Global Bubbles are Deflating

EDITOR NOTES: There’s a stark difference between the “appearance” of health and real health. This principle applies to people, situations, and, on a larger scale, the global economy. When markets and assets are valued far above their actual worth, that’s what we call a “bubble.” A bubble, which is essentially a kind of inflation, is a dangerous form of “altered market perception.” It gives people the impression that the economy is expanding whereas its really just an inflationary phenomenon, devoid of real value, that’s being fueled by “debt” rather than “production.” Every financial bubble ends with a steep asset burst that, strangely enough, seems to shock the investors who’ve played a role in blowing it up. The COVID-19 pandemic has created a fragile environment of elevated economic risk. This risk is far from being contained and, to put it quite frankly, there’s no end in sight in the near term horizon. The “Fed-induced rally” is, as this article argues, a mere bubble. It doesn’t signal economic health, nor does it indicate a healthy transition toward safer shores in the equity markets. It’s “real” effect is what most investors don’t see: current monetary efforts are making our already-fragile economy even more vulnerable--a potential “death knell” for the equity markets and the dollar, figuratively speaking, and a reckoning for real safe haven assets like gold and silver.   

“Bubble” is commonly understood to describe a divergence between overvalued market prices and underlying asset values. And while price anomalies are a typical consequence, they are generally not among the critical aspects of Bubbles. I’ll start with my basic definition: A Bubble is a self-reinforcing but inevitably unsustainable inflation.

Bubbles, at their core, are fueled by Credit – or “Credit inflation.” Asset inflation and speculative asset price Bubbles are a common upshot. At their core, Bubbles are mechanisms of wealth redistribution and destruction.

The more protracted the Bubble period, the greater the maladjustment to underlying financial and economic structures. And the longer the Bubble inflation, the greater the wealth disparities and underlying social and political strain. While Bubble-related inequalities reveal themselves more prominently later in the up-cycle, the scope of wealth destruction only becomes apparent as the Bubble finally succumbs. As Dr. Richebacher always stressed, there’s no cure for Bubbles other than not allowing them to inflate. The catastrophic policy failure over the past 20 years has been the determination to aggressively inflate out of post-Bubble stagnation.

Bubbles can have profound geopolitical impacts as well. The inflation of Bubbles and corresponding booming economies promote the view of an expanding global economic “pie”. The inflating Bubble phase is associated with cooperation, integration and solidarity. The backdrop shifts late in the Bubble phase, as inequities and maladjustment become more discernible. Bursting Bubbles mark a radical redrawing of the geopolitical landscape. The insecurities and animosities associated with a shrinking economic pie see a rise of nationalism and “strongman” leadership. The backdrop drifts toward fragmentation, disintegration and conflict.

Regular CBB readers are familiar with this analytical framework. It is being reiterated this week because of the value I believe it provides in understanding this most extraordinary of environments. To disregard that the world was late in a historic Bubble period prior to COVID leaves analysts disadvantaged. Whether in the markets, real economies, politics or geopolitics, Bubble Dynamics these days play a profound role. This is becoming clearer by the week.

Let’s start with the markets. So, U.S. equities have diverged dramatically from underlying fundamentals. Most believe this is simply the marketplace peering over the valley to the reemergence of growth once the economy moves past the pandemic. More plausible analysis focuses on the securities price impact from unprecedented monetary inflation.

Federal Reserve Assets surged $213bn last week to a record $6.934 TN, pushing the 10-week gain to $2.693 TN. M2 “money supply” (with a week’s lag) expanded another $199bn, with a 10-week rise of $2.257 TN. Institutional Money Fund Assets (not included in M2) added $15bn, boosting its 10-week expansion to $961bn.

There is clearly ample monetary fuel to push equities higher in the short-term. Yet our analysis must also factor in the Market Structure that evolved over a most protracted Bubble period. In particular, powerful speculative Bubble Dynamics fundamentally altered market perceptions and mechanisms. Assorted trend-following strategies supplanted traditional investment analysis. Algorithmic trading changed market behavior. The massive ETF complex fostered trend-following and performance chasing strategies. Negative fundamentals notwithstanding, “FOMO” (Fear of Missing Out) plays a profound role in today’s highly speculative market backdrop. To be sure, sustaining a vigorous speculative market dynamic was one cost of the Fed’s hasty and massive market bailout.

Derivatives are also playing a momentous role in market dynamics. During the boom, faith in central bank backstops promoted risk-taking. Why not revel in risk so long as derivative market “insurance” is so cheap and readily available? This whole notion of hedging market risk is a dangerous case of “fallacy of composition.” Individual market participants can hedge market risk, offloading exposure to a counter-party in the event of a significant market decline. However, it is not possible for much of the market to offload risk. There will be no one within the marketplace with the wherewithal to absorb such losses in a crisis environment.

Much of the market protection these days is offered by sellers using dynamically-traded (“delta”) hedging strategies. If an institution purchases put options that strike below current market levels, the sellers of those puts will short futures or ETFs to hedge their rising exposures in the event of a declining market. As was witnessed in March, a market fall can quickly spiral into illiquidity and self-reinforcing dislocation - as writers of market protection flood the marketplace with sell orders (to hedge put option exposures that rise parabolically as strike prices are reached and these options trade “in the money”).

This problem was identified with the popularity of “portfolio insurance” strategies leading up to the 1987 stock market crash. But the benefits of cheap market “insurance” (i.e. risk-taking, loosened financial conditions, higher asset prices, wealth effects and associated economic stimulus) ensured policymakers were willing to ignore this risk. As I’ve highlighted over the years, much of the massive derivatives complex operates on the assumption of liquid and continuous markets, a specious premise made credible only with central bank liquidity backstops. Keeping this backstop viable during a period of expanding Bubbles has required increasingly egregious policy measures and market interventions.

I’ll posit that we’re witnessing the overarching risk associated with this scheme coming to fruition. Derivative-related hedging strategies became a commanding aspect of late-cycle speculative market dynamics. Derivatives then played prominently as markets collapsed into illiquidity in March, only to see the Fed resort to unprecedented monetary inflation ($2.7 TN and counting).

Egregious “money printing” operations provoked a sharp market reversal. This spurred a major unwind of hedges and bearish bets instrumental in fueling a dramatic market recovery. And as the market rallied, targeting stocks with large short (and put option) positions became quite a rewarding speculative endeavor. A major short squeeze unfolded, powering the market higher. A surging market in the face of a faltering Bubble recalls the period August to October 2007. Watching the big tech stocks going into melt-up recalls the final derivative-induced Q1 2000 speculative blow-off (at the precipice of a major down-cycle).

After fomenting risk-taking during the Bubble period, the marketplace for market “insurance” has turned hopelessly dysfunctional. It now ensures bouts of “risk off” liquidation quickly risk escalating into illiquidity and dislocation. And during “risk on,” the unwind of hedges will stoke upside dislocation and speculative excess. Importantly, these dynamics negate traditional market adjustment and correction dynamics. The resulting extreme divergence between securities prices and economic prospects raises the odds of a market crash – along with Trillions more Federal Reserve stimulus.

The U.S. was a “Bubble Economy” - having suffered from years of structural maladjustment. There was ongoing proliferation of enterprises that would prove uneconomic in a post-Bubble backdrop of tighter financial conditions, negative wealth effects and altered spending and investing patterns. A meaningful segment of the economy was driven by boom-time discretionary spending, creating latent vulnerabilities. Moreover, such an economic structure (over-indebted, savings deficient and replete with negative cashflow entities) becomes a Credit glutton. We’re beginning to see how Trillions of federal fiscal spending will be absorbed like a huge dry sponge.

May 15 – Bloomberg (Erik Wasson and Billy House): “The House passed a $3 trillion Democratic economic stimulus bill Friday that Republicans and President Donald Trump have already rejected and isn’t likely to trigger bipartisan negotiations any time soon. The measure, passed 208-199, would give cash-strapped states and local governments more than $1 trillion while providing most Americans with a new round of $1,200 checks. House Speaker Nancy Pelosi said it should be the basis of talks with the GOP-controlled Senate and White House, which have called for a ‘pause’ to allow earlier coronavirus recovery spending to work.”

