So Much for the “Trump Put.”
May 31 – Bloomberg (Felice Maranz): “President Trump’s promise to impose tariffs on goods until Mexico halts a flow of undocumented immigrants is being panned by analysts and economists… Here’s a sample of the latest commentary: MUFG, Chris Rupkey: ‘If you are going to turn the world upside down with these America First trade sanctions against imports from China, car imports from Europe, and now immigration from Mexico, you risk turning the economy upside down… Keep your eye trained on stock market valuations as the magnitude of the decline will tell you when investors have had enough and are rushing to the safety of cash in an increasingly dangerous and uncertain world.’ Cowen, Chris Krueger: ‘In the space of a few hours last night, Trump overturned all we thought we understood about the near term direction of the Administration’s trade strategy’… The president ‘unveiled a one-two punch that we believe will make USMCA extremely hard to pass in both Mexico and the U.S.’ ‘When Tariff Man returned on a rainy Sunday (May 4) to announce tariff escalations on China, we detected a consensus that this was merely a negotiating tactic… In the 27 days that have followed, no public talks have been held and the tariff escalation for goods in-transit along with China’s escalation on $60 billion in U.S. exports is hours away.’ AGF Investments, Greg Valliere: ‘These tariffs break new ground’ …because ‘they’re political, a punishment to Mexico for not stopping the surge of immigrants from Central America.’ He listed five ‘enormous implications’: Damage to USMCA ratification process; potential that a ‘slumbering’ Congress may awaken; Trump may not be finished with new tariffs, triggering higher prices for products…; Trump doesn’t seem to be listening to advisers, appears unconcerned by market and economic damage; Federal Reserve may now be forced to cut rates, but that may not be enough to reverse the damage.’”
May 31 – Bloomberg (Michelle Jamrisko and Enda Curra): “Prospects for a U.S.-China trade deal just became even more remote after President Donald Trump whacked tariffs that could rise to 25% on Mexico until that country stops immigrants from entering the U.S. illegally. ‘A U.S.-China trade deal will be even less likely,’ said Khoon Goh, head of research at Australia & New Zealand Banking Group… ‘At the end of the day, what’s the point of doing a deal if the U.S. can just impose tariffs arbitrarily?’ Investors are already bracing for a prolonged economic stand-off between the world’s two biggest economies. One potential beneficiary of the impasse was likely to be Mexico as companies considered shifting supply chains away from China toward lower-cost markets closer to American consumers. The latest escalation of Trump tariffs threatens that process.”
May 31 – Bloomberg (Michael Sin): “‘Trade policy and border security are separate issues. This is a misuse of presidential tariff authority and counter to congressional intent,’ U.S. Senate Finance Committee Chairman Chuck Grassley (R-Iowa) says… ‘Following through on this threat would seriously jeopardize passage of USMCA.’”
May 31 – Bloomberg (Michael R. Bloomberg): “President Donald Trump’s approach to trade policy had set new benchmarks of incoherence and irresponsibility even before his threat to impose escalating tariffs on imports from Mexico — but this latest maneuver takes the cake. The administration plans to harm businesses north and south of the border, and to impose additional new taxes on U.S. consumers, not to remedy a real or imagined trade grievance but to force Mexico to curb migration to the U.S. This is a radical and disturbing development. The administration is invoking a law that allows it to impose emergency economic sanctions. It’s safe to say that Congress never envisaged that those powers would be used in a case like this.”
According to CNBC reporting (Kayla Tausche and Tucker Higgins), the President’s Mexico tariff move was “spearheaded by advisor Stephen Miller.” That the decision was made despite opposition from both Treasury Secretary Mnuchin and Trade Representative Lighthizer is only more troubling to the markets (and the world more generally). Has the President “gone off the rails”? CNBC: “The surprise decision to announce the tariff plan came as Trump was ‘riled up’ by conservative radio commentary about the recent surge in border crossings… As the tariff plan was formulated, top advisors, including Vice President Mike Pence, who was traveling, and Larry Kudlow, who was undergoing surgery, were away.”
