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Doug Noland’s Credit Bubble Bulletin: De-risking/Deleveraging at the Periphery

This is a syndicated repost courtesy of Credit Bubble Bulletin . To view original, click here. Reposted with permission.

It was another unsettled week for notably synchronized global markets. The week began with a decent bout of hope. The S&P500 rallied 2.8% in Monday trading, “its strongest one-day gain since June.” Having begun in Asia, the market rally gained momentum in European trading, which set the stage for a gap higher opening for U.S. equities.

A spark was provided by the Reserve Bank of Australia. After its previous Friday attempt fell flat, Australia’s central bank Monday doubled down on its bond purchases, essentially expending $3.1 billion in its yield control operation. Australian 10-year yields collapsed a remarkable 35 bps to 1.67%, more than reversing the previous Friday’s price spike.

After Japanese 10-year yields rose to a five-year high 16 bps Friday, there was a report Monday claiming the Bank of Japan was prepared to act against any excessive rise in yields. And then ECB governing council member Francois Villeroy stated the ECB “can and must react” against any unwarranted tightening (aka higher bond yields). European yields reversed sharply lower on his comments, with double-digit declines in Italian and Greek yields. Equities caught fire. Relief that a concerted central bank effort was poised to counter rising global yields powered Monday’s risk market recovery. It would prove fleeting.

March 4 – Financial Times (Naomi Rovnick, Neil Hume, Joshua Oliver, Aziza Kasumov and Colby Smith): “Government bond prices sustained a further blow on Thursday, prompting benchmark stocks to wipe out close to all gains for the year, after comments from Federal Reserve chairman Jay Powell failed to reassure investors… ‘Today was a really interesting day because the market was really firm, a little tentative but firm, and then Powell spoke,’ said George Cipolloni, a portfolio manager at Penn Mutual Asset Management. ‘He really didn’t say anything dramatically different, other than that they’re not at their target yet… which is rattling markets.’”

Ten-year Treasury yields were trading at 1.46% Thursday morning ahead of Chairman Powell’s scheduled Q&A session at the Wall Street Journal’s Jobs Summit – up about five bps for the week. Yields surged soon after Powell began speaking, ending the session almost nine bps higher at 1.57%.

Powell could not have been clearer. The Fed Chairman went into significant detail as to what it will take for the Fed to begin tapering QE along with what would be required to commence an increase in short-term rates. It’s all dovish – as expected. At least outwardly, the policy focus is geared specifically for a return to full employment. The Fed will not be responding to what it views as a transient uptick in inflation.

It was all the normal dovish creed we’ve grown accustomed to – that up until recently was manna to Treasury and risk markets. But it’s just not working – and why it’s not is both intriguing and critical for global market Bubbles at a heightened risk of deflating.

Why did bond yields surge on Powell’s boilerplate comments? The more obvious – and conventional – view would be his avoidance of any mention of another “operation twist” or, indeed, any measure that might indicate the Fed was considering additional buying at the long-end of the Treasury curve. Hopes the Fed would be part of a concerted global central bank “yield control” effort were dashed.

Listening to the entirety of Powell’s comments, there’s much to concern bond investors. For one, the Fed is lax on inflation in an extraordinary environment that beckons for vigilance. Our central bank is locked into experimental policy doctrine when it should be open-minded and flexible. Moreover, the Fed is trapped by a backdrop of Bubble markets and resulting acute fragilities. A Friday headline read, “Investors are having a ‘Crisis of Confidence’ in the Fed.” While somewhat premature, the Powell Federal Reserve is increasingly suffering from a credibility problem.

Powell (from the WSJ Q&A session, March 4, 2021): “I think the Fed established its credibility several decades ago on inflation and since that time the connection between having a lot of people out of work and inflation under control has gotten very, very weak. So, our new framework very explicitly takes that new learning, that new understanding, and says that we won’t raise the interest rates to cool down the economy just because unemployment gets lower – just because employment gets high. We’re going to wait to see signs of actual inflation or the appearance of other risks that could threaten the achievement of our goals. And we’ve seen that the economy can sustain very low levels of unemployment without inflation.

Powell: “So many people, particularly people who are now entering the job market, will not have lived through high inflation. And high inflation is a very bad state of affairs. And it hurts people the most on fixed incomes and lower incomes… Inflation was very high when I was in college and coming into the job market. So, it’s really not something we want. But I would say, at the Fed, we are well-aware of the history and how it happened and [we’re] not going to allow it to happen again. It was a situation where the Fed didn’t step in when it should have, when inflation pressures were building. Not at all the current situation. Inflation is currently running below 2%. It’s running at 1.5%. But we’re very mindful of what happened in really the 1960s and 1970s and determined not to repeat that mistake.

Powell: “The key thing is to keep longer-run inflation expectations anchored at 2%. If that happens then a transient increase in inflation will not affect inflation over a longer period. And we intend to use our tools to keep inflation expectations anchored at 2%, which gives us the ability to do all the things we do when the economy is weak.

It’s reasonable to conclude markets were disappointed by Powell not directly addressing potential yield suppression measures. I’ll assume the Fed would at this point prefer to save its “operation twist” (sell T-bills to purchase longer-term Treasury bonds) announcement to spring on the markets in the event of more serious instability. Echoing governor Lael Brainard, Powell said the Fed didn’t want to see “disorderly conditions” or a “persistent tightening in broader financial conditions.” This signals the Fed’s willingness to intervene if necessary, but without risking the possibility of a market selloff on an announcement of actual market support.

But I do discern a bond market increasingly uneasy with the Fed’s cavalier approach to inflation. There’s an incongruity that should trouble holders of long-term fixed-income securities: The Fed is not only explicitly stating its intention to disregard an uptick in pricing pressures, its new “inflation targeting” doctrine explicitly seeks to promote a period of above target inflation (compensating for previous below-target price increases). Meanwhile, Powell wants to have it both ways. He claims traditional resolve, stating the Fed is “determined not to repeat that mistake” when it “didn’t step in when it should have, when inflation pressures were building.”

Does anyone at this point actually believe the Fed would step in to repress inflationary pressures? Clearly, they won’t be reacting to nip “building” price pressures – they’ve said as much. And I see about zero chance of the Fed moving to tighten financial conditions in the event of inflation gaining a serious foothold. By that point, bond markets would surely already be in a state of disarray. The FOMC wouldn’t dare tighten during a period of market tumult.

One could argue the Fed retains credibility today when it comes to its “whatever it takes” crisis-fighting resolve. It has essentially committed to erring on the side of a continuation with runaway balance sheet expansion. This bolsters its credibility in handling market instability as well as a reemergence of disinflationary pressures – the two key risks weighing on markets over recent years.

But rather suddenly, there’s a third major risk: rising consumer price inflation. And the problem is there’s no reason these days to afford the Fed any credibility when it comes to controlling a reemergence of heightened inflationary pressures. We will never witness the “whatever it takes” mindset employed to secure a “WIN” – Whip Inflation Now. Powell’s “we intend to use our tools to keep inflation expectations anchored at 2%, which gives us the ability to do all the things we do when the economy is weak” rings hollow. The five-year Treasury inflation “breakeven rate” rose another six bps this week, surpassing 2.5% Thursday for the first time since July 2008.

The adoption of QE as a routine (crisis and non-crisis) policy measure essentially rendered obsolete the Fed’s capacity “to keep inflation expectations anchored at 2%” through the entire cycle. Aggressively employing QE to counter inevitable late-cycle market instability (i.e. September 2019) placed the Fed in the precarious position of reinforcing Bubble markets. Go there and there’s no turning back.

As we’ve witnessed – having been spurred on by the pandemic – the amount of stimulus necessary to support Bubble markets and economies inflates exponentially. Inflationary pressures are now mounting, while inflationary dynamics are becoming increasingly entrenched – at home and abroad. And while the future is as murky as ever, bond markets can’t trust the Federal Reserve (or global central bank community) to keep inflationary expectations anchored. Powell’s clutching of a crumbling myth is not confidence inspiring.