On the other side of the globe, China faces the consequences of historic Bubble Economy maladjustment. New Chinese credit data this week corroborates Bubble Analysis. Total Chinese Aggregate Financing jumped $435 billion for the month of April, a typically slow month for lending (compared to April 2019’s $240bn). This pushed system Credit growth to an alarming $2.0 TN for just the first four months of 2020, 38% ahead of comparable 2019 growth (then a record). Bank Loans rose $240 billion in April, with one-year growth of $2.669 TN, or 13.1%. Aggregate Financing surged $4.156 TN, or 12.0%, over a year of historic Credit growth.

China’s M2 “money supply” expanded another $177 billion during April. M2 expanded $2.09 TN, or 15.1% annualized, over the past six months. M2 gained $2.95 TN, or 11.1%, over the past year. Over two years, M2 ballooned $5.018 TN, or 20%.

If the scope of monetary inflation isn’t alarming enough, the parabolic rise in Chinese Credit comes in the throes of a major economic contraction. Enormous state-directed lending has supported the economy and markets, while holding Credit losses at bay. Beijing is gambling that stimulus will return China’s growth to its pre-COVID trajectory. But with China’s consumers remaining cautious and global depression becoming a major problem for the nation’s colossal export sector (and banking system), odds of disappointing growth are high.

May 10 – Bloomberg: “The People’s Bank of China said it’ll resort to ‘more powerful’ policies to counter unprecedented economic challenges from the coronavirus pandemic… The central bank will ‘work to offset the virus impact with more powerful policies,’ paying more attention to economic growth and jobs while it balances multiple policy targets… It reiterated that prudent monetary policy will be more flexible and appropriate and it’ll keep liquidity at a reasonable level. The remarks reflect the PBOC’s growing concern over the unprecedented economic downturn and the risk of a second quarter of contraction, given sluggish domestic demand and the collapsing global economy.”

Relative Chinese stability masks mounting risk. It is difficult to see how this doesn’t manifest into a crisis of confidence in Chinese finance. Systemic risk is in parabolic rise (rapid growth of Credit of deteriorating quality). I expect wary households to hold back on discretionary spending, while overcapacity will haunt the business sector for years to come. We can assume fraud is commonplace throughout China’s financial sector. I suspect enormous speculative leverage has accumulated over this protracted cycle, buoyed by China’s managed currency regime and the perception of PBOC and “national team” market liquidity backstops. I believe the vulnerable renminbi much remains a global crisis Fault Line.

May 13 – Financial Times (Tom Mitchell and Don Weinland): “Donald Trump’s order to stop the US government’s main pension fund from investing in Chinese equities will only hurt US investors, Beijing has warned as trade tensions between the countries threatened to turn into a ‘financial fight’. Beijing officials have been worried since late last year that Mr Trump would follow up his two-year China trade battle with action in financial markets. The latest shot in that conflict was fired… by the US president.”

This so-called “financial fight” was inevitable - and appears to have commenced in earnest. When do they invoke the threat of liquidating Treasury holdings? The unfolding U.S. vs. China cold war has entered a dangerous phase. The U.S. is less than six months from elections, while China is facing acute Bubble fragility. But as serious as the threat of this escalating “war” is to global finance, growth and the “world order” more generally, U.S. markets remain short-term focused. The assumption is President Trump will not risk pushing this confrontation too far ahead of November – all bark, no bite. Markets further assume vulnerabilities in China will restrain Beijing’s reaction to Trump’s animus.

Yet faltering Bubbles ensure great uncertainty. I’ve always believed a bursting Bubble would see China directing blame at the U.S. (along with Japan). Beijing has employed significant stimulus in repeated moves to hold crisis at bay. Bubbles only inflated larger. At this juncture, it’s doubtful such measures will work, while the Trump administration has really ratcheted up hostilities. Fanning anti-U.S. public vitriol throughout China today requires minimal effort. So, it’s not a completely inopportune juncture for Beijing to take some tough medicine and begin focusing on financial and economic restructuring. It would be painful, but communist party leadership can deflect blame upon the global pandemic and America.

The Trump administration’s tough approach with trade negotiations created animosity and a breakdown of trust. There are indications that Beijing’s “hawks” have gained influence. I would anticipate an increasing amount of intransigence out of Beijing. The move to a bipolar world will accelerate. And don’t expect Beijing to sit back and watch the Trump administration work to shift global supply chains to the U.S. without adopting strong countermeasures.

If the direct consequences of the global pandemic weren’t enough, this crisis comes at such a critical juncture. The unstable geopolitical backdrop is turning increasingly problematic.

The Brazilian real dropped another 2.1% this week, as a troubling economic and financial backdrop is compounded by Brazil becoming a global COVID hot spot. EM currencies were again under pressure, with the Czech koruna declining 2.1%, the Hungarian forint 1.8%, the South African rand 1.3%, and the Mexican peso 1.3%. Asian currency weakness saw the Singapore dollar and South Korean won drop 1.0% and 0.9%. Declining 0.4%, China’s renminbi is nearing March lows versus the dollar.

Global bank stocks were under notable pressure again this week. U.S. banks were clobbered 9.8%, trading Thursday to the lows since April 2nd. European banks (STOXX 600) were smashed 6.8%, trading back to March lows. The Hang Seng China Financials Index dropped 2.6% this week, trading Friday at the low since early April. Japan’s TOPIX Bank Index fell 2.7%, trading to a three-week low.

Global bank Credit default swap (CDS) prices moved meaningfully higher this week. Goldman Sachs (5yr) CDS jumped 15 bps to 116, a six-week high. JPMorgan CDS rose 14 bps to a six-week high 87. BofA CDS rose 14 bps (to 90), and Citigroup nine bps (to 105). Other notable increases included Wells Fargo up 21 bps (to 101), Morgan Stanley 14 bps (to 104), Commerzbank 17 bps (to 97), UniCredit 14 bps (to 192) and Intesa Sanpaolo 14 bps (to 190). I would take the signal being provided by bank stocks (corroborated by safe haven bond yields) over that from Nasdaq.

May 15 – Bloomberg (Jesse Hamilton and Rich Miller): “The Federal Reserve issued a stark warning Friday that stock and other asset prices could suffer significant declines should the coronavirus pandemic deepen… The Fed made the assertion in its twice-yearly financial stability report, in which it flags risks to the U.S. banking system and broader economy. The document highlighted the central bank’s race to intervene in markets and temporarily dial back regulations on financial firms in response to the Covid-19 crisis. ‘Asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains reemerge,’ the Fed said…”

It would appear probabilities have increased for COVID-related risks remaining elevated for months to come. From the Bubble analysis perspective, this would seem to ensure a scenario where economic fallout proves more adverse than generally expected. Securities and asset prices are acutely vulnerable. And I would further argue the Fed-induced market rally over recent weeks has only exacerbated systemic fragilities. Global Bubbles are Deflating, with far-reaching consequences.

For the Week:

The S&P500 declined 2.3% (down 11.4% y-t-d), and the Dow fell 2.7% (down 17.0%). The Utilities dropped 2.5% (down 14.6%). The Banks sank 9.8% (down 43.4%), and the Broker/Dealers dropped 6.0% (down 20.6%). The Transports fell 6.9% (down 28.8%). The S&P 400 Midcaps dropped 5.8% (down 23.5%), and the small cap Russell 2000 fell 5.5% (down 24.7%). The Nasdaq100 slipped 0.7% (down 4.8%). The Semiconductors lost 4.2% (down 8.0%). The Biotechs rose 2.4% (down 8.5%). With bullion surging $41, the HUI gold index jumped 4.1% (up 22.7%).

