to be difficult.”

July 10 – Reuters (Susan Cornwell and Amanda Becker): “Republican senators returned to Washington… following a 10-day holiday recess still at odds with one another over legislation President Donald Trump wants passed to repeal major portions of Obamacare. With only three weeks left before a summer recess scheduled to stretch until Sept. 5, Senate Majority Leader Mitch McConnell appeared determined to keep trying to find agreement on a partisan, all-Republican bill. If he cannot, he will be faced with giving up on a seven-year Republican promise to repeal the 2010 Affordable Care Act, popularly known as Obamacare - and possibly turning to Democrats for help in fixing problems with U.S. health insurance markets.”

July 13 – Reuters (Susan Cornwell and Yasmeen Abutaleb): “Senate Republican leaders released… a revised plan to dismantle the Obamacare law, playing to the party's disparate factions by letting insurers sell cheap, bare-bones policies while retaining taxes on the wealthy, but quick criticism showed the healthcare overhaul is already in jeopardy. U.S. Senate Majority Leader Mitch McConnell, pushed hard by President Donald Trump to pass a healthcare bill and make good on Republicans' seven-year mission to gut Democratic former President Barack Obama's signature legislative achievement, is walking a tightrope. With Democrats united against it, McConnell cannot afford to lose more than two Republican senators to win passage. But moderate Susan Collins and conservative Rand Paul voiced opposition to even bringing the new plan up for debate.”

July 11 – Financial Times (Sam Fleming and Barney Jopson): “While Donald Trump once vowed to ‘do a number’ on Dodd-Frank, Washington’s central piece of post-crisis financial legislation, his regulatory appointees will probably prove more effective agents of change than Congress, which remains locked in a legislative logjam. The administration… named one of the key figures in its quest to ease the load of regulation, nominating Randal Quarles to be vice-chair for financial supervision at the Federal Reserve. Bankers are hoping Mr Quarles will reverse the hardline approach to bank oversight — and in particular capital standards — that was developed after the crisis by Daniel Tarullo, a former Fed governor who was the central bank’s chief regulator but who never formally occupied the role.”

China Bubble Watch:

July 12 – Wall Street Journal (Lingling Wei and Dominique Fong): “The more China tries to rein in its roaring housing market, the more obsessed people get about buying. In February, with this southern megalopolis in the throes of a property frenzy, state banks raised mortgage rates. Then came higher down-payment rules for second homes and limits on owning multiple apartments. The result: Prices in Guangzhou continue to climb, and the market one town over has heated up. Pei Zhiyong, a 56-year-old advertising executive, was barred by the new restrictions from buying a third apartment in Guangzhou. One Sunday in April, he drove his BMW SUV to Foshan, an hour away, to check out a new riverfront high-rise. He figures it’s the ideal time to buy. ‘The harder the government tries to control the market, the more prices will rise,’ Mr. Pei said. With each new policy intended to restrict home purchases, buyers are piling in. Stressed about the prospect of being left behind, many are borrowing heavily, believing prices will continue to rise... Another article of faith is that the Communist Party won’t allow housing prices to collapse.”

July 9 – Bloomberg: “On a recent morning in Shanghai’s Lujiazui financial district, Xiong Yun’s eyes darted around the four computer screens at his desk, scanning activity in China’s bond and futures markets. Staring at the matrix of numbers, the former BNP Paribas SA trader was making sure his algorithms pounced on any arbitrage opportunities that popped up between government notes and their derivatives contracts… While Xiong’s approach would seem standard in credit markets around the world, debt-linked derivatives have until recently been a non-factor in China. But they’re being used more after a central bank clampdown ended a three-year bull run and increased volatility: in the past year, trading in bond futures more than doubled and interest rate swaps volume rose by a third. The shift brings China’s $10 trillion bond market closer in line with developed economies…”

July 10 – Bloomberg: “China’s producer price gains held up, signaling that demand in the world’s second-largest economy is maintaining pace for now, even in the face of regulatory curbs. The producer price index rose 5.5% in June from a year earlier…”

July 12 – Bloomberg: “China’s overseas shipments rose from a year earlier as global demand held up and trade tensions with the U.S. were kept in check amid ongoing talks. At home, resilient demand led to a rise in imports. Exports rose 11.3% in June in dollar terms…, more than the estimate of 8.9%. Imports increased 17.2% in dollar terms, leaving a trade surplus of $42.8 billion.”