March 5 – Bloomberg (Jack Pitcher, Ameya Karve and Priscila Azevedo Rocha): “Signs of caution mounted in corporate credit markets globally as longer-term Treasury yields kept rising on Friday, leading some borrowers from New York to Tokyo to delay bond sales and strategists to caution about trouble ahead. Gauges of credit fear jumped in Europe for investment-grade and high yield debt on Friday in derivatives markets. Two borrowers that had expected to sell bonds in the U.S. opted to push their offerings into next week, after a stronger-than-expected jobs report brought fresh inflation concerns and lifted the 10 year Treasury yield briefly above 1.6%.”

March 5 – Bloomberg (Davide Scigliuzzo and Katherine Doherty): “Junk-bond investors appear to have their limits after all. Following several weeks of talks with potential creditors, Ronald Perelman’s Vericast Corp. is scrapping a $1.775 billion bond sale after struggling to agree on terms… The scrapped sale proves the junk-bond frenzy that’s allowed a growing list of troubled companies to take advantage of record-low costs to refinance debt and push out maturities has its bounds. The deal is the first to be pulled in the U.S. junk bond market in four months…”

High yield Credit default swap (CDS) traded up to 314 bps in early Friday trading, the high since February 1st. Investment-grade CDS rose to 57.5 bps – the high since January 29th. And while these prices remain a fraction of last March’s highs (886 and 159 bps), it does appear CDS prices are poised to move higher after benefiting from months of liquidity excess and aggressive market risk embracement.

To this point, however, U.S. corporate Credit has been a sideshow.

March 4 – Bloomberg (Stephen Spratt, John Ainger and Alexandra Harris): “The cost of borrowing U.S. Treasury 10-year notes continues to spiral higher despite record-size auctions, fueled by a growing pool of investors who want to bet on higher yields. The interest rate on overnight cash loans backed by the newest 10-year note — repurchase agreements, or repos — plummeted below minus 3% Wednesday for only the third time since the beginning of 2018, according to Scott Skrym of Curvature Securities LLC. That’s the threshold below which it’s cheaper to pay a regulatory fine than to complete the transaction, and it’s an indication of huge demand to be short the issue after last week’s selloff pushed its yield to a one-year high.”

March 5 – Bloomberg (Alexandra Harris): “The Federal Reserve looks poised to disappoint Wall Street by not extending an emergency exemption that’s propped up the Treasury market since last year’s pandemic panic. After bond market liquidity dramatically disappeared a year ago, the Fed let banks stop factoring in Treasuries to their so-called supplemental liquidity ratios — letting them stockpile U.S. debt without breaking regulations. That exemption expires March 31, and central bankers have given no indication it’ll get authorized for longer. The impending expiration, some say, is a reason why Treasuries just suddenly got so volatile. Disorderly trading provides a justification for regulators to keep the SLR exemption, Bank of America strategists Ralph Axel and Mark Cabana wrote… They don’t expect an extension, but said there’s some alternatives that could help.”

I won’t delve into the “SLR” (supplemental liquidity ratios) issue. And while it has become a more salient concern following recent bond market liquidity challenges, I would tend to put more weight on mounting inflation risk, hedging-related selling and deleveraging as key factors behind Treasury market volatility, surging market yields and liquidity issues. With unprecedented Treasury and corporate bond issuance at record low yields, markets have never been exposed to today’s level of interest-rate/duration risk. This explains why equities have become hypersensitive to every tick increase in Treasury yields – recognizing today’s heightened risk of a backup in market yields turning disorderly and destabilizing. I’ll assume at this point that some of the sophisticated operators playing the speculative Bubble blow-off have begun to take chips off the table.

A number of market darlings have been under pressure. This week saw double-digit losses for Moderna (14.6%), Twitter (13.1%), Peloton (12.7%), Tesla (11.5%) and Zoom (9.7%). Crazy volatility has returned. The Nasdaq100 (NDX) was down nearly 2.0% in Friday morning trading, only to rally almost 4% off intraday lows (ending the session up 1.65%). The Semiconductors fell 2.4% and then rallied 5.8%. While not as dramatic, after being down 1% in the morning the S&P500 rallied 3.2% to more than erase the week’s decline.

For the most part, U.S. equities emerged out of a fog of instability seemingly unscathed. Out at the “periphery,” things were more scathing. EM currencies were suffering, with Eastern Europe under notable pressure. Over the past two weeks, the Turkish lira has dropped 7.5%, the Brazilian real 5.2%, the South African rand 4.3%, the Mexican peso 4.2%, and the Hungarian forint 4.0%. The surge in dollar-denominated EM bond yields was ongoing. Yields were up 41 bps this week in Turkey, 36 bps in Ukraine, 28 bps in Peru, 24 bps in Brazil, and 20 bps in Saudi Arabia. That put the two-week yield spike at 68 bps in Turkey, 62 bps in Ukraine, 56 bps in Brazil, 56 bps in Peru – and those are dollar bond yields. In two weeks, local currency bond yields were up 173 bps in Lebanon, 79 bps in Turkey, 70 bps in Colombia, 47 bps in Thailand, and 41 bps in South Africa.

March 5 – Bloomberg (Divya Patil and Rahul Satija): “A surge in bond yields is bleeding into Asian markets where at least two state-backed Indian companies and three Japanese firms pulled planned debt sales. Indian Railway Finance Corp. and National Cooperative Development Corp. withdrew rupee note offerings Thursday… In Japan, Santen Pharmaceutical put off a yen bond sale that it had planned to price Friday, after two other issuers there also paused deals in recent days. A jump in the 10-year Treasury yield — the global bond benchmark — to a one-year high is sending shockwaves through markets. Global credit markets have stumbled in one of their worst weeks this year, with Asian junk bond prices extending their drop this week to the worst since October.”

De-risking/deleveraging has initiated a tightening of financial conditions out at the global “periphery”. Not atypically, incipient tightening at the “periphery” provides transitory favor to the “core.” The dollar index’s 1.2% gain this week surely lent some support to U.S. Treasuries and securities markets more generally. With massive stimulus as far as the eye can see, the U.S. “periphery” (i.e. junk bonds) has so far remained bulletproof. Indications of vulnerability began to emerge this week.

I fully expect the tightening of financial conditions at the “periphery” to gravitate to the “core.” Despite the Fed’s ongoing $120 billion monthly liquidity injections, I don’t believe the “core” is immune to de-risking/deleveraging dynamics. That U.S. equities are in a full-fledged mania and U.S. corporate Credit still demonstrating a powerful Bubble Dynamic complicate the analysis. Beijing also creates a high degree of uncertainty.

March 2 – Wall Street Journal (Jonathan Cheng): “China’s chief banking regulator warned about rising risks from the country’s property sector and from global financial markets, underscoring Beijing’s focus on risk controls after a robust pandemic recovery. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, told reporters… he was concerned about what he called a ‘bubble’ in Chinese real-estate prices, which he said could threaten the country’s financial sector and its broader economy. ‘Many people buy homes not to live in, but to invest or speculate. This is very dangerous,’ said Mr. Guo, comparing the property bubble to a ‘gray rhino’—an obvious but neglected threat. Mr. Guo also warned about the possibility of spillover from what he described as asset bubbles in global financial markets, which he added were out of sync with real-world economic conditions.”