“‘Unreliable’ Trump Throws Markets Into Tizzy as Traders Scramble,” read a Friday afternoon Bloomberg headline. With the S&P500 index wobbling just above the key 200-day moving average, traders had been looking for a supportive tweet. Who would have expected it to be the President to nudge markets toward the cliff’s edge? Meanwhile, increasingly anxious currency traders hit a landmine, as the Mexican peso was slammed 2.4% in Friday trading (2.9% for the week). Mexico’s S&P IPC equities index dropped 1.4%. As if awakening to how incredibly uncertain the backdrop has become, gold surged $21 this week. Seemingly experiencing nightmares of global depression, WTI crude collapsed 8.7% for the week.
For a day, dramatic threats of Mexico tariffs almost took the spotlight off the rapidly escalating China-U.S. trade war. Almost.
May 31 – New York Times (Alexandra Stevenson and Paul Mozur): “The Chinese government said on Friday that it was putting together an ‘unreliable entities list’ of foreign companies and people, an apparent first step toward retaliating against the United States for denying vital American technology to Chinese companies. China’s Ministry of Commerce said the list would contain foreign companies, individuals and organizations that ‘do not follow market rules, violate the spirit of contracts, blockade and stop supplying Chinese companies for noncommercial reasons, and seriously damage the legitimate rights and interests of Chinese companies.’”
This is turning serious. The “Unreliably Entities List” follows reports earlier in the week that China is preparing to restrict the export of rare earth minerals. Friday from the New York Times: “As China Takes Aim, Silicon Valley Braces for Pain.” Another Friday headline, “U.S. is Dependent on China for Almost 80% of Its Medicine,” played into the narrative that the trade war is suddenly appearing much more complex and ominous than previously envisioned. China clearly has the capacity to play hardball; preparations have commenced.
May 29 – Reuters (Ben Blanchard, Michael Martina and Tom Daly): “China is ready to use rare earths to strike back in a trade war with the United States, Chinese newspapers warned… in strongly worded commentaries on a move that would escalate tensions between the world’s two largest economies… In a commentary headlined ‘United States, don’t underestimate China’s ability to strike back’, the official People’s Daily noted the United States’ ‘uncomfortable’ dependence on rare earths from China. ‘Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery,’ it said. ‘Undoubtedly, the U.S. side wants to use the products made by China’s exported rare earths to counter and suppress China’s development. The Chinese people will never accept this!’ the ruling Communist Party newspaper added. ‘We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!’”
I’ll assume the Mexican tariff issue is resolved relatively soon, while the trade war with China appears poised to be a major and protracted problem. As I’ve highlighted in previous CBBs, this confrontation comes at a tenuous juncture for China’s financial system and economy. The assumption – for the markets and, apparently, within the administration – has been that fragilities would incentivize Beijing to play nice and succumb to a deal.
The Trump administration pushed aggressively, and the deal blew apart. And the longer conciliatory tones go missing from both sides, the more likely it is that the Rubicon has been crossed. This significantly increases the likelihood that China is heading into a crisis backdrop, with Beijing enjoying a larger-than-life “foreigner” “bully” to blame, berate and villainize before a population with expectations perhaps as great as the challenges they now confront.
What could be the most consequential story of the past week received little press attention in the U.S. – and maybe even less in China.
May 28 – Bloomberg: “Is it the start of a new era for China’s $42 trillion financial industry, or a one-time shock that will be quickly forgotten? Five days after the first government seizure of a Chinese bank in 20 years, investors are still grasping for answers. The takeover of Baoshang Bank Co. — announced with scant explanation on Friday night — left China watchers guessing at whether it marks an end to the implicit backstop for banks that has served as a linchpin of the country’s financial stability for decades. Regulators have said they’ll guarantee Baoshang’s smaller depositors, and while they’ve warned some creditors of potential losses, they haven’t said what the final payouts could be or given public guidance on whether the takeover will be a blueprint for other lenders. Complicating matters is the fact that Baoshang has been linked to a conglomerate under investigation by Chinese authorities.”
It’s a testament to the incredible growth of China’s banking system (from about $7 TN to $40 TN since the ’08 crisis) that Baoshang, with its mere $80 billion of assets, is one of a very large group of “small banks.” Along with most “small” Chinese banking institutions, Baoshang tapped the “money” markets for much of its gluttonous financing needs. It issued institutional negotiable certificates of deposit (NCD) and aggressively borrowed in the interbank lending market. The first Chinese government bank seizure in 20 years is further notable for Beijing’s decision to impose losses on some Baoshang creditors. While retail depositors are to receive 100% of their funds, corporate and financial creditors face painful haircuts.