Three-month Treasury bill rates ended the week at 0.095%. Two-year government yields slipped a basis point to 0.15% (down 142bps y-t-d). Five-year T-note yields declined three bps to 0.31% (down 138bps). Ten-year Treasury yields fell four bps to 0.64% (down 127bps). Long bond yields dropped six bps to 1.33% (down 106bps). Benchmark Fannie Mae MBS yields dipped two bps to 1.56% (down 115bps).

Greek 10-year yields fell 11 bps to 2.05% (up 62bps y-t-d). Ten-year Portuguese yields declined five bps to 0.88% (up 44bps). Italian 10-year yields increased two bps to 1.86% (up 45bps). Spain's 10-year yields fell four bps to 0.76% (up 29bps). German bund yields added a basis point to negative 0.53% (down 35bps). French yields increased one basis point to negative 0.02% (down 14bps). The French to German 10-year bond spread was little changed at 51 bps. U.K. 10-year gilt yields were unchanged at 0.23% (down 59bps). U.K.'s FTSE equities index fell 2.3% (down 23.1%).

Japan's Nikkei Equities Index declined 0.7% (down 15.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.00% (up 1bp y-t-d). France's CAC40 sank 6.0% (down 28.4%). The German DAX equities index dropped 4.0% (down 21.0%). Spain's IBEX 35 equities index fell 4.5% (down 32.2%). Italy's FTSE MIB index lost 3.4% (down 28.3%). EM equities were mostly lower. Brazil's Bovespa index dropped 3.4% (down 32.9%), and Mexico's Bolsa sank 5.1% (down 18.0%). South Korea's Kospi index declined 1.0% (down 12.3%). India's Sensex equities index fell 1.7% (down 24.6%). China's Shanghai Exchange declined 0.9% (down 6.0%). Turkey's Borsa Istanbul National 100 index rallied 2.0% (down 12.8%). Russia's MICEX equities index dropped 1.8% (down 14.8%).

Investment-grade bond funds saw inflows of $5.245 billion, and junk bond funds posted inflows of $4.485 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates added two bps to 3.28% (down 79bps y-o-y). Fifteen-year rates slipped a basis point to 2.72% (down 81bps). Five-year hybrid ARM rates increased one basis point to 3.18% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 3.67% (down 49bps).

Federal Reserve Credit last week expanded $78.5bn to a record $6.742 TN, with a 36-week gain of $3.020 TN. Over the past year, Fed Credit expanded $2.892 TN, or 78.1%. Fed Credit inflated $3.931 Trillion, or 140%, over the past 392 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $21.1 billion last week to $3.367 TN. "Custody holdings" were down $102bn, or 3.0%, y-o-y.

M2 (narrow) "money" supply surged $199bn last week to a record $17.765 TN, with an unprecedented ten-week gain of $2.257 TN. "Narrow money" surged $3.179 TN, or 21.8%, over the past year. For the week, Currency increased $9.1bn. Total Checkable Deposits surged $81.2bn, and Savings Deposits jumped $103.6bn. Small Time Deposits declined $8.1bn. Retail Money Funds rose $12.9bn.

Total money market fund assets increased $19.8bn to a record $4.788 TN. Total money funds jumped $1.687 TN y-o-y, or 54.4%.

Total Commercial Paper declined $7.3bn to $1.062 TN. CP was down $29bn, or 2.7% year-over-year.

Currency Watch:

May 14 – Reuters (Hesham Abdul Khalek and Marwa Rashad): “Saudi Arabian monetary agency (Sama) said on Thursday in a statement reported by state TV, it is still committed to local currency peg to the U.S. dollar, and that it serves the interest of economic growth and financial stability.”

For the week, the U.S. dollar index increased 0.7% to 100.402 (up 4.0% y-t-d). For the week on the downside, the New Zealand dollar declined 3.3%, the British pound 2.4%, the Brazilian real 2.1%, the Australian dollar 1.8%, the South African rand 1.3%, the Mexican peso 1.3%, the Canadian dollar 1.3%, the Singapore dollar 1.0%, the Swedish krona 1.0%, the South Korean 0.9%, the Japanese yen 0.4%, the euro 0.2%, and the Norwegian krone 0.1%. The Chinese renminbi declined 0.39% versus the dollar this week (down 1.95% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.1% (down 23.8% y-t-d). Spot Gold jumped 2.4% to $1,744 (up 14.9%). Silver surged 8.2% to $17.07 (down 4.7%). WTI crude jumped $4.69 to $29.43 (down 52%). Gasoline gained 1.9% (down 43%), while Natural Gas sank 9.7% (down 25%). Copper fell 3.1% (down 17%). Wheat sank 4.2% (down 11%). Corn was unchanged (down 18%).

Coronavirus Watch:

May 14 – Bloomberg (Julia Leite): “Brazil reported the biggest daily jump in coronavirus cases yet as the pandemic shows no signs of slowing in Latin America’s largest economy. The Health Ministry reported 13,944 new cases on Thursday, solidifying the country as the new global hot spot for the disease. The number of infections has more than doubled in the past two weeks, pushing the total to 202,918 -- figures health officials say likely don’t fully reflect the situation amid a widespread lack of testing in the nation home to 210 million people.”

May 15 – Associated Press (Lolita C. Baldor): “Five sailors on the aircraft carrier sidelined in Guam due to a COVID-19 outbreak have tested positive for the virus for the second time and have been taken off the ship, according to the Navy. The resurgence of the virus in the five sailors on the USS Theodore Roosevelt underscores the befuddling behavior of the highly contagious virus and raises questions about how troops that test positive can be reintegrated into the military, particularly on ships. All five sailors had previously tested positive and had gone through at least two weeks of isolation. As part of the process, they all had to test negative twice in a row, with the tests separated by at least a day or two before they were allowed to go back to the ship.”

May 14 – Bloomberg: “An elderly woman with no travel history. An unexpected flare-up in a nightclub. A swelling cluster in towns near international borders with no discernible source. After containing their outbreaks through measures from strict lockdowns to rapid testing regimes, the Asian economies that have seen some of the most success in quelling the coronavirus -- Hong Kong, South Korea and China -- are now facing resurgences that underscore how it may be nearly impossible to eradicate it. It’s a painful reminder that as countries open up again and people resume normal life, untraceable flare-ups even after an extended lull in cases are likely. Scientists have warned that the disease may never go away, because it lurks in some people without causing any outward signs of sickness.”

May 12 – Reuters (Richard Cowan, Makini Brice, Doina Chiacu, Tim Ahmann, Steve Gorman, Sharon Bernstein and Dan Whitcomb;): “California’s state university system, the largest in the United States, canceled classes… for the fall semester because of the coronavirus, while Los Angeles County said its stay-at-home order was likely to be extended by three months… In one of the first indications the pandemic will continue to have a significant impact into autumn, the chancellor of California State University said classes at its 23 campuses would be canceled for the semester that begins in September, with instruction moved online.”

May 13 – Financial Times (Richard Milne and David Crow): “When the swine flu pandemic struck in 2009, some of the world’s richest countries scrambled to get their hands on vaccines however they could. Poorer countries — among the worst affected — were pushed to the back of the queue, as western nations signed deals with drugmakers to guarantee access to vaccines. Australia even stopped a domestic drugmaker from exporting doses to the US until it had immunised its entire population… For many global health experts, swine flu acts as a warning for the far more serious coronavirus crisis, which has already killed more than 290,000 people and brought economies around the world to a standstill. They fear that the current pandemic could lead to a geopolitical fight over vaccines that would exceed the failings over swine flu.”

May 13 – Bloomberg (Jason Gale): “The coronavirus may have triggered a 30-fold jump in cases of a serious but rare pediatric inflammatory disease, according to an Italian study that provides an ominous warning to other pandemic-affected nations about the risk to children. A detailed analysis from Bergamo, the epicenter of the Italian Covid-19 outbreak, found 10 cases of a Kawasaki disease-like illness in children, adding to reports of about 90 similar cases from New York and England.”