March 5 – Bloomberg: “China’s government set a conservative economic growth target for this year, shifting its focus from recovery mode to longer-term challenges like reining in debt and reducing technological dependence on the U.S. The growth target was set at above 6%, well below economists forecasts, with the budget deficit expected to fall to 3.2% of gross domestic product… In sharp contrast to places like the U.S., where the Biden administration is trying to push through a new $1.9 trillion stimulus package, Beijing outlined a plan to normalize policy now that the pandemic is under control domestically and the economy has bounced back. The target for 2021 stands in contrast to the 8.4% expansion that economists predict…”

Beijing recognizes it faces acute Bubble risk both at home and from abroad. Unrelenting U.S. fiscal and monetary stimulus – with resulting massive trade deficits – ensures powerful inflows into China. This only further complicates Beijing’s already great challenge of reining in Bubble excess without unleashing the forces of risk aversion, panic and collapse. I’ll take this week’s announcements as indicating that Beijing believes it must sacrifice growth to mitigate escalating risks associated with over-indebtedness and asset Bubbles.

Surging global yields, fragile equities Bubbles, and prospective Chinese tightening measures. That’s a confluence of risks that beckon for a more cautious approach to leverage and risk-taking more generally. Indeed, today’s backdrop places myriad levered strategies in harm’s way. I’ll assume the global leveraged speculating community – the marginal source of finance globally – has commenced de-risking/deleveraging. Issues in the “repo” and dollar swaps markets point to mounting stress in derivative hedging markets. In sum, the volatility experienced across markets over the past couple weeks indicates growing risk of a financial accident.

For the Week:

The S&P500 increased 0.8% (up 2.3% y-t-d), and the Dow jumped 1.8% (up 2.9%). The Utilities rallied 1.7% (down 5.8%). The Banks surged 4.3% (up 20.8%), and the Broker/Dealers added 0.3% (up 14.1%). The Transports gained 2.2% (up 9.0%). The S&P 400 Midcaps increased 0.7% (up 8.9%), while the small cap Russell 2000 slipped 0.4% (up 11.0%). The Nasdaq100 dropped 1.9% (down 1.7%). The Semiconductors sank 4.8% (up 4.5%). The Biotechs lost 3.6% (down 3.5%). Though bullion fell $34, the HUI gold index recovered 4.7% (down 12.6%).

Three-month Treasury bill rates ended the week at 0.025%. Two-year government yields added a basis point to 0.1% (up 2bps y-t-d). Five-year T-note yields jumped seven bps to 0.80% (up 44bps). Ten-year Treasury yields surged 16 bps to 1.57% (up 65bps). Long bond yields jumped 15 bps to 2.30% (up 66bps). Benchmark Fannie Mae MBS yields rose four bps to 1.88% (up 54bps).

Greek 10-year yields sank 15 bps to 0.96% (up 34bps y-t-d). Ten-year Portuguese yields declined three bps to 0.29% (up 26bps). Italian 10-year yields slipped a basis point to 0.75% (up 21bps). Spain’s 10-year yields declined three bps to 0.39% (up 35bps). German bund yields fell four bps to negative 0.30% (up 27bps). French yields declined four bps to negative 0.05% (up 29bps). The French to German 10-year bond spread was unchanged at 25 bps. U.K. 10-year gilt yields dropped six bps to 0.76% (up 56bps). U.K.’s FTSE equities index rallied 2.3% (up 2.6% y-t-d).

Japan’s Nikkei Equities Index slipped 0.4% (up 5.2% y-t-d). Japanese 10-year “JGB” yields sank almost seven bps to 0.10% (up 8bps y-t-d). France’s CAC40 rallied 1.4% (up 4.2%). The German DAX equities index gained 1.0% (up 1.5%). Spain’s IBEX 35 equities index rose 0.8% (up 2.6%). Italy’s FTSE MIB index recovered 0.5% (up 3.3%). EM equities were mostly higher. Brazil’s Bovespa index rallied 4.7% (down 3.2%), and Mexico’s Bolsa jumped 3.9% (up 5.2%). South Korea’s Kospi index added 0.4% (up 5.3%). India’s Sensex equities index rallied 2.7% (up 5.6%). China’s Shanghai Exchange declined 0.2% (up 0.8%). Turkey’s Borsa Istanbul National 100 index surged 4.8% (up 4.8%). Russia’s MICEX equities index rose 2.0% (up 3.8%).

Investment-grade bond funds saw inflows of $5.201 billion, and junk bond funds posted positive flows of $601 million (from Lipper).

Federal Reserve Credit last week declined $44.7bn to $7.507 TN. Over the past year, Fed Credit expanded $3.362 TN, or 81%. Fed Credit inflated $4.696 Trillion, or 167%, over the past 434 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $2.5bn to $3.544 TN. “Custody holdings” were up $86.7bn, or 2.5%, y-o-y.

Total money market fund assets gained $18.6bn to $4.363 TN. Total money funds surged $679bn y-o-y, or 18.4%.

Total Commercial Paper gained $9.5bn to $1.099 TN. CP was down $25bn, or 2.2%, year-over-year.

Freddie Mac 30-year fixed mortgage rates rose six bps to a seven-month high 3.02% (down 27bps y-o-y). Fifteen-year rates were unchanged at 2.34% (down 45bps). Five-year hybrid ARM rates dropped 26 bps to 2.73% (down 45bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up two bps to 3.20% (down 58bps).

Currency Watch:

For the week, the U.S. dollar index gained 1.2% to 91.977 (up 2.3% y-t-d). For the week on the upside, the Norwegian krone increased 1.3% and the Canadian dollar 0.6%. For the week on the downside, the Swiss franc declined 2.2%, the Mexican peso 2.2%, the Japanese yen 1.6%, the South African rand 1.6%, the Brazilian real 1.4%, the euro 1.3%, the Swedish krona 1.2%, the New Zealand dollar 0.9%, the Singapore dollar 0.7%, the British pound 0.7%, the Australian dollar 0.3% and the South Korean won 0.2%. The Chinese renminbi declined 0.28% versus the dollar this week (up 0.46% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index added 0.7% (up 10.0% y-t-d). Spot Gold fell 2.0% to $1,701 (down 10.4%). Silver sank 5.2% to $25.246 (down 4.4%). WTI crude surged $4.53 to $66.09 (up 36%). Gasoline jumped 10.0% (up 46%), while Natural Gas declined 2.4% (up 6%). Copper slipped 0.5% (up 16%). Wheat declined 1.1% (up 2%). Corn dipped 0.6% (up 13%). Bitcoin rallied $2,550, or 5.5%, this week to $49,053 (up 69%).

Coronavirus Watch:

March 3 – Reuters (Julie Steenhuysen and Kate Kelland): “Chris Murray, a University of Washington disease expert whose projections on COVID-19 infections and deaths are closely followed worldwide, is changing his assumptions about the course of the pandemic. Murray had until recently been hopeful that the discovery of several effective vaccines could help countries achieve herd immunity, or nearly eliminate transmission through a combination of inoculation and previous infection. But in the last month, data from a vaccine trial in South Africa showed not only that a rapidly-spreading coronavirus variant could dampen the effect of the vaccine, it could also evade natural immunity in people who had been previously infected. ‘I couldn’t sleep’ after seeing the data, Murray… told Reuters… He is currently updating his model to account for variants’ ability to escape natural immunity and expects to provide new projections as early as this week. A new consensus is emerging among scientists, according to Reuters interviews with 18 specialists who closely track the pandemic or are working to curb its impact. Many described how the breakthrough late last year of two vaccines… But, they say, data in recent weeks on new variants from South Africa and Brazil has undercut that optimism. They now believe that SARS-CoV-2 will not only remain with us as an endemic virus… but will likely cause a significant burden of illness and death for years to come.”

March 3 – Financial Times (Anna Gross and Michael Pooler): “Covid-19 variants may be less dangerous to vaccinated people and recovered patients than previously thought, according to researchers who found that the human body produces a strong cellular immune response to some of the most worrying new strains. The US study, conducted by researchers at the La Jolla Institute for Immunology and the University of California, identified that T-cell responses in patients who had been vaccinated or previously infected were just as robust when faced with new variants of Covid-19 — including those first identified in Kent, Brazil, South Africa and California. T-cells, which can ‘remember’ past infections and kill pathogens if they reappear, are thought to have a big influence on how long people remain resistant to infection and disease.”

