April 29, 2022: Collision Course

MARKET NEWS / CREDIT BUBBLE WEEKLY
April 29, 2022: Collision Course
Doug Noland Posted on April 30, 2022

The Shanghai Composite sank 5.1% Monday, fell another 1.4% Tuesday, rallied 2.5% Wednesday, increased 0.6% Thursday, and then rose 2.4% Friday – with the wild week’s 1.3% decline boosting y-t-d losses to 16.3%. If that wasn’t enough volatility, China’s growth-oriented ChiNext Index sank 5.6%, declined 0.9%, rallied 5.5%, fell 1.8%, and jumped 4.1% (up 1% for the week). Beijing to the rescue.

And Friday from Bloomberg’s April Ma: “The Politburo readout comes right in the nick of time, and is itself a meaningful signal of market support. The statement came during the market mid-day break, just as rumors of more support for tech and the economy started to brew. This was an exception to the norm of the release after market hours, closer to 6pm or 7pm. It wouldn’t have taken much for authorities to hold the statement for the evening. But then that would be missing the opportunity to spur afternoon gains just ahead of a five-day break from trading.”

Beijing’s prodding may have reversed much of the week’s equities market pain, though I doubt positive sentiment will return anytime soon. Crisis steps were less impactful elsewhere – notably with bank CDS and the renminbi. Things are “breaking” in China – deflating Bubbles, “Covid zero,” faith, confidence and even mental health.

China Construction Bank CDS surged 12 this week to 92.5 bps, approaching the 2020 spike level (began 2022 at 57 bps). China Development Bank CDS jumped 12.5 to 91.5 bps, surpassing the March 2020 crisis spike to a five-year high (began the year at 55bps). Industrial & Commercial Bank of China CDS rose 12 to 94 bps, almost matching the March 2020 spike high (began the year at 57bps). And Bank of China CDS closed Thursday’s session at 91 bps, up 12 w-t-d to surpass March 2020 highs (began 2022 at 56bps).

China Bank Assets have surpassed $55 TN this year, having doubled in only seven years. Bank Assets have inflated five-fold since the 2008 crisis. One would have to be a wild optimist to assume even satisfactory asset quality. At more than 300%, China dwarfs the U.S. Bank Assets ratio of just over 100% of GDP. It’s rational for markets to begin pricing in massive stimulus and bank recapitalizations. China sovereign CDS traded to 81.9 bps during Wednesday’s session, up nine for the week to the high since the March 2020 spike to 90 bps.

April 28 – Financial Times (Hudson Lockett): “The renminbi is set to close out its steepest monthly fall on record as China’s economy reels from severe Covid-19 lockdowns and the US Federal Reserve prepares to raise interest rates, driving global investors to ditch Chinese assets. The Chinese currency has fallen 4.2% this month to about Rmb6.6 per dollar, the biggest drop since the end of its US dollar peg, which was in place from 1994 to 2005. The fall is greater than a one-off devaluation by the Chinese central bank in 2015 that rattled global markets and a tumble in 2018 during the US-China trade war under the Trump administration. The pace of selling intensified after Chinese president Xi Jinping announced an ‘all out’ infrastructure spending package intended to help mitigate the damage from lockdowns in Shanghai and other cities.”

The renminbi declined 1.62% this week (offshore renminbi down 1.76%), with a stunning two-week drop of 3.59% (offshore renminbi down 3.94%) – trading this week to the low since November 2020.

Beijing is on a Collision Course. “Covid zero” is significantly accelerating the deflation of its historic Bubble. Meanwhile, global inflation continues to surge. Global central banks have commenced what is expected to be aggressive tightening cycles, with the market now expecting a 50 bps hike at next Wednesday’s FOMC meeting.

April 28 – Bloomberg (Daniel Moss and Gearoid Reidy): “Any doubt that the Bank of Japan is comfortable with a weak yen should now be eliminated. The central bank is effectively doubling down on the trademark super-easy monetary stance it began developing decades ago — just as the Federal Reserve and its peers become more aggressive in raising rates. In a statement after its policy meeting Thursday, the BOJ defended its efforts to keep the yield on 10-year government bonds near zero, and said it will buy a limitless amount of debt at fixed rates every business day to hold the line. The bank kept its guidance that rates will stay low or go south… Anyone looking for even a hint that Japan was prepared to crab-walk away from emergency settings would have been sorely disappointed. Traders, justifiably, hammered the yen.”

The yen declined another 0.9% this week, boosting April losses to 6.13% – and the 2022 drop to 11.22% – trading this week to the low versus the dollar back to 2002. Yen weakness places Chinese manufactures at a competitive disadvantage, only emboldening Beijing to play the currency devaluation card in an attempt to mitigate mounting economic woes. International investors have already been dumping Chinese assets. Higher-yielding Chinese debt securities are losing their relative appeal (in a rising yield world), and now even the perceived stability of the Chinese currency is in question.

I have suspected that speculative leverage has expanded tremendously in China over recent years. Enticing yields and a perceived stable (and appreciating) currency only ensured massive “carry trade” leverage. There has been a proliferation of hedge funds in China and throughout Asia more generally. Singapore, in particular, has become a major hub for leveraged speculation. Now the region has become a hotbed of currency instability, raising the specter of de-risking/deleveraging-related market discontinuity.

Asian currencies were again under pressure this week, capping a dismal month. April declines included the Japanese yen down 6.2%, the South Korean won 3.5%, the Malaysian ringgit 3.5%, the Thai baht 2.9%, the Taiwanese dollar 2.9% and the Singapore dollar 2.1%. Asia Credit default swap (CDS) prices increased notably this week and during April. For the month, Philippines CDS rose 32 bps (to 111bps), Vietnam 25 bps (137bps), Malaysia 25 bps (92 bps), India 22 bps (127bps), Indonesia 21 bps (106bps), and South Korea 12 bps (41bps).

Also factor in that Asia is the epicenter of technology manufacturing – with the global “tech” Bubble in grave jeopardy. The confluence of China’s bursting Bubble, Japan’s foolhardy monetary policy gambit, and highly levered systems puts Asia today on a Collision Course with rapidly deteriorating macro and micro fundamentals. I’ll assume mounting hedge fund and derivative issues.

“Amazon’s Biggest Drop Since 2006 Caps Miserable Month for Tech.” “Top Five U.S. Stocks Lose $1.2 Trillion in Value in April.” “Tech Stocks Sink Again, Nasdaq Has Worst Month Since 2008.” The Nasdaq100 dropped 3.8% this week, boosting 2022 losses to 21.2%. Technology dynamics are alarmingly reminiscent of the 2000 bursting Bubble episode. Importantly, the seemingly irrepressible massive flow of speculative finance has now reversed, triggering a destabilizing tightening of financial conditions for an inflated industry that has for years wallowed in extreme monetary overkill.

“Amazon.com Inc. acknowledged that a hiring and warehouse building binge during the pandemic is catching up with the company…” Industry heavyweights such as Amazon and Netflix are only the most obvious companies that spent egregiously in industry Arms Race Dynamics (with little concern for profits). Hiring and building excess are part of the story. Yet the overshadowing risk to the industry today is a drained money spigot forcing a 2000-2002-style slashing of technology infrastructure and advertising spending. The vulnerable technology/media/telecom (TMT) super-industry is today on a Collision Course with bursting speculative Bubbles and rapidly tightening financial conditions. A dreadful amount of uneconomic chaff will be exposed.

Investment-grade CDS gained four this week to 84 bps, the high since May 2020 (began 2022 at 50bps). It was curious to see a number of “TMT” companies high on the week’s CDS leaderboard – Dell (up 13bps), AMD (up 9bps), Disney (up 9bps), Verizon (up 7bps), Comcast (up 7bps), Cox Communications (up 6bps), HP (up 6bps), AT&T (up 6bps) and Oracle (up 6bps), to name a few. High-yield CDS surged 27 bps this week to a 21-month high 467 bps (began the year at 292bps).

April 29 – Bloomberg (Michael Gambale): “No companies are looking to issue fresh debt on Friday, according to an informal survey of debt underwriters, after a bunch of issuers shelved bond sale plans this week amid financial markets volatility. Weekly volume is likely to finish at $8.6 billion, well below consensus estimates calling for as much as $25 billion. This was the second biggest miss this year…”

The resilience of investment-grade bond issuance appeared to have finally succumbed this week. Bank stocks were hammered 5.2%, and the Broker/Dealers sank 4.7%. Also supporting the Destabilizing Financial Conditions Tightening Thesis, Bank CDS prices jumped to at least 2022 highs. JPMorgan CDS rose seven this week to 87.5 bps – the high since April 2020. Citigroup CDS jumped nine to 110.5 bps, and BofA CDS rose seven to 92 bps – both highs since April 2020. Morgan Stanley CDS jumped nine to 105.5 bps (high since April 2020), and Goldman Sachs gained five to 107 bps (high since May 2020).

Market consensus has the FOMC hiking rates 50 bps next week, as “Traders Price Near-Even Odds of 75-Basis-Point Fed Hike in June.” Breaking with the consensus, I see next week’s 50 bps hike as likely one and done with aggressive (50bps or higher) rate increases. The Fed, after all, is on a Collision Course with a market De-risking/Deleveraging Dynamic and precarious market liquidity crisis.