Market Instability Watch:

May 11 – Financial Times (Colby Smith and Robin Wigglesworth): “The kindling for another big emerging markets debt crisis has been accumulating for years. Investor demand for higher returns has allowed smaller, lesser-developed and more vulnerable ‘frontier’ countries to tap bond markets at a record pace in the past decade. Their debt burden has climbed from less than $1tn in 2005 to $3.2tn, according to the Institute of International Finance, equal to 114% of GDP for frontier markets. Emerging markets as a whole owe a total of $71tn… The G20 has agreed to temporarily freeze about $20bn worth of bilateral loan repayments for 76 poorer countries. It has urged private sector creditors to do the same, but few analysts believe that is feasible… Resolving the coming debt crises may be even tougher than in the past, however. Rather than the banks and governments — the primary creditors in the mammoth debt crisis that racked the developing world in the 1980s and 1990s — creditors are nowadays largely a multitude of bond funds. They are trickier to co-ordinate and corral into restructuring agreements.”

May 13 – Financial Times (Hudson Lockett and Anna Gross): “When Donald Trump began lashing out at Beijing over its handling of the coronavirus pandemic, global currency traders’ attention snapped back to the exchange rate that last year aggravated tensions between the world’s two most powerful economies. The renminbi has fallen by 0.5% against the dollar since the end of April, when the US president asserted… he was ‘confident’ Covid-19 emerged from a laboratory in Wuhan. Mr Trump suggested that imposing trade tariffs could be one way to punish China in response, and earlier this week ordered the main federal government pension fund to refrain from investing in Chinese companies as they present a national security ‘risk’ to the US. Such outbursts are piling pressure on the Chinese currency…”

May 12 – Bloomberg (Alessandra Migliaccio, Luca Casiraghi, and Viktoria Dendrinou): “On the September night in 1992 when George Soros famously broke the Bank of England, it wasn’t just the British pound that crashed. The Italian lira cratered too, the last of its numerous 20th century devaluations. One veteran who is still at the Finance Ministry in Rome recalls a colleague researching ‘bankruptcy’ and ‘failed state’ amid the chaos as resentment swelled at the indifference of European allies, notably Germany. Those memories of market mayhem re-emerged along with the old fault lines following the economic shock of the coronavirus lockdowns. Italy did make it to the monetary mainstream, becoming a founding euro member, but the mutual recriminations were never far from the surface — nor were doubts from skeptics… that it was just a matter of time before the imperfect union of diverging economies would eventually fall apart.”

May 12 – Bloomberg (Jared Dillian): “It’s now clear in hindsight that a global pandemic was one of those things that financial markets never truly considered a real threat. This raises the question of what other so-called black swans might be lurking out there? Here’s one that might happen sooner rather the later: a failed auction of government bonds by the U.S. Treasury Department. Such a notion was unthinkable just a few months ago for the world’s richest economy and one that enjoys the exorbitant privilege of controlling the world’s primary reserve currency. Sure, the chances are still negligible that the government won’t find enough buyers for all the bonds it needs to sell to finance an estimated $3.7 trillion budget deficit. But the point is that the odds, however slim, are probably no longer zero… The reason why is that the U.S. Treasury is starting to auction $3 trillion in the span of a few months. No country at any time has every attempted such an audacious borrowing plan.”

May 13 – Bloomberg (John Ainger, James Hirai and Vivien Lou Chen): “Traders around the world are forging ahead with bets on negative interest rates, even as central banks mount a vocal counteroffensive. Fed funds futures reflected bets for a negative U.S. policy rate for a fifth day… While expectations for a shift moderated slightly after Powell’s speech, traders are still prepared for a move during the first half of next year. Global investors are factoring in a long, difficult road for policy makers trying to get their virus-damaged economies back on track. U.K. traders became the latest to price in sub-zero rates this week, in what would be the first move below zero in British history. Investors in New Zealand also see the benchmark falling through zero…”

May 11 – Financial Times (Colby Smith and Tommy Stubbington): “When the Federal Reserve stepped in to support the world’s largest debt market in March, fixed income investors were relieved. But in successfully staving off a more pronounced financial crisis, the Fed has further distorted markets… Over the past two months, the Fed has snapped up roughly $1.5tn of Treasuries and another $600bn or so of agency mortgage-backed securities as part of its pledge to buy an unlimited quantity of government debt. According to JPMorgan, the total of the Fed’s bond-buying in just a handful of weeks is in line with what the Fed purchased during the nearly three-year period covering its second and third rounds of quantitative easing after the financial crisis.”

May 12 – Wall Street Journal (Anna Hirtenstein): “U.S. corporate bond exchange-traded funds rose Tuesday after the Federal Reserve said it would begin purchases of the securities as part of its package of measures to support functioning of credit markets through the coronavirus pandemic. A widely traded bond ETF, BlackRock’s iShares U.S. investment-grade corporate bond exchange-traded fund, advanced 1% in its biggest jump in over a month. The Vanguard Intermediate-Term Corporate Bond ETF climbed 0.5%...”

Global Bubble Watch:

May 11 – Reuters (Tommy Wilkes and Ritvik Carvalho): “Central banks and governments have unveiled an estimated $15 trillion of stimulus already to shield their economies from the coronavirus pandemic - record sums that will swell balance sheets and deficits to peacetime highs. The sum equates to about 17% of an $87 trillion global economy last year.”

May 13 – Financial Times (Martin Arnold): “The extra debt being taken on by already heavily indebted governments and companies to tackle the coronavirus crisis will ‘come back to haunt us’, Angel Gurría, secretary-general of the OECD, has warned. …Mr Gurría said: ‘We are going to be heavy on the wing because we are trying to fly and we were already carrying a lot of debt and now we are adding more.’ Mr Gurría, who has run the Paris-based club of mostly rich nations for 14 years, said governments may have to ‘capitalise’ some of this extra debt by bailing out companies or writing off some of the vast loan guarantees they have extended to keep banks lending.”

May 11 – Financial Times (Tineke Frikkee): “One result of the coronavirus crisis looks likely to be a remaking of global supply chains. An increased focus from policymakers and executives on security of supply, amid rising tensions between China and the rest of the world, should lead to the creation of better-connected local supply hubs… Countless stories have called attention to the shortage of masks and protective clothing for healthcare workers.”

May 14 – Associated Press: “The pandemic will cost the insurance industry over $200 billion, according to Lloyds of London, who estimated that its own payouts are now on a par with the Sept. 11, 2001 attacks or the combined impact of hurricanes Harvey, Maria and Irma in 2017.”

Trump Administration Watch:

May 13 – CNBC (Christina Wilkie): “President Donald Trump… said any benefits from the U.S. China trade deal he signed in January pale in comparison to the damage that has been caused by what Trump called ‘the plague from China.’ It was unclear whom Trump was referring to when he said ‘dealing with China is a very expensive thing to do.’ The White House declined to comment. But after months of Trump resisting pressure to explicitly tie U.S.-China trade relations to the bilateral coronavirus blame game, the tweet was one of several signs in recent days that Trump may be changing tack.”

May 14 – MarketWatch (Robert Schroeder): “President Donald Trump said he has a good relationship with Chinese President Xi Jinping, but ‘right now I just don’t want to speak to him.’ …Trump said he’s ‘very disappointed’ with China, continuing criticism of Beijing's response to the coronavirus pandemic. ‘They could have stopped it,’ he told the network. He also said he was ‘looking at’ Chinese companies that trade on U.S. stock exchanges but don't follow U.S. accounting rules.”

May 15 – Financial Times (James Politi): “The Trump administration has tightened export controls targeting Huawei and its suppliers in the global semiconductor industry, adding to the tensions between Washington and Beijing that have flared during the pandemic. In a statement on Friday, the commerce department said that Huawei, the Chinese telecommunications equipment company deemed a risk to US national security, and HiSilicon, an affiliate, had continued to use American technology in its semiconductor design despite being subject to export controls since May of 2019. It charged that Huawei was “commissioning their production in overseas foundries using US equipment”, undermining US national security and foreign policy goals.”