March 1 – Financial Times (Anna Gross and Clive Cookson): “The P.1 Covid-19 variant that was identified in Brazil is about twice as transmissible as some other virus strains and is more likely to evade the natural immunity usually conferred by prior infection, according to an international study. The research, conducted by a UK-Brazilian team of researchers from institutions including Oxford university, Imperial College London the University of São Paulo, found that the P.1 variant was between 1.4 and 2.2 times more transmissible than other variants circulating in Brazil. It was also ‘able to evade 25-61% of protective immunity elicited by previous infection’ with another variant, the researchers found, a sign that current vaccines could also be less effective against it.”

March 2 – Wall Street Journal (Samantha Pearson and Ryan Dube): “Researchers and doctors are sounding the alarm over a new, more aggressive coronavirus strain from the Amazon area of Brazil, which they believe is responsible for a recent rise in deaths, as well as infections in younger people, in parts of South America. Brazil’s daily death toll from the disease rose to its highest level yet this week, pushing the country’s total number of Covid-19 fatalities past a quarter of a million. On Tuesday, Brazil reported a record 1,641 Covid fatalities. Neighbor Peru is struggling to curb a second wave of infections.”

March 2 – Bloomberg (Joe Carroll and Paul Stinson): “Texas Governor Greg Abbott lifted the mask mandate and other anti-pandemic restrictions, defying warnings from health officials about the perils of dropping those precautions too soon. Effective March 10, all businesses will be allowed to open at full capacity, Abbott said… Although his executive order allows counties to reimpose anti-virus rules should hospitalizations surge, it forbids them from jailing or fining scofflaws.”

Market Mania Watch:

March 2 – Bloomberg (Annie Massa): “Fidelity Investments customer assets swelled 18% to $9.8 trillion in 2020 as markets rallied. Retail accounts rose 17% from a year earlier to 26 million as the pandemic fueled a boom in individual investing… ‘In the face of this uncertainty and upheaval, millions of new individual customers came to Fidelity, opened accounts, and engaged with us for help and guidance to manage the complexities and financial uncertainties that had upended their lives,’ Chairman and Chief Executive Officer Abigail Johnson said…”

March 1 – Reuters (Joshua Franklin and Krystal Hu): “For Jonny Coreson, $4 billion is worth $5 billion. The 32-year-old test prep business owner from Denver invested $100,000 in shares of veteran hedge fund manager Bill Ackman’s special purpose acquisition company (SPAC), Pershing Square Tontine Holdings Ltd, after they soared 25% in December with no imminent deal in sight. This valued the blank-check acquisition firm at $5 billion, when on paper it was worth only the $4 billion it had raised in an initial public offering… ‘There weren’t very many options for retail investors to get into the stock before its IPO. If I’m paying a 25% premium on the opportunity to ride Ackman’s coattails, to me it’s worth it,’ Coreson said. He said his other bets on SPACs had paid off…”

March 4 – Wall Street Journal (Frances Yoon): “Stock trading has surged across Asia, as markets have recovered from the shock of the Covid-19 pandemic, with many younger individual investors piling into shares for the first time. Activity on the region’s two busiest stock markets, in Shanghai and Shenzhen, has risen toward levels last registered in China’s 2014 and 2015 boom. Trading on exchanges in Seoul and Hong Kong has broken records. Shares are also changing hands in huge numbers in Taiwan, India and some smaller markets like Indonesia and Vietnam… ‘We’ve seen armies of Asia retail investors appear and invest in sizes that are mind-boggling, both in terms of trading volumes and the value of shares traded,’ said Herald van der Linde, head of Asia-Pacific equity strategy at HSBC.”

March 1 – Financial Times (Ortenca Aliaj, James Fontanella-Khan and Aziza Kasumov): “Blank-cheque companies signed a record $109bn of transactions globally last month, as their founders rushed to take advantage of investor enthusiasm to bring privately held companies to the public markets. Special purpose acquisition companies, known as Spacs, struck 50 deals in February, according to Refinitiv. The data demonstrates the intensifying race to snap up promising young companies, often with little in the way of revenue, at ever-increasing valuations. ‘Historically, [Spac] had been a kind of dirty four-letter word,’ said Jackson Garton, managing director… at Makena Capital Management. ‘It wasn’t necessarily viewed as the most attractive way to go public. But I think what has shifted in the last few years . . . the stigma around Spacs has subsided to a certain degree.’”

March 5 – Financial Times (Aziza Kasumov): “Companies have issued a record amount of convertible debt since the start of the year, rushing to lock in rock-bottom interest rates in case recent wobbles in stock and bond markets dent investor enthusiasm. Convertible bonds come with the right to swap the debt for shares in the issuing company at a pre-agreed price, making them a hybrid instrument sensitive to the outlook for both markets. Airbnb… announced a $2bn convertible deal, the biggest of the year so far, on the heels of Twitter, which announced a $1.25bn convertible bond issue… and Spotify, which priced $1.3bn in notes last week. Beyond Meat increased the size of a convertible bond issue… from $750m to $1bn… ‘We’ve never seen pricing like this ever in the convertible market,’ said Michael Voris, head of convertible bond financing at Goldman Sachs… ‘The favourable conditions have fuelled the busiest start to a year since Refinitiv started tracking global convertible bond proceeds in 1980. In January and February, companies raised just shy of $34bn, 68% more than in the first two months of last year.”

March 2 – Bloomberg (Ben Bain and Robert Schmidt): “Gary Gensler pledged to scrutinize trading apps that have exploded in popularity, signaling the Biden administration’s pick to lead the U.S. Securities and Exchange Commission plans to confront issues central to wild stock swings… Gensler, testifying during a… confirmation hearing before the Senate Banking Committee, said a top concern is that upstart technologies are prompting less sophisticated investors to take risks that they don’t fully understand… ‘Technology has provided greater access, but it also raises interesting questions… What does it mean when balloons and confetti are dropping and you have behavioral prompts to get investors to do more transactions?’”

Market Instability Watch:

March 3 – Bloomberg (Vivien Lou Chen, Daniela Sirtori-Cortina and Edward Bolingbroke): “U.S. Treasuries tumbled anew on Wednesday, driving long-maturity yields to their highest levels this week and pushing up inflation expectations as traders continued to price in a quicker economic rebound from the pandemic. Benchmark 10-year Treasury yields surged as much as 10.3 bps to 1.495%… Meanwhile, a market proxy for the anticipated annual inflation rate for the next half-decade exceeded 2.5% for the first time since 2008 — aided by climbing oil prices.”

March 3 – Financial Times (Colby Smith, Eric Platt and Robin Wigglesworth): “The severity of last week’s US government bond sell-off has rekindled concerns about the health of the world’s largest and most important debt market… The $21tn US government debt market started 2021 on the back foot, as investors began pricing in a big economic recovery, the possibility of faster inflation and, in turn, the prospects that the Federal Reserve could begin to raise interest rates earlier than expected. But the sell-off accelerated sharply last week, with Treasury yields soaring as the market’s normally easy trading conditions deteriorated markedly. ‘You never like to see liquidity dry up like it did. It is always concerning to see that in what is supposed to be the largest and most liquid market,’ said Mike Gladchun, director of US rates trading at Loomis Sayles. ‘It is going to amplify attention on Treasury market functioning . . . and amplify those calls for reform.’”

