Saturday, May 19, 2018

Saturday's News Links

[Reuters] China's second quarter GDP growth seen easing to around 6.7 percent - official think tank

[Reuters] China air force lands bombers on South China Sea island

[WSJ] Main Street Banks’ New Lending Rivals: Hedge Funds and Private Equity

[FT] China stops short of accepting US trade demands

[FT] Moqtada al-Sadr bloc wins Iraq election

Weekly Commentary: Crisis Watch

Where to begin? Contagion… The Argentine peso dropped another 5.0% this week, bringing y-t-d losses to 23.7%. The Turkish lira fell 3.9%, boosting 2018 losses to 15.4%. As notable, the Brazilian real dropped 3.7% (down 11.5% y-t-d), and the South African rand sank 4.0% (down 3.0% y-t-d). The Colombian peso fell 3.0%, the Chilean peso 2.7%, the Mexican peso 2.7%, the Hungarian forint 2.3%, the Polish zloty 2.1% and the Czech koruna 2.0%.

EM losses were not limited to the currencies. Yields continued surging throughout EM. Notable rises this week in local EM bonds include 54 bps in Brazil, 27 bps in South Africa, 34 bps in Hungary, 36 bps in Lebanon, 25 bps in Indonesia, 28 bps in Peru, 14 bps in Turkey, 20 bps in Mexico and 11 bps in Poland.

Dollar-denominated EM debt was anything but immune. Turkey's 10-year dollar bond yields spiked 41 bps to 7.16%, the high going back to May 2009. Brazil's dollar bond yields surged 29 bps to 5.58%, the highest level since December 2016. Mexico's dollar yields jumped 18 bps to 4.64%, the high going all the way back to February 2011. Dollar yields rose 19 bps in Chile, 28 bps in Colombia, 19 bps in Indonesia, 14 bps in Russia, 14 bps in Ukraine and 167 bps in Venezuela (to 32.80%). Losses are mounting quickly for those speculating in EM debt.

Developed bonds were under pressure as well. We'll begin with Italy:

May 17 - UK Guardian (Jon Henley): "Italy's new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the EU has been led by populist, anti-EU forces. From the EU's perspective, the coalition of the anti-establishment Five Star Movement (M5S) and the far-right League looks headstrong and unpredictable, possibly even combustible. Leaked drafts of their government 'contract' include provision for a 'conciliation committee' to settle expected disagreements. Mainly it looks alarming. Both parties toned down their fiercest anti-EU rhetoric during the election campaign, dropping previous calls for a referendum on eurozone membership… But as they approach power, the historical Euroscepticism of the M5S and the League is resurfacing. An incendiary early version of their accord called for the renegotiation of EU treaties, the creation of a euro opt-out mechanism, a reduction in Italy's contribution to the EU budget and the cancellation of €250bn (£219bn) of Italian government debt."

Italian 10-year yields surged 36 bps this week to 2.23%, the high since the spike last July. Perhaps even more dramatic, after ending last week at negative 29 bps, Italian 2-year yields surged 37 bps to a near 22-month high eight bps. The Italian to German two-year yield spread widened 36 bps this week to a 13-month high 68 bps.

Bonds throughout the euro zone periphery were under pressure. Greek 10-year yields surged 50 bps to a 2018 high 4.50%. Portuguese yields jumped 19 bps to 1.87%, and Spanish yields gained 17 bps to 1.44%. Elsewhere, Australian 10-year yields rose 12 bps to 2.90%, and New Zealand yields rose 14 bps to 2.86%.

Even with Friday's six bps decline, 10-year Treasury yields ended the week up eight bps to 3.06%. Thursday's 3.13% yield was the high going back to July 2011. With two-year yields adding a basis point this week, the two to 10-year spread widened seven bps to 51 bps. It's worth noting that 30-year yields jumped 10 bps this week to 3.21%, the high since June 2015, and benchmark MBS yields rose 10 bps to 3.76%, a high going back to July 2011.

May 17 - Bloomberg (Selcuk Gokoluk): "Debt levels that quadrupled in a decade have made emerging markets vulnerable to tightening financial conditions in the era of rising U.S. interest rates, Fitch Ratings said. Outstanding debt securities from developing nations have ballooned to $19 trillion from $5 trillion a decade earlier... Despite the development of local-currency bond markets, borrowers will be hobbled by higher external borrowing costs, a stronger dollar and slowdown of capital inflows, it said… 'If easy financial conditions tighten more sharply than expected, EM debt would come under pressure,' said Monica Insoll, the head of the credit market research team at Fitch. 'If investor appetite for EM risk reverses, issuers may face refinancing challenges even in their home markets, while capital outflows could put pressure on exchange rates or foreign exchange reserves.'"

It's worth repeating (from above): "Outstanding debt securities from developing nations have ballooned to $19 trillion from $5 trillion a decade earlier." Analysts this week were keen to note that EM market tumult has been less disruptive than the (soon passing) 2016 episode. Give it time. We're still in just the initial phase of Risk Off. Only a few weeks back, universal bullishness held sway over the emerging markets and economies. Buy one ETF and own them all!

It's worth recalling that the 2016 de-risking/de-leveraging episode was nipped in the bud by an upsurge in global QE (especially courtesy the ECB and BOJ) and a corresponding extension of easy money by the Federal Reserve. And let us not forget the commanding contribution from Beijing policymaking. After a modest slowdown in 2015, China's Credit growth surged in 2016 and that acceleration continued well into 2017. Two additional fateful years of surging global Credit and financial flows are now coming home to roost.

Today's backdrop is more conducive to a protracted EM crisis backdrop, along with, I would argue, an especially destabilizing global market liquidity crunch. For one, the overheated U.S. economy has the Fed rather hamstrung. Their timid baby-step approach has worked to sustain excessively loose financial conditions. And while central bankers dilly-dallied, extreme fiscal stimulus coalesced with extreme monetary stimulus - creating a most potent concoction way too late in the economic cycle. Between fiscal stimulus, a capital investment boom and reenergized housing inflation, the Fed today confronts extraordinary uncertainty as it attempts to gauge the amount of economic stimulus and inflationary juice in the pipeline.

Fed rate hikes, rising market yields and the resurgent dollar receive most of the attention when analysts contemplate EM vulnerabilities. Issues related to China are deserving of more prominence in the analysis. Chinese officials have finally become more assertive in cracking down on financial excess. China's system Credit growth has slowed meaningfully, and there are indications that tighter financial conditions have begun to bite.

May 18 - Bloomberg (Carrie Hong): "Zhongyuan Yuzi Investment Holding Group Co. became the second Asian investment-grade company that failed to price a dollar-denominated bond offering this week after the 10-year U.S. Treasury yield hit the highest level since 2011. The Chinese local government financial vehicle decided not to proceed with a plan to sell dollar bonds on Thursday because of unfavorable market conditions… A day earlier, developer China Overseas Grand Oceans Group Ltd. also postponed a sale of five-year bonds… With the global borrowing benchmark surging this week combined with rising Libor funding cost, appetite for Asian dollar new issues is weakening…"

May 16 - Bloomberg (Lianting Tu, Carrie Hong and Denise Wee): "A slump in prices of higher-yielding bonds sold by Chinese banks risks spurring margin calls that will exacerbate the declines. Capital instruments sold by Bank of Qingdao Co. and other small Chinese lenders sank below 90 cents on the dollar this month, tumbling faster than other securities as a rise in Treasury yields sent jitters through Asian credit markets. Because the notes were marketed to wealthy individuals as part of structured products and those investors tend to be heavily leveraged, buyers may face margin calls when prices decline to between 80 cents and 90 cents on the dollar, said three people familiar with the debt…"

May 17 - Bloomberg: "The days when only obscure Chinese companies defaulted on their debt are ending. Four of the five issuers that have defaulted for the first time in 2018 are companies with public listings, which used to be regarded as assuring better governance and information disclosure. That's as many by this type of firm as happened in 2014 through 2017… For investors, the change means it's dangerous to make assumptions. 'Our first and foremost task now is to avoid stepping on mines,' says Wang Ming, chief operating officer at Shanghai Yaozhi Asset Management LLP, which oversees 12 billion yuan ($1.9bn) in assets. 'It's increasingly difficult to tell which one will default, which not.'"

China would not face today's degree of fragility had it not fatefully resuscitated Bubble Dynamics back in 2016. EM, as well, would be in a sounder position if it had begun to deal with excess and mounting vulnerabilities. Instead, for both China and EM it's been a case of extending Terminal Phase Excess, with an additional two years of rampant Credit expansion, extraordinary international "hot money" flows, and even deeper structural impairment.

May 17 - Bloomberg (Richard Frost and Emma Dai): "Hong Kong intervened to defend its currency peg for a second day after the city's dollar fell to the weak end of its trading band The Hong Kong Monetary Authority bought HK$9.5 billion ($1.2bn) of local dollars overnight, the third-biggest intervention since the defense began last month. The HKMA mopped up HK$1.57 billion on Wednesday. Lower rates than the U.S. have made the Hong Kong dollar an attractive target for shorting. The de facto central bank has now spent $7.95 billion protecting its currency system, which has the effect of tightening liquidity in a city that's grown fat on ultra-low borrowing costs."

From my vantage point, EM contagion has reached critical mass. There will be ebbs and flows, but we're now on Crisis Watch. De-risking/De-leveraging Dynamics have attained momentum, and the focus will be on waning global market liquidity and the next domino. The process of unwinding EM "carry trade" leverage has commenced. I ponder how much leverage has accumulated throughout Asian debt markets. Hong Kong's Monetary Authority has significant international reserves (over $400bn) to support its faltering currency peg. But I would expect the reversal of "hot money" flows to accelerate, pressuring central banks throughout Asia and EM more generally. To fund outflows, central bankers will be forced sellers of Treasuries (and other sovereign debt). It's worth noting that custody holdings held by the Fed for foreign Treasury holders have dropped $63bn over the past five weeks.

Back in 2015 and 2016, the monthly change in China's international reserves garnered significant market interest. Recall that after peaking at almost $4.0 TN in June 2014, reserves were down to about $3.0 TN by the end of 2016. But between January 2017 and January 2018, China's reserves recovered $160 billion, a significant quantity but still only a fraction of the previous decline. Hinting of a return of outflows, reserves have dropped $36 billion over the past three months.

Is there a big foreign "carry trade" component in Chinese debt instruments - in Hong Kong and the mainland? In the past, I posited "currency peg on steroids" - speculators could leverage in higher yielding Chinese instruments with confidence that Chinese officials would revalue the renminbi higher versus the dollar. The 2015/2016 renminbi devaluation corresponded with huge outflows and the drawdown of China's reserve holdings. Now, for almost 18 months the renminbi has enjoyed another period of managed appreciation - concurrent with a period of global exuberance for EM and Credit more generally. How much "hot money" and leverage was enticed by China's higher yields?

China appears increasingly vulnerable to EM contagion effects. Finance is tightening in EM, in China and globally. Over recent years, China has developed into the prevailing source of EM finance and trade. China and EM interdependency has been instrumental to their respective booms. Now comes the downside. I suspect "hot money" has begun exiting EM at least partially in anticipation of waning trade and financial flows from China. And a faltering EM Bubble certainly has negative ramifications for the increasingly fragile Chinese Bubble. If there is a big "carry trade" in Chinese Credit instruments, it's susceptible.

Previous problems have not gone away - they've instead festered and metastasized. EM debt, the China Bubble, Italy and euro monetary integration, to name just a few. This week was clearly an escalation in global de-risking/de-leveraging dynamics. How much speculative leverage has accumulated (since 2012) in Italian, Greek, Portuguese and Spanish debt? ECB rate manipulation and "money printing" stoked an artificial boom. It's come at a very steep price. Myriad problems associated with a deeply flawed monetary integration are waiting to resurface, as we're witnessing in Italy.

I know it sounds crazy - pure heresy - to most. But there's a shot that the world has commenced a crisis period that will unfold into something more comprehensive and challenging than 2008. And at least in the U.S., financial crisis is the furthest thing from people's minds. Not even on the radar. Not possible.

The VIX closed the week at 13.42. Blue skies as far as eyes can see. But to one that has been chronicling the "global government finance Bubble" now for over nine years, I really worry. Excess became systemic. Deep structural maladjustment - systemic. Global imbalances - unprecedented. The amount of global debt - previously unfathomable. And, deeply concerning, the world has become so much more divisive and hostile over the past decade.