Personal Spending jumped a stronger-than-expected 1.1% in March. Rising 0.9% in March, the PCE Deflator was up 6.6% y-o-y – with the (Fed’s favored inflation indicator) Core PCE Deflator up 0.3% for the month and 5.2% y-o-y. The Q1 GDP Price Index was revised up to 8.0% annualized. The March Goods Trade Balance was reported at $125.3 billion – about 18% ahead of January’s record level. The S&P CoreLogic 20-City Home Price Index had prices up a blistering 2.39% for February, boosting y-o-y housing inflation to 20.2%.

Everything points to powerful inflationary dynamics and a Federal Reserve hopelessly “behind the curve.” The market is now pricing in a 2.86% Fed funds rate at the FOMC’s December 14th meeting. Moreover, the Fed is expected to soon commence its $95 billion monthly balance sheet reduction (“QT”).

Aggressive tightening measures are now on a Collision Course with market faith in the hallowed “Fed put.” This is a huge unfolding issue. The Fed is embarking on the first real tightening campaign since 1994, with securities markets already at the brink of illiquidity and dislocation. Markets could soon be clamoring for assurances of the Fed’s “buyer of last resort” liquidity backstop, while our central bank is prepared to begin withdrawing liquidity by selling Treasuries and MBS.

Amazingly, the ECB is even further behind the curve than the Fed. Annual euro zone consumer inflation reached a record 7.5% in April, with German inflation at a multi-decade high 7.8%. European periphery bond markets (and the bank/bond “doom loop”) are on a Collision Course with “risk off” and tightened conditions. The most vulnerable are showing the effects. Greek 10-year yields surged 35 bps this week (up 201bps y-t-d) to the high since the March 2020 crisis spike. Italian yields rose 10 bps (up 160bps y-t-d) to the high (2.77%) since February 2019.

European bank stocks dropped 3.6%, as bank CDS surged. Credit Suisse CDS jumped 15 to 135 bps (began ’22 at 57bps) – the high since the pandemic spike. Deutsche Bank CDS rose 10 to an almost one-year high 94.5 bps, and SocGen gained 9 to 67 bps. European high-yield (“Crossover”) CDS surged 40 this week (up 56 in seven sessions) to 428 bps – the high since May 2020.

And while on the subject of Collision Courses…

April 25 – Bloomberg: “Russian Foreign Minister Sergei Lavrov warned there’s a ‘serious’ risk of nuclear war over Ukraine in a statement the U.S. blasted as the ‘height of irresponsibility.’ ‘The danger is serious, real. It can’t be underestimated,’ Lavrov said in a state TV interview broadcast… Invoking the Cuban missile crisis of 1962, when the U.S. and the Soviet Union came close to nuclear war, he said that Moscow and Washington had understood the rules of conduct between the superpowers but ‘now there are few rules left…’ U.S. State Department spokesman Ned Price said Lavrov’s comments were part of a ‘pattern of bellicose statements’ from Russia, which he branded ‘irresponsible’ and ‘a clear attempt to distract from its failure in Ukraine.’ ‘Loose talk of nuclear weapons, nuclear escalation is especially irresponsible, it is the height of irresponsibility,’ Price told reporters…”

April 28 – The Hill (Maureen Breslin): “Russian President Vladimir Putin… warned of a ‘lightning fast’ response if any nation interferes in its war in Ukraine, according to multiple reports. Putin made the threat against any country that creates ‘strategic threats for Russia,’ CNBC reports. ‘If someone intends to intervene on what is happening from the outside and creates unacceptable strategic threats for us, then they should know that our response to oncoming strikes will be swift, lightning fast,’ Putin added… ‘We have all the tools for this, ones that no one can brag about, and we won’t brag — we will use them if needed — and I want everyone to know this. All the decisions have been made in this regard,’ said Putin. A mention in his remarks of ‘instruments [to respond] that no one can brag about’ is reportedly speculated to be a reference to the Russia’s supply of intercontinental ballistic missiles and nuclear weapons.”

Powerful and sophisticated munitions now flood in to support Ukraine’s Herculean war effort. The Ukrainians say Russia is suffering “colossal” losses in fierce fighting on multiple fronts. Russia appears resolved to wreak only more horrific destruction. The U.S. and NATO are determined to see a defeated Putin, with the conflict now having all the elements of a high-stakes “proxy war.” And I understand that the West cannot be blackmailed or even appear intimidated by Russia’s references to nuclear war. Each passing threat becomes only easier to dismiss, though risks are of such an extreme nature that they cannot be ignored. This has developed into the most perilous geopolitical flashpoint since the Cuban missile crisis.

April 28 – Wall Street Journal (Peggy Noonan): “Sometimes a thing keeps nagging around your brain and though you’ve said it before you have to say it again. We factor in but do not sufficiently appreciate the real possibility of nuclear-weapon use by Russia in Ukraine. This is the key and crucial historic possibility in the drama, and it really could come to pass. And once it starts, it doesn’t stop. Once the taboo that has held since 1945 is broken, it’s broken. The door has been pushed open and we step through to the new age. We don’t want to step into that age.”

For the Week:

The S&P500 dropped 3.3% (down 13.3% y-t-d), and the Dow fell 2.5% (down 9.2%). The Utilities sank 4.0% (down 1.5%). The Banks slumped 5.2% (down 16.8%), and the Broker/Dealers lost 4.7% (down 16.6%). The Transports declined 1.3% (down 9.8%). The S&P 400 Midcaps fell 3.2% (down 12.2%), and the small cap Russell 2000 dropped 3.9% (down 17.0%). The Nasdaq100 sank 3.8% (down 21.2%). The Semiconductors stumbled 2.3% (down 26.0%). The Biotechs dropped 5.3% (down 16.1%). With bullion down $35, the HUI gold index sank 5.9% (up 9.1%).

Three-month Treasury bill rates ended the week at 0.81%. Two-year government yields rose five bps to 2.72% (up 198bps y-t-d). Five-year T-note yields added two bps to 2.96% (up 169bps). Ten-year Treasury yields rose three bps to 2.94% (up 143bps). Long bond yields gained five bps to 3.00% (up 110bps). Benchmark Fannie Mae MBS yields were unchanged at 4.15% (up 209bps).

Greek 10-year yields surged 35 bps to 3.33% (up 201bps y-t-d). Ten-year Portuguese yields added three bps to 2.02% (up 155bps). Italian 10-year yields jumped 10 bps to 2.77% (up 160bps). Spain’s 10-year yields gained four bps to 1.97% (up 141bps). German bund yields declined three bps to 0.94% (up 112bps). French yields increased four bps to 1.46% (up 126bps). The French to German 10-year bond spread widened seven to 52 bps. U.K. 10-year gilt yields fell six bps to 1.91% (up 93bps). U.K.’s FTSE equities index increased 0.3% (up 2.2% y-t-d).

Japan’s Nikkei Equities Index declined 0.9% (down 6.8% y-t-d). Japanese 10-year “JGB” yields declined two bps to 0.23% (up 16bps y-t-d). France’s CAC40 dipped 0.7% (down 8.7%). The German DAX equities index slipped 0.3% (down 11.2%). Spain’s IBEX 35 equities index declined 0.8% (down 1.5%). Italy’s FTSE MIB index was little changed (down 11.3%). EM equities were mostly lower. Brazil’s Bovespa index dropped 2.9% (up 2.9%), and the Mexico’s Bolsa index fell 3.3% (down 3.5%). South Korea’s Kospi index declined 0.4% (down 9.5%). India’s Sensex equities index slipped 0.2% (down 2.0%). China’s Shanghai Exchange Index fell 1.3% (down 16.3%). Turkey’s Borsa Istanbul National 100 index dropped 1.7% (up 30.8%). Russia’s MICEX equities index surged 9.5% (down 35.4%).

Investment-grade bond funds saw outflows of $1.197 billion, and junk bond funds posted negative flows of $118 million (from Lipper).

Federal Reserve Credit last week added $2.0bn to a record $8.918 TN. Over the past 137 weeks, Fed Credit expanded $5.192 TN, or 139%. Fed Credit inflated $6.107 Trillion, or 217%, over the past 494 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week recovered $16.0bn to $3.462 TN. “Custody holdings” were down $85.0bn, or 2.4%, y-o-y.

Total money market fund assets surged $41.3bn to $4.510 TN. Total money funds declined $19.8bn y-o-y, or 0.4%.

Total Commercial Paper jumped $17.7bn to $1.104 TN. CP was down $110bn, or 9.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 5.% (up 212bps y-o-y). Fifteen-year rates added two bps to 4.40% – the high since April 2010 (up 209bps). Five-year hybrid ARM rates gained three bps to 3.78% (up 114bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up another 15 bps to a more than decade-high 5.38% (up 225bps).

Currency Watch:

April 28 – Bloomberg (Sofia Horta e Costa and Tania Chen): “When China’s tightly managed currency depreciates dramatically against the dollar, it can be hard to stop. More than six years after China’s shock 2015 devaluation roiled global markets and spurred an estimated $1 trillion in capital flight, the yuan is weakening at a similar pace. Onshore it’s lost nearly 4% in eight days, while the offshore rate is heading for its worst month relative to the greenback in history. Selling momentum is the strongest since the height of Donald Trump’s trade war in 2018.”

