Saturday, April 22, 2017

Saturday's News Links

[Reuters] France votes in cliffhanger presidential election on Sunday

[Bloomberg] French Overseas Territories Begin Presidential Voting

[Bloomberg] ECB Stands Ready to Support Banks If Needed After France Vote

[Reuters] Trump's 'big announcement' on tax to be broad principles: official

[Reuters] Trump tax plan may produce some short-term budget issues: Mnuchin

[Reuters] Wall Street gears up for busiest earnings week in years

[Reuters] Trump orders review of financial rules to prevent future crises

[NYT] Trump Vows to Unveil Tax-Cut Plan Next Week, Surprising Staff

[WSJ] What Would a Le Pen Victory in France Mean for Markets?

Weekly Commentary: Liquidity Supernova and the Big Ugly Flaw

April 21 – Reuters (Vikram Subhedar): “The $1 trillion of financial assets that central banks in Europe and Japan have bought so far this year is the best explanation for the gains seen in global stocks and bonds despite lingering political risks, Bank of America Merrill Lynch said on Friday. If the current pace of central bank buying, dubbed the ‘liquidity supernova’ by BAML, continues through the year, 2017 would record their largest financial asset purchases in a decade…”

From the report authored by BofA Merrill’s chief investment strategist Michael Hartnett: “The $1 trillion flow that conquers all… One flow that matters… $1 trillion of financial assets that central banks (European Central Banks & Bank of Japan) have bought year-to-date (= $3.6tn annualized = largest CB buying in past 10 years); ongoing Liquidity Supernova best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro."

A strong case can be made that Q1 2017 experienced the most egregious monetary stimulus yet. No financial or economic crisis – and none for years now. Consumer inflation trends have turned upward on a global basis. Stock prices worldwide have surged higher, with U.S. and other indices running to record highs. At the same time, global bond yields remained just off historic lows. Home prices in many key global markets have spiked upward. Meanwhile, central bank balance sheets expanded at a $3.6 TN annualized pace (from BofA) over the past four months.

With U.S. bond yields reversing lower of late, there’s been a fixation on weaker-than-expected Q1 U.S. GDP. Meanwhile, recent data have been stronger-than-expected in China, Europe and Japan. EM has been buoyed by strong financial inflows and a resulting loosening of financial conditions. Thus far, Fed baby-step normalization efforts have been overpowered by the “liquidity supernova”.

April 21 – Reuters (Balazs Koranyi): “Global growth and trade appear to be picking up strength but risks for the euro zone economy remain tilted to the downside, so 'very substantial' accommodation is still necessary, European Central Bank President Mario Draghi said on Friday. In a statement largely reflecting the bank's March policy statement, Draghi said that while the risk of deflation has largely disappeared, underlying inflation has shown no convincing upward trend.”

April 20 – Reuters (Leika Kihara): “Japan has benefitted from global tailwinds that boosted exports and factory output, [Bank of Japan Governor Haruhiko] Kuroda said, describing its economy as ‘expanding steadily as a trend’ - a more upbeat view than last month. But he offered a bleaker view on Japan's inflation, saying it lacked momentum with no clear sign yet it was shifting up. ‘That's why the BOJ will continue its ultra-easy monetary policy to achieve its 2% inflation target at the earliest date possible,’ he said.”

Bank of Japan Governor Haruhiko Kuroda, responding to a question from Bloomberg Television's Francine Lacqua: “The inflation rate continues to be quite sluggish. Although the real economy is improving – doing better than we anticipated just a few months ago. Like the IMF – the IMF itself also made up the [global growth] rate this time compared to the January figure. So, as far as the Japanese economy is concerned, yes the economy is doing better than we anticipated…, but the inflation front has not much improved, unfortunately.”

Mr. Kuroda is quick with a smile and carries an infectious laugh; seems like a nice guy. Seeing his big grin after stating “the inflation front has not much improved, unfortunately,” I couldn’t help but think he’s not at all unhappy with inflation stuck below target. And why not? The BOJ can proceed with its historic experiment in government debt monetization, in the process administering more liquidity upon a global system already inundated with central bank “money”. The Fateful Day of Reckoning and attendant very difficult decisions – for Japan and the rest of the world – can be relegated to some future date. Historians will surely appreciate what few are willing to admit today: it’s crazy that Haruhiko Kuroda has come to wield such incredible power over global finance and securities markets.

Japan and Europe confront deep structural issues. In particular, Japan faces an aging population and a conservative, high-savings society. It remains a powerful manufacturer and runs persistent Current Account surpluses. In the face of unprecedented debt monetization, the yen has proven impressively resilient. What’s more, the yen’s 7% y-t-d gain (vs. $) will not be supportive of the BOJ attaining its inflation target. As for the ECB’s Draghi, it’s even more difficult to argue that low inflation remains a scourge worthy of “whatever it takes.” Yet he’s obviously in no rush to rethink his aggressive printing operations – no hurry whatsoever to face his Day of Reckoning.

Here at home, inflationary biases throughout asset markets have over recent months turned increasingly robust. Stock prices surged to record highs, while home price inflation picked up steam as sales transactions escalated to the strongest pace since 2007. Debt issuance has been running at a record rate. In spite of it all, Fed chair Yellen has been quick to note that inflation remains “slightly” below the Fed’s 2% target. Rather quickly the markets question whether the Yellen Fed has the fortitude for a couple additional baby-step rate increases this year.

Can we all agree that this central bank fixation on a 2% consumer price inflation target is borderline ridiculous? Consumer price dynamics have changed momentously over the past 20 years. Most importantly, the technology revolution has basically created an unlimited supply of goods and services. From smart phones and tablets to digital downloads, companies can now easily expand output to meet heightened demand. There has been as well the equally momentous move to “globalization” – with seemingly limitless cheap labor coupled with unlimited cheap finance fundamentally boosting the supply of inexpensive goods and services globally.

Technological advancement has played a profound role in oil extraction, new energy technologies and energy conservation. There are as well advancements in pharmaceuticals and healthcare more generally. Even in basics like food, there is a proliferation of higher-priced organic and healthy-choice products. And somehow government economists are adept at constructing models and calculating hedonic adjustments to come to an accurate measure of true underlying CPI? And this single contrived data point has become key to policies that amount to a historic experiment in global activist monetary management? Wow.

I’m reminded of the mortgage finance Bubble period with chairman Greenspan supposedly fretting that booming housing markets were impervious to Fed “tightening” measures. I recall writing in the CBB at the time, “Greenspan could easily resolve this issue with two phone calls, and they’d both be local.” Fannie and Freddie were clearly at the heart of a historic Bubble in mortgage finance. Yet no one was willing to call the Fed out on the reckless GSEs and the powerful distortions emanating from the market embrace of the implied Washington backing of agency obligations.

These days, virtually no one is willing to call out global central bankers on their notion that there is basically no limit to measures to be employed to achieve 2% CPI bogeys. Zero rates, negative rates, Trillions of monetization, acquire equities and corporate debt, market yield manipulation, etc. Risk be damned. Everyone is content to disregard that central banks have inflated epic Bubbles almost everywhere across virtually all asset classes – and they’re trapped.

The entire contemporary notion of “inflation” is deeply flawed. Years ago, I adopted the “Austrian” view: start with the expansion of Credit – “Credit/monetary inflation” – and then diligently monitor for price effects and inflationary consequences associated with the resulting increase in purchasing power.

Inflation can arise in myriad forms: rising consumer and producer prices; higher asset values and market distortions; increasing corporate profits and investment; trade and Current Account deficits; etc. And, as the late Dr. Kurt Richebacher was so great at explaining, consumer prices were generally the least threatening inflationary manifestation. Central bankers could and would squeeze consumer inflation with tighter policy. Asset inflation, on the other hand, would be allowed (even nurtured) to develop into Bubbles that would inflate to the point of imparting deep structural (financial and economic) maladjustment. As we’ve witnessed for over twenty years now, there’s no constituency for thwarting rising asset prices.

After experiencing the mortgage finance Bubble fiasco, it’s difficult to comprehend that global central bankers have so aggressively embraced and promoted asset inflation. Central bankers have been hoping for modest self-reinforcing inflation in a general price level. General price inflation would, so the thinking goes, spur a commensurate increase in Credit that would support ongoing moderate increases in CPI.

Well, it may have worked that way in the past but no longer. Central banks have ensured that the powerful inflationary biases reside throughout the asset markets. These days, monetary inflation works predominately to stoke asset inflation and Bubbles, with major ramifications for ongoing inequitable wealth distribution and system fragility more generally. Deep structural impairment will be revealed when the Bubble falters, a dynamic that clearly reverberates these days throughout global bond markets.

April 20 – Reuters (David Morgan): “U.S. President Donald Trump's tax reform plan will rely largely on future revenue gains from faster economic growth to justify major tax cuts, top Trump advisers said… As Trump's first 100 days in office draw to a close, the disclosure is the latest sign that the White House could part ways with congressional Republicans who want to pay for tax cuts by taxing imports and eliminating a business tax deduction for debt interest payments. ‘Some of the lowering in (tax) rates is going to be offset by less deductions and simpler taxes,’ Treasury Secretary Mnuchin said…’But the majority of it will be made up by what we believe is fundamentally growth and dynamic scoring,’…”

During the late-nineties Bubble period, there was ruminating over fiscal surpluses that were expected to extinguish much of outstanding Treasury debt. It was all a Bubble mirage. Anyone contemplating a U.S. government $20 TN in the whole would have been viewed as a complete nut case. And here we are again in the heart of a historic Bubble, with Washington politicians talking about big tax cuts paid for with future revenues. The scope of prospective post-Bubble deficits is almost difficult to fathom.

Sunday’s first round French election will be captivating. A Marine Le Pen versus Jean-Luc Mélenchon second round would be a big issue for the markets. Markets Friday were somewhat concerned that Le Pen could receive a boost after this week’s terrorist shooting on Paris’ Champs- Élysées. For the most part, however, players were heartened by polls showing centrist Emmanuel Macron somewhat widening his narrow lead over Le Pen. Both François Fillon and Mélenchon remain within striking distance.

Crude was slammed almost 7%, as the GSCI commodities index sank 4.6% this week. And while OPEC remains an ongoing issue, China seemed to be at top of mind. It’s almost as if every headline related to tighter Chinese regulation – real estate finance, shadow-banking, wealth management products, insurance, corporate debt and repo leverage, Internet finance, the stock market – seems to help reawaken market fears of latent system fragilities. Timid policymaking has not only not worked, it’s has emboldened Bubble excess. Tough policies will be necessary but risk bursting the Bubble.

It’s evolved into a global issue: There’s no cure for major asset Bubbles other than unwinds. Once asset inflation becomes the prevailing inflationary manifestation it becomes impossible to inflate away the problem. Instead, central bank efforts to spur general inflation only exacerbate Bubbles and maladjustment. That’s The Big Ugly Flaw in this runaway global monetary experiment. Back when he served as president of the Dallas Fed, Richard Fisher espoused some cogent advice for global central bankers: The law of holes – when you find yourself in a hole, first you must stop digging. Well, the problem today is that instead of heeding Fisher’s “stop digging” they came together, called in the big backhoes and have been shoveling fanatically ever since.

Bloomberg's Francine Lacqua: “Do you worry - you’ve used a lot of tools – a lot of unconventional tools. Do you worry about your balance sheet – in terms of GDP it’s higher than that Fed’s.”

Bank of Japan Governor Haruhiko Kuroda: “Yes. We have acquired about 40% of JGBs outstanding. Which means about 80% of GDP equivalent of JGBs we have acquired. But this is a result of the quantitative and qualitative monetary easing, and we think that we can manage the enlarged balance sheet in a reasonable manner. Of course, once we exit from the QQE with yield curve control, we’ll have to consider how to deal with an enlarged balance sheet. But, like the Fed, I think we can manage the enlarged balance sheet in a reasonable way.”

Lacqua: “When is the ideal time to start talking about it [exiting QQE]?”