July 10 – New York Times (Sui-Lee Wee): “A year ago, the Chinese billionaire Wang Jianlin declared the dominance of his vast entertainment empire, Dalian Wanda Group, boasting that his theme parks were a ‘pack of wolves’ that would defeat the lone ‘tiger’ of Disney’s Shanghai resort. Now, Mr. Wang is retreating, in a sign that Wanda could be reaching the limits of its debt-fueled expansion. Wanda said… that it would sell the theme parks as part of a $9.3 billion deal that includes 76 hotels and a major chunk of 13 tourism projects. The cash from the deal… would be used to pay down debt. Wanda appears to be caught in a political and financial downdraft that has hit many big Chinese deal makers.”

July 8 – Reuters (Sumeet Chatterjee): “When Horan Fu decided to buy a 500-sq-foot apartment for HK$7.4 million last year, the biggest draw was the developer's offer of 85% financing with an option to defer interest payments for the first three years. ‘The interest rate could be a lot higher after three years, but there's also a chance that the interest would still be cheap because finance companies are competing fiercely,’ said Fu, who works in Hong Kong's financial services industry. ‘There's risk but there's also an upside. It's a good investment opportunity.’ With traditional financing drying up in Hong Kong at a time when property prices are at a record high, home buyers like Fu are looking to non-bank lenders, many of them the financing arms of developers, to get in on the boom.”

Europe Watch:

July 8 – Wall Street Journal (Simon Nixon): “The recent volatility in bond markets has stirred up old fears in Europe. Investors have long been concerned about the possible impact of the end of the European Central Bank’s quantitative easing program on the eurozone’s periphery, not least Italy—the country long-regarded as too big to save. Now with markets abuzz with talk of central bank monetary policy ‘normalization,’ those concerns are once again front of mind: Without the fire blanket of ECB government bond-buying, will Italian borrowing costs soar once again, plunging the eurozone back into crisis?”

Central Bank Watch:

July 13 – Reuters (Francesco Canepa): “The European Central Bank is likely to signal in September that its bond-buying scheme will be gradually wound down next year and ECB chief Mario Draghi could give the next clue on the plans in late August, the Wall Street Journal said… Financial markets overwhelmingly expect the ECB to decide in September on the future of its stimulus policy beyond the end of this year. Some investors expect an extension with a one-off reduction while others see a gradual but steady wind-down, known as tapering.”

July 8 – Bloomberg (Carolynn Look, Mark Deen, and Caroline Connan): “The European Central Bank is likely to decide on the next change in its stimulus settings in the fall, when it will continue the process of tweaking its measures to reflect the euro area’s upturn, according to Governing Council member Francois Villeroy de Galhau. ‘What we have to do, and what we started to do, is to adapt the intensity of this accommodative monetary policy to the progress toward our inflation target and toward economic recovery,’ Villeroy de Galhau said... ‘In the future, and this will be our decision next fall, we will go on adapting the intensity of this monetary policy.’”

July 8 – Bloomberg (Carolynn Look): “European Central Bank policy makers continued to air their differences over when to rein in stimulus, sending conflicting signals on whether pumping cash into the economy for much longer will help the euro area or hurt it. ‘Underlying inflationary pressure remains subdued’ and ‘we still need a long period of accommodative policy,’ Executive Board member Peter Praet, the ECB’s chief economist, told Belgian newspaper De Standaard… Governing Council member Klaas Knot… warned that the central bank is ‘very close to the point’ of keeping quantitative easing for too long.”

July 12 – Bloomberg (Luke Kawa): “A North American central bank hiking rates in the face of strong job growth and deteriorating core inflation rates, citing temporary factors for the drop-off in price pressures. No, it’s not Janet Yellen’s Federal Reserve -- it’s Stephen Poloz’s Bank of Canada. On Wednesday, the Bank of Canada delivered its first interest-rate hike in almost seven years, becoming the first Group of Seven central bank to join the Fed in policy normalization, the first concrete step toward global monetary policy convergence.”