May 29 – Reuters (Cheng Leng, Zheng Li and Andrew Galbraith): “Chinese regulators have issued instructions for the repayment of debts owed by China’s beleaguered Baoshang Bank that could see larger debts facing haircuts of as much as 30%, two sources with knowledge of the matter told Reuters. According to oral instructions detailed by the sources, regulators will guarantee the principal but not the interest on interbank debts between 50 million yuan and 100 million yuan. Debts of more than 5 billion yuan ($723.47 million) will have no less than 70% of their principal guaranteed, the sources said. For debts between 100 million and 2 billion yuan, regulators will guarantee no less than 90% of principal, and for debts of 2 billion yuan to 5 billion yuan, no less than 80% of principal will be guaranteed.”
May 31 – Bloomberg: “Holders of bankers’ acceptances worth more than 50m yuan ($7.2m) issued by Baoshang Bank will be repaid at least 80% of the principal, said people familiar with the matter. Investors were told on Friday that while they will be repaid 80% initially, they may still have recourse to the rest of the repayment as regulators progress in resolving Baoshang’s finances…”
Beijing has moved to invalidate the implicit 100% state guarantee of all large bank liabilities – deposits, NCDs, bankers’ acceptances, interbank loans, etc. Such a critical issue should have been decisively addressed years ago – certainly long before China’s Bubble inflated in “Terminal Phase” excess. Now, with the colossal sizes of China’s banking system and money market complex – coupled with rapidly expanding problem loans – a banking crisis would add Trillions (U.S. $) to the central government’s debt load. Bank losses will have to be shared by the marketplace, a prospect few to this point have been willing to contemplate. Going forward, investors will increasingly question the perceived “money-like” attributes of safety and liquidity for Chinese financial instruments.
Baoshang is part of an organization controlled by a Chinese tycoon under criminal investigation. While not a typical bank, its vulnerable financial structure is typical of scores of Chinese financial institutions whose breakneck growth was financed by cheap loans readily available for all from China’s booming (“shadow”) money market. Reminiscent of America’s GSE experience, it was all made possible by implied government guarantees Beijing was for too long content to empower. Beijing has now moved to adjust the rules of the game, with major ramifications for China’s fragile historic Bubble – right along with world markets and the global economy more generally.
May 28 – Bloomberg (Ina Zhou): “Pressure is building in a corner of Chinese lenders’ offshore debt after the nation’s first government seizure of a bank in about two decades. Loss-absorbing bonds, known at Additional Tier 1 instruments or AT1s, plunged across several small lenders on Tuesday after a sell-off on Monday. Huishang Bank Corp.’s 5.5% AT1s sank by a record 3 cents on the dollar Tuesday, while Bank of Jinzhou Co.’s 5.5% note fell most since July and China Zheshang Bank Co.’s 5.45% bond had the steepest drop in a year.”
The Shanghai Composite jumped 1.6% this week, while China’s currency was down only slightly (.07%). Superficially, it was easy to dismiss the Baoshang seizure as “no harm, no foul.” Thank the PBOC.
May 29 – Reuters (John Ruwitch and Simon Cameron-Moore): “China’s central bank made its biggest daily net fund injection into the banking system in more than four months on Wednesday, a move traders saw as an attempt to calm the money market after the rescue of a troubled bank. The government announced its takeover of Baoshang Bank on Friday… Worries that Baoshang’s plight might herald wider problems among China’s regional banks had driven money market rates higher, until the People’s Bank of China (PBOC) delivered a mighty infusion of cash on Wednesday.”
The PBOC’s $36 billion Wednesday injection raises a crucial question: What will be the scope of liquidity needs when a major bank finds itself in trouble – when escalating systemic stress begins fomenting a crisis of confidence? It’s worth noting that Chinese sovereign CDS jumped six bps this week to 59 bps, the high since January. Overnight repo and interbank lending rates rose, along with Chinese corporate bond yields. According to Bloomberg, issuance of negotiable certificates of deposit slowed sharply this week. Chinese finance is tightening, an ominous development for a fragile Bubble.