Kuroda: “It’s too early… Because our target rate is 2% - we’re still around zero percent inflation rate. So it’s a long way to go. So although we forecast that the inflation rate would gradually rise to our 2% and reaching the target sometime around fiscal 2018, it’s a long way to go. So, at this stage it’s premature to discuss in an exact way about an exit strategy.”

Lacqua: “Governor, what have you learned in your time as head of the BOJ? I don’t know if it is easier or more difficult than you thought to manage this complicated economy.”

Kuroda: “It’s maybe of course challenging, depending on the economic and market conditions when the BOJ starts to exit from the current QQE and yield control. But I think it can be managed in a reasonable way. So I have no particular concern about the increased balance sheet or negative interest rates on the short end. No.”


For the Week:

The S&P500 gained 0.8% (up 4.9% y-t-d), and the Dow added 0.5% (up 4.0%). The Utilities were little changed (up 5.9%). The Banks rallied 1.8% (down 2.4%), and the Broker/Dealers recovered 3.0% (up 2.3%). The Transports rallied 2.9% (up 1.0%). The S&P 400 Midcaps gained 2.2% (up 3.4%), and the small cap Russell 2000 jumped 2.6% (up 1.7%). The Nasdaq100 advanced 1.7% (up 11.9%), and the Morgan Stanley High Tech index rose 1.6% (up 13.6%). The Semiconductors rallied 3.4% (up 9.5%). The Biotechs declined 1.3% (up 13.2%). Though bullion was little changed, the HUI gold index dropped 3.4% (up 12.8%).

Three-month Treasury bill rates ended the week at 76 bps. Two-year government yields declined two bps to 1.18% (down 1bp y-t-d). Five-year T-note yields were little changed at 1.77% (down 16bps). Ten-year Treasury yields added a basis point to 2.25% (down 20bps). Long bond yields increased one basis point to 2.90% (down 16bps).

Greek 10-year yields declined two bps to 6.55% (down 47bps y-t-d). Ten-year Portuguese yields fell 14 bps to 3.74% (unchanged). Italian 10-year yields dropped six bps to 2.26% (up 45bps). Spain's 10-year yields slipped a basis point to 1.70% (up 32bps). German bund yields jumped seven bps to 0.25% (up 5bps). French yields gained two bps to 0.94% (up 26bps). The French to German 10-year bond spread widened five to 69 bps. U.K. 10-year gilt yields dipped one basis point to 1.03% (down 20bps). U.K.'s FTSE equities index dropped 2.9% (down 0.4%).

Japan's Nikkei 225 equities index rallied 1.6% (down 2.6% y-t-d). Japanese 10-year "JGB" yields increased one basis point to 0.02% (down 2bps). The German DAX equities index slipped 0.5% (up 4.9%). Spain's IBEX 35 equities index increased 0.5% (up 11%). Italy's FTSE MIB index slipped 0.2% (up 2.6%). EM equities were mixed. Brazil's Bovespa index recovered 1.5% (up 5.9%). Mexico's Bolsa was unchanged (up 7.3%). South Korea's Kospi rallied 1.4% (up 6.8%). India’s Sensex equities index slipped 0.3% (up 10.3%). China’s Shanghai Exchange dropped 2.2% (up 2.2%). Turkey's Borsa Istanbul National 100 index rose 2.6% (up 18.3%). Russia's MICEX equities index gained 1.5% (down 12.9%).

Junk bond mutual funds saw outflows of $362 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates sank 11 bps to five-month low 3.97% (up 38bps y-o-y). Fifteen-year rates fell 11 bps to 3.23% (up 38bps). The five-year hybrid ARM rate declined eight bps to 3.10% (up 39bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 4.07% (up 40bps).

Federal Reserve Credit last week expanded $9.3bn to $4.444 TN. Over the past year, Fed Credit dipped $8.1bn (down 0.2%). Fed Credit inflated $1.624 TN, or 58%, over the past 231 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.4bn last week to $3.206 TN. "Custody holdings" were down $35.8bn y-o-y, or 1.1%.

M2 (narrow) "money" supply last week jumped $42.1bn to a record $13.405 TN. "Narrow money" expanded $797bn, or 6.3%, over the past year. For the week, Currency increased $3.3bn. Total Checkable Deposits sank $84.7bn, while Savings Deposits surged $126bn. Small Time Deposits rose $0.9bn. Retail Money Funds declined $3.2bn.

Total money market fund assets dropped $16.7bn to $2.627 TN. Money Funds fell $72bn y-o-y (2.7%).

Total Commercial Paper fell $10.0bn to $974.9bn. CP declined $136bn y-o-y, or 12.2%.

Currency Watch:

April 18 – Bloomberg (Steve Matthews and Matthew Boesler): “Goldman Sachs… has finally dumped the dollar. The U.S. investment bank closed one of its top trade recommendations for 2017 -- long-dollar positioning against the euro, the sterling, and the Chinese yuan -- citing a slowdown in the reflationary momentum in the U.S. economy. ‘In recent years we have generally maintained a bullish dollar view, and the greenback still has a number of things going for it, including a healthy domestic economy, an active central bank, and lower political uncertainty compared with the U.K. and euro area,’ Goldman economist Zach Pandl wrote… ‘However, a number of fundamentals have changed on the margin, such that the long-dollar story no longer warrants a place among our ‘Top Trades.’’”

The U.S. dollar index declined 0.5% to 99.98 (down 2.4% y-t-d). For the week on the upside, the South African rand increased 2.5%, the British pound 2.4%, the euro 1.0%, the Swiss franc 0.9%, the Swedish krona 0.5%, the South Korean won 0.5%, the New Zealand dollar 0.3% and the Singapore dollar 0.1%. For the week on the downside, the Mexican peso declined 1.5%, the Canadian dollar 1.3%, the Norwegian krone 1.0%, the Australian dollar 0.5% and the Japanese yen 0.4%. The Chinese renminbi was little changed versus the dollar this week (up 0.87% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index sank 4.6% (down 3.9% y-t-d). Spot Gold was little changed at $1,284 (up 11.4%). Silver fell 3.1% to $17.94 (up 12.2%). Crude sank $3.56 to $49.62 (down 8%). Gasoline fell 5.2% (down 2%), and Natural Gas dropped 3.9% (down 17%). Copper declined 0.8% (up 1.7%). Wheat was hit 4.9% (up 3%). Corn fell 3.8% (up 3%).

Trump Administration Watch:

April 16 – Wall Street Journal (John D. McKinnon): “A senior Trump administration official warned Sunday that North Korea’s provocative behavior ‘can’t continue,’ and said the U.S. is working with partners including China to develop a range of possible responses to future ‘destabilizing behavior.’ ‘It’s really the consensus with the president, our key allies in the regions—Japan and South Korea in particular, but also the Chinese leadership—that this problem is coming to a head,’ White House national security adviser Lt. Gen. H.R. McMaster said… ‘And so it’s time for us to undertake all actions we can, short of a military option, to try to resolve this peacefully.’”

April 20 – Reuters (Ju-min Park): “North Korean state media warned the United States of a ‘super-mighty preemptive strike’ after U.S. Secretary of State Rex Tillerson said the United States was looking at ways to bring pressure to bear on North Korea over its nuclear programme… The Rodong Sinmun, the official newspaper of the North's ruling Workers' Party, did not mince its words. ‘In the case of our super-mighty preemptive strike being launched, it will completely and immediately wipe out not only U.S. imperialists' invasion forces in South Korea and its surrounding areas but the U.S. mainland and reduce them to ashes,’ it said.”

April 19 – Politico (Josh Dawsey and Jake Sherman): “The White House, under internal pressure to show legislative achievements ahead of the 100-day mark, is gearing up for a government shutdown fight to secure money for a border wall, more immigration enforcement officers and a bigger military, according to White House and congressional sources… It is a risky gambit. With almost uniform Democratic opposition to nearly all of the Trump administration's spending proposals, the fight could lead to a government shutdown next Friday — the day government spending expires… Officials could also strike a one-week compromise, giving them more time for a broader agreement.”

April 19 – Bloomberg (Billy House and Anna Edgerton): “There may be only one way for Speaker Paul Ryan to avoid a government shutdown: Ask his Democratic counterpart, Nancy Pelosi, for help. The problem is, the two don’t have much history of deal-making together. They don’t even know each other that well. But after spending weeks trying -- so far unsuccessfully -- to ram through legislation to undo Democrats’ signature health-care law, Ryan will almost certainly need Pelosi’s support to keep the government open after April 28, when current funding expires. Ryan and Pelosi have dined together only once… The distance between the pair, who are separated in age by three decades, also reflects how little time House Republicans have spent negotiating with Democrats in recent years.”

April 20 – Wall Street Journal (Peter Nicholas, Kate Davidson and Nick Timiraos): “White House officials said Thursday they are developing a sweeping plan to overhaul both corporate and individual taxes, dismissing concerns that a more modest proposal might be more viable in today’s political climate. Speaking at a conference of international financial firms, Treasury Secretary Steven Mnuchin said the administration would release its tax overhaul ‘very soon.’ The remarks ended weeks of mixed signals from the White House about the breadth of President Donald Trump’s plan, and came as some of his former campaign advisers cautioned against an aggressive approach”.

April 17 – Reuters (Laharee Chatterjee): “U.S. Treasury Secretary Steven Mnuchin said the Trump administration’s timetable for tax reform is set to falter following setbacks in negotiations with Congress over healthcare, the Financial Times reported… Mnuchin told the Financial Times… that the target to get tax reforms through Congress and on President Donald Trump's desk before August was ‘highly aggressive to not realistic at this point’. ‘It is fair to say it is probably delayed a bit because of the healthcare,’ Mnuchin told the newspaper.”

April 19 – Reuters (David Milliken): “U.S. President Donald Trump is ‘absolutely not’ trying to talk down the strength of the dollar, Treasury Secretary Steven Mnuchin was quoted as saying in the Financial Times… Trump said last week in an interview with the Wall Street Journal that the dollar was ‘getting too strong’, and backed away from labelling China a currency manipulator. Mnuchin had played down that comment on the dollar… In a more detailed version published on Wednesday, he directly rejected the idea that Trump was trying to talk down the dollar, saying ‘Absolutely not, absolutely not.’”

April 17 – Reuters (James Oliphant and Svea Herbst-Bayliss): “In a White House marked by infighting, top economic aide Gary Cohn, a Democrat and former Goldman Sachs banker, is muscling aside some of President Donald Trump's hard-right advisers to push more moderate, business-friendly economic policies. Cohn, 56, did not work on Republican Trump's campaign and only got to know him after the November election, but he has emerged as one of the administration's most powerful players in an ascent that rankles conservatives…”

April 20 – Reuters (Pete Schroeder): “The head of the U.S. House of Representatives' banking panel has unveiled the Republicans' most ambitious plan so far to loosen financial regulations, a 600-page bill to replace the Dodd-Frank financial reform law. Representative Jeb Hensarling, who chairs the House Financial Services Committee, also set an April 26 hearing to discuss replacing the 2010 law. ‘Republicans are eager to work with the president to end and replace the Dodd-Frank mistake with the Financial CHOICE Act because it holds Wall Street and Washington accountable, ends taxpayer-funded bank bailouts, and unleashes America’s economic potential,’ the Texas Republican said…”

April 18 – New York Times (Vindu Goel): “President Trump signed an executive order… that directs federal agencies to review employment immigration laws to promote ‘Hire American’ policies. The order makes no immediate changes to work visa programs but tells the Departments of Labor, Justice, Homeland Security and State to study existing laws and procedures and recommend changes. In the case of one program, H-1B temporary visas, the order directs the agencies to suggest changes to help ensure that the visas are awarded to the most skilled, best-paid immigrant workers.”

China Bubble Watch:

April 17 – Bloomberg: “The value of China’s home sales remained buoyant in March, though volume figures indicated that curbs in a number of cities may be slowing the recent buying frenzy. New home sales by value rose 18% to 1 trillion yuan ($145bn) last month from a year earlier… The increase compares with a 23% surge in the first two months of the year.”