For the week, the U.S. Dollar Index jumped 1.7% to 102.96 (up 7.6% y-t-d). For the week on the downside, the Norwegian krone declined 4.5%, the Brazilian real 3.5%, the Swedish krona 2.8%, the New Zealand dollar 2.7%, the Australian dollar 2.5%, the euro 2.3%, the British pound 2.1%, the Swiss franc 1.5%, the South Korean won 1.3%, the South African rand 1.2%, the Canadian dollar 1.1%, the Mexican peso 1.0%, the Japanese yen 0.9%, and the Singapore dollar 0.9%. The Chinese renminbi declined 1.62% versus the dollar (down 3.82% y-t-d).

Commodities Watch:

April 26 – Bloomberg (Archie Hunter): “The world of commodity traders has long been a secretive one. The merchants who buy and sell the world’s resources have a massive global reach but are mostly privately owned and tend to operate away from public and regulatory view. Suddenly, it seems that everyone is talking — and worrying — about them. The International Monetary Fund last week noted investors’ concern about traders’ access to credit and said it’s time for regulators to look more closely at commodity markets. The Dallas Federal Reserve recommended the companies take action to increase liquidity. And the Financial Stability Board flagged commodity-market strains — including the huge margin calls that pressured traders in recent weeks — as an issue that needs particular attention.”

April 28 – Bloomberg (Megan Durisin and Kim Chipman): “Corn extended its rally to the highest since 2012 in Chicago as the war in Ukraine chokes supplies and adverse weather threatens crops in the Americas… In major grower and shipper Brazil, the center-west region has had a dry April, hampering corn in its final development stages before harvest. In the U.S., where crops are just being sown, wet and chilly soils has left the plantings pace at its slowest start since 2013.”

The Bloomberg Commodities Index increased 0.4% (up 30.6% y-t-d). Spot Gold fell 1.8% to $1,897 (up 3.7%). Silver slumped 5.7% to $22.78 (down 2.3%). WTI crude rallied $2.62 to $104.39 (up 39%). Gasoline jumped 5.1% (up 56%), and Natural Gas surged another 10.9% (up 94%). Copper dropped 4.2% (down 1.2%). Wheat fell 1.8% (up 37%), while Corn jumped 3.1% (up 37%). Bitcoin dropped $1,060, or 2.7%, this week to $38,598 (down 16.8%).

Russia/Ukraine Watch:

April 26 – Associated Press (David Keyton): “Russia unleashed a string of attacks Monday against rail and fuel installations deep inside Ukraine, far from the front lines of Moscow’s new eastern offensive, as Russia’s top diplomat warned against provoking World War III and said the threat of a nuclear conflict ‘should not be underestimated.’ The U.S., meanwhile, moved to rush more weaponry to Ukraine and said the assistance from the Western allies is making a difference in the 2-month-old war… Russian Foreign Minister Sergei Lavrov said weapons supplied by Western countries ‘will be a legitimate target,’ adding that Russian forces had already targeted weapons warehouses in western Ukraine. ‘Everyone is reciting incantations that in no case can we allow World War III,’ Lavrov said… He accused Ukrainian leaders of provoking Russia by asking NATO to become involved in the conflict. By providing weapons, NATO forces are ‘pouring oil on the fire,’ he said…”

April 25 – Washington Examiner (Tom Rogan): “Storage tanks at a major oil depot in the Russian city of Bryansk exploded early on Monday. Was Ukraine responsible? Before you answer, consider first that this is only the latest disaster to afflict Russian critical infrastructure near the Ukrainian border. Another oil depot on Belgorod was targeted by a Ukrainian helicopter strike in early April. Prior to that, Russian railway lines near the border were sabotaged. A Russian missile research center and a chemical plant also recently suffered explosions. These incidents all appear to fit well with Ukraine’s military strategy.”

April 26 – Reuters (Alexander Tanas): “Ukraine accused Moscow… of trying to drag Moldova’s breakaway region of Transdniestria into its war on Kyiv after authorities in the Moscow-backed region said they had been targeted by a series of attacks. Authorities in Transdniestria, an unrecognised sliver of land bordering southwestern Ukraine, said that explosions had damaged two radio masts that broadcast in Russian and that one of its military units had been attacked.”

April 26 – Reuters (Mike Stone): “Shoulder-fired Stinger missiles are in hot demand in Ukraine where they have successfully stopped Russian assaults from the air, but U.S. supplies have shrunk and producing more of the anti-aircraft weapons faces significant hurdles. Challenges include complications related to ramping up production, reluctance by the United States to redirect valuable manufacturing capacity to decades-old technology, and fears among defense companies that they would be stuck with unwanted arms when the Ukraine war winds down…”

Economic War/ Iron Curtain Watch:

April 27 – Financial Times (Nastassia Astrasheuskaya, Sam Fleming, Neil Hume and Robert Wright): “EU leaders accused Moscow of ‘blackmail’ over gas exports after Russia’s state-owned Gazprom suspended supplies to Poland and Bulgaria on Wednesday, sending prices as much as 20% higher. The two nations are the first EU states to have supplies from Russia cut since Moscow last month threatened to withhold gas exports unless it was paid in roubles… In Russia’s biggest move since the invasion to target the EU’s reliance on its fossil fuels, the interruption rippled into markets, with the euro falling to a five-year low against the dollar.”

April 28 – Dow Jones (Bojan Pancevski and Georgi Kantchev): “Germany is now ready to stop buying Russian oil, clearing the way for a European Union ban on crude imports from Russia, government officials said. Berlin had been one of the main opponents of sanctioning the EU’s oil and gas trade with Moscow. However on Wednesday, German representatives to the EU institutions lifted the country’s objection to a full Russian oil embargo provided Berlin was given sufficient time to secure alternative supplies, two officials said. The development comes as EU nations scramble to help member states Poland and Bulgaria make up for a natural gas shortfall after Russia stopped deliveries this week in reaction to what it said was the two countries’ refusal to pay for imports in rubles.”

April 28 – Bloomberg (Michael Nienaber): “Germany has started preparations for a potential halt in Russian gas deliveries as concerns intensify amid a dispute over payment terms. Chancellor Olaf Scholz said… preparations to limit Germany’s exposure to Russian energy imports were under way even before President Vladimir Putin ordered the invasion of Ukraine. While Russian coal is already being phased out, gas is more difficult, he said…”

April 28 – Financial Times (Valentina Pop and Andy Bounds): “The EU has warned European buyers of Russian gas that they will be in breach of sanctions against Moscow if they accept Kremlin demands for payment to be completed in roubles. The warning, which is clearer than previous guidance by Brussels, comes after several European companies indicated they would comply with a March 31 decree by President Vladimir Putin to introduce a two-tiered system for gas payments.”

April 29 – Bloomberg: “Russia’s central bank cut interest rates more than forecast and indicated that borrowing costs may fall even lower, as priorities shift to supporting an economy derailed by international sanctions over the invasion of Ukraine. Three weeks after reversing part of the emergency hike delivered after the attack, the Bank of Russia again lowered its benchmark by three percentage points to 14%. All economists… predicted smaller decreases.”

April 26 – Financial Times (Sam Fleming, James Shotter and Amy Kazmin): “Poland wants EU allies to agree new powers making it easier for sanctions-hit Russian assets to be seized and sold, as member states contemplate the vast costs of rebuilding Ukraine after the war. Warsaw says the property of Russian oligarchs hit by sanctions, as well as the hundreds of billions of euros of Russia’s central bank reserves frozen by western powers, should be available to help pay for reconstruction. ‘The most basic principle is that Russia started this war, and so they need to pay for it,’ Pawel Jablonski, Poland’s deputy foreign minister, told the Financial Times. ‘We believe that a political decision should be made that we want to go in this direction, and that we are willing to confiscate these assets permanently. How it should be done — we are open for discussion.’”

April 28 – Bloomberg: “Russia may be forced to ground between half and two-thirds of its commercial aircraft by 2025 in order to cannibalize them for spare parts, Kommersant newspaper reported, citing an unidentified person at the Transport Ministry. In the ministry’s base case, at least 70% of the country’s foreign-made planes will still be flying by the end of 2025…, citing an internal report on the airline industry to 2030. However, in a worst-case scenario, Russia could begin to face severe shortages starting in the second half of this year as sanctions prevent the airline industry from importing components, the report said.”

U.S./Russia Watch:

April 26 – Reuters (Lidia Kelly and Ronald Popeski): “Russian Foreign Minister Sergei Lavrov warned the West on Monday not to underestimate the elevated risks of nuclear conflict over Ukraine and said he viewed NATO as being ‘in essence’ engaged in a proxy war with Russia by supplying Kyiv with weaponry. Lavrov, in a wide-ranging interview broadcast on state television, also said that the core of any agreement to end the conflict in Ukraine would depend largely on the military situation on the ground. Lavrov had been asked about the importance of avoiding World War Three and whether the current situation was comparable to the Cuban missile crisis in 1962, a low point in U.S-Soviet relations. Russia, Lavrov said, was doing a lot to uphold the principle of striving to prevent nuclear war at all costs. ‘This is our key position on which we base everything. The risks now are considerable… I would not want to elevate those risks artificially. Many would like that. The danger is serious, real. And we must not underestimate it.’”