July 12 – Financial Times (Roger Blitz): “Canada’s first rate rise in nearly seven years puts it in the vanguard of central banks outside the US Federal Reserve shifting monetary policy in response to better global economic growth. The market had fully priced in the move upwards of 25 bps to 0.75%, which leaves two obvious questions for investors: what next for Canada, and how soon could other central banks join the retreat from easy monetary policy? Judging by the reaction of the ‘loonie’, nickname for the Canadian dollar, the answer to the first question has already been answered by investors.”

Global Bubble Watch:

July 11 – Bloomberg (Cindy Roberts): “JPMorgan… Chairman Jamie Dimon said the unwinding of central bank bond-buying programs is an unprecedented challenge that may be more disruptive than people think. ‘We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris… ‘Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before… When that happens of size or substance, it could be a little more disruptive than people think,” Dimon said. ‘We act like we know exactly how it’s going to happen and we don’t.’”

July 7 – Financial Times (Chris Flood): “BlackRock pulled more cash into its exchange traded fund arm in the first six months of 2017 than over the whole of last year, when the world’s largest asset manager attracted record ETF inflows. Investors have ploughed around $140bn into BlackRock’s ETF business so far this year, already exceeding the annual record of $138bn gathered over the whole of 2016… Vanguard… registered ETF inflows of around $82bn by the end of June. It is on course to beat its annual record of $97bn, also registered in 2016… Global investor inflows into ETFs have reached around $335bn so far in 2017, comfortably on track to beat 2016’s record of $390bn.”

July 12 – Reuters (Simon Jessop): “European corporate bond markets could prove a bigger source of market instability during the next big shock than during the 2008 financial crisis, a study by the Bank of England showed. The study is the first to try to model how non-bank lenders would react in a stressed market environment, with the BoE particularly concerned about the effect on corporate funding rates and their impact on the real economy. The need to model the risk has arisen because capital markets have provided a bigger slice of corporate funding since the financial crisis and many of the often-illiquid bonds are held in mutual funds offering daily exits to investors.”

July 12 – Reuters (Marc Jones): “More governments are likely to see their sovereign credit ratings cut this year, S&P Global said… An average of more than one country a week has had its rating cut by the big rating agencies - S&P, Moody's and Fitch - since the start of 2014. A new report from S&P showed it had 30 sovereigns on downgrade warnings, or ‘negative outlooks’ in rating firm parlance, at the start of the month, compared with just six on positive outlooks. ‘This outlook distribution suggests that negative rating actions are likely to continue to outnumber positive actions over the coming 12 months,’ S&P said in a mid-year review of its rating moves.”

July 12 – Bloomberg: “China’s outbound investment slumped in the first half of the year as policy makers imposed curbs on companies’ foreign acquisitions following a record spending spree in 2016. Outward direct investment dropped to $48.19 billion in the six-month period, down 45.8% from a year ago… Spending fell 11.3% to $13.6 billion in June alone… Foreign direct investment fell 0.1% in yuan terms in the first half, to 441.5 billion yuan… A surge in overseas purchases last year saw firms snap up everything from soccer teams to property.”

July 10 – Bloomberg (Colin Simpson): “There could be trouble ahead for developed world equity markets with ‘frothy’ valuations as central banks start shifting policy, according to Deutsche Bank AG. Price-to-earnings ratios increased steadily after the global financial crisis as waves of monetary stimulus pulled down the yields on safe assets, spurring investors into riskier options. That dynamic may be on the verge of reversing with a turnaround in policy now underway in developed nations other than Japan, Mikihiro Matsuoka, chief economist of the Japanese unit of Deutsche Bank AG, wrote… The average of the standard deviation of stock-market capitalization as a percentage of GDP in seven major developed countries has been approaching the previous peaks of 2000 and 2008, Matsuoka highlighted.”