April 17 – Bloomberg: “China home prices rose in the most cities since October, suggesting buyers are trying to get in ahead of any further restrictions on property purchases. New-home prices, excluding government-subsidized housing, gained last month in 62 of the 70 cities tracked by the government, compared with 56 in February… Prices fell in eight cities… Chinese authorities have pledged to enforce strict curbs in most first- and second-tier cities to prevent a housing bubble, while seeking to clear a glut of unsold homes in smaller urban centers.”

April 17 – Reuters (Kevin Yao and Yawen Chen): “Real estate investment in China remained robust in the first quarter from a year earlier…, as the pace of new construction quickened, despite intensified government cooling measures. Growth in property investment, which includes residential, commercial and office spaces, accelerated to 9.1% from 8.9% in the first two months of 2017… In March alone, property investment growth rose to 9.4%...”

April 17 – Bloomberg: “China’s economy accelerated for a second-straight quarter as investment picked up, retail sales rebounded and factory output strengthened amid robust credit growth and further strength in property markets. Gross domestic product increased 6.9% in the first quarter from a year earlier… It was the first back-to-back acceleration in seven years… Fixed-asset investment excluding rural areas expanded 9.2% for the first three months, accelerating from 8.1% growth last year. Retail sales increased 10.9% from a year earlier in March…”

April 18 – Financial Times (Gabriel Wildau): “China's new chief banking regulator has started with a bang, issuing a flurry of new policy directives during his first month aimed at the industry's knottiest problems, in line with the government’s focus this year on managing financial risk. The China Banking Regulatory Commission has issued seven policy documents in the past 12 days, in what state news agency Xinhua is calling a ‘regulatory windstorm’… ‘Without a doubt, 2017 will be a big year for financial regulation. Regulation of the entire banking industry will become stricter and enforcement will become more rigorous,’ Sun Binbin, chief fixed-income analyst at TF Securities in Shanghai, wrote…’What we’ve seen so far is just framework. The detailed rules are yet to come.’”

April 20 – Wall Street Journal (James T. Areddy): “The Chinese government is trying to ensure financial-system stability in a pivotal political year by focusing on the officials who do the regulating. China has removed three of its four top financial-industry regulators over the past year or so as it also tightens the reins on banks, brokerages and insurers. The latest to fall was liberalizing insurance regulator Xiang Junbo, who jazzed up a stodgy business but caused ripples beyond his agency’s purview. After encouraging liberalization for banks, brokers and insurers in hopes of fueling a slowing economy, Beijing is becoming increasingly anxious about possible financial shock. The new message for its regulators: back to basics.”

April 20 – Bloomberg: “China’s regulators will consider potential market impacts when they introduce additional regulations on the shadow banking sector, according to a top central bank researcher. Any new rules on wealth management products and other asset management offerings will be rolled out gradually, Ma Jun, chief economist of the research bureau of the People’s Bank of China, said… The rebounding economy has created room for expedited structural reforms, Ma said. To curb risks in shadow banking… regulators are working to draft sweeping new rules…”

April 17 – Bloomberg: “China’s market for wealth management products is due for some pain as officials tighten regulations on the sector amid their campaign to curb financial risk, says the head of the nation’s third-largest mutual fund manager. Some holders of the products -- popular among individual investors for their high yields -- hold the ‘very dangerous assumption’ that the government will step in to support WMPs if they get in to trouble, said Tang Xiaodong, chief executive officer of China Asset Management Co…‘The WMPs have been developing a little too fast, too soon,’ Tang said… ‘That’s why the tightening of those regulations is a step in the right direction.’”

April 17 – Wall Street Journal (Shen Hong): “China’s riskiest corporate bonds are looking disproportionately expensive, a worrying sign that investors may have underestimated their risk as a tighter monetary policy and painful industrial restructuring weaken companies’ ability to repay debt. The unexpected popularity of bonds with low credit ratings in recent months, despite expectations of rising debt defaults and Beijing’s pledge to reduce leverage in financial markets, is the latest example of the constant anomalies in the world’s third-largest but still underdeveloped $9 trillion bond market.”

April 17 – Bloomberg: “China’s dollar bond market has a diversity problem. As borrowers raised a record $51.7 billion in dollar-denominated debt this year, Chinese banks bought about half of the notes, according to UBS… U.S.-based money managers only got access to 7% of the deals, down from 46% in 2014… The domination of China-based investors is fueling angst about the potential fallout if they all get cold feet at once, especially with $195 billion of dollar notes maturing over the next three years. Risk of a regulatory crackdown on wealth management products and a strengthening yuan are near the top of the worry list…”

April 20 – Reuters (Kevin Yao): “Capital outflows from China eased sharply in the first quarter and cross border flows were more balanced, the foreign exchange regulator said…, in the latest official comments indicating policymakers are growing less worried about the yuan currency. Reduced pressure from outflows has helped steady the yuan this year and brought China's foreign currency reserves back over the closely watched $3 trillion mark.”

April 18 – Reuters: “China's non-financial outbound direct investment (ODI) slumped 30.1% in March from a year earlier as authorities kept a tight grip on capital outflows… Non-financial ODI totalled $7.11 billion last month... For the first three months of this year, non-financial ODI tumbled 48.8% to $20.54 billion from the same period last year.”

Europe Watch:

April 19 – Wall Street Journal (Mike Bird and Christopher Whittall): “With the start of the French election just days away, investors are contemplating their nightmare scenario: a choice between far-left and far-right candidates. In recent days, a surge in opinion polls has placed Jean-Luc Mélenchon, a left-wing firebrand who promises higher wages and fewer working hours, as a potential candidate to move past this Sunday’s first round of voting. That could set up a second-round vote in May 7 with Marine Le Pen, an economic nationalist who wants to pull France out of the euro. Most analysts still expect a mainstream candidate to make it through to the second round and eventually clinch the presidency. But Mr. Mélenchon’s sudden rise has spooked investors just five days before voting kicks off.”

April 17 – Financial Times (Michael Stothard): “As he roared to the crowd, Jean-Luc Mélenchon showed how he has shaken up France’s presidential race as it heads in to the last few days of campaigning before Sunday’s first-round vote. While his rivals were hosting traditional rallies in arenas across the country, the far-left firebrand turned innovative campaigner was addressing a bankside crowd from a boat puttering down a Parisian canal. His supporters cheered wildly as the 65-year-old fan of former Venezuelan leader Hugo Chávez railed against international finance, free trade and the EU while rooting for ‘the people against the oligarchy’. Bankers, Mr Mélenchon said, are ‘parasites’ on society who ‘produce nothing’. Free trade ‘destroys everything’ and leads to the ‘total perversity’ of social dumping. Uber… is a ‘swindle’ that offers work without social protection.”

April 17 – Reuters (Michel Rose): “Presidential candidate Emmanuel Macron urged French voters… to turn the page on the last 20 years and bring a new generation to power, as he stepped up attacks against resurgent far-left and conservative rivals six days before voting day. Macron, a 39-year-old pro-EU centrist who would become the youngest French leader since Napoleon if elected, said recent leaders had betrayed the post-war generation which had rebuilt the country, leaving France unreformed and sclerotic. ‘What has been proposed to the French in the last 20 years is not liberation or reconstruction, but a slow, unavowed acceptation of unemployment, state impotence and social breakdown,’ he told a cheering crowd…”

April 18 – Reuters: “The International Monetary Fund will not take part in a bailout program for Greece if it deems the country's debt is unsustainable, the international lender's chief Christine Lagarde said… Greece needs to implement reforms agreed by euro zone finance ministers earlier this month to secure a new loan under its 86 billion-euro ($91.58 billion) bailout program, the third since 2010. The loan is needed to pay debt due in July, but talks continue and the IMF has not yet decided whether to join the bailout. The fund's participation is seen as a condition for Germany to unblock new funds to Greece.”

April 20 – Reuters (Jonathan Cable): “The euro zone economy bounded into the second quarter with strong broad-based growth, according to a survey showing businesses increased activity at the fastest rate for six years as new orders stayed robust… IHS Markit's Flash Composite Purchasing Managers' Index, seen as a good guide to growth, climbed to 56.7 from March's 56.4, its highest since April 2011.”

April 20 – Bloomberg (Fergal O'Brien): “The European Commission’s consumer-confidence index for the euro area jumped the most in five months in April. The advance put the index at its highest since March 2015, matching the strongest reading since before the financial crisis. The latest figures were far better than economists had anticipated…”

ECB Watch:

April 20 – Bloomberg (Carolynn Look, Jana Randow, and Matthew Boesler): “European Central Bank officials signaled that they’re getting close to the point when they’ll start preparing for the end of an era of unprecedented stimulus. In the last round of speeches before a week-long quiet period ahead of the next policy meeting, Executive Board members Benoit Coeure and Peter Praet agreed that the euro-area recovery has become broad-based… The 25-member Governing Council will debate the precise formulation of its stance on the economy when it decides on interest rates and stimulus settings on April 27. But with a potentially explosive election in France coming this weekend, that may still prove too soon for any change in its currently ultra-cautious tone.”

April 19 – Reuters (Andrea Shalal): “The German government believes an interest rate increase by the European Central Bank (ECB) would help to reduce Germany's often-criticized export surplus, the Funke Mediengruppe newspaper chain reported… The newspaper cited an eight-page paper prepared by the German finance and economics ministries which Finance Minister Wolfgang Schaeuble plans to present at the spring meeting of the International Monetary Fund later this week. Schaeuble is a longtime critic of the ECB's current ultra-low interest rate policy.”

Brexit Watch:

April 19 – Reuters (Elizabeth Piper, Kylie MacLellan and William James): “British Prime Minister Theresa May called… for an early election on June 8, saying she needed to strengthen her hand in divorce talks with the European Union by bolstering support for her Brexit plan. …May said she had been reluctant to ask parliament to back her move to bring forward the poll from 2020. But, after thinking ‘long and hard’ during a walking holiday, she decided it was necessary to try to stop the opposition ‘jeopardizing’ her work on Brexit. Some were surprised by May's move… but opinion polls give her a strong lead and the British economy has so far defied predictions of a slowdown.”

Global Bubble Watch:

April 18 – Bloomberg (Enda Curran, Liz McCormick, and Eric Lam): “After heading into the uncharted territory of quantitative easing, the world’s central banks are starting to plan their course through the uncharted waters of quantitative tightening. How the Federal Reserve, European Central Bank and -- eventually -- the Bank of Japan handle the transition could make the difference between a global rerun of the 2013 ‘taper tantrum,’ or the near undetectable market response to China’s run-down of U.S. Treasuries in recent years. Combined, the balance sheets of the three now total about $13 trillion… Former Fed Chair Ben S. Bernanke… has argued for a pre-set strategy to shrink the balance sheet… ‘You know what they say about mountaineering right? The descent is always more dangerous than the ascent,’ said Stephen Jen, …chief executive of hedge fund Eurizon SLJ Capital Ltd. ‘Shrinking the balance sheet will be the descent.’”

April 19 – Reuters (Jamie McGeever): “Stocks, bond yields and the dollar are all falling, yield curves are flattening and sterling is marching higher. The ‘reflation’ trades of 2016 that were supposed to mark a turning point in global markets are fading. Fast. The question for investors is whether this is the play book for the rest of the year, or whether the trends of 2016 will resume in the second half of the year. What is clear is that much of the conviction with which investors went into 2017 has been lost… Trump's surprise election victory was supposed to unleash a wave of tax cuts, banking deregulation and fiscal largesse that would lift U.S. -- and global -- growth. Meanwhile, sterling's 20% plunge after the Brexit vote was supposed to pave the way for a surge in UK equities and inflation.”

April 16 – Financial Times (Chris Flood): “Exchange traded funds attracted record inflows in the first three months of 2017 as investors continue to move out from traditional actively managed funds in protest against inconsistent performance and high fees. Investors worldwide ploughed $197.3bn into ETFs between January and March, a quarterly record… This follows 2016, when ETFs, which are famed for being low cost, gathered the highest ever annual amount of $390.4bn in new cash. Robert Buckland, a strategist at Citigroup, said the surge in ETF growth was a ‘seismic shift’, driven by a ‘profound re-assessment’ among investors about the fees they were prepared to pay asset managers to put money to work in the stock market.”