March 2 – Bloomberg (Liz Capo McCormick, Tracy Alloway and Stephen Spratt): “Bond traders have been saying for years that liquidity is there in the world’s biggest bond market, except when you really need it. Last week’s startling gyrations in U.S. Treasury yields may offer fresh backing for that mantra, and prompt another bout of soul-searching in a $21 trillion market that forms the bedrock of global finance. While stocks are prone to sudden swings, such episodes are supposed to be few and far between in a government-debt market that sets the benchmark risk-free rate for much of the world. Yet jarring moves occur periodically in Treasuries, forming a bit of a mystery as no two events have been the same.”

March 4 – Bloomberg (Richard Cookson): “Financial assets, pretty much all of them, are in increasing danger of some nasty shocks and not only because many are horribly expensive. The problem, as we started to see last week, is a changing relationship between government bonds and equities. Should that change become more entrenched — and this week’s movements suggest it will — many investors will be able to hold fewer of either. That’s because of the risk-management model that just about everyone uses and which is written into the way banks and big investment firms are regulated and capitalized. The model in question is called Value-at-Risk, more commonly known as VaR. The best we can hope for is that this de-risking happens slowly; the worst would be mechanistic selling not dissimilar to the forced selling in the 1987 crash.”

March 2 – Bloomberg (Vivien Lou Chen, Anchalee Worrachate and Jack Pitcher): “Derivatives helped trigger some of the most disastrous episodes in the history of finance. Now risk-averse institutional investors are increasingly turning to them for protection amid a perilous time for global debt markets. All manner of complex solutions, from put options to receiver swaptions, are gaining traction as a way to overcome the drawbacks of bonds as a hedge after debt failed to insulate portfolios at key moments last year. Throw in the glaring threat of fixed-income losses as the economy rebounds, and the likes of pensions, university endowments and sovereign wealth funds are tapping asset managers specializing in derivatives to help solve these woes.”

March 1 – Reuters (Marc Jones): “The swift rise of borrowing costs on global bond markets over the last month could completely alter the outlook for financial markets, according to the central bank for the world’s central banks, the Bank for International Settlements. In its latest quarterly report, the Swiss-based BIS also noted how wild retail trading-driven swings in stocks such as GameStop recently had helped whip up volatility. The big shift however has been in the U.S. Treasury markets that tend to propel global borrowing costs on the sense that unprecedented stimulus will ignite inflation if COVID-19 vaccines allow economies to fully reopen this year.”

March 3 – Bloomberg (Enda Curran, Emily Barrett and Chester Yung): “A string of poorly-received bond auctions in the past week is driving home a message — the Treasuries-led global rout is leaving investors scarred and governments staring at higher borrowing costs. Treasuries resumed declines on Wednesday, sending yields higher across the curve. That follows a disastrous sale of seven-year notes in the U.S. last week, which set the tone for tepid demand for subsequent sovereign bond offerings from Indonesia to Japan and Germany, and prompted other nations to scrap offerings… Investors are demanding higher yields to compensate for the risk of further volatility, which may complicate efforts to finance $14 trillion worth of fiscal stimulus. Concerns that central banks may withdraw policy support has soured sentiment, amid mounting evidence of a faster-than-anticipated economic recovery.”

Inflation Watch:

March 1 – Reuters (Joori Roh): “U.S. manufacturing activity increased to a three-year high in February amid a surge in new orders, but factories continued to face higher costs for raw materials and other inputs amid labor shortages at suppliers as the pandemic drags on… The ISM said its index of national factory activity rebounded to a reading of 60.8 last month from 58.7 in January. That was the highest level since February 2018… The survey’s measure of prices paid by manufacturers jumped to a reading of 86.0, the highest since July 2008, from 82.1 in January.”

March 3 – Reuters (Lucia Mutikani): “U.S. services industry activity unexpectedly slowed in February amid winter storms, while a measure of prices paid by companies for inputs surged to the highest level in nearly 12-1/2 years, bolstering expectations for faster inflation in the near term. The Institute for Supply Management (ISM) said… its non-manufacturing activity index fell to a reading of 55.3 last month from 58.7 in January… The survey’s measure of prices paid by services industries jumped to 71.8 last month, the highest reading since September 2008, from 64.2 in January.”

March 4 – Bloomberg (Brendan Murray): “The Federal Reserve is seeing a lot more shortages across the U.S. economy, in ways that might be construed as early warning signs of inflation if they persist. In the Fed’s Beige Book…, the central bank mentions the word ‘shortage’ or ‘shortages’ 31 times, the most going back at least a decade. That’s a jump from 19 in the January edition and more than triple the average number of citations in the eight reports issued since the survey’s first reference of the coronavirus in March 2020… Their latest regional radar is dotted with mentions of crunches in global supply chains for tech equipment.”

March 4 – Bloomberg (Megan Durisin and Agnieszka de Sousa): “The surge in food prices that’s eating into consumer budgets and hitting some of the poorest nations shows few signs of abating. A United Nations gauge of global costs rose for a ninth straight month in February, the longest run since 2008… Prices of everything from sugar to vegetable oils rose last month, sending the overall measure to a fresh six-year high. Food prices have jumped as China buys huge amounts of crops, adverse weather threatens harvests and supplies of products like dairy tighten. Costlier staples are trickling through to supermarket shelves, with emerging markets particularly exposed.”

March 3 – Bloomberg (Jeffrey Bair): “IA record plunge in gasoline stockpiles last week is threatening to raise pump prices across America above $3 a gallon for the first time in six years. Inventories fell by 13.6 million barrels — the most in weekly data that goes back to 1990 — after a deep freeze paralyzed much of the Gulf Coast refining sector, according to the U.S. Energy Information Administration. Demand for the fuel meanwhile rose by the most since May.”

Biden Administration Watch:

February 27 – Wall Street Journal (Ken Thomas): “President Biden urged the Senate to take quick action after the House passed his $1.9 trillion Covid-19 relief package, as Democrats faced intraparty rifts over the future of a worker-pay increase. The measure passed early Saturday largely along party lines, 219-212… Mr. Biden said there was ‘no time to waste’ in passing the bill and getting it to his desk, noting that Americans were now closer to receiving more vaccinations, $1,400 relief checks and additional aid contained in the bill. ‘If we act quickly, decisively and boldly, we can finally get ahead of this virus, we can finally get our economy moving again,’ Mr. Biden said. ‘The people of this country have suffered far too much for too long. We need to relieve that suffering.’”

February 28 – Associated Press (Kevin Freking, Hope Yen and Josh Boak): “Looking beyond the $1.9 trillion COVID relief bill, President Joe Biden and lawmakers are laying the groundwork for another top legislative priority — a long-sought boost to the nation’s roads, bridges and other infrastructure that could run into Republican resistance to a hefty price tag. Biden and his team have begun discussions on the possible outlines of an infrastructure package with members of Congress, particularly mindful that Texas’ recent struggles with power outages and water shortages after a brutal winter storm present an opportunity for agreement on sustained spending on infrastructure… A White House proposal could come out in March. ‘Now is the time to be aggressive,’ said Transportation Secretary Pete Buttigieg…”

March 3 – Associated Press (Hope Yen): “America’s infrastructure has scored near-failing grades for its deteriorating roads, public transit and storm water systems due to years of inaction from the federal government, the American Society of Civil Engineers reports. Its overall grade: a mediocre C-. In its ‘Infrastructure Report Card’…, the group called for ‘big and bold’ relief, estimating it would cost $5.9 trillion over the next decade to bring roads, bridges and airports to a safe and sustainable level. That’s about $2.6 trillion more than what government and the private sector already spend.”

March 4 – Financial Times (Demetri Sevastopulo): “In his first weeks as president Joe Biden has been focused on the Covid-19 vaccine rollout and trying to pass a $1.9tn stimulus package. But he has been eager to deliver another central message — when it comes to China, he will not be a pushover. Speaking to the online Munich security conference last month, Biden said the US and its allies faced ‘long-term strategic competition’ with China and had to ‘push back’ against Beijing’s ‘economic abuses and coercion that undercut the foundations of the international economic system’. ‘We are in the midst of a fundamental debate about the future and direction of our world,’ he said, a choice between those who argue that ‘autocracy is the best way forward and those who understand that democracy is essential.’”