Fixed Income Bubble Watch:

July 12 – Bloomberg (Sid Verma): “Credit markets didn’t get the memo. After hawkish rhetoric two weeks ago by central bankers led by Mario Draghi set off a sharp surge in government bond yields, the investment-grade and high-yield debt markets have collectively shrugged. Since then, the extra compensation investors demand to hold high-yield bonds around the world over similar-maturity government debt has increased by a whisker at five bps…, while spreads on high-rated debt in euros and dollars have tightened -- now sitting near post-crisis lows. If markets are braced for a new dawn for risk assets bereft of monetary stimulus to juice returns amid record U.S. corporate leverage, credit investors remain remarkably sanguine. That’s in contrast to the tantrums of 2013 and 2015, when the fear of a fading central bank put triggered a disorderly selloff across debt markets.”

Federal Reserve Watch:

July 12 –CNBC (Jeff Cox): “Interest rates may not have to rise that much for the Federal Reserve to meet its goals, central bank Chair Janet Yellen said… In prepared remarks to Congress, Yellen reiterated statements that Fed Governor Lael Brainard gave Tuesday, namely that rates are close to a ‘neutral’ level and not in need of a significant move higher. The neutral level is the point where the Fed's benchmark rate is neither accelerating nor restraining the economy. The current target for the funds rate is 1% to 1.25%, while inflation is around 1.4%. That puts the real rate close to zero, where Yellen and her dovish allies on the Federal Open Market Committee believe it needs to be. ‘Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance,’ Yellen will tell Congress.”

July 12 –Bloomberg (Craig Torres and Christopher Condon): “Federal Reserve Chair Janet Yellen said the U.S. economy should continue to expand over the next few years, allowing the central bank to keep raising interest rates, while also stressing the Fed is monitoring too-low inflation. ‘Considerable uncertainty always attends the economic outlook,’ Yellen said… in remarks prepared for delivery to the U.S House Financial Services Committee. ‘There is, for example, uncertainty about when -- and how much -- inflation will respond to tightening resource utilization.’”

July 12 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chairwoman Janet Yellen, faced with a recent, puzzling slowdown in global inflation, said she expects the forces holding down consumer prices to fade in the months ahead, allowing the central bank to stick to its plans for gradual interest-rate increases. But she left herself an out, saying the Fed could veer from its policy plans if inflation weakness proved more stubborn than officials expect. Ms. Yellen repeated her view that a tightening labor market would put upward pressure on wages and prices. ‘It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years,’ she said… during a hearing of the House Financial Services Committee. But, she added, ‘We’re watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent.’ Stocks rallied and bond yields fell after her testimony.”

July 11 – Reuters (Swati Pandey and Wayne Cole): “A top U.S. central banker… said he still expected one more rise in interest rates from the Federal Reserve this year and for it to start unwinding its massive balance sheet in the next few months. …San Francisco Federal Reserve Bank President John Williams said he believed a recent softening in U.S. inflation was transitory and that inflation would pick up to around 2% over the coming year. Williams emphasized that if inflation did not accelerate as expected, that would argue for a much slower pace of rate rises than currently projected.”

July 8 – Financial Times (Sam Fleming): “The Federal Reserve has set out a vigorous argument to retain broad discretion over monetary policy, in the teeth of a campaign by Republican lawmakers to push it to a more rules-based system ahead of the possible departure of Janet Yellen next year. Five days ahead of what could be one of Ms Yellen’s final testimonies on Capitol Hill as Fed chair, the central bank argued that relying too heavily on rate-setting rules could lead to perverse outcomes for the US economy. Conservative lawmakers argue the Fed has made use of its broad discretion to conduct hazardous policies that risk inflation or asset price bubbles. The Fed’s report suggests it is preparing for further battles with GOP lawmakers at a particularly sensitive time given changes in personnel in the Fed board and the potential for President Donald Trump to decline to give Ms Yellen a second term.”

U.S. Bubble Watch:

July 12 –CNBC (John W. Schoen): “Faced with tight revenues, tax-weary voters and uncertainty about the impact of federal tax and budget policies, lawmakers and governors are wrestling over what has become one of the toughest rounds of annual state budget battles since the Great Recession. More than a week after the start of the traditional July 1 fiscal year, seven states are still operating without an approved budget. In Connecticut, Rhode Island and Wisconsin, lawmakers have yet to resolve disagreements about how to close ongoing budget gaps in their states or fund new budget initiatives. Legislatures in Massachusetts, Pennsylvania, Oregon and Michigan have approved their tax and spending plans, which are waiting for signature or veto in those states. Lawmakers in a dozen states have called special sessions to resolve outstanding differences over the latest tax and spending plans.”