Come the next international crisis, it will not be the U.S. and a group of likeminded global central bankers coordinating a unified policy response. Expect a disparate group of bankers, politicians and strongmen autocrats pointing fingers, making threats and demanding action from others. If they can't after months successfully negotiate trade deals, how are they to respond to crisis dynamics that they are wholly unprepared for.

But I'm getting ahead of myself. The U.S. economic boom has a head of steam. The small caps traded to record highs this week. To the naked eye, things look sound and sustainable. If only it weren't a Bubble Illusion. The NYT's Kevin Roose this week penned an insightful article, "The Entire Economy Is MoviePass Now. Enjoy It While You Can."

"I've got a great idea for a start-up. Want to hear the pitch? It's called the 75 Cent Dollar Store. We're going to sell dollar bills for 75 cents - no service charges, no hidden fees, just crisp $1 bills for the price of three quarters. It'll be huge. You're probably thinking: Wait, won't your store go out of business? Nope. I've got that part figured out, too. The plan is to get tons of people addicted to buying 75-cent dollars so that, in a year or two, we can jack up the price to $1.50 or $2 without losing any customers. Or maybe we'll get so big that the Treasury Department will start selling us dollar bills at a discount. We could also collect data about our customers and sell it to the highest bidder. Honestly, we've got plenty of options. If you're still skeptical, I don't blame you. It used to be that in order to survive, businesses had to sell goods or services above cost. But that model is so 20th century. The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road. Over all, 76% of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to… Jay Ritter, a professor at the University of Florida's Warrington College of Business. That was the largest number since the peak of the dot-com boom in 2000, when 81% of newly public companies were unprofitable. Of the 15 technology companies that have gone public so far in 2018, only three had positive earnings per share in the preceding year… The rise in unprofitable companies is partly the result of growth in the technology and biotech sectors, where companies tend to lose money for years as they spend on customer acquisition and research and development… But it also reflects the willingness of shareholders and deep-pocketed private investors to keep fast-growing upstarts afloat long enough to conquer a potential winner-take-all' market."

We've created a Bubble economic structure that will function especially poorly come faltering markets and a tightening of financial conditions.


For the Week:

The S&P500 declined 0.5% (up 1.5% y-t-d), and the Dow dipped 0.5% (unchanged). The Utilities sank 3.1% (down 7.8%). The Banks fell 1.2% (up 2.6%), while the Broker/Dealers added 0.4% (up 11.2%). The Transports increased 0.2% (up 1.1%). The S&P 400 Midcaps added 0.2% (up 2.3%), and the small cap Russell 2000 jumped 1.2% (up 5.9%). The Nasdaq100 declined 1.2% (up 7.3%).The Semiconductors slipped 0.4% (up 7.4%). The Biotechs gained 0.9% (up 11.4%). With bullion sinking $26, the HUI gold index dropped 2.5% (down 7.6%).

Three-month Treasury bill rates ended the week at 1.85%. Two-year government yields added a basis point to 2.55% (up 66bps y-t-d). Five-year T-note yields gained five bps to 2.89% (up 68bps). Ten-year Treasury yields jumped eight bps to 3.06% (up 65bps). Long bond yields rose nine bps to 3.20% (up 46bps). Benchmark Fannie Mae MBS yields jumped 10 bps to 3.76% (up 76bps).

Greek 10-year yields surged 50 bps to 4.50% (up 42bps y-t-d). Ten-year Portuguese yields gained 19 bps to 1.87% (down 8bps). Italian 10-year yields jumped 36 bps to 2.23% (up 21bps). Spain's 10-year yields rose 17 bps to 1.44 % (down 12bps). German bund yields added two bps to 0.58% (up 15bps). French yields gained four bps to 0.83% (up 5bps). The French to German 10-year bond spread widened two to 25 bps. U.K. 10-year gilt yields gained six bps to 1.50% (up 31bps). U.K.'s FTSE equities index increased 0.7% (up 1.2%).

Japan's Nikkei 225 equities gained 0.8% (up 0.7% y-t-d). Japanese 10-year "JGB" yields gained almost two bps to 0.06% (up 1bps). France's CAC40 rose 1.3% (up 5.7%). The German DAX equities index added 0.6% (up 1.2%). Spain's IBEX 35 equities index dropped 1.5% (up 0.7%). Italy's FTSE MIB index sank 2.9% (up 7.3%). EM equities were mostly lower. Brazil's Bovespa index dropped 2.5% (up 8.7%), and Mexico's Bolsa fell 2.3% (down 7.5%). South Korea's Kospi index declined 0.7% (down 0.3%). India’s Sensex equities index dropped 1.9% (up 2.3%). China’s Shanghai Exchange gained 0.9% (down 3.4%). Turkey's Borsa Istanbul National 100 index recovered 0.5% (down 11.2%). Russia's MICEX equities declined 0.8% (up 10.3%).

Investment-grade bond funds saw inflows of $3.069 billion, while junk bond funds posted outflows of $542 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped six bps to 4.61% (up 59bps y-o-y). Fifteen-year rates gained seven bps to 4.08% (up 81bps). Five-year hybrid ARM rates rose five bps to 3.82% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.72% (up 64bps).

Federal Reserve Credit last week declined $3.1bn to $4.314 TN. Over the past year, Fed Credit contracted $125bn, or 2.8%. Fed Credit inflated $1.504 TN, or 53%, over the past 289 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $9.4bn last week to a five-month low $3.387 TN. "Custody holdings" were up $153bn y-o-y, or 4.7%.

M2 (narrow) "money" supply rose $16.0bn last week to a record $13.971 TN. "Narrow money" gained $511bn, or 3.8%, over the past year. For the week, Currency increased $0.5bn. Total Checkable Deposits sank $64.8bn, while savings Deposits surged $70.9bn. Small Time Deposits added $2.1bn. Retail Money Funds gained $7.2bn.

Total money market fund assets rose $11.5bn to $2.818 TN. Money Funds gained $173bn y-o-y, or 6.6%.

Total Commercial Paper jumped $9.6bn to $1.069 TN. CP gained $82.3bn y-o-y, or 8.3%.

Currency Watch:

The U.S. dollar index jumped 1.2% to 93.637 (up 1.6% y-t-d). For the week on the upside, the Swiss franc increased 0.2%. For the week on the downside, the South African rand declined 4.0%, the Brazilian real 3.7%, the Mexican peso 2.7%, the Swedish krona 1.7%, the Norwegian krone 1.5%, the euro 1.4%, the Japanese yen 1.3%, the New Zealand dollar 0.9%, the South Korean won 0.8%, the Canadian dollar 0.7%, the British pound 0.5%, the Singapore dollar 0.5% and the Australian dollar 0.4%. The Chinese renminbi declined 0.72% versus the dollar this week (up 1.99% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.0% (up 10.6% y-t-d). Spot Gold fell 1.9% to $1,293 (down 0.8%). Silver dropped 1.8% to $16.455 (down 4.0%). Crude gained 58 cents to $71.28 (up 18%). Gasoline jumped 2.0% (up 24%), and Natural Gas rose 1.5% (down 4%). Copper declined 1.5% (down 7%). Wheat rallied 3.9% (up 21%). Corn jumped 1.5% (up 15%).

Market Dislocation Watch:

May 16 - Bloomberg (Robert Burgess): "Ask most any smart investor what could cause the next crisis in markets and the likely answer would be a sharp rise in borrowing costs brought on by a selloff in the bond market. But the thing about markets is that the pain usually originates in places where it's least expected. That may be the case now with emerging markets. The fact is, investors have had a few years now to prepare for the inevitable rise in bond yields that is currently underway. That's seen in the record bets against U.S. Treasuries. What hasn't been expected is the big slump in EM, which attracted a record $315 billion in non-resident portfolio debt flows in 2017…"

Trump Administration Watch:

May 18 - Bloomberg (Eric Martin, Josh Wingrove and Jenny Leonard): "President Donald Trump's chief Nafta negotiator said the U.S., Canada and Mexico are 'nowhere near close to a deal' to update the region's 24-year-old free-trade pact as U.S. lawmakers warn that time is almost up to reach a agreement that can pass the current Congress. 'There are gaping differences on intellectual property, agricultural market access, de minimis levels, energy, labor, rules of origin, geographical indications, and much more,' U.S. Trade Representative Robert Lighthizer said… 'We of course will continue to engage in negotiations, and I look forward to working with my counterparts to secure the best possible deal for American farmers, ranchers, workers, and businesses.'"

May 16 - Reuters (Doina Chiacu and David Lawder): "The United States is still pushing for a deal to revise the North American Free Trade Agreement (NAFTA), the White House said…, while a top Mexican official held out the possibility of an agreement in the coming weeks. President Donald Trump is committed to getting a better agreement with Canada and Mexico, White House press secretary Sarah Sanders told Fox News. 'We still want to see something happen and we're going to continue in those conversations. They're ongoing now and we're pushing forward and hopeful that we can get something done soon,' said Sanders."

May 16 - Reuters (John Irish): "China's foreign minister on… took a swipe at the United States' trade policy and defended international free trade on the basis of World Trade Organisation regulations. 'Trade unilateralism goes against the current of history,' Wang-Yi said… 'We must preserve international free trade on the basis of WTO rules.'"¬¬

May 16 - Bloomberg: "The Trump administration is delivering the World Trade Organization 'three hard blows' that could destroy the body's ability to regulate global commerce, China's ambassador to the Geneva-based body said. 'The U.S. is blocking selection of new Appellate Body members, taking restrictive trade measures under Section 232 and threatening to impose tariff measures of $50 billion of goods imports from China under Section 301 of U.S. domestic law,' said Zhang Xiangchen, China's envoy to the WTO since last year. 'Any one of these, if left untreated, will fatally undermine the functioning of the WTO.'"

May 16 - Politico (Andrew Restuccia, Nancy Cook and Doug Palmer): "Tensions between Trump administration moderates and hard-liners on trade with China are boiling over ahead of talks with Chinese negotiators in Washington this week - and as President Donald Trump seems increasingly eager to reach a deal. Peter Navarro, a Beijing critic and the standard-bearer of the president's harsh campaign rhetoric on China, had a screaming match with Treasury Secretary Steven Mnuchin, a moderate, during an initial round of talks in Beijing two weeks ago. On Wednesday, his name wasn't on a Treasury Department list of U.S. officials who will meet with Chinese Vice Premier Liu He and the rest of the Beijing delegation at Treasury on Thursday and Friday."

May 17 - Bloomberg (Toluse Olorunnipa): "John Bolton's desire to turn North Korea into the next Libya isn't going over so well in Pyongyang, where Kim Jong Un's government has threatened to cancel upcoming talks with the U.S. in part because of the U.S. national security adviser's remarks. Bolton drew the ire of the North Korean government for saying that the country's nuclear disarmament should follow the 'Libya model' embraced by Muammar Qaddafi, who was later overthrown and killed in a U.S.-backed uprising."

May 13 - Reuters (Valerie Volcovici and Richard Cowan): "The United States threatened on Sunday to impose sanctions on European companies that do business with Iran, as the remaining participants in the Iran nuclear accord stiffened their resolve to keep that agreement operational. White House national security adviser John Bolton said U.S. sanctions on European companies that maintain business dealings with Iran were 'possible,' while Secretary of State Mike Pompeo said he remained hopeful Washington and its allies could strike a new nuclear deal with Tehran."

May 11 - Wall Street Journal (Louise Radnofsky, Stephanie Armour and Joseph Walker): "President Donald Trump unveiled dozens of initiatives aimed at curbing high drug prices Friday, a raft of modest moves that left the pharmaceutical industry relieved and buoyed their stocks. 'We're going to take on one of the biggest obstacles to affordable medicine: the tangled web of special interests,' Mr. Trump said… 'The drug lobby is making an absolute fortune at the expense of American consumers.'"