March 2 – Financial Times (Kiran Stacey): “Joe Biden’s nominee to lead the US stock market regulator has promised a review of fees paid by large Wall Street firms to retail brokerages in the wake of chaotic trading in companies such as GameStop. Gary Gensler… said that if confirmed as head of the Securities and Exchange Commission he would want to look into payment for order flow, in which retail brokerages receive fees from market makers to handle their trades. The practice has been lucrative for brokerages such as Robinhood, many of which do not charge commission for their trades. But it has come under political scrutiny after many small investors betting against large hedge funds were surprised to find that their brokerages were also collecting money from market-making firms such as Citadel Securities.”

March 5 – CNBC (Lauren Feiner): “Big Tech critic and antitrust hawk Tim Wu announced Friday he is joining the Biden administration to work on technology and competition policy on the National Economic Council. The hire signals the White House is serious about competition policy and will likely be viewed favorably among progressives hoping to see greater enforcement of antitrust laws, especially against tech giants like Amazon and Facebook. Wu’s writing has played a major role in advancing the idea that major tech companies should be broken up to reinvigorate competition…”

March 2 – Reuters (Susan Cornwell): “House Majority Leader Steny Hoyer said… the U.S. House of Representatives will take up legislation soon to raise the minimum wage to $15 over five years, after Senate rules blocked including the proposal in a COVID-19 relief bill before Congress. Democrats and some Republicans have voiced support for the idea of raising the federal minimum wage, now at $7.25 an hour, for the first time since 2009, although they disagree on how much.”

March 1 – CNBC (Greg Iacurci): “A slew of Democrats on Capitol Hill — including progressives Sen. Elizabeth Warren… and Sen. Bernie Sanders… proposed a 3% total annual tax on wealth exceeding $1 billion. They also called for a lesser, 2% annual wealth tax on the net worth of households and trusts ranging from $50 million to $1 billion. The Ultra-Millionaire Tax Act aims at reining in a widening U.S. wealth gap, which has been exacerbated by the Covid pandemic. ‘The ultra-rich and powerful have rigged the rules in their favor so much that the top 0.1% pay a lower effective tax rate than the bottom 99%, and billionaire wealth is 40% higher than before the Covid crisis began,’ Warren said…”

March 2 – Financial Times (Colby Smith and James Politi): “Two senior Democratic lawmakers have warned the Federal Reserve and other US regulators that it would be a ‘grave error’ to extend looser capital requirements that were introduced for US banks at the start of the pandemic. The intervention from Elizabeth Warren… and Sherrod Brown, the Ohio senator who chairs the Senate banking committee, has intensified a political battle over the more lenient rules, which are due to expire at the end of the month.”

Federal Reserve Watch:

March 1 – CNBC (Jeff Cox): “While the Federal Reserve may not raise its benchmark interest rate for years, there are growing expectations it may tweak policy soon to address some of the recent tumults in the bond market. The moves could happen as soon as the upcoming March 16-17 Federal Open Market Committee meeting, according to investors and economists who are watching recent action closely and expect the central bank to address some distortions that have occurred. One possible move would the third iteration of Operation Twist, a move the Fed last made nearly a decade ago during market tumult around the time of the European debt crisis.”

March 2 – Reuters (Howard Schneider and Ann Saphir): “U.S. Federal Reserve officials, facing a potential bout of inflation this spring in an economy turbocharged by vaccines and government spending, …said they will nevertheless keep their easy money plans in place in hopes of speeding displaced Americans back to work… But ‘we are far from reaching our objectives,’ Fed Governor Lael Brainard said, ticking off the litany of ways, from 10 million missing jobs to the pandemic-related drop in women’s labor force participation, in which the U.S. job market is still falling short.”

March 1 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Richmond President Thomas Barkin played down recent Treasury market volatility, in remarks that reinforce the message that the U.S. central bank is not yet troubled by the increase in yields. ‘I’m mostly concerned about the labor market,’ Barkin said… ‘At these levels of interest rates, when I talk to businesses in my district, I do not hear any sense that people are dialing back their investment.’”

March 3 – Reuters (Dhara Ranasinghe): “Federal Reserve: 1, bond markets: 0. That’s more or less where it stands after Round One in the tussle over borrowing costs. But Round Two, and perhaps even Round Three, are inevitable, and they may require policy action rather than just words.”

U.S. Bubble Watch:

March 4 – Reuters (David Lawder): “The U.S. federal debt burden will double over the next 30 years, reaching 202% of economic output in 2051, as deficits grow and interest rates eventually rise, the Congressional Budget Office said… The non-partisan CBO projected that federal debt will reach 102% of gross domestic product in 2021 due to massive spending associated with the coronavirus pandemic. This spending is expected to fade over the next decade, shrinking annual deficits to an average of 4.4% of GDP in the 2022-2031 period, from 10.3% in 2021. But deficits are forecast to then grow to average 7.9% of GDP in the 2032-2041 period and 11.5% of GDP in the 2042-2051 period…”

March 5 – Reuters: “The United States’ trade deficit increased in January as goods imports jumped to a record high amid a sharp rebound in consumer spending, offsetting a continued recovery in exports. The… trade gap rose 1.9% to $68.2 billion in January. Economists… had forecast a $67.5 billion deficit in January. Goods imports advanced 1.6% to $221.1 billion, the highest on record… Exports of goods gained 1.6% to $135.7 billion.”

March 5 – Bloomberg (Olivia Rockeman): “U.S. employers added more jobs than forecast in February and the unemployment rate declined, suggesting the labor market is clawing its way forward again following several disappointing months. Payrolls increased 379,000 after an upwardly revised 166,000 January increase… Economists… projected a 200,000 February gain. The unemployment rate dropped to 6.2%.”

March 3 – Reuters (Lucia Mutikani): “U.S. private payrolls increased less than expected in February amid job losses in manufacturing and construction, suggesting the labor market was struggling to regain speed despite the nation’s improving public health picture. Private payrolls rose by 117,000 jobs last month after increasing 195,000 in January, the ADP National Employment Report showed… Economists… forecast private payrolls increasing by 177,000 jobs in February.”

March 4 – Bloomberg (Reade Pickert): “Applications for U.S. state unemployment insurance rose slightly last week, underscoring the pandemic’s lingering restraint on the labor market recovery. Initial jobless claims in regular state programs totaled 745,000 in the week ended Feb. 27, up 9,000 from the prior week… Economists… estimated 750,000 claims. Continuing claims — an approximation of the number of people filing for ongoing state benefits — fell to 4.3 million in the week ended Feb. 20 from 4.4 million.”

March 3 – Reuters (Dan Burns): “U.S. mortgage rates jumped by the most in nearly a year last week to their highest level since July on the heels of a surge in Treasury bond yields… The contract rate on a 30-year fixed-rate mortgage, the most popular U.S. home loan, rose by 0.15 percentage point to 3.23% in the week ended Feb. 26…”

March 3 – CNBC (Diana Olick): “Mortgage interest rates last week rose at the fastest pace in over a year, throwing cold water on already cooling demand. Total mortgage application volume was essentially flat for the week, rising just 0.5% according to the Mortgage Bankers Association… Mortgage applications to purchase a home increased 2% for the week and were just 1% higher than a year ago. Homebuyers are facing a pricey and lean housing market, as homebuilders struggle to meet demand, and potential sellers pull back.”