July 10 – Financial Times (John Plender): “It is 10 years, almost to the day, that Chuck Prince, then chief executive of Citigroup, told the Financial Times: ‘When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’ Those fateful words bear thinking about, especially when looking at today’s equity market where investors are dancing furiously despite the Federal Reserve, the European Central Bank and the Bank of England adopting increasingly hawkish rhetoric about tightening policy. While the bond markets have been rattled, the party in equities continues with a swing. And quite a party it has been. According to Harry Colvin of Longview Economics, the US equity bull market is now the second longest since 1896. It is also the third largest, delivering a cumulative 328% total return to early July… The cyclically adjusted price/earnings ratio is at a level previously only seen before the 1929 Wall Street Crash and in the dotcom bubble of the late 1990s. With the Fed likely to raise rates further this year and actively discussing how to shrink its balance sheet, the more nervous dancers may be tempted to make an exit.”

July 10 – Bloomberg (Adam Tempkin and Claire Boston): “‘I’d like to know: Why now?’ asked Steve Eisman. It was July 10, 2007, and the hedge fund manager was on a 10 a.m. conference call with analysts at Standard & Poor’s, which had just decided to put $7.3 billion of subprime mortgage bonds on watch for downgrade. A growing number of investors like Eisman had been betting on a crash as overdue home loans rose. But up to that point, much of the world was still putting its faith in the safe-as-Treasuries ratings that had been awarded to the bonds, which helped bankroll $445 billion of risky mortgages in 2006 alone. From that day onward, even the most cautiously optimistic economist or sanguine Federal Reserve governor should have known that the housing mess and the subprime debacle wasn’t going to be contained. ‘The news has been out on subprime now for many, many months; the delinquencies have been a disaster for many, many months,’ Eisman said on the call. ‘I’d like to know why you’re making this move today instead of many months ago.’ Over the next year, S&P analysts (who told Eisman they had to wait until the bonds were adequately ‘seasoned’ before they would downgrade them), would join Moody’s… and other credit raters in downgrading more than $1 trillion of mortgage-related securities.”

July 8 – Barron’s (Kopin Tan): “We still call it a stock market, but these days it has many more indexes than it does stocks: There are nearly 6,000 indexes today, up from fewer than 1,000 a decade ago. Meanwhile, the number of stocks in the Wilshire 5000 Total Market Index has shriveled to 3,599, from 7,562 in 1998… How is this boom in index products affecting the stock market? The question is especially pertinent these days, as benchmarks such as the Standard & Poor’s 500 index and the Nasdaq Composite nuzzle serial new highs, and actively managed funds struggle to keep up… Investors have been pulling money from active funds and plowing it into their passive peers. Through the first five months of this year, investors steered $338 billion into passive mutual funds and ETFs—that’s on top of last year’s record inflows of $506 billion… If this pace keeps up, passive funds could take in more than $800 billion in 2017, a 60% jump from 2016’s record and nearly double the haul from 2015.”

July 12 – Bloomberg (Charles Stein): “Investors haven’t soured on all active fund managers -- only those who pick U.S. stocks. Actively managed mutual funds and exchange-traded funds that own domestic stocks experienced $98.5 billion in net redemptions in the first six months of 2017, according to… Morningstar Inc. Active funds that buy international stocks attracted inflows of $8.7 billion and active funds that buy bonds gathered $106.5 billion. ‘The trend for U.S. stocks funds keeps going and going,’ said Russel Kinnel, director of manager research at Morningstar. ‘There is a perception that they can’t beat their benchmarks, especially when it comes to large-cap stocks.’”

July 13 – Reuters (Ernest Scheyder): “U.S. shale producers survived an oil price crash and confounded OPEC's efforts to drain a global glut by employing innovative drilling and production techniques. Now, some of these producers are turning to creative investments to pump more oil. Drilling joint ventures, called ‘DrillCos’ for short, combine cash from investors like Carlyle Group LP with drillable-but-idle land already owned by producers. Investors get a pledge of double-digit returns within a few years, while producers can raise productivity without spending more of their own money.”