May 13 - Reuters (Valerie Volcovici and Michael Martina): "U.S. President Donald Trump pledged on Sunday to help ZTE Corp 'get back into business, fast' after a U.S. ban crippled the Chinese technology company, offering a job-saving concession to Beijing ahead of high-stakes trade talks this week. Trump's unexpected announcement was a stunning reversal, given Washington's tough stance on Chinese trade practices that have put the world's two largest economies on course for a possible trade war… 'Too many jobs in China lost. Commerce Department has been instructed to get it done!' Trump wrote on Twitter…"

May 14 - Politico (Andrew Restuccia and Doug Palmer): "Wilbur Ross has largely been sidelined in high-stakes trade negotiations with China in the latest signal that President Donald Trump is losing confidence in his commerce secretary… Ross - whom Trump once affectionately called a 'killer,' a high compliment in the president's lexicon - has steadily become a bit player, with the president regularly leaning on Treasury Secretary Steven Mnuchin, U.S. Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro. The commerce secretary's standing took another hit this week when the president tweeted criticism of the department's recent decision to block the Chinese phone-maker ZTE from accessing U.S. technology…"

Federal Reserve Watch:

May 15 - Reuters (Howard Schneider and Ann Saphir): "Federal Reserve Chair Jerome Powell's top deputies are edging toward a clash that could shape the pace of interest-rate hikes in coming months, as well as how the Fed should prepare for and combat the next economic downturn. The fault lines are technical as well as philosophical and include a debate over whether the economy has shifted into a higher gear, giving the Fed room for more interest-rate hikes and perhaps reducing the need for controversial tools like bond-buying to fight future recessions. They come as tax cuts and government spending boost growth and inflation, giving policymakers the breathing room to debate whether to retool the Fed's basic policy approach to give themselves more firepower even if slower future economic growth is unavoidable."

May 14 - CNBC (Natasha Turak): "The U.S. should keep its debt-to-GDP in mind before things 'get out of hand,' Federal Reserve Bank of Cleveland President Loretta Mester said… Asked by CNBC's Joumanna Bercetche if she was worried about the outlook for rising U.S. debt, Mester was measured but encouraged monitoring the debt level, which is at its highest since just after World War Two. 'I think we have to be taking into account the health of U.S. economy, in terms of are we on a sustained fiscal path?' Mester replied. 'And I do think that's something we should be thinking of now as we go forward, and not waiting till things get too far out of hand.'"

U.S. Bubble Watch:

May 14 - CNBC (Jeff Cox): "America's budget deficit and unemployment rate are heading in opposite directions - something that's never happened during post-World War II peacetime and could cause a significant jump in interest rates. Goldman Sachs projects, for instance, that the 10-year Treasury note could be yielding 3.6% next year. The deficit increase is coming due to the recent barrage of fiscal stimulus from Congress, including a $1.5 trillion tax cut approved in December 2017 and a $1.3 trillion spending bill aimed at keeping the government operating through the end of the fiscal year. Normally such moves would come in the early stages of an economic recovery. The U.S. economy, though, is in the eighth year of its post-financial crisis expansion…"

May 11 - Reuters (Richard Leong): "The U.S. economy is likely growing at a 2.97% annualized pace in the second quarter, little changed from the 2.96% rate calculated a week earlier, the New York Federal Reserve's Nowcast model showed…"

May 15 - CNBC (Diana Olick): "A sharp sell-off in the bond market is sending mortgage rates to the highest level in seven years. The average contract rate on the 30-year fixed will likely end the day as high as 4.875% for the highest creditworthy borrowers and 5% for the average borrower… Mortgage rates, which loosely follow the yield on the 10-year Treasury, started the year right around 4% but began rising almost immediately. They then leveled off in March and early April, only to begin rising yet again."

May 15 - Wall Street Journal (Akane Otani, Ben Eisen and Chelsey Dulaney): "U.S. companies are ramping up spending on their businesses at the fastest pace in years, a long-awaited development after years of tepid growth. Spending on factories, equipment and other capital goods by companies in the S&P 500 is expected to have risen to $166 billion in the first quarter, up 24% from a year earlier, according to Credit Suisse…. It is on track for the fastest pickup since 2011 and a record for the first quarter of a year. The jump has been aided by the U.S. tax-code overhaul, which is putting more cash in companies' coffers."

May 17 - Axios (Steve LeVine and Chris Canipe): "At a time of rock-bottom joblessness, high corporate profits and a booming stock market, more than 40% of U.S. households cannot pay the basics of a middle-class lifestyle - rent, transportation, child care and a cellphone, according to a new study. Quick take: The study, conducted by United Way, found a wide band of working U.S. households that live above the official poverty line, but below the cost of paying ordinary expenses. Based on 2016 data, there were 34.7 million households in that group - double the 16.1 million that are in actual poverty…"

May 17 - Wall Street Journal (Janet Adamy): "American women are having children at the lowest rate on record, with the number of babies born in the U.S. last year dropping to a 30-year low… Some 3.85 million babies were born last year, down 2% from 2016 and the lowest number since 1987, according to the Centers for Disease Control and Prevention's National Center for Health Statistics. The general fertility rate for women age 15 to 44 was 60.2 births per 1,000 women-the lowest rate since the government began tracking it more than a century ago…"

China Watch:

May 14 - Reuters (Kevin Yao and Fang Cheng): "China reported weaker-than-expected investment and retail sales in April and a drop in home sales, clouding its economic outlook even as policymakers try to navigate debt risks and defuse a heated trade row with the United States. Fixed asset investment grew the slowest since 1999 while the pace of retail sales softened to a four-month low, suggesting a long-anticipated slowdown in the world's second-largest economy may finally be setting in even as protectionism is on the rise. The lone bright spot on Tuesday's activity data was industrial output, which jumped more than expected as automobile and steel production surged."

May 13 - Reuters (Shu Zhang and Engen Tham): "Chinese insurers are channeling funds through shadow lenders to real estate and local government infrastructure projects in a bid to boost returns, six insurance and trust sources told Reuters. The practice undermines Beijing's efforts to cut local debt risk and curb a property bubble, highlighting the difficulties regulators face in reining in shadow lending and applying regulations uniformly across China's $15 trillion asset management sector… The amount insurers have allocated to alternative assets - trusts, asset management plans and bank wealth management products - has surged rapidly since authorities relaxed investment rules in 2012. Analysts warn that the complex and opaque structure of such products makes it difficult for insurers to see the ultimate borrowers and to then gauge their real exposure - a risk magnified by the long investment periods involved."

May 18 - Bloomberg: "China's regulator is warning companies to be mindful of currency and interest-rate risks when issuing offshore notes as mainland firms aggressively tap the dollar-bond market amid tighter cash conditions onshore. Chinese companies planning to sell overseas notes with tenors of over one year need to explain the rationale and feasibility of the borrowing, according to a statement on National Development and Reform Commission's website... Companies should consider forex, interest rates and other factors before issuing debt, it said. Chinese companies sold a record $75.6 billion dollar bonds so far this year… Offshore issuance from Chinese borrowers has surged in the wake of tougher access to funding in the onshore market as the government reduces financial leverage."

May 14 - Reuters (Kevin Yao and Yawen Chen): "China's property investment growth slowed in April while sales marked their biggest fall in six months as higher borrowing costs and increased curbs on buyers weighed on demand, backing views that a key driver of the economy is losing some momentum. Real estate investment rose 10.2% in April from the same period a year earlier, compared with a 10.8% rise in March… New household loans, mostly mortgages, slowed to 528.4 billion yuan in April from 580 billion yuan in March…"

Central Bank Watch:

May 14 - Bloomberg (Piotr Skolimowski, Jana Randow and Alessandro Speciale): "European Central Bank policy maker Francois Villeroy de Galhau signaled that he expects bond purchases to end this year and an interest-rate hike could follow in 2019, putting him in the camp of officials who see the current euro-area slowdown as temporary. …The French central banker said inflation will resume its acceleration in coming months, with underlying price pressures set to strengthen… The ECB could say a rate increase will follow the halting of net asset purchases by 'at least some quarters, but not years' he said…"

Global Bubble Watch:

May 17 - Bloomberg (Sridhar Natarajan): "Warren Buffett once called them 'financial weapons of mass destruction.' Now Pope Francis, of all people, is taking aim at derivatives. In a sweeping critique of global finance released by the Vatican…, the Holy See singled out derivatives including credit-default swaps for particular scorn. 'A ticking time bomb,' the Vatican called them. The unusual rebuke -- derivatives rarely reach the level of religious doctrine - is in keeping with Francis's skeptical view of unbridled global capitalism. 'The market of CDS, in the wake of the economic crisis of 2007, was imposing enough to represent almost the equivalent of the GDP of the entire world. The spread of such a kind of contract without proper limits has encouraged the growth of a finance of chance, and of gambling on the failure of others, which is unacceptable from the ethical point of view,' the Vatican said in the document."

May 17 - Bloomberg (Sid Verma): "In credit markets, it's America first no longer. A wave of foreign selling of U.S. corporate bonds threatens to unhinge global debt markets from their bullish moorings, according to HSBC… After a multi-year binge, the largest owners of America Inc.'s debt -- overseas investors -- are paring their exposures as higher short-term U.S. rates drive up hedging costs, especially for Europeans. The accompanying pressure on the biggest corporate bond market risks hobbling credit bulls around the world. 'Our analysis of foreign investors in U.S. dollar and euro suggests major changes in global capital flows are underway,' strategists led by Jamie Stuttard wrote… While European issuers will benefit from repatriation flows, a 'disorderly' retrenchment from dollar debts would ensure no developed credit market escapes the 'bearish correlations.' Higher relative yields and the U.S. economic recovery lured a tide of capital inflows in recent years. Now short-term dollar rates are at crisis-era levels, increasing the cost for foreigners to hedge their exposures, and dimming the market's allure even as yields on U.S. investment-grade notes rise to seven-year highs."

May 15 - Bloomberg (Greg Quinn): "Canadian home sales fell to the lowest in more than five years in April, as tougher mortgage qualification rules deterred buyers. The number of homes sold last month declined 2.9% from March, the Canadian Real Estate Association said… Declines were recorded in about 60% of cities tracked including Vancouver, Calgary, Toronto and Montreal."

May 18 - Bloomberg (Frederik Balfour): "A rare bottle of 60-year-old Macallan whisky sold for HK$7.96 million ($1.01 million) at Bonhams Hong Kong on Friday, smashing the record for the most expensive bottle ever sold at auction. The bottle sold for more than twice the high estimate of HK$4.5 million."

Europe Watch:

May 17 - Bloomberg (Alessandra Migliaccio): "Italy's populist parties are planning an overhaul of its banking system that would reverse years of national and international regulatory policy. A 39-page draft program published by Corriere della Sera and confirmed by Five Star and League officials contains plans including a strategy review for Banca Monte dei Paschi di Siena SpA, the lender that was nationalized last year… The program also laid out plans to reimburse retail shareholders of banks that have been wound down; review the Basel banking accords whose parameters 'threaten the existence of Italy's small and medium companies;' and separate investment banking from deposit-taking consumer banking."

May 14 - Reuters (Lisa Jucca): "Italy's impending radical government will be a headache for the European Union. After days of intense talks, the anti-establishment 5-Star Movement and the rightist League are closing in on a joint political programme and will report to President Sergio Mattarella on Monday afternoon. Both resent Brussels' fiscal oversight, and its failure to help with Italy's migration crisis. Their policies will likely stir up tensions with European partners… According to Italian media reports, 5-Star, which represents the poor constituencies of Italy's South, and the League, which draws support from the entrepreneurial North, have drawn up an agenda comprising tax cuts, looser early retirement rules and more handouts for Italy's jobless. If these are all implemented, Italy's fiscal bill could rise by 100 billion euros a year, local economists estimate, equivalent to almost 6% of gross domestic product."

May 16 - Bloomberg (Mark Gilbert): "It's Groundhog Day again for the euro. It doesn't really matter whether talks in Italy between the Five Star Movement and the League still include plans to seek a write-off of 250 billion euros ($295bn) of the nation's debts and secure an exit mechanism from the euro, as the Huffington Post reported. The fact that these ideas were even mooted shows that the common currency remains deeply flawed almost two decades after its introduction. On Wednesday, German Chancellor Angela Merkel called on the governments of the 19-member euro zone to accelerate efforts to integrate the bloc, including enhancing the European Stability Mechanism to create a 'common backstop' in the region. The idea of common debt obligations gets revived repeatedly in Brussels. But aren't such moves to ever-closer union exactly what Italian voters rejected by voting for populist anti-European parties in their most recent election?"