This is where the analysis turns absolutely fascinating – and becomes as important as it is chilling. The PBOC is at increasing risk of confronting the same predicament that other emerging central banks faced when their Bubbles succumbed: in the event of a mounting crisis of confidence in the stability of the financial system and the local currency, large central bank injections work to fan market fears while generating additional liquidity available to flow out of the system. “Everyone has a plan until they get punched in the mouth.”
Markets ended the week pricing in a 95% probability of a Federal Reserve rate cut by the December 11th meeting. Ten-year Treasury yields sank 20 bps this week to 2.12%, falling all the way back to the lows from September 2017 (2.57% 30-yr yield to pre-2016 election level). German bund yields dropped nine bps to a record low negative 0.20%. Swiss yields fell five bps to negative 0.51%, with Japanese JGB yields down two bps to negative 0.10%. I view the ongoing global yield collapse as powerful confirmation of the acute fragility of Chinese and global Bubbles.
If President Trump is determined to squeeze rate cuts out of the Federal Reserve, he made impressive headway this week. This CBB began with, “So Much for the Trump Put.” As for the “Beijing put,” a $36 billion PBOC liquidity injection was indiscernible beyond Chinese markets. Investors in U.S. securities would be wise to anticipate zero favors from China.
As such, markets are left with the “Fed put.” For the most part, U.S. stocks, equities derivatives and corporate Credit have been comfortable banking on the Federal Reserve backstop. But with things turning dicey in China, risk aversion is gaining a foothold. Investment-grade funds saw outflows surge to $5.1 billion the past week (“most since 2015”). Corporate spreads and CDS prices have begun to indicate liquidity concerns. With the “Fed put” now in play, there are important questions to contemplate: Where’s the “strike price” – what degree of market weakness will it take to compel the Fed to move – and, then, to what effect? Markets, after all, have already priced in aggressive rate cuts. It could very well require some “shock and awe” central banking to reverse markets once panic has begun to set in. And it’s as if global safe haven bond markets are anticipating a bout of panic in the not too distant future.
May 29 – Bloomberg (Jason Rogers, David Stringer, and Martin Ritchie): “A flurry of Chinese media reports…, including an editorial in the flagship newspaper of the Communist Party, raised the prospect of Beijing cutting exports of the commodities that are critical in defense, energy, electronics and automobile sectors. The world’s biggest producer, China supplies about 80% of U.S. imports of rare earths, which are used in a host of applications from smartphones to electric vehicles and wind turbines. The threat to weaponize strategic materials ratchets up the tension between the world’s two biggest economies before an expected meeting between Presidents Xi Jinping and Donald Trump at the G-20 meeting next month.”
May 28 – South China Morning Post (Karen Yeung): “China must exercise extreme caution in handling its housing sector because it is showing signs similar to those witnessed during Japan’s bubble period of the 1980s that contributed to the collapse of Japanese asset prices and its subsequent ‘lost decades’ of weak economic growth and deflation, a Japanese financial system expert warned. The parallels between China’s current landscape and Japan’s three decades ago are readily apparent, stemming from a loose monetary policy that laid the foundation for the expansion of a housing bubble, said Naoyuki Yoshino, dean and CEO of the Asian Development Bank Institute. China flooded its economy with credit in response to the 2008 global financial crisis, fuelling rapid growth in mortgages, real estate borrowings and investments over the past decade.”
May 28 – Bloomberg: “China’s credit investors are demanding to be paid for risk – and that’s leading to explosive growth in the nation’s high-yield bond market. There are about 1.1 trillion yuan ($159 billion) of local company bonds outstanding that offer investors more than 8%, the local cutoff for what’s considered high-yield, according to AJ Securities Co. By late last year, the market was seven times larger than it was at the start of 2015, Guosen Securities Co. data show. A record wave of company defaults is forcing asset managers to spend more time doing due diligence on issuers, and account for those risks in bond-market pricing.”