July 12 – CNBC (Diana Olick): “The appetite for riskier mortgages is rising, and a small cadre of investment firms is ready to feed it. Angel Oak Capital Advisors just announced its second rated securitization of nonprime residential mortgages this year, a deal worth just more than $210 million and its largest ever. Its first deal was slightly less, but demand from borrowers and investors alike is growing, and the securitizations are growing with it. Angel Oak is one of very few firms offering these private-label mortgage-backed securities — the ones that were so very popular during the last housing boom and which were later blamed for the financial crisis.”

Japan Watch:

July 9 – Reuters (Kaori Kaneko and Elaine Lies): “Japanese Prime Minister Shinzo Abe will reshuffle his cabinet and party leaders early next month, moving to shore up his worst levels of popular support since returning to power in 2012, following a historic loss in a Tokyo assembly election. Last week's loss… spotlights Abe's potential vulnerability after nearly five years in power, with many blaming voter perceptions of arrogance on his part and that of his powerful Chief Cabinet Secretary, Yoshihide Suga. Opinion polls… showed Abe's popularity at its lowest since he returned to power late in 2012, with support of 36%...”

July 11 – Bloomberg (Isabel Reynolds): “Unpopular policies and a slew of scandals triggered a slide in public support for Japanese Prime Minister Shinzo Abe that led to a heavy election defeat. That was in 2007, when he abruptly resigned, citing health issues, after losing in the upper house of parliament. Ten years on, his situation looks uncomfortably familiar. Abe returned to Tokyo… from a curtailed European trip to face lost public trust and record low voter support. Ministerial gaffes and his failure to allay suspicions over a cronyism scandal involving a close friend contributed to his ruling party suffering an historic defeat in a recent Tokyo election. The public is wary of his plan to rush through a revision to the pacifist constitution.”

July 13 – Reuters (Leika Kihara, Sumio Ito, Tetsushi Kajimoto, Stanley White, Minami Funakoshi and Kaori Kaneko): “Bank of Japan policymakers see little to cheer in successfully defending their yield target as European and U.S. central banks start to pull the plug on ultra-cheap money, casting doubt on their view that global bond yield gains will be short-lived. Rising global yields forced the Japanese central bank to rev up bond buying last Friday to cap 10-year Japanese government bond (JGB) yields around its zero percent target, putting it at odds with its counterparts eyeing an exit from ultra-loose policy. On top of an increase in regular bond buying, the BOJ offered to buy unlimited amounts of 10-year JGBs at 0.110% - employing its most powerful tool for only the third time since adopting yield curve control (YCC) in September.”

July 10 – Financial Times (Leo Lewis and Dan McCrum): “The Bank of Japan faces a ‘protracted battle’ for control over yields on the benchmark 10-year government bond, say analysts, as global markets and the sliding popularity of Prime Minister Shinzo Abe threaten to push market interest rates higher. Warnings of repeated summer confrontations between the BoJ and the Japanese government bond (JGB) market come as investors spent Monday adjusting to BoJ governor Haruhiko Kuroda’s decision last week to draw a clear line in the sand, after the 10-year JGB yield crept above 0.1%... By stepping into the market with an offer to buy an unlimited amount of JGBs on Friday, traders said the BoJ was deploying the most potent weapon at its disposal as the central bank defended its 10-month-old policy of holding the 10-year benchmark at ‘around 0.0%’.”

July 10 – Bloomberg (Chikafumi Hodo and Netty Idayu Ismail): “While the Bank of Japan faced down the market on Friday with its offer to buy an unlimited amount of bonds, the battle over yield control may have only just begun. The swift action allowed the BOJ to quickly assert authority over the 10-year yield, bringing it down from a five-month high of 0.105%. The question is how far the central bank would have to go, and at what costs to its balance sheet, as the hawkish tilt adopted by its peers increases the extra yield offered by U.S. Treasuries and German bunds over Japanese bonds. ‘It hinges on whether the BOJ can inspire confidence and establish credibility on its intent to hold yields,’ said Vishnu Varathan, head of economics and strategy at Mizuho Bank… ‘The option of shifting to a target referenced to spreads -- as global yields move higher -- rather than fixed levels, may be a policy consideration.’”