May 14 - Reuters (Piotr Skolimowski): "Economic growth slowed across Europe at the start of the year, with Germany seeing its pace of expansion cut in half amid weaker trade. The 0.3% increase in Europe's largest economy was softer than forecast and the weakest in more than a year. Dutch and Portuguese growth also cooled more than expected in the first quarter, while a similar trend was seen across central and eastern Europe. A deceleration in euro-area momentum to 0.4% was confirmed…"

Fixed Income Bubble Watch:

May 18 - Bloomberg (Sally Bakewell and Kiel Porter): "Buyout titans are benefiting as banks get less fearful about leveraged buyouts. When Leonard Green & Partners recently decided to buy a majority stake in SRS Distribution Inc., banks led by Bank of America Corp. and Barclays Plc sought loans and bonds to help finance the $3.6 billion buyout. Investors have so far been willing to increase debt for the building supply company to more than seven times a measure of earnings, a level that just a few years ago would have raised regulators' eyebrows. That deal isn't unusual. Debt in leveraged buyouts is creeping above the six times level that regulators said in 2013 was potentially too risky, after commitments to private equity deals scorched banks during and after the crisis. The average company in an LBO had borrowings equal to 6.4 times earnings before interest, taxes depreciation and amortization in 2018, according to Fitch… Last year it was 6.2 times Ebitda and in 2016, it was 5.9 times. The higher debt burdens are a symptom of memories getting shorter as the economic expansion grows longer."

May 13 - Wall Street Journal (Ryan Dezember and Peter Rudegeair): "KKR & Co. is raising its bet on high-interest, short-term home loans, the latest sign that Wall Street firms are aiming to cash in on the risky but lucrative house-flipping market. Borrowers of residential transitional loans-or flip loans, as they are better known-use the money to buy a property, renovate it and then try to quickly resell at a profit. They have become a lucrative and growing niche of finance in recent years. Nomura Holdings Inc. estimates that flippers will borrow some $15 billion this year, nearly 25% more than last year. KKR is the latest example of Wall Street's growing interest in the area."

EM Bubble Watch:

May 16 - Bloomberg (Ben Bartenstein): "While money managers from Goldman Sachs… to UBS Wealth Management still tout investing opportunities in emerging markets, the asset class has one notable critic: Harvard professor Carmen Reinhart. The… economist points to mounting debt loads, weakening terms of trade, rising global interest rates and stalling growth as reasons for concern. In fact, developing nations are worse off than during their two most recent moments of weakness: The 2008 global financial crisis and 2013 taper tantrum, when equities endured routs of 64% and 17% respectively. 'The overall shape they're in has a lot more cracks now than it did five years ago and certainly at the time of the global financial crisis,' Reinhart said… 'It's both external and internal conditions.'"

May 14 - Financial Times (Kate Allen): "Investors who bought some of the riskiest emerging market sovereign bond sales in the past year have been left nursing paper losses as a strengthening dollar has rattled sentiment for emerging markets. JPMorgan's emerging markets bond index has lost 5.1% since the start of this year. Some of the worst-hit bonds are those from countries that were rarely seen in debt markets until last year, when demand for sovereign debt paying attractive fixed yields was paramount among investors."

May 14 - Financial Times (Kate Allen): "Emerging economies with shorter debt maturities and less fiscal scope to accommodate rising debt costs are most vulnerable to a tightening of global financial conditions, according to… Moody's. The study singled out Egypt, Bahrain, Pakistan, Lebanon and Mongolia as particularly at risk; Sri Lanka and Jordan are also 'highly exposed' to an interest rate shock, Moody's said. With global interest rates rising and emerging market nations accumulating a rapidly-increasing debt pile, concerns are growing that they could be hit with a financing crisis. The IMF warned earlier this year that 40% of low-income developing countries face 'significant debt-related challenges'. Investors who bought some of the riskiest emerging market sovereign bond sales of the past year have in recent weeks been left nursing paper losses as a strengthening dollar rattles sentiment for emerging markets."

May 15 - Bloomberg (Guy Johnson and James Hertling): "Turkish President Recep Tayyip Erdogan said he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month. With the Turkish lira at a record low against the dollar… Erdogan told Bloomberg… that after the vote transforms Turkey into a full presidential system, he expects the central bank will have to heed his calls for lower interest rates. The central bank's key rate is now 13.5%, compared with 10.9% consumer-price inflation. 'When the people fall into difficulties because of monetary policies, who are they going to hold accountable? …They'll hold the president accountable. Since they'll ask the president about it, we have to give off the image of a president who's influential on monetary policies.' That 'may make some uncomfortable,' he said. 'But we have to do it. Because it's those who rule the state who are accountable to the citizens.'"

May 15 - Financial Times (Roger Blitz, Jonathan Wheatley and Laura Pitel): "When banks and investment funds sent senior representatives to dine with Recep Tayyip Erdogan, they probably expected the Turkish president to deliver a reassuring message about investing in his country. But by the end of Monday's lunch at Bloomberg's London office, they were left wondering whether there was any longer an argument for risking their money in his country's currency, stocks and government bonds. The message was uncompromising. The Turkish president, seeking re-election next month, made clear that not only was he steadfastly opposed to raising rates, he was intent on taking control of monetary policy."

May 16 - Bloomberg (Ferdinando Giugliano): "Turkey's president Recep Tayyip Erdogan has issued a stark warning to his country's central bank. If he wins a presidential parliamentary election next month, he says he'll clamp down on central bank independence to keep interest rates low. This is obviously a terrible idea, and comes at the worst possible moment. The lira is in freefall and inflation on the rise. Turkey needs a strong monetary authority, not a stooge obeying the president's bizarre orders. Erdogan has long held wrong-headed views on the impact of interest rates. Unlike the vast majority of economists, he believes a tight monetary policy causes rather than tames inflation. In an interview with Bloomberg TV…, he went a step further, saying he was ready to interfere with the central bank if it didn't follow his advice. 'It's those who rule the state who are accountable to the citizen,' he said."

May 16 - Wall Street Journal (Richard Barley): "Who's next? The fear of contagion is stalking emerging markets again, but Argentina and Turkey have put themselves in the firing line while others have distanced themselves from it. The shakeout in emerging markets sparked by the 'taper tantrum' of 2013 put the spotlight on countries with relatively wide current-account deficits… Right now, the uncomfortable spotlight is on Argentina, where the peso has fallen more than 23% against the dollar this year and the country is seeking support from the International Monetary Fund, and Turkey, where the lira has fallen more than 15%. Both stand out for having current-account deficits estimated by the International Monetary Fund in 2018 at more than 5% of gross domestic product: the widest of the emerging-market members of the Group of 20 nations."

May 15 - Reuters (Dave Graham and Christine Murray): "Mexican presidential frontrunner Andres Manuel Lopez Obrador extended his lead to more than 12 points over his nearest rival ahead of the July 1 vote, according to a poll published on Tuesday. The survey by polling firm Consulta Mitofsky showed Lopez Obrador, running for the third time, had 32.6% of support, up from 31.9% in April. Second-placed Ricardo Anaya, the candidate of the 'For Mexico in Front' coalition of three parties from the right and left, saw his backing fall slightly to 20.5%..."

May 16 - Bloomberg (Liau Y-Sing and Kartik Goyal): "Mahathir Mohamad's return may spell more pressure on Malaysia's beleaguered bond market - almost a decade of efforts spent narrowing a fiscal deficit is at risk just when capital is flowing out of emerging markets. Already reeling from the impact of a stronger dollar and higher U.S. Treasury yields, ringgit sovereign securities may face a further blow as newly-elected Prime Minister Mahathir presses ahead with a plan to scrap a consumption tax and reinstate fuel subsidies. Bond investors and rating companies are worried that may hurt efforts to narrow a persistent budget shortfall."

Japan Watch:

May 16 - Bloomberg (Yuko Takeo): "Japan's first economic contraction in two years is expected to be only a speed bump on the road to further, yet slower growth. The economy shrank in the first quarter at an annualized rate of 0.6% due to capital investment unexpectedly falling 0.1% and flat private consumption. Growth is forecast to resume in the current quarter as global trade and Japanese exports regain traction."

Geopolitical Watch:

May 16 - Reuters (Gabrielle Tétrault-Farber): "Russian President Vladimir Putin and his Turkish counterpart Tayyip Erdogan, in a phone call, expressed serious concern over the number of casualties in the protests on the Gaza border, the Kremlin said…"

May 16 - CNBC (Natasha Turak): "Turkey's President Recep Erdogan and Israeli Prime Minister Benjamin Netanyahu went at each other's necks via Twitter, accusing each other of brutality and human rights abuses. The spat… went down in the wake of violence on the Israeli-Gaza border on Monday during which Israeli forces killed at least 60 Palestinian protesters, coinciding with the opening of the U.S. embassy in Jerusalem. Turkey's government loudly condemned the killings. 'Israel is wreaking state terror. Israel is a terror state,' Erdogan said in a speech for state television… 'What Israel has done is a genocide. I condemn this humanitarian drama, the genocide, from whichever side it comes, Israel or America.' In response, Netanyahu shared some choice words for the Turkish president on Twitter, saying, 'Erdogan is among Hamas's biggest supporters and there is no doubt that he well understands terrorism and slaughter. I suggest that he not preach morality to us.'"

May 13 - Reuters (Ahmed Aboulenein and Maher Chmaytelli): "Populist cleric Moqtada al-Sadr, a long-time adversary of the United States, has all but won Iraq's parliamentary election, the electoral commission said, in a surprise turn of fortune for the Shi'ite leader. In the first election since Islamic State was defeated in the country, Iran-backed Shi'ite militia chief Hadi al-Amiri's bloc was in second place, while Prime Minister Haider al-Abadi, once seen as the front-runner, trailed in third."

Thursday, May 17, 2018

Thursday Afternoon Links

[Reuters] U.S. labor market tightening; mid-Atlantic factory activity picks up

[Reuters] U.S. 30-year mortgage rates hit 7-year peak: Freddie Mac

[CNBC] When earnings look this great, it's actually a really bad time to invest in stocks

Thursday's News Links

[Reuters] Wall Street turns positive as oil powers energy stocks

[BloombergQ] Treasury Yields Hit 3.1%; Customs Talk Roils Pound: Markets Wrap

[Reuters] Dollar stands tall as euro plumbs five-month low on Italian political uncertainty

[Reuters] Japan plans retaliatory tariffs against United States: NHK

[Politico] Tensions erupt among Trump trade officials ahead of China talks

[BloombergQ] Fitch Says Emerging Markets Vulnerable as Debt Hits $19 Trillion

[BloombergQ] Emerging Markets Come Under Pressure to Boost Borrowing Costs

[BloombergQ] Investors' Unconditional Love for Emerging Markets Is Fading

[UK Guardian] Populists’ rise to power in Italy sets perilous precedent for EU

[BloombergQ] Italy Populists Seek Banking System Overhaul in Policy Plan

[Reuters] Italy's 5-Star and League put final touches to government deal

[BloombergQ] Hong Kong Spends $1.2 Billion Defending Currency Overnight

[BloombergQ] Morgan Stanley Says a Shipping Revolution Has Oil Headed for $90

[BloombergQ] Why Is The Indian Rupee Looking Nervous?

[Axios] Exclusive: 40% in U.S. can't afford middle-class basics

[BloombergQ] Bolton Emerges as Potential Wrecking Ball for Trump's Kim Summit

[BloombergQ] The U.S.-China Rivalry Is Just Getting Started

[NYT] The Entire Economy Is MoviePass Now. Enjoy It While You Can.

[WSJ] U.S. Farms, Factories Can’t Produce Enough to Meet White House Goal to Cut China Deficit

[WSJ] In Emerging Turmoil, What Links Argentina and Turkey?