May 26 – Bloomberg: “Huawei Technologies Co. founder Ren Zhengfei struck a defiant tone in the face of U.S. sanctions that threaten his company’s very survival. In an interview with Bloomberg Television, the billionaire founder of China’s largest technology company conceded that Trump administration export curbs will cut into a two-year lead Huawei had painstakingly built over rivals like Ericsson AB and Nokia Oyj. But the company will either ramp up its own chip supply or find alternatives to keep its edge in smartphones and 5G.”
May 28 – Bloomberg (Carrie Hong): “China is reining in offshore bond sales by property developers and local government financing vehicles in a bid to ease credit risk following a surge in issuance. The National Development and Reform Commission (NDRC) has tightened approvals for these firms seeking quotas for offshore bond sales since early April… The tighter rules particularly apply to real estate companies looking to sell offshore bonds for the first time and lower-tier LGFVs, said the people who aren’t authorized to speak publicly… Since April, several offshore issuance quota applications from these companies have been rejected by the authority. The greater scrutiny follows a jump in debt sales so far this year on the back of a dovish U.S. Federal Reserve…”
May 28 – CNBC (Fred Imbert): “China’s true pace of economic growth is always hard to decipher, but the country’s lagging diesel demand could be a sign that the world’s second-largest economy is in a much more dire state than official numbers indicate. Diesel demand in China fell 14% and 19% in March and April, respectively, reaching levels not seen in a decade, according to data compiled by Wells Fargo. Monthly demand has also been falling every month since December 2017…”
Brexit Watch:
May 27 – Reuters (Elizabeth Piper and Elisabeth O’Leary): “Britain’s two main parties set the stage… for a battle over a no-deal Brexit, hoping to win back voters who abandoned them for a new movement led by eurosceptic Nigel Farage and other smaller parties in European elections. After a punishing night when acrimonious divisions over Britain’s departure from the European Union were plain to see, contenders for the leadership of the governing Conservatives said the results were a demand to deliver Brexit no matter what.”
Central Banking Watch:
May 26 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… the global economic outlook is highly uncertain, and there are downside risks due to trade friction, China’s slowing economy and Britain’s negotiations to leave the European Union. ‘There is a high degree of uncertainty… and the downside risks are large,’ Kuroda said…”
May 26 – Reuters (Frank Siebelt): “European Central Bank policymaker and presidential hopeful Jens Weidmann said… he saw no need for the ECB to change its policy at present, despite a weaker euro zone economy. The ECB’s Governing Council is due to meet on June 5-6 and decide on the terms of its third round of cheap loans to banks… ‘This isn’t a situation where prices are falling and we have to react now,’ the head of Germany’s central bank told members of the public at the Bundesbank’s open days.”
May 29 – Reuters (Leika Kihara): “Former European Central Bank President Jean-Claude Trichet said… it was not right to think that central banks must achieve exactly the level of inflation they target in a set period of time. ‘There is a consensus among central banks that real success is to solidly anchor inflation expectations in the medium- to long-term in line with their definition of price stability,’ Trichet said…”
May 28 – CNBC (Jeff Cox): “Policymakers pulled out all the stops to fix the financial crisis, but they may have to get even more extreme when the next downturn hits. Future crises could see a ‘radicalization’ of the types of measures taken to jolt the economy out of its last malaise, according to an analysis by AB Bernstein that looks both at the waning effectiveness of current attempts and the shape future efforts will take. Essentially, the view is that next time around policymakers will go even further. That means the use of ‘Modern Monetary Theory’ — in which even more government debt is used to spur growth — along with negative interest rates and the possible step of distributing ‘helicopter money’ or direct cash from central banks like the Federal Reserve.”
May 28 – Reuters (Gavin Jones): “Italian Deputy Prime Minister Matteo Salvini called… for a new role for the European Central Bank, which should ‘guarantee’ government debt in order to keep bond yields low… Fresh from a victory in European parliamentary elections, the leader of the right-wing League said… that the EU’s ‘failed’ fiscal rules should be rewritten with the focus on cutting unemployment, not capping budget deficits.”