EM Bubble Watch:

July 10 – Bloomberg (Lisa Abramowicz): “Emerging-market debt funds had a phenomenal first half of 2017, with record inflows and solid returns. But the ebullience is running out of steam and that sentiment will most likely deteriorate even further in the weeks to come. The biggest emerging-market debt ETF just had its largest one-week outflow in its history. In the past week, investors withdrew $826.8 million from the biggest emerging-market debt exchange-traded fund, the largest withdrawals in the $11.5 billion fund's history.”

Leveraged Speculation Watch:

July 10 – Bloomberg (Dani Burger and Sid Verma): “The trend is not your friend -- at least not lately. Between sleepy movements in global assets and short-lived macro shocks, programmatic investors who make their fortunes chasing momentum have had a particularly rough year. In fact, by some measures, commodity trading advisers are on track to post the worst yearly return since 1987... CTAs, the majority of which bet on price trends using futures contracts across asset classes, are known for being volatile strategies, billed for their low correlation to equities. Hit by choppy trends, especially in fixed income and the dollar, they’re are now finding it difficult to live up to return and diversification expectations, said Pravit Chintawongvanich, head of Derivatives Strategy at Macro Risk Advisors. ‘From 2014 to early 2015, the combination of a rising dollar, falling crude, and declining yields led to strong performance among trend followers,’ Chintawongvanich wrote… ‘Over the past year, the only trend that is working is equities. Clearly, that is not a very helpful diversifier to long equities.’”

July 10 – Bloomberg (Saijel Kishan): “Financial markets no longer make sense to macro managers like Mark Spindel. After spending three decades focusing on things like economic trends, currency moves, politics and policy, Spindel has been confounded by markets shaped by low volatility, algorithms and more. He finally gave up and closed his nine-year-old hedge fund. ‘I felt the intensity of following markets at a time of increasing political and economic confusion very hard,’ said Spindel, founder of Potomac River Capital… ‘My entire career had centered on an understanding of monetary politics and I had trouble getting my head around it all. It was exhausting.’ These are troubled -- and troubling -- times for macro managers, those figurative heirs of famed investor George Soros who were once dubbed the masters of the universe. They’ve barely made money this year and once again, their returns pale next to those of cheaper index funds. Many investors are looking elsewhere.”

July 12 – CNBC (Leslie Picker): “A revitalization in the hedge-fund industry may be more dependent on machines than humans. After years of outflows, new reports show many of the larger funds and their current and prospective investors, are keenly focused on words like ‘quant’ and ‘data science.’ As one indication, take a look at this chart that was highlighted in a recent client report by Jefferies that was obtained by CNBC. This is based on Google Trends, showing the relative interest in the words ‘hedge fund’ versus ‘data science.’ ‘2016 seems to have marked a tipping point for the hedge fund industry's mainstream embrace of data science,’ Jefferies wrote…”

July 11 – Bloomberg (Hema Parmar): “Investor interest in hedge funds is back on the upswing. Hedge funds saw the biggest jump in demand among asset classes examined in a Credit Suisse Group AG report... More allocators plan to boost their exposure to the funds than reduce it this year, it said. That’s a pivot from mid-2016, when more investors intended to make redemptions, according to the survey which polled 212 investors globally last month representing almost $660 billion invested in the industry. Continuing the bullish sentiment, 81% of investors surveyed said they plan to put at least some money to work in hedge funds over the next six months, compared with 73% last year.”

Geopolitical Watch:

July 11 – Reuters (Ben Blanchard): “China hit back… in unusually strong terms at repeated calls from the United States to put more pressure on North Korea, urging a halt to what it called the ‘China responsibility theory’, and saying all parties needed to pull their weight. U.S President Trump took a more conciliatory tone at a meeting with Chinese President Xi Jinping on Saturday, but he has expressed some impatience that China, with its close economic and diplomatic ties to Pyongyang, is not doing enough to rein in North Korea.”