April 17 – New York Times (Landon Thomas Jr.): “The Vanguard trading floor is the epicenter of one of the great financial revolutions of modern times, yet it is a surprisingly relaxed place. A few men and women gaze at Bloomberg terminals. There is a muted television or two and a view of verdant suburban Philadelphia. No one is barking orders to buy or sell stock. For a $4.2 trillion mutual fund giant that is still growing rapidly, it occupies a small fraction of the space of a typical Wall Street trading hub. You can barely hear the quiet hum of money being invested — money in scarcely imaginable quantities, pouring into low-cost index mutual funds and exchange-traded funds (E.T.F.s) that track financial markets. In the last three calendar years, investors sank $823 billion into Vanguard funds… The scale of that inflow becomes clear when it is compared with the rest of the mutual fund industry — more than 4,000 firms in total. All of them combined took in just a net $97 billion during that period…”

April 19 – Financial Times (Ben McLannahan and Eric Platt): “Was Goldman Sachs — of all banks — wrongfooted by the Trump trade? Since the election of Donald Trump in November, the Wall Street bank has seen several senior executives decamp to Washington: none of them more influential than Gary Cohn, the bank’s former president now serving as Mr Trump’s top economic adviser. Despite that apparent edge, the bank was the only one of the US’s top six banks to report disappointing earnings for the first quarter. While rivals were boosted by brighter performances from bond-trading units, Goldman’s revenues from debt trading were basically flat. Analysts and traders say the bank may well have made a big bet that went wrong during the first quarter: the assumption that Mr Trump’s talk of boosting growth would push up interest rates, and thus push down the price of trillions of dollars of corporate bonds.”

April 18 – Bloomberg (Kim Chipman and Maciej Onoszko): “Canadian officials across all three levels of government vowed to be vigilant in monitoring the Toronto region’s rapidly accelerating housing market, including possibly taking formal steps aimed at curbing speculative activity. Federal Finance Minister Bill Morneau, Ontario Finance Minister Charles Sousa and Toronto Mayor John Tory met Tuesday to discuss the thorny question of how to cool the city’s residential real estate market… Possible steps include taxing homes left empty for speculative purposes, Tory said… Home prices in the Toronto area climbed 6.2% in March, the biggest one-month gain on record…, and are up almost 30% over the past 12 months.”

April 17 – Bloomberg: “Australia’s central bank will focus on the performance of the nation’s labor and housing markets in coming months… In minutes of this month’s policy meeting released Tuesday, the Reserve Bank of Australia noted labor market conditions were ‘somewhat weaker than had been expected’… ‘The board judged that developments in the labor and housing markets warranted careful monitoring over coming months,’ the RBA said…”

April 19 – Bloomberg (Dani Burger): “Exchange-traded funds are making stock markets dumber -- and more expensive. That’s the finding of researchers at Stanford University, Emory University and the Interdisciplinary Center of Herzliya in Israel. They’ve uncovered evidence that higher ownership of individual stocks by ETFs widens the bid-ask spreads in those shares, making them more expensive to trade and therefore less attractive. This phenomenon eventually turns stocks into drones that move in lockstep with their industry…The study is the latest to point out signs of diminished efficiency in markets increasingly overrun by the funds.”

Fixed Income Bubble Watch:

April 20 – Financial Times (Eric Platt and Joe Rennison): “Within the US fixed income market, investors are sending a clear message about the prospect of higher interest rates. In recent weeks, investors have pushed back against a string of leveraged loan transactions, with a handful of deals pulled as money flows into the sector have shrunk. The stumbles underline a diminished appetite for richly valued, floating rate loans, seen as providing investors with some protection from a rising interest rate environment.”

April 19 – Financial Times (Shawn Donnan and Gemma Tetlow): “A debt binge has left a quarter of US corporate assets vulnerable to a sudden increase in interest rates, the International Monetary Fund has warned. The ability of companies to cover interest payments is at its weakest since the 2008 financial crisis, according to one measure. The IMF’s twice-yearly Global Financial Stability Report released on Wednesday highlights what economists at the fund see as one of the main risks facing President Donald Trump and his plans to boost US growth via a combination of tax cuts and infrastructure spending.”

April 17 – Reuters (Ernest Scheyder): “Investors who took a hit last year when dozens of U.S. shale producers filed for bankruptcy are already making big new bets on the industry's resurgence. In the first quarter, private equity funds raised $19.8 billion for energy ventures - nearly three times the total in the same period last year… The quickening pace of investments from private equity, along with hedge funds and investment banks, comes even as the recovery in oil prices from an 8-year low has stalled at just over $50 per barrel amid a stubborn global supply glut.”

Federal Reserve Watch:

April 19 – Bloomberg (Wes Goodman): “Traders are pulling back from bets the Federal Reserve will raise interest rates in June as inflation expectations crumble. The odds of a hike have fallen back to about 44% from more than 60% earlier this month… Yields on federal funds futures contracts for June and July are retreating as investors scale back forecasts for a move. Two-year Treasuries, among the most sensitive to Fed policy expectations, are poised for their first two-month rally in a year. Investors are questioning the strength of the U.S. economy and the Fed’s plan to raise rates three times in 2017… They’re also voicing disappointment that President Donald Trump’s proposed tax cuts and infrastructure spending plans have yet to materialize.”

April 20 – Bloomberg (Craig Torres, Rich Miller, and Matthew Boesler): “Don’t bet on the Federal Reserve blinking again. U.S. central bankers appear to be on course to raise interest rates twice more this year and remain confident in their forecast for growth of around 2% despite a series of weak first-quarter reports. That’s a shift from past performance, when they backed away from projected rate increases in the face of unexpected headwinds. Now, the bar for delay is higher.”

April 16 – Wall Street Journal (Nick Timiraos): “The Federal Reserve is moving quickly to fill in the details of how it will wind down its securities holdings in the years ahead, a process that could start this year and become the next big challenge for investors grown accustomed to easy money from the world’s most important central bank. The Fed wants to move toward a smaller portfolio for several reasons. The economy is on stronger footing, leaving less need for support from a large bond portfolio. The large holdings have become a political liability, unpopular in Congress. Moreover, getting started now could relieve pressure on possible new leadership in 2018, when Fed Chairwoman Janet Yellen’s term ends. Finally, officials want room to ramp it back up in a crisis if needed. The Fed moved closer to agreement on the outlines of a plan at their March 14-15 meeting…”

April 18 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve Bank of Kansas City President Esther George urged the Federal Open Market Committee to start shrinking its $4.5 trillion balance sheet this year, making reductions automatic and not subject to a quick reversal. ‘Balance sheet adjustments will need to be gradual and smooth, which is an approach that carries the least risk in terms of a strategy to normalize its size,’ George said… ‘Importantly, once the process begins, it should continue without reconsideration at each subsequent FOMC meeting. In other words, the process should be on autopilot and not necessarily vary with moderate movements in the economic data.””

U.S. Bubble Watch:

April 20 – Bloomberg (Katherine Burton and Katia Porzecanski): “Yellen and investors: Be very afraid. The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75% over two-plus years. That measure -- the value of the stock market relative to the size of the economy -- should be ‘terrifying’ to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference… Jones is voicing what many hedge fund and other money managers are privately warning investors…”

Japan Watch:

April 20 – Bloomberg (James Mayger and Francine Lacqua): “The Bank of Japan will continue with very accommodative monetary policy and maintain the current pace of asset purchases for some time, Governor Haruhiko Kuroda said… While Japan’s economy is doing better than thought a few months ago, the inflation rate is still quite sluggish, Kuroda said… Speaking a week before the BOJ’s next policy meeting, when the board will also update its estimates for growth and consumer prices, he said the exchange rate could affect inflation in the short term and that if the yen appreciates, there is a chance of a delay in hitting his 2% price goal.”

April 19 – Bloomberg (Connor Cislo and Maiko Takahashi): “Japanese exports grew at the fastest rate in more than two years in March, supporting a moderate economic recovery in the face of weak domestic demand. Exports rose 12% from a year earlier (median estimate +6.2%)… Imports jumped 15.8% (median estimate 10%), the biggest gain in more than three years.”

EM Watch:

April 17 – Reuters (Tuvan Gumrukcu and Humeyra Pamuk): “President Tayyip Erdogan declared victory in a referendum on Sunday to grant him sweeping powers in the biggest overhaul of modern Turkish politics, but opponents said the vote was marred by irregularities and they would challenge its result. Turkey's mainly Kurdish southeast and its three main cities, including the capital Ankara and the largest city Istanbul, looked set to vote ‘No’ after a bitter and divisive campaign.”

Geopolitical Watch:

April 18 – BBC: “North Korea will continue to test missiles, a senior official has told the BBC in Pyongyang, despite international condemnation and growing military tensions with the US. ‘We'll be conducting more missile tests on a weekly, monthly and yearly basis,’ Vice-Foreign Minister Han Song-ryol told the BBC's John Sudworth. He said that an ‘all-out war’ would result if the US took military action.”

Friday, April 21, 2017

Friday Evening Links

[Bloomberg] U.S. Stocks End Two-Week Losing Streak as Industrials Rally

[Reuters] "Liquidity supernova" keeping markets afloat, Europe in demand - BAML

[Bloomberg] Trump Plan Said Unlikely to Back Ryan's Border-Adjusted Tax

[Bloomberg] Sales of Existing U.S. Homes Rise to Fastest Pace in a Decade

[Reuters] Fitch cuts Italy's debt rating; cites weak growth, political risk

[Bloomberg] Fannie-Freddie Overhaul Is 'Very Important' Goal, Mnuchin Says

[Bloomberg] Quants Fire Back at Paul Tudor Jones After His Attack on Risk Parity

[Reuters] Security dominates French election after shooting

[WSJ] Brick-and-Mortar Stores Are Shuttering at a Record Pace

[WSJ] Too Many Questions on Too Big to Fail

[NYT] I.M.F. Torn Over Whether or Not to Bail Out Greece Again

[NYT] Regulators Worry Banks Are Too Big to Fail. The Markets Don’t.

Friday's News Links

[Bloomberg] U.S. Stocks Mixed as Euro Slips Before French Vote: Markets Wrap

[Bloomberg] China Stocks Head for 2017's Worst Week Amid Crackdown Concerns

[Bloomberg] Ignore China's Credit Risks at Your Peril, Says Top Bond Manager

[Bloomberg] Mnuchin’s Talk of Tax Plan ‘Soon’ Stirs Markets and Skeptics

[Reuters] Trump tax plan to rely on future U.S. growth to fund cuts: officials

[Bloomberg] Fed Intensifies Balance-Sheet Discussions With Market Players

[Reuters] Euro zone economy races into second-quarter with bumper growth: PMI

[Bloomberg] Traders Are Losing Faith in European Banks as Earnings Loom

[Bloomberg] Paul Tudor Jones Says U.S. Stocks Should 'Terrify' Janet Yellen

[Reuters] China's rising debt poses biggest risk to economy - former finance minister

[Bloomberg] China Said to Crack Down on Property Financing Through Trusts

[Washington Post] Trump’s threat of steel tariffs heralds big changes in trade policy

[NYT] Trump Roars Again on Trade, Reviewing Steel and Chiding Canada

[WSJ] White House Banks On Sweeping Tax Plan

[WSJ] Trump Administration Launches National-Security Probe on Steel Imports

[WSJ] China’s Stock Markets Dive in Anti-Speculation Drive

[FT] Reflation trade doubts look overdone

[FT] Investors push back against leveraged loans as reflation trade ebbs

Thursday, April 20, 2017

Thursday Afternoon Links

[Bloomberg] Treasuries Fall as Haven Bid Ebbs Ahead of French Election

[Bloomberg] The Fed's Sticking to Its Rate-Hike Plan Despite Soft Patch

[CNBC] The market suddenly doubts the Fed will raise rates twice more this year

[Bloomberg] Kuroda Says Current Purchase Pace to Continue for Some Time

[Bloomberg] Yen Pre-Trump High Looms on Geopolitical Risk, Reflation Unwind

[Bloomberg] Euro-Area Consumer Confidence Matches Highest Since 2007: Chart

[Bloomberg] U.S. Mortgage Rates Drop to Five-Month Low With 30-Year at 3.97%

[Bloomberg] Fannie-Freddie Plan Would Create Utilities, Add Competitors

[CNN] US official: With eye on North Korea, China puts bombers on 'high alert'