[WSJ] U.S. Births Hit Lowest Number Since 1987

Wednesday, May 16, 2018

Wednesday Evening Links

[Reuters] Wall St. gains as small-cap Russell 2000 hits record

[CNBC] 10-year Treasury note yield hits 3.1%, highest since 2011

[Reuters] Italy's 5-star, League finish policy programme, pass to leaders

[Reuters] China denounces trade unilateralism, defends free trade

[Investing.com/Bloomberg] Harvard's Reinhart Says Emerging Markets Worse Than '08 Crisis

[BloombergQ] Incoming New York Fed Chief on Yield Curve, Inflation: Excerpts

[BloombergQ] Wages Are Poised to Increase at a Faster Rate

[CNBC] Trump says 'we'll have to see' if summit with Kim Jong Un is still happening

[CNBC] Netanyahu and Erdogan trade insults on Twitter over Gaza violence

[Reuters] Putin, Erdogan express 'serious concern' over casualties in Gaza: Kremlin

[WSJ] Erdogan’s Plan to Drive Turkish Monetary Policy Sows Fear Among Investors

[FT] Italian bond sell-off worsens amid political tension

Wednesday's News Links

[BloombergQ] Euro Drops, Dollar Strengthens as Stocks Fluctuate: Markets Wrap

[BloombergQ] Italy Bonds Fall as Populist Pact Throws Up Uncertainty

[Reuters] Euro slides below $1.18 on Italy debt concerns and dollar jump

[BloombergQ] U.S. Housing Starts Fall on Retreat in Apartment Building

[Reuters] White House on NAFTA: 'We still want to see something happen'

[Reuters] Italian markets jolted by 5-Star, League coalition proposals

[BloombergQ] U.S. Could `Fatally Undermine' the WTO, China's Ambassador Says

[BloombergQ] Japan’s Two-Year Growth Streak Snapped as Economy Contracts

[CNBC] North Korea says it may blow off Trump meeting, and 'sinister' US won't make it give up nukes

[BloombergQ] Emerging Markets Face Their Moment of Truth

[BloombergQ] Something Is Rotten at the Heart of the Euro

[BloombergQ] President Erdogan Throws Gasoline Onto a Raging Fire

[Reuters] Mexican leftist frontrunner extends lead for presidency: poll

[BloombergQ] U.S. Navy Takes Aim at Russia With a New Fleet

[WSJ] Trump’s Goal for Nafta Rewrite Looks Unattainable in 2018

[WSJ] Why the Credit-Card Boom May Have Just Peaked

[FT] Investors lose their appetite for Turkey after Erdogan lunch

Tuesday, May 15, 2018

Tuesday Evening Links

[BloombergQ] Stocks Retreat as Treasuries Plunge, Dollar Gains: Markets Wrap

[BloombergQ] U.S. 10-Year Yield Reaches Highest Since 2011 as Rout Deepens

[BloombergQ] Turkish Assets Hammered by Erdogan's Vision as Crisis Deepens

[Reuters] At top of Fed, a dispute on policy picks up steam

[CNBC] Many forces are in place that could keep pushing rates even higher

[CNBC] Mortgage rates are surging to the highest level in 7 years

[CNBC] The US may be on the cusp of a 'hot, high-priced gasoline summer'

[Reuters] Trump Fed nominee signals skepticism on quantitative easing

[CNBC] Two of the supposedly safest stock market strategies are losing badly this year

[CNBC] Art Cashin: If the S&P 500 gets too much lower then I'll really start to worry

[Reuters] North Korea casts doubt on Trump summit, suspends talks with South

[WSJ] U.S. Bond Yields Jump to Fresh Highs on Retail Sales

[FT] EM currency index poised for worst day in a year

Tuesday's News Links

[CNBC] US stocks fall after Home Depot sales miss, interest rates advance

[CNBC] US 10-year Treasury yield jumps to highest level since 2011 above 3.06%

[Reuters] Global stocks sink as soft China data, trade fears weigh

[BloombergQ] Lira, Bonds Slide to Records as Erdogan Comments Spook Traders

[MarketWatch] Gold extends slide to push below $1,300 as 10-year yield clears 3% and dollar rallies

[Reuters] India bonds hit near 33-mth low, rupee weakest in 16 months on higher oil, inflation

[Reuters] U.S. retail sales increase moderately in April

[BloombergQ] What Fed Officials Are Saying About the Flattening Yield Curve

[Politico] Ross losing sway with Trump on China

[Reuters] U.S., China still 'very far apart' on trade: U.S. ambassador

[CNBC] Goldman: Something strange is happening with the US economy that could cause interest rates to jump

[BloombergQ] Bond Traders Get a Peek at the Apocalypse

[Reuters] China April investment, retail sales growth slows but factory output strong

[Reuters] China Jan-April property investment up 10.3 percent year on year

[BloombergQ] German Economy Stumbles as Europe Suffers Setback in Growth

[Reuters] Populist cleric Sadr all but wins Iraq election

[NYT] Medical Mystery: Something Happened to U.S. Health Spending After 1980

[WSJ] A World Apart: Charting the Gulf Between Chinese and U.S. Tariffs

[WSJ] Capital Spending Boom Is No Great Boost to Capital Markets

[WSJ] U.S., China Discussing Deal on ZTE, Agricultural Tariffs

[FT] Turkish lira touches yet another low as Moody’s warns on bank risk

[FT] Moody’s warns emerging economies over debt vulnerabilities

[FT] Strong dollar poses a sizeable risk for EM bonds

[FT] Dollar strength and emerging market stress are inseparable

[FT] Donald Trump’s bizarre U-turn on sanctions against China’s ZTE

Monday, May 14, 2018

Monday Afternoon Links

[BloombergQ] U.S. Stocks Mixed as Treasuries Slip, Oil Gains: Markets Wrap

[MarketWatch] Argentine peso drops almost 9% to lowest ever against U.S. dollar

[Reuters] IMF says supports Argentina floating exchange rate as peso tumbles

[Politico] Wilbur Ross: We’re exploring ‘alternative remedies’ for ZTE ban

Monday's News Links

[Reuters] World stocks head higher on hopes of thawing trade tensions

[Reuters] Argentine peso opens 6.22 pct weaker, sets new record low -traders

[Reuters] Fed's Mester reiterates support for gradual U.S. rate increases

[CNBC] US should watch its debt pile before 'things get out of hand,' Fed's Mester says

[CNBC] Italy is poised for an anti-establishment leader

[Reuters] Breakingviews - Italy’s radical government will be an EU headache

[BloombergQ] ECB's Villeroy Sees Rate Hike Quarters, Not Years, After QE

[BloombergQ] Emerging Markets Watch Fed, Not ‘Decoupled’ After All

[Reuters] Rhetoric over U.S. exit from Iran deal rises amid threat of sanctions

[Reuters] Firebrand nationalist cleric Sadr leads Iraq election

[BloombergQ] What the Lira's Plight Says About Turkey's Economy: QuickTake

[WSJ] Fed’s Mester Says Improved Economic Outlook Supports More Rate Rises

[WSJ] Farmers Across High Plains Brace for Hard Times as Drought Bears Down

[WSJ] Wall Street Is Getting In On the House Flipping Game

[FT] Anbang: the downfall of China’s global dealmaker

[FT] Landmark bond sales hit by emerging markets downturn

Saturday, May 12, 2018

Saturday's News Links

[Reuters] N.Y. Fed sees U.S. GDP growing at 2.97 percent in second quarter

[Reuters] 'Unauthorized transfers' siphon funds from Mexican banks: central bank

[BloombergQ] New Malaysian Leader Tightens Net Around Ousted Najib Over 1MDB

[Reuters] U.S. fighter jets intercept Russian bombers in international airspace off Alaska

[BloombergQ] In Iraq's Election, It's Hard to Avoid Iran's Presence

[NYT] These 95 Apartments Promised Affordable Rent in San Francisco. Then 6,580 People Applied.

[WSJ] Rising Dollar Pummels Emerging-Market Bonds, Cooling Off a Hot Sector

[WSJ] Trump Targets Foreign Auto Makers for Not Building Enough in U.S.

[WSJ] Trump’s Plan to Cut Drug Prices Leaves Industry Relieved

Weekly Commentary: Disequilibrium

Much to the consternation of our allies, President Trump withdraws from the Iran nuclear deal. WTI crude adds another 1.5% (up 17% y-t-d) this week to the high since November 2014. Iran and Israel moved closer to direct military confrontation. With even 40% rates unable to staunch the bleeding, a stunned Argentine government warily negotiates an IMF bailout. Italy's far right and far left parties - both populist, anti-establishment, anti-euro and anti-immigration - begin negotiations to form a coalition government. Malaysians elect 92-year old Mahathir Mohamad, ending the 60-year reign of the Barisan Nasional party (including Mahathir as prime minister between 1981 and 2003).

Some astounding developments, but not enough these days to shake financial markets. Why fret a complex and increasingly unstable world, not with the timely return of Goldilocks. She's back… Headline U.S. April CPI was up 0.2% vs. expectations of 0.3%. Core CPI was up only 0.1% against expectations of 0.2%. April Import Prices were up 0.3% vs. estimates of 0.5%. Forget surging energy prices, rather quickly the rosy narrative shifts to peak inflation.

May 11 - Reuters (Howard Schneider): "St. Louis Federal Reserve Bank President James Bullard on Friday spelled out the case against any further interest rate increases, saying rates may already have reached a 'neutral' level that is no longer stimulating the economy… 'We should be opening the champagne here,' not raising interest rates with unemployment low and inflation in no seeming danger of accelerating, Bullard said… 'The economy is operating quite well right now.'"

I suggest the Fed and global central bankers hold back on carting out the bubbly. "Opening the champagne" is reminiscent of Citigroup CEO Chuck Prince's summer of 2007 "still dancing." Bullard focuses on traditional yield curve analysis. "I would say the yield curve inversion is getting close to crunch time." "The yield curve inversion would be a bearish signal for the US economy if that develops."

I would argue the yield curve has become an especially poor indicator for gauging the appropriateness of monetary policy or predicting imminent recession. "Whatever it takes" monetary management fundamentally altered the structure of global interest rates. Long-term bond prices now incorporate a significant premium based on the expectation for aggressive future rate cuts and bond purchase programs (QE). And the longer the artificially depressed interest rate structure fuels Bubble excess, the greater the long-term bond premium (lower yields) and the flatter the curve. Bubble Dynamics

Bullard proffered additional interesting analysis: "'This is an equilibrium process, not an inflationary one,' Bullard said, and 'it is not necessary to disrupt' it with higher interest rates."

"Equilibrium" with short-term rates between 1.5% and 1.75% - with the Fed having avoided actually tightening financial conditions? Equilibrium with annual Current Account Deficits approaching $500 billion? With the Dow up 18.5% over the past year and the Nasdaq Composite surging almost 21%? With historically low housing inventory and home price inflation significantly above after-tax borrowing costs - and accelerating? With the unemployment rate at 3.9% and businesses struggling to find qualified applicants? With Trillion dollar U.S. fiscal deficits in the offing? With the ECB and BOJ still monetizing debt in large quantities? With 10-year JGB yields at five bps and Italian yields at 1.87%? With still Trillions of negatively-yielding debt instruments globally? Equilibrium with most central banks around the world hesitating to tighten policy - with global monetary policy nowhere in the vicinity of a semblance of normality? Disequilibrium.

May 10 - Financial Times (Robin Wigglesworth): "The investor withdrawal from emerging markets accelerated over the past week, with equity funds suffering their worst outflows in nearly a year and bond funds losing money for a third week running - the longest streak of withdrawals since late 2016… EM equity funds had outflows of $1.6bn in the seven days to May 9, the first weekly outflow since February and the biggest since August 2017… Fixed-income funds focused on the developing world saw their outflows accelerate. Investors withdrew $2.1bn from EM bond funds, the third consecutive week of outflows and the worst one since February. EM debt funds have now suffered outflows of more than $4bn since mid-April."

A decade of ultra-easy monetary policies has ensured deep structural maladjustment. Importantly, "activist" policies have nurtured way too much "money" playing global risk assets. Indeed, global financial speculation has become one historic Crowded Trade. And too much "money" in the game alters market dynamics. The bastardized yield curve is one momentous manifestation. Serial market boom and bust dynamics is another.

The speed by which the EM boom has faltered offers a warning to all. After all, it was only weeks ago that EM prospects were viewed as exceptionally bullish. And with "money" flooding into "developing" markets, it was too easy to disregard structural vulnerabilities and mounting risks. As always, there was ample "hot money" originating from leveraged "carry trades," derivatives and the leveraged speculating community more generally. But these days, with the broad menu of available hot international ETF products, it has never been so easy for retail "money" to jump aboard the EM boom cycle. Jump they did, late definitely not better than never.