Europe Watch:
May 29 – Financial Times (Claire Jones and Adrienne Klasa): “The voting is over and now the horse-trading begins. The EU’s 28 member countries have elected a new European Parliament, but deciding who gets appointed to the top jobs is a matter for the politicians. At the heart of the negotiations that will take place over the next few weeks is the naming of a successor to Mario Draghi as president of the European Central Bank. Mr Draghi is set to step down in October. Following in his footsteps will not be an easy task. During his eight-year tenure, the Italian economist undertook controversial and radical policies during the eurozone debt crisis but is widely credited with saving the single currency. He declared in 2012 that the ECB was prepared to do ‘whatever it takes’ to preserve the currency, a move that is seen as a turning point, shoring up confidence in shaky European economies and rebooting lending.”
May 27 – Reuters (Jan Strupczewski): “The results of the European parliamentary election are likely to lead to less ambitious euro zone integration plans and set Italy up for more clashes with the European Commission over its fiscal policy, euro zone officials said…”
May 28 – Financial Times (Miles Johnson and Mehreen Khan): “Matteo Salvini has called for a ‘fiscal shock’ of tax cuts in Italy as he exerts his political influence after a resounding victory in the European elections, but Brussels is preparing to hit back over Rome’s budget plans. Italy’s deputy prime minister and leader of the anti-immigration League party said that Italy ‘must lower taxes’. ‘We need a Trump cure, an Orban cure, a positive fiscal shock to restart the country,’ Mr Salvini said… ‘Not everything all at once, but the goal is in the government contract.’”
May 25 – Reuters (Claire Jones and Miles Johnson): “Italy’s stuttering economy is one of the greatest obstacles to eurozone growth — but just as the country needs external policy support it is at risk of losing its seat on the European Central Bank. For the first time in the history of the monetary union’s highest policymaking body, Italy may not have an appointee on its governing board after Mario Draghi… steps down this autumn after eight years in charge. Since the birth of the central bank in 1998, the eurozone’s third-largest economy has held one of six seats on a board that shapes everything from how the ECB responds to financial crises to the day-to-day running of the institution.”
May 25 – Reuters (Alastair Macdonald and Jan Strupczewski): “Parties committed to strengthening the European Union held on to two-thirds of seats in the EU parliament, official projections from the bloc’s elections showed on Sunday, though far-right and nationalist opponents saw strong gains. France’s Emmanuel Macron, who has staked his presidency on persuading Europeans that the EU is the answer to the challenges of an uncertain, globalising world economy, took a personal hit when his centrist movement was edged into second place by Marine Le Pen’s anti-immigration, anti-Brussels National Rally.”
May 28 – Reuters (Silvia Aloisi): “The European Commission could impose a 3 billion euro fine on Italy for breaking EU rules due to its rising debt and structural deficit levels, the country’s Deputy Prime Minister Matteo Salvini said… Salvini, whose far-right League party triumphed in European elections on Sunday, said he would use ‘all my energies’ to fight what he said were outdated and unfair European fiscal rules.”
May 28 – Bloomberg (Arne Delfs and Patrick Donahue): “Angela Merkel has given up hope on her heir apparent and is hunkering down in office in the face of growing turmoil in Germany’s ruling party. Merkel has decided that Annegret Kramp-Karrenbauer, who took over as leader of the Christian Democratic Union in December, is not up to the country’s top job, according to two officials… As a result, the chancellor has become more determined than ever to stay in power until her term ends in 2021, the officials said.”
May 28 – Financial Times (Valentina Romei): “Lending growth to businesses in the eurozone accelerated in April but was not broad-based, with a worrying contraction in weaker economies. Lending to eurozone businesses, adjusted for securitisation, rose by an annual rate of 3.9%, stronger than the 3.6% in March. Lending growth to households remained solid and improved marginally to 3.4%… Lending growth in France and Germany continued at a strong pace above 6%, but it contracted in Italy and Spain.”
Japan Watch:
May 27 – Reuters (Tim Kelly and Malcolm Foster): “U.S. President Donald Trump expects that Japan’s military will reinforce U.S. forces throughout Asia and elsewhere, he said…, as the key U.S. ally upgrades the ability of its forces to operate further from its shores. Trump’s comments followed his inspection of Japan’s largest warship, the Kaga, a helicopter carrier designed to carry submarine-hunting helicopters to distant waters.”