[WSJ] U.S. Farmers, Who Once Fed the World, Are Overtaken by New Powers

[FT] Threat of US shutdown looms on the horizon

[FT] China bond party attracts few takers

Thursday's News Links

[Bloomberg] U.S. Stocks Rise as Treasuries, Dollar Retreat: Markets Wrap

[Bloomberg] Jobless Claims in U.S. Rise While Benefit Rolls at 17-Year Low

[Reuters] Chasing pair Fillon, Melenchon level as French election nears

[CNBC] Republicans have a new plan to repeal Obamacare — and here it is

[Reuters] U.S. House banking chairman unveils Dodd-Frank replacement

[Bloomberg] ECB Officials Inch Toward the Day They Discuss Stimulus Exit

[Bloomberg] PBOC's Ma Says China Weighing Impact of Shadow Banking Rules

[Reuters] China's banking regulator warns trust firms of rising danger: sources

[Bloomberg] China Sage Tips 'Destruction' of Leverage Trades as Stocks Slide

[Reuters] China capital outflows stabilized in first quarter as capital controls bite

[Bloomberg] Japanese Exports Surge to End First Quarter on Strong Note

[Politico] White House eyes harder line on shutdown talks

[Reuters] House Speaker Ryan sees long battle over tax reform

[Reuters] North Korea warns of 'super-mighty preemptive strike' as U.S. plans next move

[Bloomberg] Tillerson Faults Iran Nuclear Accord as U.S. Plans New Review

[WSJ] China Shakes Up Financial Regulators in Scramble for Stability

[FT] Markets may be too sanguine about French election risk

[FT] Goldman Sachs crashes to bottom of the class as bets turn sour

Wednesday, April 19, 2017

Wednesday Evening Links

[MarketWatch] Oil suffers suffer largest one-day loss in six weeks

[Bloomberg] Stocks Slide as Oil Tumbles, Dollar Strengthens: Markets Wrap

[Bloomberg] ETFs Create Stock Markets That Are Both Mindless and Too Expensive, Study Says

[Reuters] Minsheng Bank says branch chief suspected of illegal conduct

[FT] IMF says debt binge leaves US corporate assets exposed

Wednesday's News Links

[Bloomberg] Stocks Advance With Dollar as Haven Demand Eases: Markets Wrap

[Reuters] Macron clings on to lead in tense French election race

[Bloomberg] Melenchon Softens Attacks on Euro as French Race Tightens

[Bloomberg] Fed June Hike Odds Below 50% After Inflation Expectations Tumble

[Bloomberg] Ryan's Best Hope to Avoid a Shutdown: Making Friends With Pelosi

[Bloomberg] Markets Start to Ponder the $13 Trillion Gorilla in the Room

[Reuters] Trump "absolutely not" trying to talk down dollar - U.S. Treasury's Mnuchin

[Reuters] Reflation trades of 2016 deflate with remarkable speed

[Reuters] China relaxes some cross-border capital curbs as yuan steadies: sources

[Reuters] ECB rate hike would help reduce German current account surplus: media

[Bloomberg] There's a Bottleneck in Asia's High Grade Bond Market

[WSJ] A Le Pen-Mélenchon Runoff: Investors’ Nightmare Scenario in France

[FT] China struggles to deal with ‘hopeless’ North Korea

Tuesday, April 18, 2017

Tuesday Evening Links

[Bloomberg] Japan 10-Year Yield Hits Zero for First Time in Five Months

[Bloomberg] U.S. Stocks Fall as Goldman Earnings Disappoint: Markets Wrap

[Bloomberg] Treasuries Rise; Yields Fall to Lowest Levels of 2017

[Bloomberg] Industrial Metals Are Diving

[Bloomberg] Pound Surges to 4-Month High After Snap Call for U.K. Election

[Bloomberg] Canada Puts Housing Speculators on Notice as Toronto Prices Soar

[Bloomberg] George Calls for Fed’s Balance Sheet to Shrink on ‘Autopilot’

[Bloomberg] Goldman Sachs Cools on Long-Dollar Trades as Reflation Wanes

[Bloomberg] Follow $17 Trillion of Fund Money to See Cracks in Trump Trade

[Bloomberg] Home Prices in ‘Drum-Tight’ Toronto Surge by Most on Record

[Washington Post] On North Korea, Trump administration talks tough but hopes to avoid war

[NYT] How Trump’s ‘Hire American’ Order May Affect Tech Worker Visas

[FT] Interview with Steven Mnuchin

[FT] China bank overseer launches ‘regulatory windstorm’

Tuesday's News LInks

[Bloomberg] U.S. Stocks Down as Goldman Earnings Disappoint: Markets Wrap

[Bloomberg] Chinese Stocks Are Unnerving Investors Again as Losses Steepen

[CNBC] US housing starts total 1.215M in March vs. 1.25M starts expected

[Reuters] Goldman Sachs profit misses estimates on trading weakness

[CNBC] Stocks, bonds diverge over whether Trump will be able to deliver on tax reform, stimulus

[Reuters] British PM May calls for early election to strengthen Brexit hand

[CNN] French election: Le Pen, Macron... or Mélenchon?

[Bloomberg] Iron Ore Ignores China Data, Index as Decline Accelerates: Chart

[Bloomberg] China's Booming Dollar Bond Market Faces Threat From Within

[Bloomberg] China Home Prices Rise in More Cities as Buyers Beat Curbs

[Bloomberg] U.S. Firms in China Face Worst Conditions in Decades: AmCham

[Reuters] China March outbound direct investment slumps 30.1 percent as capital curbs bite

[Bloomberg] Don't Bet China Will Bail Out Wealth Products, Fund CEO Says

[Reuters] Greek debt must be sustainable for IMF to join bailout: Lagarde

[Bloomberg] Australia's Central Bank Says Housing Market Risks Are Rising

[FT] Donald Trump, Kim Jong Un and the risk of nuclear miscalculation

[FT] Key market indicators to watch in French presidential election

Monday, April 17, 2017

Monday Evening Links

[Reuters] Wall Street rallies in low volume led by banks, tech

[Reuters] Mnuchin warns of tax reform delay following healthcare setback: FT

[Reuters] Macron urges French to get rid of old generation as race tightens

[BBC] North Korea 'will test missiles weekly', senior official tells BBC

[CNBC] A seismic shift is happening, and billions are pouring into these index funds and ETFs

[FT] US admits Trump tax reforms will be hit by healthcare setback

[FT] Mélenchon barges way into tight French race in final straight

[WSJ] Investors Pile Into Risky Chinese Debt

Monday's News Links

[Bloomberg] Stocks Rise, Dollar Falls as Weekend Risks Fade : Markets Wrap

[Bloomberg] Global Financial-Market Stress Jumps to This Year's High

[Bloomberg[ Trump to Nominate Quarles for Fed's Top Regulatory Post, Source Says

[Reuters] Undaunted by oil bust, financiers pour billions into U.S. shale

[Reuters] The long, rough ride ahead for 'Made in America'

[Bloomberg] China Roars Back to Lift Global Outlook as U.S. Consumer Weakens

[Bloomberg] China’s Economy Accelerates as Retail, Investment Pick Up

[Bloomberg] China Home Sales Surged 18% in March Ahead of Stepped-Up Curbs

[Reuters] China's first-quarter property investment accelerates, defying curbs

[Wall Street Journal] This Is a Dangerous Time to Own Emerging Markets

[Washington Post] Pence warns NKorea ‘era of strategic patience is over’

[Washington Post] Against all odds, a communist soars in French election polls

Saturday, April 15, 2017

Saturday's News Links

[Reuters] Asian economies escape 'manipulator' tag, but expect more pressure on trade

[NYT] Is American Retail at a Historic Tipping Point?

[Reuters] North Korea displays apparently new missiles as U.S. carrier group approaches

[WSJ] North Korea Parades New Long-Range ‘Frankenmissile’

Weekly Commentary: "Risk Off" Making Some Headway

Global “Risk Off” has been Making Some Headway. This week saw ten-year Treasury yields drop 15 bps to 2.23%, the low since the week following the election. German bund yields declined another four bps to a 2017 low 19 bps. The Crowded Trade hedging against higher rates is blowing apart. The Crowded yen short has similarly been blown to pieces, with the Japanese currency surging an additional 2.3% this week (increasing 2017 gains to an impressive 7.7%). Japan’s Nikkei equities index dropped 1.8% this week, with y-t-d losses rising to 4.1%.

Meanwhile, this week Gold surged 2.5%, Silver jumped 2.9% and Platinum gained 1.9%. In contrast to the safe haven precious metals, Copper dropped 2.8%, Aluminum fell 2.7% and nickel sank 4.2%.

European periphery spreads (to bunds) widened meaningfully. Italian spreads widened 14 to 213 bps, the widest since early-2014. Spanish spreads widened 13 to an eight-month high 152 bps. Portuguese spreads widened six bps and French spreads seven. Italy’s stocks fell 2.6%, with Italian banks down 5.9%. Spanish stocks lost 1.9%. European bank stocks dropped 2.6% this week.

A little air began to leak from the EM Bubble. Russian stocks were hammered 5.9% to an eight-month low, increasing 2017 losses to 14.2%. Brazilian stocks lost 2.5%. Chinese equities suffered moderate declines, while appearing increasingly vulnerable. For the most part, however, EM held its own. The weak dollar helped. EM equites (EEM) declined only 0.6% for the week, while EM bonds (EMB) gained 0.4%.

U.S. equities trade unimpressively. The VIX rose slightly above 16 Thursday to the highest level since the election. The banks (BKX) sank 3.2%, increasing 2017 losses to 4.1%. The broker/dealers also lost 3.2% (down 0.7% y-t-d). The Transports were hit 2.5% (down 1.9%). The broader market continues to struggle. The mid-caps dropped 1.5% (up 1.2%), and the small caps fell 1.4% (down 0.9%). Even the beloved tech sector has started to roll over. At the same time, high-yield and investment grade debt for the most part cling to “Risk On.”

A number of articles this week pronounced the death of the “reflation trade.” It’s worth noting that the GSCI Commodities index gained 2.2% this week, trading to a six-week high and back to positive y-t-d. Rising geopolitical tensions helped Crude rise to almost $54, before closing the week at $53.18. President Trump talked down the U.S. dollar, and I’ll add “careful what you wish for.” The dollar index declined 0.6% this week. Is it a coincidence that the President calls the dollar “too strong” only a few days after meeting with Chinese President Xi Jinping? China is no currency manipulator, not if it can rein in a psycho North Korean despot.

When it comes to global reflation, China continues to play a leading role. Chinese Credit enjoyed a historic 2016 – and, after a record first quarter, China's Credit growth is on track to surpass $3.5 Trillion in 2017.

For March, China’s Total Social Finance (TSM) increased a much stronger-than-expected $308 billion. This put first quarter consumer and corporate Credit growth at $1.014 TN, a record exceeding even 2016’s unprecedented Q1. For comparison, China’s Q1 2017 TSM growth was 50% greater than Q1 2015. TSM ended March at $23.65 TN, up 12.5% y-o-y - expanding at a rate almost double the real economy.

And while Chinese bank loan growth slowed to a 12.4% rate in March, there were notable trends that must worry officials. First, shadow banking components expanded a much stronger-than-expected almost $110 billion during the month. Meanwhile, China’s mortgage finance Bubble continues to prove resilient in the face of various efforts to cool overheated housing markets.