This long cycle's EM excesses have been unprecedented. A down-cycle is long overdue. Let's hope the downside can somehow avoid being proportional to this cycle's unprecedented excesses. Outflows have just begun.

May 8 - Financial Times (Benedict Mander and John Paul Rathbone): "Seventeen years ago, economic policies backed by the IMF brought Argentina to its knees. Five years later, then-president Néstor Kirchner severed IMF ties, swearing never again. This week, a run on the currency forced President Mauricio Macri to return to the international lender. On Tuesday, in a televised address to the nation, a sober-faced Mr Macri said assistance from the International Monetary Fund would help 'avoid a crisis like the ones we have faced before . . . [it] will allow us to strengthen our programme of growth and development'. It was a stunning reversal for the 59-year-old former businessman who came to power in December 2015 vowing to make Argentina a 'normal country', after 12 years of leftist rule…"

Argentina was not without its share of responsibility, yet unfettered global finance ran roughshod through Argentine financial and economic structure. At U.S. and IMF insistence, Argentina in the nineties adopted a U.S. dollar-based currency board system. This was to ensure that money supply growth did not exceed dollar reserve holdings, thereby containing inflation and, supposedly, ensuring financial stability. Inflation did collapse, but the Washington-dictated policy regime was a powerful magnet for global "hot money" flows. The currency board held narrow money supply growth in check, yet it did the very opposite for Credit. The onslaught of international inflows spurred massive government and corporate debt growth - too much of it denominated in dollars. The Argentine miracle economy boomed and became the poster child for enlightened "Washington Consensus" policymaking. It was all a Bubble Mirage. Conventional wisdom could not have been more detached from reality.

The Bubble inevitably faltered (2001/2002), and "hot money," as it does, raced for the exits. There were no buyers, no liquidity and meager real wealth to make good on all the debt that had been extended. It was a horrendous collapse and tragedy for the Argentine people, for which they're still suffering some 17 years later. Like many Bubbles before and since, it's amazing how long markets remain oblivious to financial imbalances and mounting structural impairment.

Brazil's 2001 crisis sealed the fate for their neighbor Argentina's flawed dollar currency board regime. Might the unfolding Argentine crisis this time push Brazil over the edge? It's worth noting that Brazil's sovereign CDS rose above 200 bps Wednesday for the first time in eight months. And while it doesn't compare to the Argentine peso's 5.8% drop (down 11.5% in 2-wks), Brazil's real fell 2.0% this week. The Brazilian real is down 4.0% over two weeks and 8.1% y-t-d. Brazil's local currency 10-year yields spiked Wednesday to a 2018-high 10.25% (closed the week at 10.0%).

Mexican local 10-year yields jumped to 7.75% Wednesday, just below multi-year highs, before ending the week at 7.58%. Mexico's peso traded to a 2018 low in Wednesday trading. Now down 5.1% y-t-d, the Indian rupee ended the week at 15-month lows. Hungary's local bond yields jumped 19 bps to an eight-month high 2.80%.

Turkey, another recent EM "darling," saw its currency drop another 2% this week, boosting its two-week decline to 6.3% and y-t-d losses to 12.0%. Turkey sovereign CDS rose another 13 bps this week to a 14-month high 238. Turkish government 10-year dollar-denominated yields jumped 14 bps to 6.66%, nearing the high going all the way back to 2009.

May 11 - Reuters (Ali Kucukgocmen and Behiye Selin Taner): "Turkish President Tayyip Erdogan called for lower interest rates on Friday and described them as the 'mother and father of all evil', triggering a fresh slide in the lira as investors worried about the central bank's ability to rein in high inflation… 'If my people say continue on this path in the elections, I say I will emerge with victory in the fight against this curse of interest rates,' Erdogan said in a speech to business people in Ankara…"

"Evil" is not possessed in too high interest rates - but rather in too much debt. And foreign-denominated debt, which Turkey has accumulated aplenty, can prove the "mother of all evil" when currency crisis devolves swiftly into a full-fledged financial panic. With the lira sinking and inflation surging, Turkey's central bank will likely have no alternative than to raise rates - perhaps aggressively - heading into June 24th snap elections. Lira 10-year bond yields spiked above 14% to an eight-year high in Wednesday trading.

May 9 - Financial Times (Gabriel Wildau): "China credit spreads hit their widest level in nearly two years this week following new regulations that undermined long-held assumptions about implicit guarantees on debt linked to local governments. Chinese localities have long used arm's length local government financing vehicles (LGFVs) to skirt restrictions on direct fiscal borrowing and to finance infrastructure, contributing to a surge in economy-wide debt since 2008. LGFVs are among the biggest borrowers in the local bond market. The spread between yields on 5-year Chinese government bonds and 5-year medium-term notes rated double A minus reached 3.6 percentage points on Monday and remained at that level on Tuesday… Six months ago the spread was only 2.51 points."

May 9 - Bloomberg (Lianting Tu and Carrie Hong): "The average yield on China's junk-rated dollar bonds rose above the 8% mark, fueling concerns of further gains amid a bulging issuance pipeline and the absence of a strong demand from mainland investors. Yields on dollar junk bonds from Chinese firms rose to the highest since April 2016, while those from the broader region yielded 7.4%... It took just 43 days for China's average yield to rise from 7% to 8%, after having taken more than four months for the move from 6% to 7%. BNP Paribas Asset Management expects credit spreads in the region to widen by a further 25-50 bps."

Turkey, China and others may hold crisis at bay for now. Argentina, an EM Bubble weak link, has rather precipitously succumbed. Even as the central bank (with a reasonable quantity of international reserve holdings) hiked interest rates to 40% and the Macri government sent a delegation to Washington to negotiate with the IMF, the currency plunge ran unabated. Argentina less than 11 months ago sold $2.75 billion 100-year bonds at a 7.9% yield.

May 11 - Financial Times (John Paul Rathbone): "A hundred years ago, at about the same time that the Titanic hit the iceberg, Argentina was among the 10 richest countries in the world. Today it ranks 87th. In all, it has defaulted on its debt eight times, suffered hyperinflation twice, and gone through 20 IMF-supported economic programmes in 60 years. The most brutal of these ended in 2001, triggering a $100bn default and crushing devaluation. The spectacular collapse left one in five Argentines unemployed, and with an understandable allergy to anything associated with the IMF. It also led to 12 years of populist rule. All this has made Mr Macri's subsequent quest for 'normality' harder still."

The S&P500 jumped 2.4% this week. EM instability worked to hold 10-year Treasury yields back from the 3.0% breakout level. Timely reports of less-than-expected inflation data didn't hurt either. The S&P500 bouncing off the 200-day moving average helped spur a bout of short covering - and short squeezes can take on lives of their own.

But, mainly, it was another week where U.S. markets were content to disregard myriad risks. And why not? A focus on risk can lead to untimely hedging and reductions in long exposures - and resulting underperformance. And underperforming active managers risk losing only more assets to the ballooning passive index ETF complex. In a world of too much "money" and Crowded Trades prevailing throughout the risk markets, it regresses into a dysfunctional game of disregarding risk and chasing performance. Buy and hold an equities index is, these days, pure genius.

This speculative dynamic, however, is coming home to roost in the emerging markets. At the same time, "developed" market outperformance spurs a rush to play - and talk of Goldilocks and dreams of new eras of permanent prosperity. Serious issues are in play at the "Periphery." It's an inopportune time for complacency at the "Core," let alone exuberance. That Bubble at the Periphery - it's been absolutely historic.

May 11 - Wall Street Journal (Chelsey Dulaney, Jon Sindreu and Saumya Vaishampayan): "The dollar's rise is squeezing bond markets in developing countries like Argentina, Indonesia and Turkey, gutting what had been a popular trade for investors seeking stronger returns. Countries in the developing world have been borrowing heavily, supported by upbeat expectations for global growth and a long period of low to negative interest rates that drove investors into emerging markets to get any sort of yield. Emerging markets added on $7.7 trillion in new debt last year, including bonds and other types of loans, with about $800 billion of that denominated in foreign currencies, according to data from the Institute of International Finance."

For the Week:

The S&P500 rose 2.4% (up 2.4% y-t-d), and the Dow gained 2.3% (up 0.5%). The Utilities fell 2.1% (down 4.9%). The Banks surged 4.1% (up 3.9%), and the Broker/Dealers jumped 2.9% (up 10.8%). The Transports rose 3.3% (up 1.0%). The S&P 400 Midcaps gained 2.0% (up 2.0%), and the small cap Russell 2000 jumped 2.6% (up 4.6%). The Nasdaq100 advanced 2.7% (up 8.7%). The Semiconductors surged 4.1% (up 7.8%). The Biotechs jumped 4.0% (up 10.5%). With bullion gaining $3, the HUI gold index recovered 0.5% (down 5.2%).

Three-month Treasury bill rates ended the week at 1.86%. Two-year government yields added two bps to 2.54% (up 65bps y-t-d). Five-year T-note yields gained five bps 2.84% (up 63bps). Ten-year Treasury yields added two bps to 2.97% (up 57bps). Long bond yields slipped two bps to 3.10% (up 36bps). Benchmark Fannie Mae MBS yields increased two bps to 3.66% (up 66bps).

Greek 10-year yields fell 10 bps to 4.00% (down 7bps y-t-d). Ten-year Portuguese yields dipped three bps to 1.68% (down 26bps). Italian 10-year yields jumped eight bps to 1.87% (down 14bps). Spain's 10-year yields declined three bps to 1.27% (down 29bps). German bund yields gained two bps to 0.56% (up 13bps). French yields added less than a basis point to 0.79% (unchanged). The French to German 10-year bond spread declined one to 23 bps. U.K. 10-year gilt yields rose four bps to 1.44% (up 25bps). U.K.'s FTSE equities index jumped 2.1% (up 0.5%).

Japan's Nikkei 225 equities rose 1.3% (unchanged y-t-d). Japanese 10-year "JGB" yields were little changed at 0.047% (unchanged). France's CAC40 added 0.5% (up 4.3%). The German DAX equities index rose 1.3% (up 0.6%). Spain's IBEX 35 equities index jumped 1.7% (up 2.3%). Italy's FTSE MIB index declined 0.7% (up 10.6%). EM equities were mixed. Brazil's Bovespa index rallied 2.5% (up 11.5%), while Mexico's Bolsa slipped 0.6% (down 5.3%). South Korea's Kospi index gained 0.7% (up 0.4%). India’s Sensex equities index rose 1.8% (up 4.3%). China’s Shanghai Exchange jumped 2.3% (down 4.4%). Turkey's Borsa Istanbul National 100 index declined 0.7% (down 11.7%). Russia's MICEX equities surged 2.4% (up 11.2%).

Investment-grade bond funds saw inflows of $804 million, while junk bond funds posted outflows of $755 million (from Lipper).

Freddie Mac 30-year fixed mortgage rate were unchanged at 4.55% (up 50bps y-o-y). Fifteen-year rates slipped two bps to 4.01% (up 72bps). Five-year hybrid ARM rates jumped eight bps to 3.77% (up 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.71% (up 55bps).

Federal Reserve Credit last week declined $8.1bn to $4.318 TN. Over the past year, Fed Credit contracted $116bn, or 2.6%. Fed Credit inflated $1.507 TN, or 54%, over the past 288 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.9bn last week to a 13-week low $3.397 TN. "Custody holdings" were up $175bn y-o-y, or 5.4%.

M2 (narrow) "money" supply declined $8.2bn last week to $13.955 TN. "Narrow money" gained $480bn, or 3.6%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits gained $5.7bn, while savings Deposits fell $24.2bn. Small Time Deposits rose $3.6bn. Retail Money Funds added $5.6bn.

Total money market fund assets expanded $6.9bn to $2.807 TN. Money Funds gained $157bn y-o-y, or 5.9%.

Total Commercial Paper rose $6.2bn to $1.059 TN. CP gained $78bn y-o-y, or 7.9%.