April 28 – Reuters (Guy Faulconbridge): “Russia… warned the West that there would be a tough military response to any further attack on Russian territory, accusing the United States and its key allies of undermining European security by openly inciting Ukraine to assault Russia… ‘In the West, they are openly calling on Kyiv to attack Russia including with the use of weapons received from NATO countries,’ Russian foreign ministry spokeswoman Maria Zakharova told reporters… ‘I don’t advise you to test our patience further.’ The Kremlin said Western – and in particular British – attempts to supply heavy weapons to Ukraine threatened the security of Europe.”

April 23 – Reuters (Mark Trevelyan): “Russia said… it plans to deploy its newly tested Sarmat intercontinental ballistic missiles, capable of mounting nuclear strikes against the United States, by autumn. The target stated by Dmitry Rogozin, head of the Roscosmos space agency, is an ambitious one as Russia reported its first test-launch only on Wednesday and Western military experts say more will be needed before the missile can be deployed.”

China/Russia/U.S. Watch:

April 29 – Bloomberg: “China stepped up its rhetorical support for Russia, defying the U.S. and other nations who want Beijing to condemn Moscow for the war in Ukraine. ‘An important takeaway from the success of China-Russia relations is that the two sides rise above the model of military and political alliance in the Cold War era,’ Foreign Ministry spokesman Zhao Lijian said, adding that they ‘commit themselves to developing a new model of international relations.’ That model involved not causing confrontations or targeting other nations, Zhao said… He added that this was different from the ‘Cold War mentality’ displayed by certain countries — Beijing’s standard criticism of U.S. cooperation with blocs like the North Atlantic Treaty Organization, whose expansion Beijing says led to Russia’s attack.”

April 27 – Reuters (Patricia Zengerle and Michael Martina): “U.S. Secretary of State Antony Blinken said… he will address in the coming weeks a long-awaited national security strategy to deal with the emergence of China as a great power. ‘I will have an opportunity I think, very soon in the coming weeks to speak publicly and in some detail about the strategy,’ Blinken said at a Senate Foreign Relations Committee hearing. After more than a year in office, the Biden administration has faced criticism from Republicans and others for lacking a formal strategy for dealing with China…The administration announced a strategy for the Indo-Pacific in February in which it vowed to commit more diplomatic and security resources to the region to counter what it sees as China’s bid to create a regional sphere of influence.”

April 27 – Bloomberg: “China and Iran agreed to step up military cooperation in a range of areas including exercises, in a sign that the two nations are moving somewhat closer amid lingering tensions with the U.S. Beijing and Tehran will work together on military training and exchange of knowledge, the semi-official Fars News Agency reported, citing Mohammad Bagheri, the chief of staff of Iran’s armed forces.”

Europe/Russia/China Watch:

April 26 – Reuters: “Russia warned Britain… that if it continued to provoke Ukraine to strike targets in Russia then there would be an immediate ‘proportional response’. Russia’s defence ministry cited statements from Britain’s armed forces minister James Heappey who told BBC radio that it was entirely legitimate for Ukraine to hunt targets in the depths of Russia to disrupt logistics and supply lines. ‘We would like to underline that London’s direct provocation of the Kiev regime into such actions, if such actions are carried out, will immediately lead to our proportional response,’ Russia’s defence ministry said.”

April 27 – Financial Times (George Parker and Jim Pickard): “Liz Truss, UK foreign secretary, has warned China to learn lessons from the west’s robust economic response to Russia’s invasion of Ukraine, saying Beijing will face consequences if it does not ‘play by the rules’. Truss, in a hawkish set-piece speech, argued that the Ukraine crisis had delivered a salutary lesson to the west and showed that democracies must use economic levers to rein in authoritarian regimes. Her comments underline the dramatic change in tone on China taken by Conservative governments since David Cameron, then-prime minister, in 2015 said he wanted the UK to be Beijing’s ‘best partner in the west’. In her speech…, Truss said the west must stop being ‘naive about the geopolitical power of economics’ and get tough with countries such as China. ‘Countries must play by the rules and that includes China,’ she said, adding that Beijing was ‘rapidly building a military capable of projecting power deep into areas of European strategic interest’.”

April 28 – Reuters (By Andreas Rinke and Ju-min Park): “Germany seeks closer ties with countries that share democratic values in the Asia-Pacific region, Chancellor Olaf Scholz said…, visiting Japan rather than top trade partner China during his first official trip to the region. ‘It is no coincidence that my first trip as chancellor to this region has led today here, to Tokyo,’ he said. In a joint news conference, Japanese Prime Minister Fumio Kishida underscored the two countries’ rejection of Russia’s invasion of Ukraine and warned of possible attempts also in Asia to move territorial boundaries by force.”

April 28 – Bloomberg (Alan Crawford, Colum Murphy, and Alberto Nardelli): “Russia’s war on Ukraine has triggered a profound reassessment in European capitals of their individual and collective relations with China. Confronted by the need to rapidly unwind a dependence on Russian energy built up over decades, government officials from Rome to Prague are re-evaluating the extent of their economic and political ties to China. Senior lawmakers in Berlin who now concede that such closeness to Russia was a historic liability are starting to see the danger of repeating the mistake with another authoritarian regime, raising alarm bells over Germany’s status as Beijing’s largest European trading partner. Nations in central and eastern Europe are casting fresh doubt on the wisdom of the so-called 16+1 forum with China.”

April 27 – Reuters (Andy Bruce): “British Foreign Secretary Liz Truss warned China that failure to play by global rules would cut short its rise as a superpower, and said the West should ensure that Taiwan can defend itself. Renewing her call to boost NATO, Truss said moves to isolate Russia from the world economy in response to its invasion of Ukraine proved that market access to democratic countries was no longer a given. ‘Countries must play by the rules. And that includes China,’ Truss said…”

Market Instability Watch:

April 23 – Wall Street Journal (Michael MacKenzie): “The bond market, St. Louis Fed President James Bullard said…, ‘is not looking like a very safe place to be.’ Few investors would argue with that — except, perhaps, to call it an understatement. New waves of selling engulfed the Treasury market over the past week, roiling investors and analysts who’ve been trying to predict just how high yields will go… ‘It’s a tornado right now,’ said Gregory Faranello, head of U.S. rates trading and strategy for AmeriVet Securities. ‘Fed policy really matters now, and it’s no longer lift-off. The question is where are they going?’”

April 28 – Bloomberg (Toru Fujioka and Sumio Ito): “Japan’s finance ministry issued its most strongly worded warning yet on the yen’s slide, saying it would respond ‘appropriately’ to abrupt moves after the currency plunged on a promise from the nation’s central bank to keep bond yields at rock-bottom levels. The finance ministry remarks represented a stepping up in language from government officials on the currency… The Bank of Japan said earlier Thursday that it would buy an unlimited amount of bonds at a fixed rate every business day to protect a 0.25% ceiling on 10-year government debt yields as part of its stimulus measures. The yen weakened sharply against the dollar after the policy meeting…”

April 26 – Bloomberg (Selcuk Gokoluk): “Emerging market bonds wiped out gains of the last two years as the selloff extended to a fourth month in the longest streak of losses since 2006. The market value of dollar-denominated corporate and sovereign bonds from emerging markets has fallen $98 billion in April, taking this year’s declines to $346 billion, according to a Bloomberg index. This brings the total value of debt to less than $2.1 trillion, the lowest since May 2020…”

April 25 – Bloomberg (Emily Graffeo): “Markets around the world are in the throes of volatility, as growth fears in China break out just as Wall Street grapples with ever-more hawkish monetary policy in the age of elevated inflation. U.S. stock fluctuations measured by the Cboe Volatility Index, or VIX, spiked to the highest level since mid-March in Monday trading. Yields on 10-year Treasuries broke a three-week slump to trade as much as 14 bps lower. A broad measure of currency fluctuations is near its highest in a month.”

April 25 – Bloomberg (Lu Wang): “The only thing that isn’t falling in markets is the price of protection — complicating the lives of harried traders rushing to hedge. The issue is particularly pronounced in equities, where the relative cost of loss-protecting put contracts is as high as its been any time in two years. The benchmark options index in the U.S., know as the VIX, on Monday briefly surged above longer-dated futures — a relatively rare inversion that occurs when market volatility mushrooms. Higher insurance costs are another thing to worry about as the S&P 500 flirts with its lowest levels in almost a year.”

Bubble/Mania Watch:

April 27 – Bloomberg (Heather Perlberg): “It took Vincent Burniske months to get a seven-figure loan to buy two small apartment buildings in a coveted Miami neighborhood. The sports-media consultant had money — but much of it was tied up in crypto. Digital wealth meant little to banks when it came to a mortgage. And Burniske, 63, wanted to keep his coins rather than trade them for dollars. ‘If you cash out, you have to pay sizable tax and you’re leaving a lot of upside on the table because you’re getting out early,’ he said. Then came an option that wasn’t available when Burniske found the properties late last year: a 30-year fixed-rate mortgage secured by part of his Bitcoin and Ethereum holdings. He nailed down the loan from Milo Credit, a Miami-based startup that’s seeking to tap into the burgeoning pool of crypto loyalists who want to diversify their wealth while hanging on to their tokens. Crypto mortgages are the latest example of the deepening role of digital coins in the U.S. real estate market, with property buyers and lenders alike embracing the volatile currencies to underpin deals for hard assets.”