April 14 – Reuters (Elias Glenn): “Loans to households surged to 797.7 billion yuan ($115bn) in March, …accounting for 78% of all new loans in the month. That was much higher than either January or February and even the 50% of new loans in 2016. The rise likely was due to a surge in short-term lending to households, as individuals may be turning to alternative types of loans as banks tighten rules on traditional mortgages, said Wendy Chen, an economist at Nomura in Shanghai. ‘We think (the increase in short-term loans) is possibly due to attempts to circumvent strict regulations on mortgages… The high loans to households reflect that property sales are still very hot, and likely shifting from top tier cities to more third or fourth tier cities.’”

In a precarious “Terminal Phase” Credit Bubble Dynamic, Chinese shadow banking has gone parabolic. Over the past five months, shadow banking assets (compiled by Bloomberg) have expanded $472 billion, or about 35% annualized. For comparison, shadow banking increased about $70 billion for all of 2015. Chinese shadow banking increased $300 billion during Q1.

April 11 – Wall Street Journal (Shen Hong): “China’s battle to counter rising stress in its financial system has escalated this week, with regulators making a fresh warning to banks not to engage in speculation that creates unhealthy asset bubbles and prevents money from flowing to more productive parts of the economy. In a directive circulated to banks Monday, the country’s banking regulator instructed banks to carry out self-checks by late November on their involvement in what it termed ‘irregularities.’ The seven-page document… said such actions include making highly leveraged bets on markets via popular investment products, and the excessive use of a newly popular form of short-term debt that banks are increasingly relying on for funding.”

April 10 – Bloomberg: “Like many individual investors in China, Yang Mo has no idea what’s in the wealth management products that make up a big chunk of her net worth. She says there’s really no point in finding out. Sure, WMPs invest in all kinds of risky assets, but the government would never let a big one fail, she says. ‘It’s not how the Chinese government does things, and it’s not even Chinese culture,’ explains Yang, a 29-year-old public relations professional… Hers is a common refrain in Asia’s largest economy, where savers have poured $9 trillion into WMPs and similar products on the assumption that they’ll get bailed out if the investments sour. Even after news in February that policy makers are drafting rules to make it clear that state guarantees don’t exist, Yang is undaunted… ‘Cracking down on implicit guarantees is just like curbing home prices,’ she says. ‘It’s something that the government needs to say, but it’s not something they will eventually do.’”

For several years now, Chinese policymakers have made myriad attempts at the old “lean against the wind” approach to counter mounting financial excess. They’re now facing a Credit typhoon of their own making. At this point, Beijing must inflict pain if they intend to break what is now deeply ingrained inflationary psychology in housing finance as well as powerful speculative impulses throughout finance more generally. Apparently, everyone – from Chinese citizen to global investor – is confident that no dramatic policy measures will be employed prior to the autumn meetings of the National Congress of the Community Party.

Yet Chinese fragility is but one of what has become a litany of risks to the global Bubble. And while largely numb to Chinese risks, speculative global markets are having more difficulty disregarding the troubling geopolitical backdrop. With North Korea at the brink of another nuclear test and warning of nuclear war – and Trump sending an “armada” to the Korean peninsula and threatening a preemptive military strike if a “looking for trouble” North Korea test appears imminent – it’s enough to take some risk off the table and buy gold, Treasuries and bunds. That Trump would send a flurry of Tomahawk missiles into Syria, confront Russia on Assad and drop “the mother of all bombs” into the Afghan mountainside have some thinking it’s time to take geopolitical risks more seriously.

Assuming we make it through Easter weekend without tensions ratcheting up in Korea or elsewhere, market attention will turn to next Sunday’s first round French election.

April 12 – Reuters (Sudip Kar-Gupta and Sarah White): “France's presidential race looked tighter than it has all year on Friday, nine days before voting begins, as two polls put the four frontrunners within reach of a two-person run-off vote. The latest voter surveys may raise investor concerns about the outside possibility of a second round that pits the far-right candidate Marine Le Pen against hard-left challenger Jean-Luc Melenchon. The election is one of the most unpredictable in modern French history, as a groundswell of anti-establishment feeling and frustration at France's economic malaise has seen a growing number of voters turn their backs on the mainstream parties. An Ipsos-Sopra Sterna poll showed independent centrist Emmanuel Macron and Le Pen tied on 22% in the April 23 first round, with Melenchon and conservative Francois Fillon on 20 and 19% respectively.”

Basically, there are four candidates all within the margin of statistical error vying for two spots in the May 7th second round head-to-head. For months now, far-right candidate Marine Le Pen has led first round polling numbers. While somewhat unsettling to markets, the assumption has been that Le Pen would lose badly to the leading “establishment” candidate, presently Emmanuel Macron. But with just over a week to go, far-left candidate Jean-Luc Melenchon is enjoying a surge in popularity. This increases the odds that market favorite Macron might not make it out of the first round.

A Le Pen versus Melenchon second round would be a nightmare scenario for skittish markets. Concern would quickly turn to Italy, where the anti-euro 5-Star Party has been rapidly gaining in the polls ahead of next year’s general election.

Plenty of worries globally and here at home. Especially after last week’s release of weak March auto sales data, concern is growing that tightened Credit conditions have begun to restrain the U.S. economy. For the most part, quarterly earnings reports from the major banks confirmed a weakening of loan growth. Yet it isn’t clear how much of this is the result of tightened lending standards and waning demand for borrowings, or instead more a reflection of huge corporate debt issuance (issue bonds rather than borrow from banks) and a slowing of big M&A deals.

It’s worth noting that the recent drop in mortgage rates comes at a most opportune time for the peak home sales period. Mortgage purchase applications jumped last week to the high since last June - and were the third highest weekly level since 2009. Mortgage rates remain extraordinarily low, consumer confidence quite high and the inventory of homes for sale unusually low. A significant Treasury market squeeze could further stoke housing markets already demonstrating strong inflationary/Bubble biases.

April 13 – CNBC (Diana Olick): “Homes are flying off the shelves this spring, as demand rises and supply continues to drop. Record high prices in some local markets are not thwarting hungry buyers, as they rush to take advantage of the lowest mortgage rates of the year. Home sales jumped nearly 9% in March compared with March 2016, even as the number of homes for sale plunged 13%, according to… Redfin… That demand dynamic further increased competition in the market, resulting in the fastest average sales pace since Redfin began tracking in 2010. The typical home went under contract in just 49 days, down from 60 days a year ago. Steep competition also pushed the median price of a home sold in March to $273,000, up 7.5% year over year.”

As for the U.S. stock market, it appears a decent amount of hedging has taken place over the past couple weeks. Previously such dynamics often created the firepower to squeeze the shorts and force the risk averse to unwind hedges and scamper back aboard the bull market. Complacent markets may have forgotten that put options and myriad “portfolio insurance” strategies can as well provide firepower for a self-reinforcing downside. North Korea, Syria, Russia and France provide potential for clear and present danger.

There is as well the risk of a U.S. government shutdown at the end of the month, along with all the ambiguity surrounding the Trump Administration’s shifting agenda. What appeared a united group determined to go right down the list of campaign promises – keen to focus on tax cuts/reform and infrastructure spending – these days appears confused, less than cohesive and without much of a list. If markets abhor uncertainty, it’s hard to see them enamored with the stunning degree of policy reversals and flip-flopping. Return to healthcare and deal with tax and spending legislation later? Roused from a state of deep depression, the Democrats now count down the days until next year’s mid-terms.


For the Week:

The S&P500 fell 1.1% (up 4.0% y-t-d), and the Dow declined 1.0% (up 3.5%). The Utilities added 0.5% (up 5.8%). The Banks (down 4.1%) and the Broker/Dealers (down 0.7%) sank 3.2%. The Transports were hit 2.5% (down 1.9%). The S&P 400 Midcaps fell 1.5% (up 1.2%), and the small cap Russell 2000 dropped 1.4% (down 0.9%). The Nasdaq100 declined 1.2% (up 10.1%), and the Morgan Stanley High Tech Index fell 1.3% (up 11.8%). The Semiconductors sank 3.9% (up 5.9%). The Biotechs gained 1.4% (up 14.7%). With bullion up $31, the HUI gold index jumped 4.5% (up 16.8%).

Three-month Treasury bill rates ended the week at 79 bps. Two-year government yields dropped eight bps to 1.21% (up 2bps y-t-d). Five-year T-note yields sank 15 bps to 1.77% (down 16bps). Ten-year Treasury yields fell 15 bps to 2.24% (down 21bps). Long bond yields dipped two bps to 2.98% (down 8bps).

Greek 10-year yields sank 21 bps to 6.57% (down 45bps y-t-d). Ten-year Portuguese yields added two bps to 3.89% (up 14bps). Italian 10-year yields jumped 10 bps to 2.32% (up 51bps). Spain's 10-year yields rose nine bps to 1.71% (up 33bps). German bund yields fell four bps to 0.19% (down 2bps). French yields increased three bps to 0.92% (up 24bps). The French to German 10-year bond spread widened seven to 73 bps. U.K. 10-year gilt yields slipped three bps to 1.04% (down 19bps). U.K.'s FTSE equities index dipped 0.3% (up 2.6%).

Japan's Nikkei 225 equities index dropped 1.8% (down 4.1% y-t-d). Japanese 10-year "JGB" yields fell four bps to 0.01% (down 3bps). The German DAX equities index declined 0.9% (up 5.5%). Spain's IBEX 35 equities index fell 1.9% (up 10.4%). Italy's FTSE MIB index sank 2.6% (up 2.8%). EM equities were mostly lower. Brazil's Bovespa index was hit 2.5% (up 4.3%). Mexico's Bolsa declined 0.8% (up 7.3%). South Korea's Kospi dipped 0.8% (up 5.4%). India’s Sensex equities index fell 0.8% (up 10.6%). China’s Shanghai Exchange lost 1.2% (up 4.6%). Turkey's Borsa Istanbul National 100 index gained 1.8% (up 15.3%). Russia's MICEX equities index sank 5.1% (down 14.2%).

Junk bond mutual funds saw outflows of $348 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined two bps to a 19-week low 4.08% (up 50bps y-o-y). Fifteen-year rates dipped two bps to 3.34% (up 48bps). The five-year hybrid ARM rate declined a basis point to 3.18% (up 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.15% (up 46bps).

Federal Reserve Credit last week was little changed at $4.434 TN. Over the past year, Fed Credit declined $13.6bn (down 0.3%). Fed Credit inflated $1.617 TN, or 58%, over the past 231 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $1.5bn last week to $3.213 TN. "Custody holdings" were down $30.8bn y-o-y, or 0.9%.

M2 (narrow) "money" supply last week declined $38.5bn to $13.379 TN. "Narrow money" expanded $773bn, or 6.1%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits surged $79.7bn, while Savings Deposits sank $126bn. Small Time Deposits increased $2.8bn. Retail Money Funds rose $3.4bn.

Total money market fund assets declined $4.1bn to $2.644 TN. Money Funds fell $88bn y-o-y (3.2%).

Total Commercial Paper contracted $7.8bn to $984.9bn. CP declined $108bn y-o-y, or 9.9%.

Currency Watch:

The U.S. dollar index declined 0.6% to 100.51 (down 1.8% y-t-d). For the week on the upside, the South African rand increased 2.4%, the Japanese yen 2.3%, the British pound 1.2%, the Australian dollar 1.1%, the Norwegian krone 0.9%, the New Zealand dollar 0.8%, the Mexican peso 0.8%, the Canadian dollar 0.6%, the Singapore dollar 0.5%, the Swedish krona 0.4%, the Swiss franc 0.4% and the euro 0.3%. For the week on the downside, the South Korean won declined 0.5%. The Chinese renminbi increased 0.22% versus the dollar this week (up 0.87% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.2% (up 0.8% y-t-d). Spot Gold surged 2.5% to $1,286 (up 11.6%). Silver rose 2.9% to $18.51 (up 15.8%). Crude gained 89 cents to $53.18 (down 1.2%). Gasoline slipped 0.5% (up 4%), and Natural Gas declined 0.7% (down 14%). Copper dropped 2.8% (up 3%). Wheat gained 1.5% (up 9%). Corn jumped 2.9% (up 7%).