May 14 – Reuters (Demetri Sevastopulo): “Donald Trump has warned that he could ‘cut off the whole relationship’ with China, in the latest escalation of US tensions with Beijing as he increasingly blames China for the global spread of the coronavirus. ‘There are many things we could do,’ Mr Trump told Fox Business… ‘We could cut off the whole relationship. Now if you did, what would happen? You’d save $500bn.’ It was unclear what that figure represented. Mr Trump was responding to a question about whether the US should refuse Chinese nationals student visas for sensitive science areas.”

May 12 – Associated Press (Deb Riechmann): “The Trump administration has directed the U.S. federal employee retirement fund to scrap its plan to place more than $4 billion into Chinese investments, a move that comes as the president blames Beijing almost daily for not doing more to stop COVID-19 from spreading around the world. The administration has given the board overseeing the Thrift Savings Plan until Wednesday to comply with the president’s directive. The more than $4 billion, however, is a small slice of the hundreds of billions in the tax-deferred retirement savings and investment plan that works like a 401(k) plan offered by private corporations.”

May 14 – Reuters (Susan Heavey and Kanishka Singh): “U.S. President Donald Trump… said he was very disappointed in China over its failure to contain the novel coronavirus, saying the worldwide pandemic cast a pall over his U.S.-China trade deal… ‘I’m very disappointed in China,’ the Republican president… ‘They should have never let this happen. So I make a great trade deal and now I say this doesn’t feel the same to me. The ink was barely dry and the plague came over. And it doesn’t feel the same to me,’ Trump said.”

May 11 – Reuters (Andrea Shalal and Ryan Woo): “U.S. President Donald Trump said… he opposed renegotiating the U.S.-China ‘Phase 1’ trade deal after a Chinese state-run newspaper reported some government advisers in Beijing were urging fresh talks and possibly invalidating the agreement… ‘No, not at all. Not even a little bit,’ Trump said when asked if he would entertain the idea of reworking Phase 1. ‘I’m not interested. We signed a deal. I had heard that too, they’d like to reopen the trade talk, to make it a better deal for them.’”

May 14 – Bloomberg (Mario Parker): “President Donald Trump said he’s ‘looking at’ Chinese companies that trade on the NYSE and Nasdaq exchanges but do not follow U.S. accounting rules. ‘We are looking at that very strongly,’ Trump told Fox Business… Trump followed up by saying that getting tough on Chinese companies on the exchanges could backfire. ‘Let’s say we do that, right,’ Trump said. ‘So what are they going to do? They’re going to move their listing to London or someplace else.’”

Federal Reserve Watch:

May 13 – Reuters (Howard Schneider): “The head of the Federal Reserve warned… of an ‘extended period’ of weak economic growth, vowed to use the U.S. central bank’s power as needed, and called for additional fiscal spending to stem the fallout from the coronavirus pandemic… The worst-case outcome leaves the economy mired in ‘an extended period of low productivity growth and stagnant incomes ... Additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,’ Powell said in what amounted to a direct call for Congress to ramp up its aid during the crisis.”

May 13 – Bloomberg (Brian Chappatta): “Federal Reserve Chair Jerome Powell made two things clear during much-anticipated remarks... First, fiscal policy might need to do more to combat the lasting economic damage from the coronavirus pandemic. Second — in what markets were most eager to hear — he’s not about to steer the central bank down the path to negative interest rates. ‘The evidence on the effectiveness of negative rates is very mixed,’ Powell said… To hammer home the point: ‘This is not something that we’re looking at.’ ‘It’s an unsettled area, I would call it,’ he said. ‘I know that there are fans of the policy, but for now it’s not something that we’re considering. We think we have a good toolkit, and that’s the one we’ll be using.’ What was left unsaid, of course, is that one such fan is President Donald Trump, who tweeted on Tuesday that ‘as long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT’. Big numbers!’”

May 13 – New York Times (Jeanna Smialek, Jim Tankersley and Emily Cochrane): “The Federal Reserve chair, Jerome H. Powell, delivered a stark warning on… that the United States was experiencing an economic hit ‘without modern precedent,’ one that could permanently damage the economy if Congress and the White House did not provide sufficient financial support to prevent a wave of bankruptcies and prolonged joblessness. Mr. Powell’s blunt diagnosis was the latest indication that the trillions of dollars that policymakers have already funneled into the economy may not be enough to forestall lasting damage from a virus that has already shuttered businesses and thrown more than 20 million people out of work.”

May 12 – Reuters (Ann Saphir, Howard Schneider, and Jonnelle Marte): “U.S. businesses and households are going to need more fiscal support to get through what will likely be a longer period of recovery from the coronavirus shutdown than initially expected, Federal Reserve policymakers said… ‘There may well need to be more fiscal stimulus in order to boost economic growth so that we can grind down that unemployment and get closer to full employment,’ Kaplan said.”

U.S. Bubble Watch:

May 14 – Associated Press (Christopher Rugaber): “Nearly 3 million laid-off workers applied for U.S. unemployment benefits last week… Roughly 36 million people have now filed for jobless aid in the two months since the coronavirus first forced millions of businesses to close their doors and shrink their workforces… An additional 842,000 people applied for aid last week through a separate federal program set up for the self-employed and gig workers.”

May 13 – CNS News (Terence P. Jeffrey): “The federal government has spent more money and run a larger deficit in the first seven months of fiscal 2020 (October through April) than in any previous year… In the first seven months of the fiscal year, the federal government spent a record $3,326,683,000,000 while bringing in only $1,845,379,000,000 in total receipts—thus running a record deficit of approximately $1,481,303,000,000.”

May 12 – Wall Street Journal (Paul Kiernan): “The budget deficit soared to a record $1.935 trillion in the 12 months through April as the U.S. ramped up spending and cut taxes to counter the economic slowdown and revenue dropped… The annual deficit was almost double the $1.037 trillion budget gap for the year through March. Spending rose to $5.2 trillion, while revenues fell to $3.265 trillion. Spending climbed to $979.71 billion in April, a monthly record… By comparison, monthly spending averaged $384 billion in the previous year. At the same time, revenue plunged to $241.86 billion, down 55% from April 2019. That left a deficit of $737.85 billion for the month.”

May 12 – Wall Street Journal (Heather Gillers): “Public pension plans lost a median 13.2% in the three months ended March 31, according to Wilshire Trust…, slightly more than in the fourth quarter of 2008. March’s stock market plummet led to the biggest one-quarter drop in the 40 years the firm has been tracking. ‘It was a horrible quarter for all public funds,’ said Chicago Teachers’ Pension Fund Investment Chief Angela Miller-May. Stocks bounced back in April, making up a significant chunk of the losses. But absent a full and speedy recovery, pension losses are poised to drive up already-burdensome retirement costs for governments.”

May 14 – Reuters (Elizabeth Dilts Marshall): “Credit card spending among some of JP Morgan Chase & Co’s U.S. customers fell 40% during March and early April compared to last year, as Americans stayed home to protect against the novel coronavirus…”

May 14 – Bloomberg (Ed Ludlow): “One in every four U.S. restaurants will go out of business due to the coronavirus quarantines that have battered the food-service industry, according to a forecast by OpenTable… Total reservations and walk-in customers from OpenTable’s network were down 95% on May 13 from the same day a year ago…”

May 12 – Reuters (Lucia Mutikani): “U.S. consumer prices dropped by the most since the Great Recession in April, weighed down by a plunge in demand for gasoline and services including airline travel as Americans stayed home during the coronavirus crisis… The consumer price index tumbled 0.8% last month after falling 0.4% in March. That was the largest decline since December 2008 when the economy was in the throes of a recession…”

May 12 – Bloomberg (Prashant Gopal): “U.S. home prices continued climbing in the first quarter, before the impact of the pandemic’s economic shutdown took hold. The median price for a previously owned single-family house was $274,600, up 7.7% from a year earlier, the National Association of Realtors said in a report Tuesday. Prices rose in 96% of the 181 metropolitan areas measured.”