April 25 – Bloomberg (Vildana Hajric): “Bitcoin seems to be stuck in a rut: Prices are flagging, online searches for the largest cryptocurrency and other digital assets have fallen off, fewer and fewer coins are changing hands, and crypto-related funds are seeing massive outflows. In fact, a UBS analysis of around 160 products shows April is set to see the largest crypto-ETF outflows on record, with investors having pulled more than $417 million so far this month.”

April 25 – Financial Times (Martin Arnold): “A senior European Central Bank official has launched a tirade against cryptocurrencies, likening them to a ‘Ponzi scheme’ and calling for a regulatory clampdown to avoid a ‘lawless frenzy of risk-taking’. Fabio Panetta, the executive board member who oversees the ECB’s work on a digital euro, appealed for ‘co-ordinated efforts at the global level to bring crypto assets into the regulatory purview’ by increasing taxation, tightening rules against money laundering and improving disclosure in the fast-moving market.”

Inflation Watch:

April 28 – Wall Street Journal (Ryan Dezember): “Corn and soybeans prices have risen nearly to records, signaling higher food inflation to come. Global food prices had already reached records when Russia invaded Ukraine in late February and jeopardized big slices of the world’s grain and oilseed supplies. Poor harvests in South America, inclement planting weather in the U.S. and rising biofuel demand threaten to stretch inventories even thinner and push prices higher. The price of soybeans, which are fed to cows, chicken and salmon and crushed into oils, has gained 27% so far this year… Corn futures, up 37% this year, settled Wednesday at $8.15, about 24 cents shy of the all-time high.”

April 28 – Wall Street Journal (Collin Eaton): “America’s most prolific oil field is running out of the workers, cash and equipment needed to produce more oil. In the Permian Basin, the sprawling oil-rich region in West Texas and southeastern New Mexico, drillers are facing long delays and steep competition for everything from roughnecks to steel to fracking pumps. The region is the only place where U.S. crude production is expected to grow significantly this year, and the Biden administration is hoping production there can help alleviate high prices at the pump. But mounting supply-chain crunches are putting a ceiling on how much more frackers can produce there…”

April 25 – Bloomberg (Emma Kinery): “About 40% of U.S. small businesses intend to raise selling prices by 10% or more amid decades-high inflation, according to a survey from the National Federation of Independent Business. Overall, more than two-thirds of the respondents plan to increase prices in the next three months, according to the survey, conducted between April 14 and April 17 among 540 business owners. Almost half of the small firms are planning increases of 4% to 9%. The report suggests that many businesses are planning increases that are above the current rate of national inflation… Nearly nine in ten employers in the NFIB survey said they’ve had to raise prices to absorb some of the costs.”

April 23 – Wall Street Journal (Anne Steele): “Enya Ramirez shelled out $400 to see My Chemical Romance and $500 to see Bad Bunny on recent tours. The 20-year-old Dallas resident has noticed the prices for bigger artists creeping up, but that isn’t stopping her… ‘It sucks for sure because I’ve had to miss out on other big concerts to go to these ones,’ she says, adding that she budgeted and paid in installments for the Bad Bunny ticket… Fans flooding back to see their favorite artists are finding yet another commodity whose price has gone up: concert tickets… Ticket prices increased 11% in 2021 relative to 2019, and 14% in North America, according to Live Nation Entertainment…”

Biden Administration Watch:

April 26 – New York Times (Marc Santora, John Ismay and Rick Gladstone): “The United States toughened its messaging on the Ukraine war on Monday, saying the American aim was not just to thwart the Russian invasion but also to weaken Russia so it could no longer carry out such military aggression anywhere. The aim was stated in explicit terms by the highest-ranking Biden administration delegation to visit Ukraine since the war began. It reflected an emboldened intent to counter Russia by giving more numerous and powerful arms to the Ukrainians, who have battled Russian forces with unexpected tenacity, sapped Kremlin resources and flustered President Vladimir V. Putin’s hope for a quick victory… ‘We want to see Russia weakened to the degree it cannot do the kinds of things that it has done in invading Ukraine,’ Mr. Austin said.”

April 25 – Wall Street Journal (William Mauldin and Thomas Grove): “U.S. Defense Secretary Lloyd Austin said Russia’s military capabilities should be degraded after he and Secretary of State Antony Blinken met with Ukraine’s President Volodymyr Zelensky and announced more U.S. military aid to the country. ‘We want to see Russia weakened to the degree that it can’t do the kinds of things that it has done in invading Ukraine,’ Mr. Austin said Monday after the highest-level visit of U.S. officials to Kyiv since Russia invaded Ukraine on Feb. 24. Mr. Blinken said: ‘Russia is failing, Ukraine is succeeding.’”

April 23 – Financial Times (Felicia Schwartz): “Before Russian forces began withdrawing from territory around Kyiv at the start of the month, US war policy appeared aimed at delicately threading a geopolitical needle: bolstering Ukraine’s defences without triggering a conflict between Nato and the Kremlin. In the past two weeks, however, current and former US officials say that much of the caution of the war’s first phases has been all but discarded. Joe Biden, US president, has become far more strident in his rhetoric, accusing Vladimir Putin of ‘genocide’ and urging the establishment of a war-crimes tribunal. Nowhere has the shift in policy been more evident than in the weaponry the US has begun shipping to Ukrainian forces.”

April 28 – Bloomberg (Trevor Hunnicutt and Steve Holland): “President Joe Biden asked Congress for $33 billion to support Ukraine – a dramatic escalation of U.S. funding for the war with Russia… The funding request includes over $20 billion for weapons, ammunition and other military assistance, as well as $8.5 billion in direct economic assistance to the Ukrainian government and $3 billion in humanitarian aid. It is intended to cover the war effort’s needs through September…”

Federal Reserve Watch:

April 29 – CNBC (Jeff Cox): “A measure that the Federal Reserve focuses on to gauge inflation rose in March, likely cementing the central bank’s intention to hike interest rates by half a percentage in May. The core personal consumption expenditures price index, which measures costs that consumers pay across a wide swath of items…, increased 5.2% from a year ago… However, that was slightly below the 5.3% reading in February, which was the highest since April 1983.”

U.S. Bubble Watch:

April 27 – Bloomberg (Vince Golle): “The U.S. merchandise-trade deficit widened unexpectedly to a new record in March as the value of imports dwarfed that of outbound shipments, reflecting a surge in inflation. The shortfall grew almost 18% to $125.3 billion last month… The figures… far exceeded all estimates in a Bloomberg survey of economists… U.S. merchandise imports grew 11.5% to a record $294.6 billion, reflecting a surge in the value of industrial supplies that include petroleum… Exports increased 7.2% to $169.3 billion in March, also a record and driven by a jump in shipments of industrial supplies.”

April 29 – Wall Street Journal (Harriet Torry): “Consumer spending picked up sharply in March, positioning American households to help propel the economy heading into the second quarter of the year. Personal consumption expenditures increased a seasonally adjusted 1.1% in March from the prior month… Consumers stepped up spending on services like travel and dining, as well as on goods like gasoline and food. Spending on durable goods declined for the second month in a row, led by lower spending on vehicles. Personal income… climbed 0.5% from the prior month.”

April 26 – CNBC (Diana Olick): “Home prices increased 19.8% in February year over year, according to the S&P CoreLogic Case-Shiller national home price index. That is up from the 19.1% annual increase in January and is the third-highest reading in the index’s 35-year history. The 10-city composite annual increase came in at 18.6%, up from 17.3% in the previous month. The 20-city composite was up 20.2%, rising from 18.9%. Sun Belt cities continued to see the highest gains. Phoenix, Tampa, Florida, and Miami saw annual home price gains of 32.9% 32.6% and 29.7%… For a median-priced home financed with a 30-year loan, the monthly payment is $550 higher than a year ago, an increase of 46%, according to calculations by Realtor.com…”

April 26 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes tumbled in March as soaring mortgage rates and prices reduced affordability, but the housing market remains supported by an acute shortage of previously owned properties. New home sales plunged 8.6% to a seasonally adjusted annual rate of 763,000 units last month… February’s sales pace was revised higher to 835,000 units from the previously reported 772,000 units… The median new house price in March jumped 21.4% from a year ago to $436,700. Almost all the houses sold last month were above the $200,000 price level… There were 407,000 new homes on the market, up from 392,000 units in February. Houses under construction made up 65.5% of the inventory, with homes yet to be built accounting for about 25.8%.”