March 3 – CNBC (Phil LeBeau): “Don’t look now, but the average monthly loan payment for a new car is approaching $600 according to Experian, which analyzes millions of new and used vehicle loans. ‘We went up higher amounts year over year in 2020 than we ever really have before and hit record highs in loan amounts and record highs in payments,’ said Melinda Zabritski, senior director for Experian… Those taking out loans to buy a new vehicle borrowed an average of $35,228, an increase of almost $2,000 from a year earlier. As a result, monthly loan payments jumped $13 to a record high of $576… Loans for used vehicles also hit all-time highs, with consumers borrowing an average of $24,467, up almost $1,700 year over year.”

February 28 – Bloomberg (Gary McWilliams): “The largest and oldest electric power cooperative in Texas filed for bankruptcy protection in Houston on Monday, citing a disputed $1.8 billion debt to the state’s grid operator. Brazos Electric Power Cooperative Inc, which supplies electricity to more than 660,000 consumers across the state, is one of dozens of providers facing enormous charges stemming from a severe cold snap last month. The fallout threatens utilities and power marketers, which collectively face billions of dollars in blackout-related charges, executives said.”

March 3 – Bloomberg (Gary McWilliams): “Texas’ power grid operator… cited 12 energy companies and two municipal utilities for failure to pay their bills for power and services during February’s deadly blackout that has led to the ouster of the operator’s chief executive. The companies and utilities owe $2.21 billion for power and services during the storm, the Electric Reliability Council of Texas (ERCOT)… said.”

March 1 – Bloomberg (John Gittelsohn): “U.S. mall values plunged an average 60% after appraisals in 2020, a sign of more pain to come for retail properties even as the economy emerges from pandemic-enforced lockdowns. About $4 billion in value was erased from 118 retail-anchored properties with commercial mortgage-backed securities debt after reappraisals triggered by payment delinquencies, defaults or foreclosures, according to data compiled by Bloomberg. Those new valuations may underestimate losses when the properties come up for sale because so much retail real estate is in distress. And few buyers are willing to take risks on aging shopping centers as e-commerce continues to grab market share.”

Fixed Income Watch:

March 2 – Bloomberg (Christopher Maloney): “Mortgage investors may have cheered Thursday’s decision by the Federal Housing Finance Agency to extend its forbearance grace period to 18 months, matching that of the Federal Housing Administration. While this pushes back the time-line for any delinquency buyouts, these loans will need to be dealt with eventually. The problem is most acute within mortgage bonds guaranteed by Ginnie Mae, where those homeowners who fall on lower end of the credit spectrum tend to be pooled. For example, 11.9% of the loans within the Ginnie Mae II 30-year 4.5% coupon are now at least 90 days past due, up from just 2.1% in February of 2020. This trend is seen across the Ginnie Mae II higher coupons.”

China Watch:

March 2 – Bloomberg: “For investors fretting about an end to the era of cheap and plentiful debt, China just provided another reason to worry. The nation’s top banking regulator jolted markets… with a warning about the need to reduce leverage amid the rising risk of bubbles globally and in the local property sector… Central banks around the world are facing the challenge of when and how to pare back stimulus as economies recover from the pandemic… Deleveraging has particular resonance in China, where it is a key priority of President Xi Jinping due to the size of the nation’s debt mountain. A crackdown on leverage in 2017 sent corporate and government bond yields to multi-year highs before officials halted the drive a year later amid the worsening trade war with the U.S.”

March 2 – Reuters (Gabriel Crossley): “China’s services sector activity grew at its slowest pace in 10 months in February as firms struggled with sluggish demand and high costs…, prompting them to cut jobs. The Caixin/Markit services Purchasing Managers’ Index (PMI) fell to 51.5, the lowest since April, from 52.0 in January but remained above the 50-mark that separates growth from contraction on a monthly basis. A sub-index for employment stood at 47.9, slipping into contraction after six months of growth, as businesses laid off workers…”

February 28 – Reuters (Gabriel Crossley): “China’s factory activity expanded at the slowest pace in nine months in February as weak overseas demand and coronavirus flare-ups weighed on output, adding pressure on the country’s labour market, a business survey showed… The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 50.9 last month, the lowest level since last May… Export orders shrank for the second month. Factories laid off workers for the third month, and at a faster pace…”

February 28 – Reuters (Colin Qian and Gabriel Crossley): “Activity in China’s services sector expanded at a slower pace in February… The official non-manufacturing Purchasing Managers’ Index (PMI) fell to 51.4 from 52.4 in January, data from the National Bureau of Statistics (NBS) showed.”

March 3 – Wall Street Journal (Xie Yu and Frances Yoon): “A developer of industrial parks joined the ranks of Chinese companies defaulting on international borrowings, with its failure to repay a maturing bond casting doubt over the entirety of its $4.6 billion in dollar-based debt. The debt difficulties at China Fortune Land Development Co. follow a series of defaults by other sizable Chinese groups such as Tsinghua Unigroup Co., a player in the country’s push for self-reliance in semiconductors, and state-owned commodity trader Tewoo Group Co. While eager to support growth and avoid market turmoil, Chinese authorities have grown more tolerant of defaults in recent years…”

March 1 – Bloomberg (Molly Dai): “China’s $18.2 trillion onshore debt market is seeing its largest amount of delinquencies through the first two months of the year on record. Missed repayment of principal and interest have reached 25.9 billion yuan ($4bn) so far this year, almost twice the amount during the same period last year.”

March 1 – Reuters (Alfred Cang): “China’s Inner Mongolia has banned cryptocurrency mining and declared it will shut all such projects by April, spurring fears the world’s No. 2 economy will take more steps to eradicate the power-hungry practice. The autonomous region, a favorite among the industry because of its cheap power, also banned new digital coin projects… The aim is to constrain growth in energy consumption to about 1.9% in 2021.”

February 27 – Reuters (Jessie Pang and James Pomfret): “Forty-seven Hong Kong pro-democracy campaigners and activists were charged on Sunday with conspiracy to commit subversion in the largest single crackdown on the opposition under a China-imposed national security law.”

Global Bubble Watch:

March 1 – Financial Times (Nicolle Liu and Thomas Hale): “Steve Chuang’s Hong Kong-based electronics manufacturing company has enjoyed steady demand from the US and Europe over the past year. But, like many Asian exporters, he is struggling to get his products to customers. Chuang’s business, which makes solar energy electronics, is just one of many enjoying a trade boom that has helped the regional economy bounce back from last year’s pandemic-driven downturn. But their success is being held back by disruption to global shipping supply chains. The surge in exports from China to the west, combined with disruption at ports due to coronavirus, has left many containers out of position, resulting in queues of ships outside ports and soaring freight rates.”

March 1 – Reuters (Joori Roh): “South Korea’s factory activity expanded at its fastest pace in nearly 11 years in February…, as the strongest growth in over a decade in production and new orders drove the recovery in the manufacturing-heavy economy.”

March 1 – Bloomberg (Samson Ellis): “Factories in Taiwan faced the longest delays on record in securing raw materials and components in February as they worked overtime to keep up with surging demand from clients overseas. Manufacturers cited low stock levels at suppliers, a shortage of freight containers and delayed shipping schedules as main reasons for the biggest delays since records began nearly 17 years ago, according to… IHS Markit… This comes as the Purchasing Managers’ Index rose to 60.4 last month, the highest level since April 2010, fueled by improved demand from China, Europe and the U.S.”

March 3 – Bloomberg (Nicholas Comfort, Steven Arons and Lucca de Paoli): “Germany’s financial watchdog shuttered Greensill Bank AG and asked law enforcement officials to investigate accounting irregularities at the lender, compounding the woes of its parent company as it seeks to stave off a collapse that it says could prompt corporate defaults and job losses. Regulator BaFin… said it closed the Bremen-based lender for business after finding irregularities in how Greensill Bank booked assets tied to a key client of Greensill Capital, British industrialist Sanjeev Gupta.”