EM Watch:
May 27 – Bloomberg (Cagan Koc): “Turkey’s central bank took another step to boost its coffers by raising the amount of foreign currency lenders are required to park at the regulator as reserves. The monetary authority increased reserve requirements for foreign-exchange deposits by 200 bps… The measures will withdraw around $4.2 billion of liquidity from the market, it said. Data last week showed that Turkey’s net international reserves dropped to the lowest level since October as concerns linger that the central bank is trying to prop up the lira before elections next month.”
May 28 – Bloomberg (Asli Kandemir): “Turkey’s industrial giants are struggling to keep a lid on soaring finance expenses that are threatening to engulf operating income as the lira’s depreciation pushes up foreign-borrowing costs. Istanbul’s top 500 industrial firms, which together account for almost half of the nation’s exports, reported finance expenses of 95.8 billion lira ($16 billion) last year, compared with 35.2 billion liras in 2017… The ratio of financial costs to operating profits almost doubled to 88.9%, he said.”
May 29 – Reuters: “Brazil’s economy shrank in the first quarter of this year, contracting 0.2% from the prior quarter…, the first contraction since 2016.”
May 27 – Bloomberg (Suvashree Dey Choudhury and Shruti Srivastava): “India’s shadow banks are likely to see a further squeeze on their profit margins after the Reserve Bank of India signaled it will tighten liquidity requirements to bring them in line with the country’s more closely regulated commercial banks. Instead of providing a much-expected liquidity window to non-bank finance companies via the regular lenders, the central bank took a tougher stance on Friday by issuing draft guidelines requiring most NBFCs to set aside a liquidity buffer by investing in high-quality liquid assets, primarily sovereign bonds.”
Global Bubble Watch:
May 29 – New York Times (Neil Irwin): “You know the moment in a horror movie when the characters are going about their business and nothing bad has happened to them yet, but there seem to be ominous signs everywhere that only you, the viewer, notice? That’s what watching global financial markets the last couple of weeks has felt like.”
May 29 – Bloomberg (James Crombie and Jonathan Ferro): “Credit market risk is at an all-time high, according to Scott Mather, chief investment officer of U.S. core strategies at Pacific Investment Management Co… ‘We have probably the riskiest credit market that we have ever had,’ Mather said… The increased size, lower quality and lack of liquidity in corporate bond markets are all red flags, Mather said.”
Fixed-Income Bubble Watch:
May 30 – CNBC (Jeff Cox): “Low-rated companies are the biggest accumulators of debt, prompting a major credit agency to warn of significant troubles if current conditions deteriorate. The alert from Moody’s… comes as worries mount over a looming economic downturn… Should conditions continue to deteriorate, it could mean trouble for companies that are rated at the lower end of the spectrum, a group that rang up $695 billion in new debt during 2018. The danger is that these ‘B3’ companies only need to decline one notch to fall into the junk category, which would make their debt loads even more onerous… New issuers in B3 debt comprised 44% of all new paper that came to market in 2018, double the level in 2007…”
May 28 – Wall Street Journal (Sam Goldfarb and Avantika Chilkoti): “A decadelong rise in corporate borrowing is prompting new scrutiny about how debt markets might hold up in an economic downturn. While few worry that the corporate debt market is in imminent danger, both regulators and investors are grappling with how stress could ripple through it. In a speech last week, …Jerome Powell ticked through a number of topics of concern, including the near record-level of business debt as a share of the economy; the increase in debt at the bottom end of the investment-grade ratings scale; and the rapid disappearance of protections for lenders to higher-risk companies. As of the end of last year, the ratio of business debt to U.S. gross domestic product had reached 73.1%, according to Federal Reserve data, just short of the high of 73.7% set in 2009. Meanwhile, the amount of triple-B rate U.S. corporate debt… has more than doubled since the crisis.”
May 27 – Wall Street Journal (Gunjan Banerji): “Investors seeking yield are piling into the riskiest corner of the municipal bond market at a pace not seen in decades. They have poured $8 billion into funds that deal in high-yield muni bonds—or junk munis—this year, the most through May since at least 1992… Muni-bond funds overall have attracted $37 billion during that same period, the most in almost three decades. There is ‘more demand than at any time in recent memory,’ said Jeff Burger, a portfolio manager at Mellon Investments… Investors have jumped into the municipal-bond market in search of returns this year as Treasury yields have fallen…”
May 28 – Wall Street Journal (Ben Eisen): “Investment trusts that buy residential home loans are piling into mortgage bonds, taking on a more prominent role in the housing market as the government retreats. Mortgage real-estate investment trusts were once small players in housing finance, but they’ve increased their mortgage-bond portfolios by almost 28% to $308 billion over the 12 months through March. It was the largest stockpile in a half-dozen years… Annaly Capital Management Inc. and AGNC Investment Corp., the two biggest companies in the sector, accounted for the majority of the growth.”