April 27 – Reuters (Lindsay Dunsmuir): “The average interest rate on the most popular U.S. home loan rose to its highest level since June 2009 last week and demand for mortgages ebbed as the impact of rising costs began to bite, Mortgage Bankers Association (MBA) data showed… The average contract rate on a 30-year fixed-rate mortgage increased to 5.37% in the week ended April 22 from 5.20% a week earlier, the MBA survey showed. It has risen 220 bps from 12 months ago…”

April 26 – Bloomberg (Olivia Rockeman): “Orders placed with U.S. factories for durable goods rose in March, pointing to sustained investment in business equipment that is helping drive economic growth. Bookings for durable goods… increased 0.8% in March after a revised 1.7% decline a month earlier… The value of core capital goods orders, a proxy for investment in equipment that excludes aircraft and military hardware, rose by a larger-than-forecast 1%.”

April 28 – Bloomberg (Romy Varghese): “California has an unprecedented $68 billion that it can use for any purpose in the next fiscal year, according to state Senate Democrats, a surplus that presents both opportunities and conflicts for Governor Gavin Newsom in his budget release next month. The figure surpasses the staggering $38 billion lawmakers had at their disposal during the previous budget season, then considered the biggest. The most-populous U.S. state is benefiting from soaring tax collections from its highest earners…”

April 24 – Wall Street Journal (Gwynn Guilford and Sarah Chaney Cambon): “Job-switchers are often reaping double-digit pay increases, a new survey shows, a phenomenon that is demonstrating bargaining power for workers while threatening to keep inflation high. About 64% of job-switchers said their current job provides more pay than their previous job. Among these workers, nearly half received a raise of 11% or more, according to a ZipRecruiter survey… Nearly 9% are now making at least 50% more.”

Fixed-Income Bubble Watch:

April 29 – Bloomberg (Michael Gambale): “No companies are looking to issue fresh debt on Friday, according to an informal survey of debt underwriters, after a bunch of issuers shelved bond sale plans this week amid financial markets volatility. Weekly volume is likely to finish at $8.6 billion, well below consensus estimates calling for as much as $25 billion. This was the second biggest miss this year after the week of Jan. 24… Overall market volatility quelled issuance all week in the primary market with most companies opting to stand down and take another look at a later date.”

April 26 – Bloomberg (Amanda Albright): “U.S. cities and states are paying up to get muni deals off the ground as buyers gain more bargaining power — a marked departure from the anything-goes market for sellers in the easy-money era. Issuers… are finding buyers now have the upper hand as the Federal Reserve’s push to tighten monetary policy raises refinancing costs. ‘We’ve seen the pricing power shift from the issuers, who were seeing that excess demand and heavy subscriptions in 2021 — we’re now seeing that power shift to investors,’ said Christopher Lee, head of municipal-bond sales for Wells Fargo’s Corporate & Investment Bank & Co.”

Economic Dislocation Watch:

April 25 – Bloomberg (Brendan Murray, Ann Koh, and Kevin Varley): “China’s stringent rules to curb Covid-19 are about to unleash another wave of summer chaos on supply chains between Asia, the U.S. and Europe. Beijing’s zero-tolerance approach amid an escalating virus outbreak brings the pandemic full circle, more than two years after its emergence in Wuhan upended the global economy. Shipping congestion at Chinese ports, combined with Russia’s war in Ukraine, risks a one-two punch that threatens to derail the recovery, already buffeted by inflation pressures and headwinds to growth. Even if the virus is reined in, the disruptions will ripple globally — and extend through the year — as bunched-up cargo vessels start sailing again.”

China Watch:

April 26 – Financial Times (Sun Yu and Tom Mitchell): “Chinese regulators led by vice-premier Liu He are concerned that the government is underestimating the economic impact of its crackdown on the property sector and Covid-19 lockdowns in Shanghai and other cities, according to officials and policy advisers. But other senior officials have opposed efforts by Liu, President Xi Jinping’s longtime financial and economic adviser, to ease the pressure on the real estate sector, six Beijing-based government officials and policy advisers told the Financial Times. The policy disagreements within the Chinese government highlight the difficult choices it faces as it tries to shore up growth in the world’s second-largest economy while also pursuing a tough zero-Covid strategy and taming heavily indebted property developers.”

April 25 – Bloomberg (Abhishek Vishnoi and Charlotte Yang): “Fears about the economic toll of China’s strict Covid Zero policy intensified Monday, as news that lockdowns were spreading to Beijing sent stocks, commodities and the yuan tumbling. The benchmark CSI 300 Index closed nearly 5% down, at the lowest level since April 2020, wiping out gains from a sweeping March pledge by officials to support the economy. The onshore yuan slumped to its weakest level in 17 months on concerns about rising capital outflows and oil sank below $100 on worries over Chinese demand.”

April 26 – Bloomberg: “A renewed pledge by Chinese authorities to boost the economy is being met with skepticism by stock traders worried about a potential city-wide lockdown in Beijing. The People’s Bank of China vowed support through targeted financing for small businesses and a quick resolution of the ongoing crackdown on technology firms. While that gave the CSI 300 Index a boost in Tuesday morning’s session, the benchmark closed down 0.8%. Investors remain cautious as past promises of market stability from Chinese authorities have had a fleeting impact on local equities.”

April 26 – Bloomberg: “China’s President Xi Jinping made a bold commitment to boost infrastructure construction in Beijing’s latest bid to rescue economic growth, a strategy that may prove less effective this time around as authorities take a hardline approach to bringing Covid outbreaks under control. All-out efforts must be made to spur infrastructure spending, Xi said Tuesday at a meeting of the Central Committee for Financial and Economic Affairs. Infrastructure was a pillar of economic and social development, Xi added…”

April 25 – Bloomberg: “China’s worst equity selloff since early 2020 reflects a growing concern about President Xi Jinping: He can’t afford the political costs of shifting from a Covid Zero strategy that is pummeling the economy. In Shanghai, a weekslong Covid-19 lockdown got even worse, with workers in hazmat suits fanning out over the weekend to install steel fences around buildings with positive cases… ‘This Covid situation is really putting China into a very dark moment, perhaps the darkest moment in economic terms for the last couple of decades,’ Junheng Li, JL Warren Capital founder and chief executive officer, said… ‘It’s a confidence crisis in a sense that you’ve got the most affluent city in China with this consensus disappointment and resentfulness towards a very non-sensible policy.’”

April 26 – Bloomberg (Sofia Horta e Costa and Ishika Mookerjee): “China looks increasingly left to its own devices in a bid to rescue its economy and markets from the Covid crisis as the rest of the world withdraws stimulus to battle surging inflation. Unlike in 2020, when Beijing was able to limit disruptions to its manufacturing hubs and rely on unprecedented global liquidity to shore up investor confidence, this time it has to go it alone. A strict Covid Zero policy has left it stuck in a repeat of lockdowns while other countries have turned to reopening their economies. International funds are selling out of Chinese assets, while efforts to encourage domestic money into capital markets aren’t working as protracted restrictions and a slowing property market erode wealth. The People’s Bank of China… seems wary to overstimulate, preferring to limit financial risk, rein in debt and keep inflation under control.”

April 27 – Bloomberg: “China’s State Council pledged to promote the growth of internet platform firms and give cash handouts to poor people who have lost their jobs, stepping up efforts to bolster an economy under threat from Covid-19 outbreaks.”

April 25 – Reuters (Clare Jim and Shuyan Wang): “Several Chinese property developers attended talks with China’s central bank last week to discuss the sale of distressed assets and other ways to support the real estate industry that has been battered by defaults, sources… said. The central bank said last week it had held discussions with banks and asset management firms to discuss support for the economy and property sector, but it had not indicated that property developers had also been invited.”

April 25 – Bloomberg (Shen Hong): “China’s central bank stepped up its support for several distressed property developers by allowing banks and bad-debt managers to loosen restrictions on some loans to ease a cash crunch, people familiar with the matter said. Meantime, Beijing also has signaled a willingness to allow local governments to increase off-balance sheet debt again after a crackdown in recent years to bring it under control.”

April 24 – Bloomberg: “China’s biggest state-owned banks lowered rates on some deposits of consumers in response to the government’s call for help in backstopping the world’s second-largest economy. Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of Communications Co. cut two-year, three-year and five-year rates on certificates of deposits and other types by 10 bps. After the reduction, the two-year CD rate stands at 2.6%.”

April 28 – Bloomberg: “Cities across China are rolling out swift measures from mass-testing drives to lockdowns for just a mere handful of Covid-19 cases, aiming to keep flareups at bay and avoid the economic and social hardship endured by Shanghai. Hangzhou, an e-commerce hub a short train ride from Shanghai, has started a mass testing drive. Schools in capital Beijing will start their Labor Day holiday early, and don’t have a firm return date. And the port city of Qinhuangdao, along with Yiwu… have gone into full or partial lockdowns. The hard-line responses reflect the growing stakes local governments face in wrestling with the highly infectious omicron strain before it takes hold, plunging cities into protracted lockdowns that incur heavy costs on residents and businesses.”

April 25 – Reuters (David Stanway and Yifan Wang): “Shanghai’s COVID-19 lockdown misery dragged into a fourth week, as orders on Monday for mass testing in Beijing’s biggest district sparked fears that the Chinese capital could be destined for a similar fate. In their battle to stamp out the virus, authorities in Shanghai said they would reserve the harshest restrictions for smaller areas around confirmed cases, raising hopes of some respite among the millions of people currently living in strictly quarantined neighbourhoods.”