March 3 – Bloomberg (Eddie Spence): “Greensill Capital’s unraveling is piling pressure on the sprawling empire of a British industrialist known as the ‘savior of steel.’ Sanjeev Gupta’s GFG Alliance, which spans steel, aluminum, renewable energy and banking assets around the world, owes much of its expansion to Lex Greensill’s eponymous firm that’s fighting to stave off a collapse. GFG spent about $6 billion in just five years, targeting old, unwanted assets, with funding help from Greensill. But with Greensill’s supply chain finance business crumbling, the question is what that means for Gupta. By Wednesday, there were already signs of stress.”

March 3 – Bloomberg (Lucca de Paoli and Nabila Ahmed): “The seeds for the rapid disintegration of Lex Greensill’s empire were sown eight months ago, when a little-known Australian insurer called Bond and Credit Company decided not to renew insurance policies covering $4.6 billion in corporate loans backed by the financier’s firm. The policies were due to lapse on March 1, prompting a last-ditch effort from Greensill’s supply-chain firm to take the insurer to court in Australia, warning that losing insurance coverage for its 40 or so clients could spark defaults and put 50,000 jobs at risk. But late on Monday a judge in Sydney struck down Greensill’s injunction, triggering a series of events that have since reverberated around the world. Hours later… Credit Suisse Group AG suspended a $10 billion family of funds that invested in debt arranged by Greensill Capital, choking off a key source of funding that’s left the tycoon’s namesake firm struggling for survival.”

Central Bank Watch:

March 1 – Bloomberg (Alexander Weber, William Horobin, Carolynn Look and Greg Ritchie): “The European Central Bank ‘can and must react against’ any unwarranted rise in bond yields that threaten to undermine the euro-area economy, policy maker Francois Villeroy de Galhau said. The comments by the Bank of France governor, among the strongest yet by ECB officials, encouraged investors to bet that the central bank is already stepping up its own emergency bond-buying program… The yield on 10-year Italian debt fell 10 bps to 0.66%, its biggest decline since June… Villeroy said part of the recent tightening of financial conditions is due to ‘excessive spillovers and tensions.’ The ECB should start by using its pandemic emergency bond-buying program to drive down yields, he said, and ‘we continue to stand ready to adjust all of our instruments, as appropriate, including possibly a lowering of the deposit rate if needed.’”

March 1 – Financial Times (Joshua Oliver and Martin Arnold): “Australia’s central bank doubled the size of its regular bond purchases on Monday in a move that analysts say will have broad implications as policymakers consider their response to a global jump in borrowing costs. The decision by the Reserve Bank of Australia added fuel to a rebound rally that sent the country’s 10-year bond yield tumbling almost 0.25 percentage points to 1.67%. It had soared as high as 1.928% as the country became one of the main focal points of last week’s worldwide bond sell-off. The RBA’s purchases of A$4bn ($3.1bn) in long-term bonds was the second recent intervention after the bank on Friday launched an unscheduled purchase of A$3bn in short-term bonds.”

March 3 – Reuters (Praveen Menon and Renju Jose): “Central banks globally are prepared to over-shoot inflation targets as they battle rapidly falling prices and a dislocation in labour markets, New Zealand’s Central Bank Governor said… Treasury yields have risen recently on concerns that government spending globally to support economies could push inflation above central bank targets more quickly than expected. However, Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr said the world is no longer focused on the fear of returning to the problems of high inflation… ‘The single biggest challenge in the world at the moment is rapidly falling prices, deflation and dislocation in the labour markets,’ Orr said… ‘Every central bank is talking about risking over-shooting inflation targets so at least on average they are broadly right, because at the moment they are all well undershot,’ he added.”

March 1 – Reuters (Swati Pandey and Wayne Cole): “Australia’s central bank… affirmed its pledge to keep interest rates at historic lows as policymakers battle to stop surging bond yields disrupting the country’s surprisingly strong economic recovery. Concluding its March board meeting, the Reserve Bank of Australia (RBA) kept rates at 0.1% and committed to maintaining its ‘highly supportive monetary conditions’ until its employment and inflation goals are met.”

March 3 – Bloomberg (Carolynn Look, Alexander Weber and Jana Randow): “European Central Bank policy makers are downplaying concerns over rising bond yields, suggesting they can manage the risk to the euro-area economy with verbal interventions including a pledge to accelerate bond-buying if needed. ECB Governing Council members, who meet next week to set policy, see no need for drastic action such as expanding the overall size of their 1.85 trillion-euro ($2.24 trillion) emergency asset-purchase program, according to officials familiar with internal discussions.”

EM Watch:

March 1 – Bloomberg (Farah Elbahrawy, Lilian Karunungan and Sydney Maki): “Eight years ago, when the taper tantrum roiled emerging markets, the so-called Fragile Five of Turkey, Brazil, South Africa, India and Indonesia suffered the most. Another spike in U.S. Treasury yields is threatening to wreak havoc on at least three of those nations. The Turkish lira, Brazilian real and South African rand led major global declines last week in the worst developing-nation currency selloff since late September. Those exchange rates have the highest one-week implied volatility in the world, with some analysts warning of more pain ahead.”

March 1 – Bloomberg (Divya Patil): “Borrowing costs for Indian companies spiked by the most in more than seven years last month, in a blow to firms struggling to recover from the pandemic. The average yield on top-rated three-year, five-year and 10-year corporate rupee bonds all climbed by their most since 2013 in February. A confluence of factors including higher global bond yields, and concerns that companies may be crowded out of local debt markets by the government’s near-record borrowings plans have pushed up borrowing costs up for Indian companies.”

March 2 – Reuters (Jamie McGeever): “The monthly rate of producer price inflation in Brazil kicked off this year at its second highest since comparable records began more than six years ago…, with prices rising across all 24 activities surveyed. Factory gate prices rose 3.36% in January from the month before, almost touching the 3.4% increase registered last October, the highest since the IBGE series began in 2014.”

Japan Watch:

February 28 – Reuters (Daniel Leussink): “Japan’s factory activity expanded at the fastest pace in over two years in February, a private-sector survey showed…, as strong orders led to the first output rise since the start of the coronavirus pandemic… It also showed, however, that producers are facing a jump in input prices, which rose at their fastest pace since February 2019, pressuring their profit margins.”

March 4 – Bloomberg (Chikako Mogi): “Japanese investors sold a record $33.6 billion of overseas bonds in the last two weeks of February, adding fuel to the selloff in global debt driven by concern central banks are moving toward withdrawing stimulus… That’s a record for a two-week period.”

Geopolitical Watch:

March 1 – Wall Street Journal (Yuka Hayashi): “The Biden administration said… it will use ‘all available tools’ to respond to alleged unfair trading practices by Beijing as it conducts a comprehensive review of its trade policy with China. Releasing its first trade agenda, the administration said it is committed to using tariffs and other tools to combat alleged unfair trade practices by China, including unfair subsidies to favored industries and use of forced labor that targets Uyghurs and other ethnic minorities. ‘The Biden administration recognizes that China’s coercive and unfair trade practices harm American workers, threaten our technological edge, weaken our supply-chain resiliency and undermine our national interests,’ the administration said. ‘Addressing the China challenge will require a comprehensive strategy and more systematic approach.’”

March 2 – CNN (Jennifer Hansler): “The Biden administration imposed a raft of sanctions on Russian officials and entities… in response to the poisoning and imprisonment of opposition leader Alexey Navalny. The actions — taken in coordination with the European Union… — represent the first significant move against Moscow since Joe Biden became President. The Treasury Department sanctioned seven senior Russian government officials: two of President Vladimir Putin’s deputy chiefs of staff, two Russian defense ministers, the Russian prosecutor general, the director of the Federal Penitentiary Service and the head of Russia’s security services…”

March 2 – Reuters: “Myanmar security forces opened fire on protests against military rule on Wednesday, killing at least 18 people, a human rights group said, a day after neighbouring countries called for restraint and offered to help Myanmar resolve the crisis.”

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