Trump Administration Watch:

April 12 – New York Times (Alan Rappeport): “President Trump made three startling economic policy reversals on Wednesday, stepping away from pledges he made as a candidate and even policies he supported only days ago. The shifts confounded many of Mr. Trump’s supporters and suggested that the moderate financiers he brought from Wall Street are eclipsing the White House populist wing led by Stephen K. Bannon… In a series of interviews, Mr. Trump said he no longer wanted to label China a currency manipulator — a week after telling The Financial Times that the Chinese were the ‘world champions’ of currency manipulation. In an interview with The Wall Street Journal, the president said he no longer wanted to eliminate the Export-Import Bank. And he said that he might consider reappointing Janet Yellen as chairwoman of the Federal Reserve when her term ends next year.”

April 14 – NBC (William M. Arkin, Cynthia McFadden, Courtney Kube and Kenzi Abou-Sabe): “The U.S. is prepared to launch a preemptive strike with conventional weapons against North Korea should officials become convinced that North Korea is about to follow through with a nuclear weapons test, multiple senior U.S. intelligence officials told NBC News. North Korea has warned that a ‘big event’ is near, and U.S. officials say signs point to a nuclear test that could come as early as this weekend. The intelligence officials told NBC News that the U.S. has positioned two destroyers capable of shooting Tomahawk cruise missiles in the region, one just 300 miles from the North Korean nuclear test site.”

April 11 – Reuters (Sue-Lin Wong and David Brunnstrom): “North Korean state media warned… of a nuclear attack on the United States at any sign of American aggression, as a U.S. Navy strike group steamed toward the western Pacific - a force U.S. President Donald Trump described as an ‘armada’. Trump, who has urged China to do more to rein in its impoverished ally and neighbor, said in a tweet that North Korea was ‘looking for trouble’ and the United States would ‘solve the problem’ with or without Beijing's help.”

April 12 – New York Times (Julie Hirschfeld Davis and David E. Sanger): “President Trump and Secretary of State Rex W. Tillerson sought… to isolate President Vladimir V. Putin of Russia for backing the Syrian government in the wake of its lethal chemical weapons attack on civilians, and worked to build international pressure on Moscow to change course. In Washington, Moscow and New York, the Trump administration publicly chastised Mr. Putin but privately worked to hash out increasingly bitter differences with him. At the same time, Mr. Trump embraced NATO — a military alliance he had previously derided as obsolete — as an effective and vital force for peace and security in a region where Russia has been an aggressive actor.”

April 9 – CNBC (Nyshka Chandran): “As of last week, President Donald Trump's foreign policy vision remained mired in fog. Now, recent developments show an administration that's ready to go on offense. From attacking a Syrian government airfield on Thursday to moving an aircraft carrier group closer to North Korea on Sunday, the White House seems to be pursuing an aggressive approach to reign in rogue nations. ‘Clearly, what the Syrian situation does is illustrate that the Trump administration is willing to use force,’ Adrian Mowat, managing director and chief Asian/EM equity strategist at J.P. Morgan, told CNBC...”

April 14 – Financial Times (Sam Fleming): “The US Treasury warned China that it is closely scrutinising its foreign exchange and trade practices after past interventions caused “significant and long-lasting hardship” for American workers. But it declined to brand the country a currency manipulator despite Donald Trump’s campaign pledges. The Treasury’s twice-annual report on foreign exchange policies lashed the People’s Republic of China for its ‘long track record of engaging in persistent, large-scale, one-way foreign exchange intervention’ but acknowledged that its more recent practices have aimed to prevent excessive depreciation in its exchange rate.”

April 12 – Wall Street Journal (Gunjan Banerji): “Volatility watchers are circling a new date on their calendars: April 28. That is when the U.S. government’s current funding ends. Lawmakers need to pass a new spending bill by then or they risk triggering a partial government shutdown. The CBOE Volatility Index, or VIX, has jumped 29% since April 6 to its highest level since November. The volatility measure is based on options prices and tends to move in the opposite direction of stocks.”

April 10 – Bloomberg (Billy House): “Members of Congress are back home for a two-week recess after one of the most bitterly divided and least productive starts in recent history. A new, urgent challenge is waiting for them when they return: finding a way to set aside their anger and mistrust long enough to keep the federal government open. Government funding expires on April 28, which will give Congress five days to unveil, debate and pass an enormous spending bill, or trigger a government shutdown. ‘What a mess,’ said Paul Brace, a congressional expert at Rice University…”

April 11 – Wall Street Journal (Jacob M. Schlesinger): “The Trump administration moved Wednesday to ramp up its tougher new trade policy, adding another trade hawk to its policy team, while invoking new import penalties against South Korean steelmakers. The steps help kick into gear a trade agenda that has had a slow start compared with the robust trade rhetoric President Donald Trump used on the campaign trail. Democrats in recent days have sought to capitalize on that delay, portraying Mr. Trump as slow to implement his new ‘America First’ approach to global commerce…”

April 11 – New York Times (Neil Irwin): “As Congress and the Trump administration turn their sights on overhauling the tax code, it’s a good time to think about the great three-dimensional brain twister of the 1980s, the Rubik’s Cube. That’s partly because the first and last time there was a comprehensive rewrite of the tax code, it was 1986. But there is more than that. What makes trying to solve a Rubik’s Cube so exasperating is that every rotation you make to align the colors on one side messes up something on one of the other sides. Nothing moves in isolation; everything affects everything else, and rarely for the better. The 1986 tax overhaul took two years. Despite bipartisan backing from the Reagan administration and congressional Democrats, it had many false starts and reversals in its voyage to becoming a law.”

April 12 – Reuters (David Morgan): “U.S. House Speaker Paul Ryan's tax reform blueprint appears to be losing its status as the likely framework for the first major tax overhaul since 1986, with rival approaches emerging from the White House, Senate and other quarters in Congress. Congressional aides, lobbyists and analysts say the changing focus could delay passage of a tax bill until late 2017 or 2018… Like the healthcare bill, the House Republican tax blueprint stems from Ryan's ‘A Better Way’ legislative agenda launched during the 2016 election campaign.”

April 11 – Reuters (Jeff Mason and Sarah N. Lynch): “President Donald Trump told a group of chief executives on Tuesday that his administration was revamping the Wall Street reform law known as Dodd-Frank and might eliminate the rules and replace them with ‘something else.’ At the beginning of his administration, Trump ordered reviews of the major banking rules put in place after the 2008 financial crisis, and last week he said officials were planning a "major haircut" for them. ‘For the bankers in the room, they'll be very happy because we're really doing a major streamlining and, perhaps, elimination, and replacing it with something else,’ Trump said… ‘That will be the minimum. But we're doing a major elimination of the horrendous Dodd-Frank regulations, keeping some obviously, but getting rid of many,’ he said.”

China Bubble Watch:

April 14 – Reuters (Elias Glenn): “China's banks unexpectedly extended less credit in March than in the previous month as the government tries to contain the risks from an explosive build-up in debt and an overheating housing market. But aggregate financing, which includes bank loans as well as off-balance sheet lending, surged in March and was a record in the first quarter, raising doubts about the effectiveness of official efforts so far to clamp down on risks in the financial system. A surge in household lending in March also added to worries about whether authorities will be able to get the frenzied property market under control… China's total social financing (TSF), a broad measure of credit and liquidity in the economy, rocketed to 2.12 trillion yuan in March from 1.15 trillion yuan in February. For the first quarter, TSF reached a record 6.93 trillion yuan -- roughly equivalent to the size of Mexico's economy -- and well above last year's first quarter total.”

April 12 – Bloomberg: “China’s overseas shipments last month jumped the most in two years as global demand held up. Imports moderated after a holiday-season surge in February and the trade balance rose. Exports rose 16.4% in dollar terms, reversing a 1.3% drop a month earlier… Imports increased 20.3%, pulling back after soaring 38.1% the prior month, to leave a trade surplus of $23.93 billion.”

April 13 – Wall Street Journal (Lingling Wei): “President Xi Jinping gathered with his economic mandarins in December for their annual strategy meeting at a heavily guarded government hotel. In closed-door sessions, say people familiar with the confab, he made clear what their mandate was for 2017: He would tolerate no wobbliness in the economy. The communiqué coming out of the session singled out one policy objective in particular—keep the yuan stable. What followed has been the marked acceleration of a shift in priorities at the People’s Bank of China, the central bank, toward preventing the currency from cratering above all else.”

April 12 – Bloomberg: “China’s bond issuers, faced with 9.7 trillion yuan ($1.4 trillion) of maturing debt this year, are stepping on the gas. Companies and governments sold 1.3 trillion yuan of onshore notes in March, about as much as in the first two months of the year combined… Fitch Ratings expects refinancing needs to drive issuance in the coming months, with corporate debt sales for the year forecast to match or even exceed last year’s total. Chinese companies issued a record 9.8 trillion yuan of bonds in 2016.”

April 11 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan’s shift toward new tools to steer the economy has swollen a targeted lending program to such a level that outstanding funds are now worth more than the annual output of the Malaysian and Danish economies combined. The Medium-term Lending Facility has increased to 4.1 trillion yuan ($594 billion), with 3.2 trillion yuan coming due from April to December this year, according to data compiled by Bloomberg. About 2 trillion yuan matured in the same period last year. While the monetary authority has shown a willingness to roll over the funds, with new loans extending maturities in each of the first three months of 2017, the ballooning amount illustrates the challenge Zhou faces as he tries to reduce leverage in the financial system while keeping the monetary base big enough to avoid a credit crunch.”

April 10 – Bloomberg (Alfred Liu): “Hong Kong’s de facto central bank expressed concern about the riskiness of mortgages with high loan-to-value ratios issued by developers… ‘The accumulation of these high LTV mortgages may change the risk profiles of these property developers to which banks may have exposures,’ Raymond Chan, executive director for banking supervision at the Hong Kong Monetary Authority, said… The HKMA said it may ask banks to take additional steps to manage their exposure to the sector.”

Global Bubble Watch:

April 12 – Bloomberg (Brian Chappatta): “Gold and the yen rallied to five-month highs while Treasury note yields approached the lowest levels of the year as investors sought out traditional havens from geopolitical risks. The U.S. equity market’s standard fear gauge rose to the highest since November. The yen strengthened versus all of its G-10 peers as tensions in Asia ratcheted higher… U.S. Secretary of State Rex Tillerson said during a Group of Seven meeting in Italy that Russia must abandon its support of Syrian President Bashar al-Assad’s regime.”

April 11 – Financial Times (Philip Stafford): “The Bank for International Settlements has recommended that central banks become more active participants in the plumbing system that underpins the trading of government bonds to offset increasing market volatility. The bank… said… it had become concerned about the functioning of repo markets because of the effect of accommodative monetary policy and post-crisis regulation, and planned a two-year study to better understand them. The comments from the… institution echo market fears that regulation and expansive policy are collectively having serious repercussions within the $12tn global repo market… Volatility in repo has become more frequent around the end of quarterly reporting periods for financial institutions.”

April 9 – Wall Street Journal (Ben Eisen, Chris Dieterich and Sam Goldfarb): “Investors are buying record volumes of new bonds… Companies and governments in emerging markets sold $178.5 billion of dollar-denominated debt in the first three months of the year, the best first quarter on record, according to… Dealogic. U.S. companies with junk-bond ratings issued $79.6 billion, double from a year earlier. Highly rated U.S. companies also issued $414.5 billion of debt during the first three months of the year. That was a record for any quarter.”