Currency Watch:

May 10 - Bloomberg (Siddharth Verma): "Winds of change in currency markets threaten to blow global investment trends further off course -- but from the East as much as the West. While investors have been focused on a strengthening U.S. dollar and rising Treasury yields, a weaker Chinese yuan also threatens to heap pressure on emerging market assets that have already wiped out their gains for the year. That's because a pause in the yuan's appreciation path would challenge a clutch of developing economies by hitting their trade competitiveness against China, according to Morgan Stanley. 'RMB up and USD down is the best world in which you can live,' said Hans Redeker, the bank's… chief global currency strategist. 'You have it easier on exports and funding, all at the same time."

The U.S. dollar index was little changed at 92.537 (up 0.4% y-t-d). For the week on the upside, the Swedish krona increased 2.4%, the South African rand 2.0%, the Norwegian krone 0.7%, the South Korean won 0.7%, the Canadian dollar 0.4%, the British pound 0.1% and the Australian dollar 0.1%. For the week on the downside, the Brazilian real declined 2.0%, the Mexican peso 0.8%, the New Zealand dollar 0.7%, the Japanese yen 0.3%, the Singapore dollar 0.2%, and the euro 0.1%. The Chinese renminbi gained 0.45% versus the dollar this week (up 2.73% y-t-d).

Commodities Watch:

May 9 - Wall Street Journal (Benoit Faucon, Summer Said and Sarah McFarlane): "Washington's decision to reinstate Iranian sanctions is likely to slowly cut off a chunk of the world's crude supply-a shift that could redraw global supply lines and require Iran's big customers to find alternative sources. The Trump administration's move rattled oil markets, sending international crude up sharply after bouncing wildly in the lead-up to the decision. Midday in Europe, international crude was up 2.7% to $76.87 a barrel on London's Intercontinental Exchange, trading at its highest level in 3½ years."

The Goldman Sachs Commodities Index gained 0.1% (up 9.5% y-t-d). Spot Gold increased 0.2% to $1,318 (up 1.2%). Silver rose 1.4% to $16.752 (down 2.3%). Crude gained 98 cents to $70.70 (up 17%). Gasoline jumped 3.5% (up 22%), and Natural Gas rose 3.5% (down 5%). Copper increased 0.8% (down 6%). Wheat sank 5.2% (up 17%). Corn dropped 2.4% (up 13%).

Market Dislocation Watch:

May 8 - Bloomberg (Srinivasan Sivabalan): "The U.S. 10-year Treasury yield has retreated below the 3% mark, but the psychological damage it wrought by crossing that threshold hasn't eased. Since April 24, when the milestone was reached in intraday trading for the first time in five years, the risk-on rally in emerging markets has shown signs of faltering. While Treasury yields have stabilized, a selloff in foreign-currency bonds of developing nations has accelerated. The yield on the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index, which includes sovereign, quasi-sovereign and corporate bonds, has jumped 97 bps this year, compared with an increase of 54 bps in the 10-year Treasury yield. That has taken the gap between them to the highest level since January 2017."

May 10 - Bloomberg (Dani Burger): "Here's another sign the synchronized global growth story is on shaky ground: an investing strategy that outperforms in economic booms has suffered its biggest drop since the crisis-era heyday. A U.S. long-short value portfolio, an investing style typically deployed by quantitative funds, fell for 10 consecutive days through Wednesday, the longest losing run on record. That defies the market's prediction for a stellar trajectory for value stocks -- those priced cheaply relative to their assets -- amid record profit forecasts for Corporate America and continued expansion in Europe. If sustained, it's a troubling signal about the growth trajectory, and defies Wall Street projections at the start of the year."

May 10 - Bloomberg (Brian Chappatta): "The Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007, as a combination of weaker-than-expected U.S. inflation and solid demand for a record-sized bond auction bolstered investor confidence in owning long-dated securities. The gap was poised for its biggest one-day decline in more than a month, with the differential dropping through a previous intraday low from April to as little as 28.3 bps. The spread between 2 and 10 year Treasuries also narrowed in a bull flattening move."

Trump Administration Watch:

May 6 - New York Times (Keith Bradsher): "Senior Chinese and American officials concluded two days of negotiations on Friday with no deal and no date set for further talks, as the United States stepped up its demands for Chinese concessions to avert a potential trade war. The American negotiating team, which included Treasury Secretary Steven Mnuchin and the United States trade representative, Robert E. Lighthizer… did not release a statement. But a list of demands that the group took into the meeting called for reducing the United States' trade gap with China by $200 billion over the next two years and a halt on Chinese subsidies for advanced manufacturing sectors. The demands, which spread on Chinese social media and were confirmed by a person close to the negotiations, suggested that both sides hardened their positions this week despite the two days of talks."

May 8 - CNBC (Thomas Franck): "President Donald Trump's decision to pull the U.S. out of the Iran nuclear deal… could have widespread global implications ranging from the price of oil to the future of Tehran's nuclear ambitions. The U.S. withdrawal from the deal could stress already strained diplomatic relations with a number of key allies, including European Union leaders in Germany, France and the United Kingdom, all original parties in the 2015 accord. President Emmanuel Macron of France and British Foreign Secretary Boris Johnson have both implored Trump in recent days to stay in the landmark deal brokered under President Barack Obama. Macron later tweeted… his disappointment with Trump's decision to exit the deal, formally known as the Joint Comprehensive Plan of Action. 'France, Germany, and the UK regret the U.S. decision to leave the JCPOA,' Macron said… 'The nuclear non-proliferation regime is at stake.'"

May 9 - Bloomberg (Javier Blas): "The U.S. is giving its allies 180 days to extricate themselves from Iranian oil deals, making explicit its desire to start curbing the nation's crude exports quickly in a bid to go after Tehran's economic lifeline. The sanctions 'effectively' go into place immediately, U.S. Treasury Secretary Steven Mnuchin said... In a document accompanying the announcement, the Treasury Department gave an unequivocal 'Yes' to the question of 'Will the United States resume efforts to reduce Iran's crude oil sales?' It was a message harsher than some oil traders had expected."

May 9 - Financial Times (Sam Fleming, Shawn Donnan and Michael Peel): "Even as European leaders prepared their pleas for exemptions from US president Donald Trump's sanctions on Iran, advisers were warning of a deepening chill on multinationals' willingness to do business with the Islamic republic. The US has offered grace periods ranging from 90 to 180 days before imposing the new restrictions on companies' ability to conduct transactions with Iran. But Steven Mnuchin, the US Treasury secretary, warned after the president's statement that while licences and waivers could be applied for, America's objective is to impose 'maximum sanctions' on Iran. Andrew Peek, deputy assistant secretary for near eastern affairs, told reporters… that the Europeans had been responsive to previous US calls for sanctions on Iran, and he expected the same this time."

May 9 - New York Times (Jack Ewing and Stanley Reed): "European companies moved quickly to invest in Iran after it agreed in 2015 to mothball its nuclear weapons program in return for an end to economic sanctions. Automakers… linked up with Iranian partners to sell vehicles. Siemens of Germany struck a deal to deliver locomotives. Total of France began a project to explore offshore natural gas. Yet even before President Trump pulled out of the agreement with Iran, many companies had already tempered their expectations and limited their investment. Now their prospects look murkier as European leaders try to determine whether there is a path forward without the United States."

May 10 - CNBC (Jeff Cox): "Trade negotiations between U.S. and Chinese leaders are focused in part on getting China to buy more goods rather than getting it to ship less, Commerce Secretary Wilbur Ross said… Fresh from a high-level meeting in China between members of both nations, Ross said there was progress made but that barriers remain. 'The Chinese are very good at the rhetoric of free trade, but in fact they are probably the most protectionist country of the major countries,' he told Tyler Mathisen… Despite the criticism, he was at least pleased with China's willingness to listen and respond to U.S. concerns over a growing trade gap… 'It was the right level of people,' Ross said. 'There's a considerable gap between what they put on the table and what we feel we need. But that's OK, you sort of expect that at this stage in the game.'"

May 5 - Reuters (David Shepardson): "The White House… sharply criticized China's efforts to force foreign airlines to change how they refer to Taiwan, Hong Kong and Macau, labeling China's latest effort to police language describing the politically sensitive territories as 'Orwellian nonsense'. …The carriers were told to remove references on their websites or in other material that suggests Taiwan, Hong Kong and Macau are part of countries independent from China…"

Federal Reserve Watch:

May 7 - Bloomberg (Enda Curran and Carolina Millan): "The Federal Reserve's gradual push towards higher interest rates shouldn't be blamed for any roiling of emerging market economies, which are well placed to navigate the tightening of U.S. monetary policy, Fed Chairman Jerome Powell said. In a speech that argued U.S. decision-making isn't the major determinant of flows of capital into developing economies, Powell said the influence of the Fed on global financial conditions should not be overstated, despite it being blamed five years ago for the so-called taper tantrum."

May 6 - Bloomberg (Craig Torres): "One of the Federal Reserve's most senior officials and his incoming successor both said that overshooting the U.S. central bank's 2% inflation target for a time is nothing to worry about because the central bank has been below the goal for so long. 'I've said it many times: being a little above 2% after being below 2% for many, many years is not a problem," New York Fed President William Dudley said… That sentiment was echoed a short while later by John Williams, the current head of the Fed's San Francisco branch, who will replace Dudley next month."

U.S. Bubble Watch:

May 8 - CNBC (Annie Nova): "Americans are bracing for houses to get costlier. In a recent survey, 64% said they're anticipating an increase in property values during the next year, according to… Gallup. That's the highest share since the housing bubble in the mid-2000s, when 70% were predicting price levels to soar. Optimism levels vary depending on which pocket of the country you find yourself. Nearly 80% of Americans in the West forecast a pricier real estate market in the next year, compared with 64% in the South, 58% in the East and 56% in the Midwest."

May 9 - Bloomberg (Steve Matthews and Prashant Gopal): "Adam Blaylock was pretty sure he overpriced his Santa Clara, California, home by offering it in February for $1.48 million… But within a week, the 1,280-square-foot ranch-style house was in contract for $155,000 above asking. The $1.5 trillion tax overhaul President Donald Trump signed in December capped mortgage-interest deductions on loans up to $750,000, down from the prior limit of $1 million. It also set a $10,000 maximum for state and local tax deductions… Those provisions prompted one of the most powerful lobbying groups -- the National Association of Realtors -- to warn that home prices in some high-end markets would tank. So far though, those areas have proven to be resilient. There are 308 U.S. ZIP codes that have homes with median values in excess of $1 million -- more than 92% of them saw their median home prices increase in March from a year earlier… 'We are seeing the opposite of what was expected,' said Aaron Terrazas, senior economist at Zillow."

May 8 - Bloomberg (Shobhana Chandra): "U.S. job openings surged to a record in March, putting vacancies roughly on par with the number of unemployed workers, Labor Department data showed… Number of positions waiting to be filled rose by 472k to 6.55m (est. 6.1m) from upwardly revised 6.08m in Feb."

May 10 - Wall Street Journal (Ben Eisen and Akane Otani): "U.S. companies are buying back their shares at a record pace, providing fresh support during a rocky stretch for the stock market when many investors have rushed for the exits. S&P 500 companies that have reported earnings for the first three months of 2018 have bought $150 billion of their own stock in the first quarter… About 80% of S&P 500 components have reported so far. That is on pace for the biggest amount in any quarter, based on data going back to 1998. It has been fueled in part by a new tax law that is freeing up cash and encouraging companies to bring back money held abroad… S&P 500 firms are on pace to have returned almost $1 trillion to shareholders for the 12 months through March though dividends and buybacks."

May 9 - Wall Street Journal (Eric Morath, Heather Haddon and Jacob Bunge): "Higher input costs are pressuring U.S. companies to raise prices-a potential precursor to more consumer inflation-but shoppers are resisting their efforts to do so. Businesses are facing higher costs for everything from fuel and freight hauling to steel to accounting services. Input price increases have outstripped consumer price increases since late 2016, with some pipeline costs rising at two or three times the rate of consumer inflation… The challenge is particularly acute in the food industry."

May 9 - Wall Street Journal (Theo Francis and Jieqian Zhang): "Median pay reached $12.1 million for CEOs of the biggest U.S. companies in 2017, a new post-recession high, as profits and stock prices soared. Most S&P 500 CEOs received raises of 9.7% or better last year, according to a WSJ analysis of data from MyLogIQ… CEOs at pharmaceutical, media, technology and financial firms dominated the WSJ's pay ranking, taking 16 of the 25 top spots."