May 13 – Reuters: “U.S. producer prices fell more than expected in April, leading to the largest annual decline since 2015… The… producer price index for final demand tumbled 1.3% last month after slipping 0.2% in March. In the 12 months through April, the PPI decreased 1.2%. That was the biggest decline since November 2015 and followed a 0.7% increase in March.”

May 13 – Bloomberg (Elise Young): “New Jersey Governor Phil Murphy announced the first steps for reopening the state as it saw April revenue plummet 60% from a year ago, evidence of the financial toll exacted by the coronavirus pandemic… New Jersey lost an unprecedented $3.5 billion of revenue in April.”

May 10 – Reuters (Tom Polansek): “U.S. President Donald Trump ordered meat processing plants to stay open to protect the nation’s food supply even as workers got sick and died. Yet the plants have increasingly been exporting to China while U.S. consumers face shortages, a Reuters analysis of government data showed… Meat buyers in China ramped up imports from around the world as a pig disease decimated its herd, the world’s largest, and pushed Chinese pork prices to record highs.”

May 13 – Reuters (Elizabeth Dilts Marshall): “Wall Street bonuses for 2020 could fall by as much as 25%-30% due to the deep cuts to revenues recorded by banks and hedge funds earlier this year as a result of the novel coronavirus, according to… compensation consulting firm Johnson Associates Inc.”

Fixed-Income Bubble Watch:

May 14 – Bloomberg (Amanda Albright and Danielle Moran): “To the analysts at UBS Global Wealth Management, the $3.9 trillion municipal-bond market is heading into the biggest financial storm anyone has ever seen. The nation’s swift economic collapse is hitting virtually every corner of the market, which extends far beyond states and cities with the power to raise taxes. Nursing homes that have sold tax-exempt debt are being ravaged by the outbreak. College dormitory operators are facing vacancies, while small private schools that were already competing for students face uncertain prospects. Airlines whose lease payments back some bonds are seeing losses pile up. Stadiums and museums are empty.”

May 12 – Financial Times (Joe Rennison and Robert Smith): “The close cousin of collateralised debt obligations that became notorious during the subprime mortgage meltdown over a decade ago, CLOs package up risky corporate loans to back payments on a group of new securities that have cascading exposure to default by any of the underlying borrowers. To the outsider, they can appear to perform some of the alchemy that was evident in the run-up to the financial crisis, transforming risky credits into securities where the largest tranche is awarded a triple A rating. ‘CLOs and the loans underpinning them are ground zero in terms of the vulnerability of this crisis,’ says Matthew Mish, a credit analyst at UBS. The US market… has expanded from $327bn in 2007 to $691bn at the end of 2019…, rising in lockstep with the underlying leveraged loan market which has doubled from $554bn to nearly $1.2tn, according to… S&P Global.”

May 12 – Bloomberg (Lisa Lee): “The Federal Reserve revised its Term Asset-Backed Securities Loan Facility to allow CLOs that hold a broader range of leveraged loans to be used as collateral. The Fed will now accept new AAA CLOs with leveraged loans, including refinanced loans, that priced as far back as January 2019… Previously, eligible collateralized loan obligations could only hold newly-originated loans. The Fed’s decision should help increase demand in the $690 billion CLO market, which so far hasn’t benefited much from the central bank’s effort to boost credit liquidity.”

May 12 – CNBC (Lauren Hirsch): “J.C. Penney is in talks with key lenders to secure $450 million in financing for a possible bankruptcy filing… The funds, known as a ‘debtor in possession’ loan, would be smaller than the $1 billion in DIP the retailer was initially seeking… The company is planning to file for bankruptcy as soon as Friday, though that timing could still be delayed…”

China Watch:

May 11 – Global Times: “More hawkish voices have emerged within China on the phase one trade deal with Washington, with some calling for new negotiations and a tit-for-tat approach on spiraling trade issues, after US' malicious attacks on China ignited a tsunami of anger among Chinese trade insiders, the Global Times learned from sources close to the Chinese government. Inside China, dissatisfaction with the phase one agreement has been growing... In the past, some trade negotiators believed that it would be worthwhile to make certain compromise to reach a partial truce in the 22-month trade war and ease escalating tensions. However, given US President Donald Trump's hyping an anti-China conspiracy that aims to cover up his mishandling of the COVID-19 pandemic, advisors close to the trade talks have suggested Chinese officials rekindling the possibility of invalidating the trade pact and negotiating a new one to tilt the scales more to the Chinese side… A former Chinese trade official told the Global Times… China could complete such procedures based on force majeure provisions in the pact. ‘It’s in fact in China’s interests to terminate the current phase one deal. It is beneficial to us. The US now cannot afford to restart the trade war with China if everything goes back to the starting point,’ another trade advisor to the Chinese government told the Global Times… ‘After signing the phase one deal, the US intensifies crackdown in other areas such as technology, politics and the military against China. So if we don’t retreat on trade issues, the US could be trapped,’ the former official noted.”

May 10 – Reuters (Yew Lun Tian): “China has issued a lengthy rebuttal of what it said were 24 ‘preposterous allegations’ by some leading U.S. politicians over its handling of the new coronavirus outbreak. The Chinese foreign ministry has dedicated most of its press briefings over the past week to rejecting accusations by U.S. politicians, especially Secretary of State Mike Pompeo, that China had withheld information about the new coronavirus and that it had originated in a laboratory in the city of Wuhan. A 30-page, 11,000-word article posted on the ministry website on Saturday night repeated and expanded on the refutations made during the press briefings, and began by invoking Abraham Lincoln, the 19th century U.S. president.”

May 15 – Reuters (Shubham Kalia): “China is ready to put U.S. companies in an ‘unreliable entity list,’ as part of countermeasures against Washington’s move to block shipments of semiconductors to Huawei Technologies, the Global Times reported… The measures include launching investigations and imposing restrictions on U.S. companies such as Apple Inc, Cisco Systems Inc, Qualcomm Inc as well as suspending purchase of Boeing Co airplanes, the report said here citing a source.”

May 10 – Reuters (Weizhen Tan): “China could find itself having to write off massive loans as countries that owe Beijing money under its massive infrastructure project struggle with mounting debts in the coronavirus fallout, analysts say. China’s mammoth infrastructure investment plan — also known as the Belt and Road Initiative (BRI) — is highly controversial and widely criticized for saddling many countries with debt. It is an ambitious project that aims to build a complex network of rail, road and sea routes stretching from China to Central Asia, Africa and Europe. It is also aimed at boosting trade. Chinese financial institutions have provided hundreds of billions in funding to countries involved in the BRI projects.”

May 11 – Reuters (Yawen Chen and Se Young Lee): “China’s factory prices fell at the sharpest rate in four years in April… The producer price index (PPI) fell 3.1% from a year earlier, the National Bureau of Statistics said in a statement on Tuesday, compared with a 2.6% drop tipped by a Reuters poll of analysts and a 1.5% decline in March.”

May 12 – Reuters (Stella Qiu and Se Young Lee): “China’s passenger numbers fell 68.5% in April from a year ago, for a drop smaller than in March…, pointing to a fragile industry recovery from the coronavirus pandemic as other nations reopen economies.”

May 13 – Bloomberg (Daniela Wei and Emma Dong): “For decades, North Sichuan Road was Shanghai’s answer to Hong Kong’s Causeway Bay—a place where thousands shopped daily for everything including food and designer clothes. But that was before the new coronavirus. Now the local Printemps, a franchise of the glitzy Paris department store, has closed its doors, a nearby shopping center has shut for renovation, and few people were browsing the neighborhood on a recent evening. It’s an ominous sign for a once-vibrant segment of the world’s biggest consumer market: restaurants and the malls that depend on them.”

May 11 – Bloomberg (Tian Chen): “A sell-off in China’s sovereign notes worsened Monday, with the benchmark 10-year yield surging to its highest level since March… The yield on sovereign notes due in a decade jumped as much as seven basis points to 2.68%. Sales this month of local government bonds are expected to climb to a record high of more than $141 billion. The supply has raised concerns that commercial banks, the largest holders of sovereign notes, may shift some funds to debt sold by regional authorities for their higher returns.”