April 9 – Wall Street Journal (Chuin-Wei Yap): “Big Chinese banks are lending record volumes abroad in a bid to tap new growth, helped by state-backed ambitions to build infrastructure around the world. For banks, the timing of one of President Xi Jinping’s showpiece initiatives—known as ‘One Belt, One Road’—is fortuitous: Loans to finance hundreds of projects along ancient trade routes promise oases of profitability amid faltering returns at home. For the first time, three of the country’s four largest lenders last year posted larger increases in overseas lending than in domestic corporate loans… Bank of China, the fourth-biggest Chinese lender by assets, was the top originator of overseas corporate loans last year, with 1.7 trillion yuan ($246.8bn) in such lending…”

April 10 – Bloomberg (Greg Quinn): “Canadian housing starts surged to the fastest pace in a decade, led by apartments and condominiums. Housing starts soared 18% to an annualized 253,720 units in March, from 214,253 units in February… Multiple-unit starts in urban areas surged 30% to 160,989 units. Housing has been one of the main drivers of Canada’s economy over the last several years, as interest rates remain at historically low levels.”

April 12 – Bloomberg (Michael Heath): “Australia’s central bank signaled deeper concern amid ‘heightened risks’ from rising household debt and escalating property prices in Sydney and Melbourne. The Reserve Bank of Australia… said interest-only loans are rising and now account for almost a quarter of owner-occupier mortgages. It also noted about one-third of mortgage holders have either no buffer or less than one month’s repayments.”

April 10 – Bloomberg (Michael Heath): “Australian business conditions jumped to the highest level since February 2008, signaling the economy could be set to strengthen. A gauge of business conditions -- measuring hiring, sales and profits -- jumped to 14 in March from 9 in February, the highest reading since January 2008…”

Fixed Income Bubble Watch:

April 10 – Bloomberg (Liz McCormick and Brian Chappatta): “These days, it seems like everyone in the bond market is obsessed over what will happen when the Federal Reserve starts whittling down its mammoth, crisis-era investments in U.S. government bonds. Yet lost in the hullabaloo is one little-noticed fact: there’s an even bigger debt pile that could draw buyers away from Treasuries at just the wrong time. In overseas markets, more than $3 trillion of negative-yielding government bonds -- which all but guarantee losses for buy-and-hold investors -- have turned positive in recent months… Foreigners currently own 43% of the $13.9 trillion Treasury market. With the Trump administration’s pro-growth agenda likely to swell the public debt burden in coming years, they’ll be crucial in helping hold down long-term borrowing costs as the Fed raises interest rates.”

April 12 – Reuters (Nick Brown): “Bankruptcy for Puerto Rico is looking ever more likely as the clock ticks down toward a May 1 deadline to restructure $70 billion in debt, ramping up uncertainty for anyone betting on returns from the island's widely held U.S. municipal bonds. When U.S. Congress last year passed the Puerto Rico rescue law dubbed PROMESA, it froze creditor lawsuits against the island so its federally appointed oversight board and creditors could negotiate out of court on the biggest debt restructuring in U.S. municipal history. The freeze expires on May 1, however, and an extension by Congress is "not going to happen," said a Republican aide to the House Committee on Natural Resources, which is in charge of territory matters.”

April 10 – Wall Street Journal (Ben Eisen): “The market for risky bonds sold by U.S. companies is showing a never-seen-before pattern, one sign of how expensive that corner of the market has become. BB-rated junk bonds are now characterized by so-called negative convexity, suggesting that junk bonds become more rate-sensitive as rates rise and less rate-sensitive as rates fall, according to Bank of America Merrill Lynch. That’s something that had never happened until last fall. The upside-down condition is happening largely because many high-yield bonds now have provisions built into them to allow the issuer to redeem them early at a set price.”

Europe Watch:

April 11 – Bloomberg (Stefania Spezzati): “The impending French presidential election is rippling across Europe’s bond markets. French bonds fell on Tuesday, increasing the yield spread over Germany to 74 bps. Italian 10-year yields climbed to 2.27%, widening the spread over bunds to the highest level since 2014. Jitters are increasing before the first round of voting on April 23, with polls indicating the stage may be set for a four-way race.”

April 12 – Wall Street Journal (Gunjan Banerji): “Investors have exuded sangfroid about the French presidential election, largely ignoring the risk of Marine Le Pen’s far-right Front National riding on the populist wave that propelled Brexiters and Donald Trump to victory. Such market composure always seemed too good to be true, and this week it showed signs of cracking. As the first round of election on April 23 nears, the cost of insuring against a volatile swing in the euro has jumped. One-month options contracts on the euro-dollar pair have risen to their highest level since the fortnight before the Brexit vote.”

April 12 – Financial Times (Joël Gombin): “Could Marine Le Pen, leader of the far-right National Front (FN), become the next president of France? Since January, opinion polls have consistently suggested that she will win around 26% of the vote in the first round of the presidential election at the end of April, a score in line with those the FN achieved in the European Parliament elections in 2014 and the regional elections in 2015. More recent polls have her at between 23 and 24%, but this would still be enough to ensure she makes it into the run-off in early May. But once there, her chances of prevailing are slim to non-existent. Since President François Hollande withdrew from the race in December, no poll has had Ms Le Pen winning in the second round against the independent centrist Emmanuel Macron or indeed any other opponent. Most surveys give her a second-round score of around 40%.”

April 11 – Wall Street Journal (Christopher Whittall and Riva Gold): “Investors’ next political test is the French election, but many are zeroing in on a different European risk for global markets: Italy. French bonds and shares sold off this week as investors focused again on the country’s presidential election, a two-round vote that begins on April 23 and has triggered concerns of a win for anti-euro candidate Marine Le Pen. Italian bonds also came under pressure and continued to weaken on Wednesday, even as French debt rallied. Those moves came as investors looked beyond France’s election to the problems of Italy, the third-largest economy in the eurozone.”

April 12 – Reuters (Jeremy Gaunt): “The euro zone's greatest existential threat may no longer center on small, peripheral countries such as Greece and Portugal dragging it down, but instead on the prospect that its third largest economy, Italy, could abandon ship. Two recent economic reports show what the euro has meant to Italians and why polls suggest they are no longer keen. One suggests they are poorer as a result of being part of the currency bloc, the other that they are falling further behind their counterparts in main trading partner Germany. It is a distant risk to the currency bloc that Italy will actually walk away, but not beyond imagination. Italy's 5-Star movement, which wants to dump the euro through a referendum, has been surging in opinion polls recently, getting as much as a third of the vote in a March Corriere Della Sera poll. The anti-European Union Northern League got another 12 or so percent - and there are others.”

Federal Reserve Watch:

April 11 – Wall Street Journal (David Harrison): “Federal Reserve Chairwoman Janet Yellen indicated… that the era of extremely stimulative monetary policy was coming to an end. …Ms. Yellen said the Fed was moving away from its efforts to revive a recession-scarred economy and focusing instead on maintaining the gains of the past few years. That will change the central bank’s policy-making stance, she said, noting that Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate. ‘Where before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now [we’re] allowing the economy to kind of coast and remain on an even keel… To give it some gas, but not so much that we’re pressing down hard on the accelerator.’”

U.S. Bubble Watch:

April 13 – Reuters (David Henry): “Big U.S. banks revealed more evidence of a slowdown in loan growth in their earnings reports…, though executives assured there is still healthy demand from borrowers and no reason to worry about the state of the economy. JPMorgan… and Citigroup Inc posted higher first-quarter earnings that beat analysts' expectations on large gains in trading revenue. Wells Fargo… reported a slight dip in profit due to a slowdown in mortgage banking. The results underscored concerns expressed recently by analysts and investors that higher interest rates, combined with uncertainty about geopolitical events, could hurt economic growth - and therefore crimp lenders' bottom lines.”

April 9 – Financial Times (Rana Foroohar): “Rapid run-ups in debt are the single biggest predictor of market trouble. So it is worth noting that over the past 10 years the amount of student loan debt in the US has grown by 170%, to a whopping $1.4tn — more than car loans, or credit card debt. Indeed, as an expert at the Consumer Financial Protection Bureau recently pointed out to me, since 2008 we have basically swapped a housing debt bubble for a student loan bubble… In America, 44m people have student debt. Eight million of those borrowers are in default… While the headline consumer price index is 2.7%, between 2016 and 2017 published tuition and fee prices rose by 9% at four-year state institutions, and 13% at posher private colleges.”

April 11 – Wall Street Journal (Gunjan Banerji): “The popular Wall Street trade of shorting volatility stumbled this week as a sharp reversal in markets forced investors to unwind their bets. Concerns over U.S. policy changes and geopolitical developments across the globe sparked a flight to safety on Tuesday, sending stocks and government bond yields lower. The CBOE Volatility Index, or VIX — a gauge that tracks investor anxiety — bounced back sharply, jumping 8% to 15.17, on track for the highest close since the U.S. presidential election on Nov. 8.”

April 11 – Financial Times (Alistair Gray): “More than a million new apartments have sprung up across the US in a post-crisis construction surge. Now bankers who funded the boom are worried: have developers built too much? As concerns grow about a supply glut, financial watchdogs this month began scrutinising how the largest lenders would cope with a property market crash. Officials at the Federal Reserve ordered banks to set out how they would fare if commercial real estate (CRE) prices dropped 35% and rental apartment values collapsed by more… Almost a decade since the financial crisis — when CRE prices dropped as much as 40%, even more than residential housing — bankers as well as regulators are again growing nervous about the sector.”

April 11 – Wall Street Journal (Peter Grant): “Commercial real-estate lending by banks, insurance companies and other financial institutions is declining as sales activity slows and regulators voice concern about the sector. Lenders closed roughly $491 billion of mortgage loans backed by U.S. property in 2016, down 3% from 2015… Most of the decline occurred in the fourth quarter, when volume was 7% lower than the same quarter in 2015… Despite the decrease, the new-volume number was the third highest since the association began doing the survey, behind 2015 and the record year of 2007.”

April 10 – Bloomberg (Romy Varghese): “California cities and counties will see their required contributions to the largest U.S. pension fund almost double in five years, according to an analysis by the California Policy Center. In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023… The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.”

Japan Watch:

April 10 – Bloomberg (Pavel Alpeyev and Takako Taniguchi): “The troubles at Japan’s Toshiba Corp. grew deeper as the 142-year-old conglomerate warned it may not be able to continue as a going concern because of losses from its Westinghouse Electric nuclear business… The disclosure came… as the… company took the unusual step of reporting third quarter earnings without approval from its auditors. Toshiba said losses last year had left it with negative shareholders equity of 225.6 billion yen ($2.1bn)…”

EM Watch:

April 12 – Bloomberg (Michael Heath): “Brazil’s central bank signaled further aggressive key rate cuts are in store after slashing borrowing costs by the most in nearly eight years to help boost growth. Policy makers… voted unanimously to reduce the benchmark rate by a full percentage point to 11.25% following two 75 bps cuts. The monetary authority has lowered borrowing costs 300 bps since beginning the easing cycle in October.”

Geopolitical Watch:

April 12 – Reuters (Nobuhiro Kubo): “Japan's navy plans a joint show of force with the U.S. Navy's USS Carl Vinson aircraft carrier strike group as it steams towards the Korean peninsula aimed at deterring secretive North Korean regime from further missile tests, two sources said. With tension growing markedly, the Korean peninsula is the closest it has been to a ‘military clash’ since Pyongyang's first nuclear test in 2006, an influential state-run Chinese newspaper said…”

April 12 – Reuters (Sue-Lin Wong and David Brunnstrom): “North Korean state media warned… of a nuclear attack on the United States at any sign of American aggression, as a U.S. Navy strike group steamed toward the western Pacific - a force U.S. President Donald Trump described as an ‘armada’. Trump, who has urged China to do more to rein in its impoverished ally and neighbor, said in a tweet that North Korea was ‘looking for trouble’ and the United States would ‘solve the problem’ with or without Beijing's help.”

April 8 – Wall Street Journal (Asa Fitch): “Following a U.S. strike on a Syrian air base, Iran has sought to buttress ties with a key ally: Russia. On Saturday, several Iranian military officials and diplomats discussed the conflict in Syria with Russian counterparts, after dozens of U.S. Tomahawk cruise missile strikes on Thursday targeted the Shayrat Airfield near Homs, Syria. The U.S. strikes marked the first time during Syria’s civil war that the U.S. directly targeted the regime of Iran’s close ally, Syrian President Bashar al-Assad…”