April 28 – Reuters (Eduardo Baptista and David Stanway): “Beijing closed some schools and public spaces on Thursday, as most of the Chinese capital’s 22 million residents turned up for more mass COVID-19 testing aimed at averting a Shanghai-like lockdown. Most people in Shanghai were one month into stressful home isolation, struggling to meet basic needs. But there was hope on the horizon as the number of new cases declined further and officials said their focus was shifting towards boosting vaccinations among the elderly.”

April 25 – Financial Times (Ryan McMorrow, Tom Mitchell and Andy Lin): “Panic buying has gripped the Chinese capital as local Covid-19 cases rise and residents brace for a Shanghai-style lockdown. Beijing reported just 41 cases on Saturday and Sunday, but city health officials called the situation ‘grave’ as evidence emerged of days-long community spread of coronavirus. Health officials said the Omicron variant was spreading through different transmission chains and ordered several neighbourhoods to lock down on Monday. Beijing residents emptied supermarket shelves of meat and vegetables and non-perishable foods on Sunday and Monday. Several online grocery delivery apps were also sold out of food.”

April 24 – Reuters (Brenda Goh and Jacqueline Wong): “Shanghai authorities battling an outbreak of COVID-19 have erected fences outside residential buildings, sparking fresh public outcry over a lockdown that has forced much of the city’s 25 million people indoors. Images of white hazmat suit-clad workers sealing entrances of housing blocks and closing off entire streets with roughly two metre-tall green fencing went viral on social media, prompting questions and complaints from residents.”

April 26 – Financial Times (Eleanor Olcott and Andy Lin): “China’s booster vaccination drive is slowing as medical staff are redirected to carry out mass testing with coronavirus cases rising across the country. Relatively low vaccination rates will leave tens of millions of Chinese people vulnerable to severe illness if the government’s tough ‘zero-Covid’ policy fails to contain the Omicron variant. In the final week of March, China administered 770,000 third-dose jabs a day to over 60s following outbreaks in Shanghai and Jilin. But that figure had fallen to 590,000 a day by mid-April…”

April 22 – Financial Times (Sun Yu and Tom Mitchell): “Li Huixiang, a property broker in the central Chinese city of Zhengzhou, had been looking forward to a bumper March. In an effort to boost the city’s flagging property sector and the local economy along with it, municipal officials unveiled an array of incentives, including lower mortgage rates and cash subsidies for new home buyers. But Li, normally a star agent at one of the largest residential developments in Zhengzhou, has sold only five apartments at Sunac City since the measures were announced — a fraction of his normal sales volume. ‘The stimulus measures aren’t enough to offset negative factors that are showing little sign of easing,’ Li said, citing factors including travel restrictions related to Covid-19 and falling household incomes. Compared with the same period last year, new home sales in Zhengzhou fell more than 30% in the six weeks from March 1 to mid-April, mirroring a nationwide trend.”

April 28 – Financial Times (Tabby Kinder and Hudson Lockett): “The founder and chair of one of Asia’s biggest private equity investors has criticised the Chinese government for policies that he says have resulted in a ‘deep economic crisis’ comparable to the global financial crash. Weijian Shan, whose group PAG manages more than $50bn, said his fund had diversified away from China and was being ‘extremely careful’ about its portfolio in the country. ‘We think the Chinese economy at this moment is in the worst shape in the past 30 years,’ he said… ‘China feels to us like the US and Europe in 2008,’ Shan added. ‘While we remain long-term confident in China’s growth and market potentials, we are very cautious towards China markets.’”

April 24 – Bloomberg: “President Xi Jinping’s corruption crackdown on the nation’s sprawling financial sector is accelerating, reaching the upper levels at some of China’s premier institutions and further unnerving investors… At least 17 officials, including former China Merchants Bank Co. President Tian Huiyu, have been probed or penalized in April, according to announcements from the Central Commission for Discipline Inspection, the top anti-corruption body. That’s in addition to dozens of financial officials that had been ensnared since October when an inspection focused on financial institutions and regulators was launched.”

April 27 – Bloomberg: “In the early hours of April 14, the Chinese Communist Party’s social media strategy went off the rails. It began when state media accounts on Weibo, China’s Twitter equivalent, promoted the hashtag ‘The U.S. is the country with the largest human rights deficit.’ Tens of thousands of Chinese internet users turned the accusation around onto Beijing. They criticized not only China’s Covid response of strict stay-at-home orders and minimal financial support for households but also wider social problems: long working hours, high property prices, violence against women, and censorship itself. ‘Our doors are locked down. Our pets are killed. Our medical resources are wasted so that people with acute illness can’t be treated,’ wrote one poster. ‘The American government is so horrible, I’m so lucky to be born in China,’ read a typically ironic post. The pressure had been building for weeks.”

Central Banker Watch:

April 28 – Financial Times (Martin Arnold): “The European Central Bank has issued a mea culpa for persistently underestimating inflation, blaming its increasingly large forecast errors on soaring energy prices, supply chain bottlenecks and a faster economic rebound from the pandemic. The ECB said in a paper… that it had tried to learn from its mistakes by improving its models. But it warned that the fallout from Russia’s invasion of Ukraine and the further lifting of Covid-19 restrictions meant that inflation would ‘remain very challenging to forecast in the near term’.”

April 26 – Financial Times (Martin Arnold and Coby Smith): “Christine Lagarde has spent several days persuading investors the European Central Bank will take a more ‘gradual’ approach than the Federal Reserve to stamping out soaring inflation. However, her insistence that the eurozone economy is not yet as strong as the US has not stopped markets pricing in the possibility of the ECB raising rates for the first time in a decade as soon as July. Such a shift… would mark a turnround for the ECB and its president, who was insisting as recently as December that it was ‘very unlikely’ to raise rates at all in 2022.”

Global Bubble and Instability Watch:

April 26 – Reuters (Wayne Cole): “Australian consumer prices surged at the fastest annual pace in two decades last quarter as petrol, home building and food costs all climbed, fueling speculation interest rates could rise from record lows as soon as next week… Wednesday’s data made for painful reading as the consumer price index (CPI) jumped 2.1% in the first quarter, topping market forecasts of a 1.7% increase. The annual pace picked up to 5.1%, from 3.5% the previous quarter and the highest since 2001.”

April 28 – Wall Street Journal (Patricia Kowsmann): “Europe’s banking regulator is growing antsy about a booming market for banks: loans that fuel riskier borrowers and the global deal-making machine. That corner of banks’ business, called leveraged financing, has skyrocketed in Europe and elsewhere over the past years as central banks unleashed cheap money to propel economic growth. Although issuance has slowed down this year because of the war in Ukraine, the European Central Bank estimates there are over $4 trillion in such loans outstanding globally.”

Europe Watch:

April 25 – Reuters (Victor Mallet, Sarah White and Leila Abboud): “A sigh of relief from France’s European and Nato allies was heard after Emmanuel Macron won a convincing victory over his far-right challenger Marine Le Pen in the final round of the presidential election… France’s status as a linchpin of the EU and a strong contributor to Nato in its support for Ukraine against Russia has been secured for another five years, as reflected in the plaudits for Macron on Sunday night from the likes of Joe Biden, Olaf Scholz and Ursula von der Leyen… At home in France, however, an electoral victory that might seem a landslide in another country — Macron beat Le Pen by 58.5% of the vote — disguises the reality that the nationalist, Eurosceptic, anti-immigration far right is stronger than at any time since the second world war. French society remains deeply divided.”

April 28 – Bloomberg (Carolynn Look): “German inflation unexpectedly accelerated to the fastest since records began in the early 1990s as Russia’s war in Ukraine roiled energy markets and disrupted supply chains. Consumer prices jumped 7.8% from a year earlier in April — higher than the 7.6% median estimate…”

April 29 – Associated Press: “Inflation hit a record in April for the 19 countries that use the euro as skyrocketing fuel prices boosted by the war in Ukraine weigh on the region’s economic recovery from the coronavirus pandemic. Annual inflation reached 7.5% for the month, topping the old record of 7.4% from March…The April figure was the sixth consecutive record reported for the eurozone. Eurostat said energy prices jumped 38%, an indication of how Russia’s invasion of Ukraine is affecting the eurozone’s 343 million people.”

April 25 – Bloomberg (Andrew Atkinson): “U.K. manufacturers raised prices at the fastest pace in more than four decades in a bid to cover soaring raw material and energy costs, and a further acceleration is expected, according to the Confederation of British Industry. In its first quarterly survey of the sector since Russia invaded Ukraine, the CBI found companies from food producers to auto makers under growing pressure in the three months through April. Costs jumped the most in almost half a century, and there is no immediate relief in sight, the business lobby group said.”

EM Bubble Watch:

April 29 – Bloomberg (Michael McDonald): “For five months now, El Salvador President Nayib Bukele has been trying to hawk a Bitcoin-backed bond to international investors. This, he’s insisted, is a better option than turning to multilateral lenders in Washington for more conventional financing. It’s not working. Bukele, a devout believer in crypto currencies, has yet to receive a single penny of the $1 billion he’s seeking, and this — along with stalled talks with the International Monetary Fund — is deepening concern among creditors that the country will fail to pay back an $800 million bond at the start of next year. Prices on the country’s debt collapsed in April, falling 15.1%, a rout only surpassed by bonds in war-torn Ukraine.”