May 10 - Reuters (Lucia Mutikani): "U.S. consumer prices rebounded less than expected in April as rising costs for gasoline and rental accommodation were tempered by a moderation in healthcare prices, pointing to a steady buildup of inflation. [The]… Consumer Price Index rose 0.2% after slipping 0.1% in March. In the 12 months through April, the CPI increased 2.5%, the biggest gain since February 2017, after rising 2.4% March. Excluding the volatile food and energy components, the CPI edged up 0.1% after two straight monthly increases of 0.2%. The so-called core CPI rose 2.1% year-on-year in April…"

May 6 - Wall Street Journal (Jon Kamp and Joseph De Avila): "An improved national economy is easing pressure on state budgets. Budget officials from Utah to Connecticut are reporting better tax revenues and say their fiscal outlook has brightened, thanks to an expanding economy and job growth. The effects of the new federal tax law also increased revenue figures, but analysts caution that lift will be temporary for many states. 'Unlike last year, we're seeing broad-based strength,' said Matthew Knittel, who directs Pennsylvania's Independent Fiscal Office."

May 7 - Bloomberg (Joe Light): "Freddie Mac has quietly started extending credit to nonbanks that issue mortgages, a move it says will help the companies maintain access to a crucial stockpile of cash if their home loans go sour. But critics say the financing could create an unfair market advantage that allows preferred lenders to muscle out competitors. Fannie and Freddie Died But Were Reborn…"

China Watch:

May 6 - Reuters (Stella Qiu and Se Young Lee): "China's 'huge' trade imbalance with the United States is a structural and long-term problem and should be viewed with rationality, the Chinese central bank governor was quoted as saying by financial magazine Caixin."

May 10 - Bloomberg: "With corporate-debt defaults on the rise, China's securities regulator will probe bond funds to ensure that they have proper risk controls in place, according to people familiar with the matter. The China Securities Regulatory Commission's investigation will include whether individual firms' funds are shuffling high-risk bonds between them, said the people… One suspicion is mutual-fund companies may be motivated to beautify their holdings to avoid a mass withdrawal by investors, the people said."

May 10 - Bloomberg (Carrie Hong and Narae Kim): "The anxiety sweeping through credit markets is becoming self-reinforcing, say underwriters. The chain of events goes like this: in a weak market backdrop skittish Chinese junk bond issuers ask banks to guarantee bigger slices of debt sales to make sure the deal goes OK; the underwriters then try to get rid of those bonds in the secondary market immediately; prices drop. That, in turn, makes it harder for other deals to come to market. 'We're seeing a tendency that some underwriters are taking more bonds than their balance sheet can hold given what they have committed to get into the deal,' said Sebastian Ha, head of the debt syndicate at Bank of China… This leaves them with little choice but to sell the bonds the next day and this practice is 'somewhat distorting' the market, Ha said."

May 9 - Financial Times (Edward White): "Fitch has issued a warning over the increasing integration of Hong Kong's banking environment with China's financial system. The ratings agency has downgraded its view on the operating environment for Hong Kong's banks due to what it says is the 'growing influence of the links between [Hong Kong] and mainland China'. 'China's governance standards … are substantially lower than Hong Kong's,' Fitch said… It cut its assessment of the operating environment for Hong Kong's banks to ''a'/stable' from ''a+'/negative.' Fitch expected both Hong Kong banks to 'increasingly finance mainland customers' activities in China' and Chinese banks to 'leverage their considerably larger resources and customer bases to pursue growth in Hong Kong'."

May 9 - Reuters (Stella Qiu and Kevin Yao): "China's producer inflation picked up for the first time in seven months in April, bolstered by surging commodities prices and suggesting its industrial demand remains resilient even as trade tensions ratchet up with the United States… The producer price index (PPI) rose 3.4% in April from a year ago, accelerating from a 17-month low of 3.1% in March… The consumer price index (CPI) rose 1.8% from a year earlier, just below expectations and slowing from March's 2.1%."

Central Bank Watch:

May 10 - Bloomberg (Jill Ward): "Mark Carney said the Bank of England still intends to deliver 'modest' tightening after an unexpected economic slowdown derailed an interest-rate hike that investors had anticipated as soon as this month. The BOE governor spoke after officials kept the key interest rate at 0.5%, citing the first-quarter slump, and said inflation will weaken faster than previously thought. While his comments keep the prospect of tighter policy alive, investors sold the pound and reduced their bets on a hike this year. 'We think the momentum in the economy is going to reassert… The Monetary Policy Committee judges that an ongoing, modest tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target.'"

May 7 - Bloomberg: "Central banks across the globe lack the tools to boost inflation, according to Raghuram Rajan. The former Reserve Bank of India Governor was speaking to Bloomberg at the Hoover Institute Conference in Stanford, California. 'We are in a new world,' he said adding, earlier the fight for central banks was against high inflation. 'Unfortunately, we have the opposite problem now that inflation in many cases is a little too low. The central banks want to boost inflation but we don't have the tools that allow us to do that in a reliable way.'"

Europe Watch:

May 11 - Bloomberg (Lorenzo Totaro): "Populists may be coming soon to power in Italy with ideas including a flat tax for all that could blow a hole in the country's finances if they are ever implemented. The various promises, which also cover a lower retirement age and a guaranteed income for the poor, would probably provide a short-term growth boost. Still, they risk heaping additional fiscal burden on an economy already crippled with debt… Italy's economy is forecast to grow 1.5% this year, making it the worst performer in the 19-nation euro area. Unemployment constantly around 11% is above euro-area average, while the nation's debt burden at over 130% of its output is the region's second-highest after Greece."

May 10 - Bloomberg (John Follain): "Italy's populist leaders took strides toward forming the next administration at a meeting in Rome Thursday, including on the issue of who should be prime minister. Luigi Di Maio of the anti-establishment Five Star Movement and Matteo Salvini of the anti-immigrant League reported 'significant steps forward on the make-up of the executive and of the premier' in their first-ever joint statement. They asked President Sergio Mattarella to give them until Monday to complete their plans. If the two euroskeptic parties can pull off an agreement to take control of Europe's fourth-biggest economy they would become a major obstacle to efforts to strengthen the European Union."

May 10 - Reuters (Crispian Balmer and Gavin Jones): "The anti-establishment 5-Star Movement and far-right League have made 'significant steps' towards forming a government, the two parties said… as Italy looked to end nine weeks of political deadlock. The two groups, which are hostile to European Union budget restrictions and have made electoral pledges that would cost billions of euros to implement, entered into negotiations… just as a swift return to the polls looked inevitable. 'Significant steps forward have been made on the composition of the government and on the (nomination) of a prime minister,' a joint statement said…"

Fixed Income Bubble Watch:

May 10 - Bloomberg (Chitra Somayaji): "'This is still an incredibly good time to access' the market for capital and investment-grade financing, John Waldron, co-head of investment banking at Goldman Sachs, said in an interview with Ed Hammond that aired on Bloomberg TV."

May 6 - Bloomberg (Alexandra Harris): "A struggle that will dictate the future of financial markets is brewing. Long beleaguered Libor is fighting to preserve its status as the premier global benchmark for dollar-based assets just as questions pile up over the credibility of its presumptive heir. It's a clash with few equals in financial history. In one corner, the much maligned set of London-based rates that, even after being tainted by rigging scandals, still underpin more than $370 trillion of instruments across various currencies. In the other, a potential successor, conceived over the past four years by the Federal Reserve Bank of New York and the Fed Board of Governors, as well as a who's who of Wall Street titans, from JPMorgan… and Goldman Sachs… to BlackRock Inc. Replacing the London interbank offered rate 'would be the most profound development in financial markets' for years to come, said Ward McCarthy, chief financial economist at Jefferies… But 'there are more than $300 trillion of financial assets tied to Libor, and if you're going to transition from that to something else, that's $300 trillion of potholes that are potentially coming.'"

May 9 - Bloomberg (Shelly Hagan): "Corporate America partied like never before on cheap money over the past decade, and now comes the hangover. Companies will need to refinance an estimated $4 trillion of bonds over the next five years, about two-thirds of all their outstanding debt, according to Wells Fargo Securities. This has investors concerned because rising rates means it will cost more to pay for unprecedented amounts of borrowing, which could push balance sheets toward a tipping point. And on top of that, many see the economy slowing down at the same time the rollovers are peaking."

EM Bubble Watch:

May 10 - Financial Times (Gillian Tett): "A year ago, Argentina was the darling of global investors. So much so that, when it issued a pioneering 100-year bond with a yield of just 7.9%, investors gobbled it up, ignoring the fact that the country has defaulted eight times in the past 200 years. Whoops! This week President Mauricio Macri asked the IMF for help, after the peso tumbled to record lows. And that century bond? After rising to 105% of its face value late last year, it is now trading nearer to 85%. This is deeply painful for the Macri government - and for long-suffering Argentine voters who hoped that 'gradualist' reforms could deliver an exit from years of economic turmoil, indebtedness and decline. But there is a silver lining too, at least for the wider world: Argentina's turmoil could offer a timely wake-up call about the bigger challenges in 2018."

May 10 - Bloomberg (Shuli Ren): "Calling early elections is always a gamble, no matter how strong an incumbent's hold. The 92-year-old Mahathir Mohamad stunned the world by defeating his former protege, Prime Minister Najib Razak, in Wednesday's landmark Malaysian vote, dealing another blow to complacent emerging-market investors who are licking their wounds from Argentina to Turkey. As recently as two weeks ago, global investors saw Malaysia as the best growth story among emerging Southeast Asian markets, in large part because of Najib's 'stability rules' and his close ties with China. Park that thesis. To make sure foreign (hot) money doesn't just flee, Bank Negara Malaysia declared special post-election holidays for the rest of the week, shutting the onshore money, bond and stock markets. Investors were caught off-guard elsewhere. In Turkey, even though political risk has been mounting steadily since November, they didn't price in their concern until this month. The Turkish lira is now down 11.5% on the year…"

May 6 - Reuters (Marc Jones and Karin Strohecker): "A resurgent dollar and higher borrowing costs are smashing through Argentina and Turkey's currencies like a wrecking ball and raising the likelihood more broadly that emerging markets' three-year long interest rate cutting cycle is at an end. Emerging markets came into the year flying, riding on the back of a healthy global economy and rising commodity prices alongside tame inflation and a weak dollar. It looked more than likely that a wave of rate cuts would keep rolling, allowing a bond rally to continue. From Brazil and Russia to Armenia and Zambia, developing countries, big and small, have been on a rate cutting spree. With hundreds of rate cuts since Jan. 2015, the average emerging market borrowing cost fell under 6% earlier this year from over 7% at the time."

Geopolitical Watch:

May 9 - Reuters (Dan Williams and Angus McDowall): "Israel said it attacked nearly all of Iran's military infrastructure in Syria… after Iranian forces fired rockets at Israeli-held territory for the first time in the most extensive military exchange ever between the two adversaries. It was the heaviest Israeli barrage in Syria since the 2011 start of the civil war in which Iranians, allied Shi'ite Muslim militias and Russian troops have deployed in support of President Bashar al-Assad. The confrontation came two days after the United States announced its withdrawal, with Israel's urging, from a nuclear accord with Iran."

May 5 - BBC: "The US Navy has said it will re-establish its Second Fleet, as Russia becomes more assertive. Chief of Naval Operations Adm John Richardson said the fleet, disbanded in 2011, would oversee forces on the US East Coast and North Atlantic. He said the National Defense Strategy, published earlier this year, made it clear that the era of great power competition had returned. The strategy makes countering Russia and China a priority. The fleet, which was disbanded for cost-saving and structural reasons, will be based in its previous home - Norfolk, Virginia."

May 10 - Bloomberg (Arne Delfs and Gregory Viscusi): "German Chancellor Angela Merkel said Europe can no longer count on the U.S. for military protection and must 'take its destiny into its own hands.' Merkel's comments… reprise a theme she first sounded last year in response to U.S. President Donald Trump's 'America First' foreign policy, and his hectoring of European NATO allies for allegedly spending too little on defense. It's her latest retort to Trump… 'It's no longer the case that the United States will simply just protect us,' Merkel said to applause… 'Rather, Europe needs to take its fate into its own hands. That's the task for the future.'"