May 11 – Bloomberg: “Chinese securities firms are raising a record amount in short-term bills, taking advantage of cheap, central bank-fueled liquidity as they pile into the nation’s battered stocks… Seizing on a market plunge as the nation grappled with the outbreak of the coronavirus, China’s brokers issued 312 billion yuan ($44bn) of short-term bills in the interbank market in the first four months of the year…”

May 11 – Wall Street Journal (Xie Yu): “China’s regional bosses are ramping up infrastructure spending, falling back on an old remedy to boost economic activity as the coronavirus pandemic curbs consumption and industrial production. Off-balance-sheet entities are selling bonds to finance projects such as investing in warehouses, expanding underground metro networks, building data centers or renovating shantytowns… These vehicles—known to investors as local government financing vehicles or LGFVs—raised 1.46 trillion yuan ($206bn) in January to April this year, according to S&P Global Ratings. That is the busiest start to the year in the rating company’s records, which go back to 2005. S&P analyst Gloria Lu forecast full-year issuance would top last year’s record of 3.4 trillion yuan.”

May 11 – Bloomberg (Annie Lee, Rebecca Choong Wilkins, and Denise Wee): “A Hong Kong-listed oil explorer became the first casualty of the spectacular oil price slump in China’s offshore bond market, after defaulting on a dollar note. MIE Holdings Corp. failed to deliver an interest repayment of about $17 million for its 13.75% dollar bond due 2022 after a 30-day grace period expired…”

May 10 – Associated Press (Paul Wiseman): “China’s direct investment in the United States fell last year to its lowest level since the Great Recession… The decline in Beijing’s investment in the United States reflected tensions between the world’s two biggest economies and Chinese government restrictions on overseas investment. A report… from the National Committee on U.S.-China Relations and the Rhodium Group consultancy found that China’s direct investment in the U.S. dropped from $5.4 billion in 2018 to $5 billion last year, the lowest level since the recession year of 2009.”

May 13 – Bloomberg: “Concern that China may soon witness its first convertible-bond default is drawing attention to just how speculative the market has become. The Shenzhen Stock Exchange suspended trading in Jiangsu Huifeng Bio Agriculture Co.’s bond in late April after the company reported its second consecutive year of losses. Jiangsu Huifeng… it may not be able to pay investors should a large proportion of the notes, set to mature in 2022, fail to convert into equity when they come due… Adding to the nervousness is a put option that allows investors to demand early repayment on the bond -- a clause that’s triggered if the stock trades below a certain level for 30 consecutive trading days… After a record 126 convertible bonds were sold in China last year, raising a combined 269 billion yuan ($38bn), this year’s pace is set to top that with 56 deals so far. Rushing in have been smaller and lower-rated firms, who tend to have increased credit risks. …86% of 2020’s total issuers are rated AA or less, the most in at least a decade.”

May 13 – Financial Times (Don Weinland and Sherry Fei Ju): “During the most intense phase of China’s coronavirus outbreak, Anhui Huamao’s cotton spinning and garments business held up, reporting a small loss of Rmb25.6m ($3.6m) over the first three months of the year. But it was another part of the textiles company — a non-core unit making bets on stocks and other financial products — that really hit trouble. Losses from Huamao’s financial investments were more than six times greater, hitting Rmb168m in the first quarter. The company is one of nearly 500 listed Chinese groups that posted losses on their financial investments in the first quarter of the year, up from just 165 in the same period last year… The groups lost a collective Rmb11.2bn ($1.6bn) on their financial investments…”

ECB Watch:

May 13 – Reuters (Thomas Escritt): “Chancellor Angela Merkel said… she would respect a ruling by Germany’s constitutional court requiring her government to challenge the ECB on its flagship stimulus plan but added that she wanted to preserve a strong single currency. ‘I believe we must approach these tasks now with a clear political compass and this compass means for me I would like to see a strong common currency, a euro,’ Merkel told lawmakers.”

Central Bank Watch:

May 11 – Reuters (Leika Kihara): “The Bank of Japan will do ‘whatever it can’ to mitigate the growing fallout from the coronavirus pandemic, Governor Haruhiko Kuroda said…, warning that a collapse in global activity has had severe consequences on the economy… ‘What’s most important for us is to take steps to smoothen corporate financing and stabilise markets,’ Kuroda said. ‘We will do whatever we can as a central bank, working closely with the government.’”

May 12 – Bloomberg (Tracy Withers): “New Zealand’s central bank almost doubled its quantitative easing program and said it is open to cutting interest rates further, including taking them negative… The Reserve Bank increased its bond-purchase program to NZ$60 billion ($36bn) from NZ$33 billion and said it is prepared to use additional monetary policy tools if needed… It could also add other types of assets to its Large Scale Asset Purchase program and provide fixed-term loans to banks, the RBNZ said… ‘The Monetary Policy Committee remains prepared to do whatever it takes to ensure that we have significant monetary stimulus in the economy,’ Governor Adrian Orr told a news conference.”

Europe Watch:

May 12 – Bloomberg (Karin Matussek and Stephanie Bodoni): “Members of Germany’s top court continued to defend their controversial decision that questioned the underpinning of the European Central Bank’s asset repurchase program, saying national courts do have a limited oversight role over the bloc’s judges. Peter Huber, who drafted last week’s ruling for Germany’s constitutional court, said the judges wanted the ECB to take responsibility for the quantitative easing program and to explain it to those negatively affected. …His colleague Andreas Vosskuhle denied that the EU top court always has the last word in matters of the region’s law. ‘The message to the ECB is actually homeopathic,’ Huber, 61, said… ‘It shouldn’t see itself as the ‘Master of the Universe.’ An institution like the ECB, which is only thinly legitimized democratically, is only acceptable if it strictly adheres to the responsibilities assigned to it.’”

May 10 – Financial Times (Sam Fleming, James Shotter, and Valerie Hopkins): “The EU is seeking ways of defusing a constitutional crisis that threatens to weaken the legal glue holding the union together. The German constitutional court’s decision last week casting aside a European Court of Justice ruling on monetary policy marked the most overt and significant challenge ever posed to the EU’s highest court... In a statement… described by one EU expert as a ‘cry for help’, the ECJ warned that the bloc’s legal order may be in jeopardy. Ursula von der Leyen, president of the European Commission, said in a letter… to Sven Giegold, a German MEP, that Brussels was considering options including legal action against Germany. But the most immediate danger lies in the east, where Warsaw and Budapest are already engaged in legal skirmishes with Brussels and could be emboldened by the German constitutional court’s defiance. Experts fear courts in other countries will also start taking shots at the ECJ.”

May 13 – Financial Times (Guy Chazan, Sam Fleming and Martin Arnold): “A judge in Germany’s highest court has warned that EU infringement proceedings against Berlin over the court’s contentious ruling on the European Central Bank would plunge Europe into crisis. Peter M Huber, who drafted last week’s constitutional opinion, told the Frankfurter Allgemeine Zeitung that such a procedure ‘would trigger a significant escalation, potentially tipping Germany and other member states into a constitutional conflict that would be very difficult to resolve’. In the long term, it would ‘weaken or even endanger the European Union’, he added.”

Brazil Watch:

May 9 – Reuters (Carolina Mandl): “Brazil’s Economy Minister Paulo Guedes… said the country’s central bank is likely to shower the economy with money in case of a depression due to the coronavirus pandemic… Brazil’s Congress… approved a constitutional amendment with extra spending and emergency measures to help weather the impact of the crisis, giving the central bank powers to buy private and public sector assets. In case of a depression, Guedes said the central bank could provide liquidity to companies and even small businesses.”

May 12 – Reuters (Jamie McGeever): “Services activity in Brazil shrank 6.9% in March…, the biggest monthly fall on record and a stark indication of the economic damage wrought by the coronavirus crisis.”