April 26 – Bloomberg (Eric Martin): “Governments in Latin America should provide targeted and temporary fiscal support to help poor families cope with higher food and energy prices and reduce the risk of social unrest from soaring inflation, according to the International Monetary Fund. The IMF, long criticized for advocating painful austerity, said that in nations where social safety nets aren’t well developed, governments can implement temporary measures to smooth the pass-through of surging international prices due to Russia’s invasion of Ukraine. At the same time, the… fund warned about the fiscal cost and potential for distortions.”

April 27 – Bloomberg (Rajesh Kumar Singh and Swansy Afonso): “Metals producers in India are cutting activity and warning of potential closures as a worsening coal shortage threatens to escalate into a full-blown energy crisis for Asia’s third-largest economy. In the central state of Chhattisgarh, a hub for iron ore and steel-making, sponge iron makers are running at about 60% of usual levels and could be forced to shut down completely if they can’t get more coal, said Anil Nachrani, president of the Chhattisgarh Sponge Iron Manufacturers Association.”

Leveraged Speculation Watch:

April 28 – Bloomberg (Brian Chappatta and Katherine Burton): “‘Are we going to be able to pay for these trades today? I don’t see how we can.’ The deputy’s words, now immortalized in a federal indictment, said it all: Inside Bill Hwang’s Archegos Capital Management, panic was setting in. Hwang, the enigmatic billionaire behind Archegos, had amassed one of the world’s great fortunes in virtual secrecy, and that trove — a staggering $160 billion position in stocks — was unraveling everywhere, all at once. That was March 23, 2021 — and Wall Street had no idea what was about to go down. A year after the collapse of Archegos sent shock waves through global finance, Hwang was arrested… and… federal prosecutors offered an official account of what really happened at the secretive family office. The chaotic story portrayed in the 59-page indictment charts a rapid rise and fall in riches unlike anything Wall Street has ever seen.”

April 27 – Financial Times (Joshua Franklin and Eric Platt): “Bill Hwang secured billions in dollars in financing from leading Wall Street banks with lies that ranged from assurances he could quickly exit his positions to claims he had large holdings of easily traded stocks like Apple and Google… The banks apparently took Hwang’s words at face value as they entered into leveraged derivatives trades with Hwang’s family office, Archegos Capital Management. These deals enabled him to hide the size of his enormous positions in a half dozen US stocks from the broader market and the banks themselves before the scheme collapsed in March 2021. Following Hwang’s arrest on Wednesday on federal racketeering, fraud and market manipulation charges, Wall Street faced renewed questions about how sophisticated trading desks and compliance departments fell for his alleged misrepresentations — and lost more than $10bn in the process.”

Covid Watch:

April 28 – Bloomberg (Antony Sguazzin): “New omicron sublineages, discovered by South African scientists this month, are likely able to evade vaccines and natural immunity from prior infections, the head of gene sequencing units that produced a study on the strains said. The BA.4 and BA.5 sublineages appear to be more infectious than the earlier BA.2 lineage, which itself was more infectious than the original omicron variant, Tulio de Oliveira, the head of the institutes, said. With almost all South Africans either having been vaccinated against the coronavirus or having had a prior infection the current surge in cases means that the strains are more likely to be capable of evading the body’s defenses rather than simply being more transmissible, de Oliveira said.”

April 28 – Axios (Tina Reed): “COVID cases are on the rise in all but six states and Washington, D.C., as the Omicron subvariant continues to spread across the U.S. The big picture: Case rates and hospitalizations are still well below pandemic highs, prompting NIAID director Anthony Fauci to say this week that the nation is out of a ‘full-blown explosive pandemic phase.’ By the numbers: There were roughly 51,000 new daily cases over the last week, up 51% from two weeks ago.”

April 26 – Reuters (Manas Mishra and Julie Steenhuysen): “Following the record surge in COVID-19 cases during the Omicron-driven wave, some 58% of the U.S. population overall and more than 75% of younger children have been infected with the coronavirus since the start of the pandemic, according to a U.S. nationwide blood survey…”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 26 – Guardian (Gabrielle Canon): “Southern California officials declared a water shortage emergency Tuesday, and adopted new unprecedented restrictions on outdoor watering that will affect millions of people living in Los Angeles, Ventura and San Bernardino counties. Metropolitan water district of southern California’s resolution will limit outdoor watering to just one day per week for district residents supplied by a stressed system of canals, pipelines, reservoirs and hydroelectric power plants called the State Water Project, which supplies water… to 27 million Californians and 750,000 acres of farmland. The restrictions, which take effect in June, will severely limit how much water people can use to water their lawns or wash cars.”

April 28 – CNN (Stephanie Elam): “The West is in the grips of a climate change-fueled megadrought, and Lake Mead — the largest manmade reservoir in the country and a source of water for millions of people — has fallen to an unprecedented low. The lake’s plummeting water level has exposed one of the reservoir’s original water intake valves for the first time… The valve had been in service since 1971 but can no longer draw water, according to the Southern Nevada Water Authority, which is responsible for managing water resources for 2.2 million people in Southern Nevada, including Las Vegas.”

April 27 – Bloomberg (Naureen S. Malik): “The Texas grid operator expects crypto miners to increase electricity demand by up to 6 gigawatts by mid-2023, more than enough to power every home in Houston. The forecast from the Electric Reliability Council of Texas is the first official estimate on how much stress miners are apt to put on the state’s electrical system. Officials expect 5 to 6 gigawatts of new demand over the next 12 to 15 months, the equivalent of up to about 1.2 million homes.”

April 23 – Wall Street Journal (Jim Carlton and Eliza Collins): “Arizona is the first state to experience deep cutbacks caused by a drought-fueled decline in the Colorado River, one of the most important sources of water in the American Southwest. Farmers in the fast-growing state are losing most of the water they receive from the Colorado this year, and many are leaving large amounts of land unplanted, with further cuts planned for next year. If shrinking water flows in the river don’t reverse, cities in Arizona and other states could be affected next, officials say. ‘All of the projections are for the flow to continue to go down because of the warming of the climate,’ said Tom Buschatzke, director of the Arizona Department of Water Resources. ‘The challenge will be how you parse out those limited resources from a long-term perspective.’”

April 28 – Bloomberg (Patrick Gillespie and Ignacio Olivera Doll): “Argentina’s crypto frenzy is putting the energy grid of a small province in Patagonia near a breaking point as miners take advantage of generous electricity subsidies to mint Bitcoin. Crypto mining is expected to consume close to a quarter of all electricity supply in the Tierra del Fuego province… in the next few months until October… Local officials warn that crypto mining, together with an already feeble energy infrastructure, is putting their energy grid at the risk of collapse.”

Geopolitical Watch:

April 25 – Reuters (Essi Lehto): “Three NATO warships arrived in the southwestern Finnish port of Turku on Monday to train with Finland’s navy as Helsinki considers the possibility of joining the U.S.-led alliance amid increased tensions with Russia over Ukraine. Latvian minelayer LVNS Virsaitis and minehunters Estonian ENS Sakala and Dutch HNLMS Schiedam will train with two minehunters from Finland’s coastal fleet, the Finnish defence forces said…”

April 29 – Financial Times (Christian Davies): “New satellite images of a North Korean nuclear facility suggest that Pyongyang is inching towards its first nuclear test since 2017, experts have warned, as Kim Jong Un ratchets up tensions on the Korean peninsula. The commercial satellite images were collected this week… They revealed the construction of buildings, movement of lumber and an increase in equipment and supplies immediately outside a new entrance to the Punggye-ri nuclear test site in the country’s north-east.”

April 26 – Reuters (Josh Smith and Hyonhee Shin): “North Korean leader Kim Jong Un has pledged to speed up development of his country’s nuclear arsenal while overseeing a huge military parade that displayed intercontinental ballistic missiles (ICBMs)… The parade took place on Monday night during celebrations for the 90th anniversary of North Korea’s armed forces… Pyongyang has recently stepped up weapons tests and displays of military power as denuclearisation talks with the United States have stalled and a new conservative administration takes power in South Korea.”

April 25 – AFP (Johannes Ledel): “Global military spending rose again in 2021, setting new records as Russia continued to beef up its military prior to its invasion of Ukraine, researchers said…, predicting the trend would continue in Europe in particular. Despite the economic fallout of the global Covid pandemic, countries around the world increased their arsenals, with global military spending rising by 0.7% last year, according to… the Stockholm International Peace Research Institute (Sipri). ‘In 2021 military spending rose for the seventh consecutive time to reach $2.1 trillion. That is the highest figure we have ever had,’ Diego Lopes da Silva, senior researcher at Sipri, told AFP.”

April 28 – Bloomberg: “Americans’ negative views of China are rising as President Xi Jinping maintains close ties with Moscow during the war in Ukraine, a sign that the invasion and other issues are taking a toll on Beijing’s image. That’s according to the latest survey by the Pew Research Center, which found that 82% of respondents had ‘unfavorable opinions’ of the Asian nation, up six percentage points from last year. It’s also the highest since 2020…”

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