Leveraged Speculation Watch:
May 29 – Bloomberg (Shahien Nasiripour, Sridhar Natarajan and Katherine Burton): “The New Jersey State Investment Council voted to cut its target allocation to hedge funds in half to 3% from 6%. The pension fund approved the plan… under pressure from labor unions to reduce fees to investment managers.”
Geopolitical Watch:
May 30 – Reuters (Ben Blanchard): “The United States is ‘playing with fire’ with its support for self-ruled Taiwan, China said…, in angry comments ahead of a meeting between Defence Minister Wei Fenghe and acting U.S. Defense Secretary Patrick Shanahan.”
May 29 – Wall Street Journal (Justin Scheck and Bradley Hope): “U.S. allies, looking to buck American control over international trade, are developing alternate systems that don’t rely on U.S. currency. The catalyst was the Trump administration’s decision last year to reimpose trade sanctions on Iran after pulling out of the 2015 nuclear-weapons deal. The U.K., Germany and France didn’t support the sanctions, which include a ban on dollar transactions with Iranian banks. So they are fine-tuning a system to enable companies to trade with Iran without using dollars. India wasn’t happy either. Iran is a longtime trading partner, and India wants Iranian oil. India began using a similar alternative system in November, and shipping records show it already is being used by international companies to trade with Iranian businesses subject to sanctions. China and Russia, also eager to break free of U.S. control, are promoting their own alternatives to the global bank-transfer system, which the U.S. effectively controls, and are striking deals to trade with yuan and rubles instead of dollars.”
May 29 – Wall Street Journal (Arthur Herman): “Iran sabotages ships in the Persian Gulf and threatens to resume enrichment of uranium for its nuclear program. Russia dispatches troops to beleaguered dictator Nicolás Maduro of Venezuela, while China sends logistical support. China resists a trade truce with the U.S. and seeks to drive a wedge between the U.S. and allies like Jordan and Saudi Arabia by selling them armed drones. Russia sends bombers and fighters into Alaska’s Air Defense Identification Zone. Iran, Russia and China all work tirelessly to keep Syrian dictator Bashar Assad in power. In the aftermath of the Iran nuclear deal in August 2015, I warned of a Moscow-Beijing-Tehran axis. Since then, these three authoritarian and revisionist powers have become bolder, more sophisticated and more global. Their effort to diminish and disrupt the influence of the U.S. and its allies extends from Syria and the Strait of Hormuz to North Korea and Latin America, as well as Central Asia and even the South Pacific.”
May 26 – Reuters (Yimou Lee and Ben Blanchard): “China responded angrily… as Taiwan confirmed the first meeting in more than four decades between senior U.S. and Taiwanese security officials. Taiwan’s national security chief David Lee met White House national security adviser John Bolton earlier this month… The official Central News Agency said the meeting was the first since the island and the United States ended formal diplomatic ties in 1979… ‘China is extremely dissatisfied and resolutely opposed to this,’ Foreign Ministry spokesman Lu Kang told a daily news briefing, adding China was against any form of official exchanges between the United States and Taiwan.”
May 26 – Reuters (Inti Landauro): “Libyan eastern commander Khalifa Haftar has ruled out a ceasefire in the battle for Tripoli and accused the United Nations of seeking to partition Libya, according to an interview… Haftar’s Libyan National Army (LNA) began an offensive in early April to take Tripoli from fighters loyal to Prime Minister Fayez al-Serraj’s Government of National Accord (GNA) which has the backing of the United Nations.”
May 29 – Reuters (Lisa Barrington): “U.S. National Security Adviser John Bolton said… that naval mines ‘almost certainly from Iran’ were used to attack oil tankers off the United Arab Emirates this month, and warned Tehran against conducting new operations.”