EM Watch:

May 14 – Reuters (Orhan Coskun and Jonathan Spicer): “Turkey’s government has appealed to foreign allies in an urgent search for funding, three senior Turkish officials said, as it prepares defences against what analysts fear could be a second currency crisis in as many years. Treasury and central bank officials have held bilateral talks in recent days with counterparts from Japan and the United Kingdom on setting up currency swap lines, and with Qatar and China on expanding existing facilities, the officials said.”

May 11 – Bloomberg (Asli Kandemir, Constantine Courcoulas and Cagan Koc): “Turkey lifted a ban on trading liras with BNP Paribas SA, Citigroup Inc. and UBS Group AG, a quick reversal just days after it imposed the restrictions that rippled beyond the currency market. A spokesman for the banking regulator… confirmed that the trading curbs -- which were imposed amid a market rout on Thursday -- had been reversed. In instituting the ban, the regulator said the global lenders had failed to meet local-currency obligations to their Turkish counterparts.”

May 11 – Reuters (Ali Kucukgocmen): “President Tayyip Erdogan said… those who tried to plot against the Turkish economy using foreign financial institutions would be foiled.”

May 13 – Wall Street Journal (Mike Bird): “The Indian government promised a blockbuster economic stimulus… that lifted the country’s stocks. But the country’s economic circumstances looked bleak even before the pandemic began, and it is unclear who the buyers for all this debt will be. …Unemployment rose to 27.1% in the week to May 3, and many low-income workers have or are at risk of running out of money for basic necessities. The government touts the total size of the new rescue package at 10% of gross domestic product…”

May 12 – Bloomberg (Vrishti Beniwal): “Indian Prime Minister Narendra Modi said his government will spend a total of 20 trillion rupees ($265bn) to help Asia’s third-largest economy weather the fallout of the coronavirus pandemic. The package amounting to 10% of the nation’s gross domestic product will help the economy get back on its feet after weeks of stay-at-home restrictions…”

May 12 – Bloomberg (Anurag Joshi): “Indian companies are getting downgraded at the worst pace ever, adding to challenges for policy makers trying to keep credit markets from seizing up amid the Covid-19 pandemic. For every upgrade of rupee debt of Indian firms since April 1 there have been about 11 downgrades, leaving this quarter set to be the worst on record… Ratings have been cut for 847 domestic firms in the period. That’s pushing up refinancing costs, with spreads on top-rated three-year rupee company notes over similar-maturity Indian sovereign bonds rising to the highest since 2013.”

May 12 – Bloomberg (Subhadip Sircar): “Sovereign bonds declined in India as traders braced for a further jump in government borrowing after Prime Minister Narendra Modi announced an ambitious 20 trillion rupees ($265bn) package to deal with the fallout of the coronavirus pandemic. The benchmark 10-year bond yield rose 6 bps to 6.22%... Yields rose by the most in thee years on Monday following a 54% increase in government borrowing.”

May 10 – Reuters (Hesham Abdul Khalek, Marwa Rashad, Davide Barbuscia and Saeed Azhar): “Saudi Arabia will triple value added tax and suspend a cost of living allowance for state workers…, seeking to shore up finances hit by low oil prices as the coronavirus pandemic pummels global demand for its lifeline export… Central bank foreign reserves fell in March at their fastest rate in at least 20 years and to their lowest since 2011, while oil revenues in the first three months of the year fell 24% from a year earlier to $34 billion.”

Leveraged Speculation Watch:

May 12 – Bloomberg (Katherine Burton and Melissa Karsh): “Stan Druckenmiller said the risk-reward calculation for equities is the worst he’s seen in his career, and that the government stimulus programs won’t be enough to overcome real world economic problems. ‘The consensus out there seems to be: ‘Don’t worry, the Fed has your back,’ said Druckenmiller… ‘There’s only one problem with that: our analysis says it’s not true.’ While traders think there is ‘massive’ liquidity and that the stimulus programs are big enough to solve the problems facing the U.S., the economic effects of the coronavirus are likely to be long lasting and will lead to a slew of bankruptcies, he said.”

May 12 – Financial Times (Hudson Lockett): “China-focused hedge funds recorded their best monthly performance in half a decade in April, as a rebound in the country’s markets following the coronavirus sell-off helped investors outperform their global peers. The Eurekahedge Greater China Hedge Fund index — which tracks almost 70 hedge funds with about $30bn between them — climbed 9.7% last month… That was its best showing since April 2015, and brought its year-to-date performance to a gain of 2.5%.”

Geopolitical Watch:

May 14 – Financial Times (George Magnus): “Frosty doesn’t begin to describe the current relationship between China and the US, and a growing list of other countries. No one can say for sure how the complex pieces of this geopolitical kaleidoscope will settle. There is no question, though, that the coronavirus pandemic has opened up a new and dangerous front in tensions between China and the West, which will cast long shadows over the global system long after the worst of the pandemic is behind us. It has also rocked China’s economy in ways that no one predicted, compounding the structural headwinds that were in any event pointing to a decade of much slower economic growth. More suddenly than we could have expected, China now has a major unemployment problem. From an economic perspective, we may have arrived at what we could call ‘Peak China’. Put another way, it’s the moment when a major demand shock and balance sheet and other growth-sapping economic factors are colliding.”

May 14 – Financial Times (Editorial Board): “The global economy is reeling from the coronavirus pandemic. The last thing it needs now is for the smouldering trade war between the world’s two largest economies to escalate. Yet the US administration seems prepared to take that risk. The White House this week fired what could become the first shot in a new financial fight. US labour secretary Eugene Scalia wrote to the board overseeing a pension fund for 5.9m present and retired federal employees saying President Donald Trump was directing them to halt plans to allow the fund to invest in shares of Chinese companies… The pension board on Wednesday delayed the move. The White House, meanwhile, is taking steps to replace three of its five directors.”

May 11 – Financial Times (Kathrin Hille): “China’s diplomats have done away with diplomacy. In a quest to counter western accusations that coronavirus originated in their country, Beijing’s emissaries have over the past two months replaced courtesy with intimidation. Claiming that pensioners in French retirement homes were being left to die, threatening a boycott of Australian produce if Canberra pursued an investigation into Covid-19, pressuring governments from Prague to Wellington for public praise in exchange for mask shipments, and tweeting conspiracy theories that the US created the pandemic to hurt China — Beijing has jumped headlong into a furious fight over the pandemic’s narrative. China’s ‘wolf warrior’ diplomats — named after a set of films in which Chinese special-operations fighters defeat western-led mercenaries — have emerged over the past three years. But the virus has pushed their combative tactics to the centre of Beijing’s foreign policy approach.”

May 14 – Wall Street Journal (Rachel Pannett): “For years Australia tried to balance diplomatic concerns with China against the importance of their bilateral trade relationship. Now, the two countries are openly sparring over China’s handling of the coronavirus outbreak, in a sign of how Beijing’s efforts to extend its global influence are backfiring even in places where it is an economic lifeline. The spat began when Australian government officials began seeking support from European leaders in mid-April for an investigation into any missteps early in the crisis that contributed to the pandemic. Canberra wants global health authorities to have powers akin to weapons inspectors to go into areas where there is the potential for a future pandemic to emerge.”

May 8 – Reuters (Sarah Kinosian and Gabrielle Tétrault-Farber): “Russian soldiers are operating drones over Venezuela as part of a search operation for members of a paramilitary force that led a botched invasion this week, local media reported on Friday, citing deleted tweets from a state military command center. At least eight Russian special forces members will be ‘operating drones to run search and patrol operations’ near La Guaira, the coastal state just north of Caracas…”

May 12 – Associated Press (Suzan Fraser): “Turkey… accused Greece, Cyprus, Egypt, France and the United Arab Emirates of seeking to form an ‘alliance of evil’ after these countries issued a joint declaration denouncing Ankara’s policies in the eastern Mediterranean and Libya. In a strongly-worded statement, Turkish Foreign Ministry spokesman Hami Aksoy said the five countries were pursuing ‘regional chaos and instability’ in the eastern Mediterranean and sacrificing Libyans’ ‘hope for democracy for the reckless aggression of dictators.’”

Originally posted on Credit Bubble Bulletin