August 18, 2023: Crisis of Confidence

August 18, 2023: Crisis of Confidence
Doug Noland Posted on August 19, 2023

China’s Bubble deflation has entered the acceleration phase. Going forward, Crisis Dynamics will be increasingly unpredictable and difficult to control.

August 17 – Bloomberg: “Only a week ago, Zhongzhi Enterprise Group Co. attracted little notice within China and was almost unheard of everywhere else. Now, the secretive shadow banking giant has become the latest symbol of financial fragility in an $18 trillion economy where confidence among investors, businesses and consumers is rapidly dwindling. The privately owned manager of more than 1 trillion yuan ($137bn) and its trust-company affiliates are under intense scrutiny after halting payments to thousands of customers.”

Zhongzhi is a top-10 player in China’s shadowy $3.0 TN “trust” industry. Operating as “shadow banks,” trust companies typically offer investment products with rates significantly higher than bank deposits. Many are essentially subprime lenders. The industry is said to have about $300 billion, or 10%, direct exposure to real estate development, though most analysts believe overall real estate exposure is much higher.

While the failure of so-called “wealth management products” is not that unusual, today’s situation is much more dire. The unfolding collapse of Country Garden has unnerved already fragile confidence, with the entire developer industry likely to face a further collapse in sales, along with an acute liquidity crisis. The trust industry faces the grim prospect of rapidly mounting bad loans and panicked investors desperate to get their money back.

As more data become available, a clearer picture emerges of why Country Garden and other developers faced such a rapid deterioration in their liquidity positions. Already weak apartment sales fell off a cliff during July.

From Bloomberg: “The value of residential sales nationwide tumbled 43% in July from June to 654.5 billion yuan ($90 billion), the weakest monthly sales in almost six years…”

And from the Wall Street Journal (Cao Li): “Last month, the country’s 100 largest property developers sold new homes worth the equivalent of $49 billion—the lowest monthly sum in three years, according to China Real Estate Information, a private industry tracker. The sales were down a third from June and from the same period a year ago. They were also 59% less than the total in July 2021.”

There is now little doubt that government-generated housing data does not accurately reflect the intensity of apartment price deflation.

August 16 – Bloomberg: “New-home prices have slipped just 2.4% from a high in August 2021, government figures show, while those for existing homes have dropped 6%. But the picture emerging from property agents and private data providers is far more dire. These figures show existing-home prices falling at least 15% in prime neighborhoods of major metropolitan areas like Shanghai and Shenzhen, as well as in more than half of China’s tier-2 and tier-3 cities. Existing homes near Alibaba Group Holding Ltd.’s headquarters in Hangzhou have dropped about 25% from late 2021 highs, according to local agents.”

It’s not hyperbole to warn that we are witnessing the collapse of arguably history’s greatest Bubble. Up to this point, confidence has held that Beijing has everything under control. But as the Chinese people come to grips with unfolding apartment price deflation, this harsh reality will have them question their financial well-being, the soundness of China’s economy, future prospects, and the competency of their government. This blow to confidence will unleash the destabilizing next crisis phase.

August 15 – Bloomberg (Jill Disis): “President Xi Jinping has resisted pulling the trigger on a major stimulus to revive the world’s second-biggest economy. The grim market reaction to a surprise rate cut shows investors want to see him take much bolder steps. The People’s Bank of China on Tuesday lowered the rate on its one-year loans — or medium-term lending facility — by 15 bps to 2.5%, the steepest cut in three years. The move came shortly before the release of July data that showed weak consumer spending growth, sliding investment and rising unemployment.”

Chinese markets immediately brushed off Tuesday’s surprise rate cut. There was a similar reaction Wednesday, after the PBOC injected the most liquidity since February. Thursday’s PBOC assurances of ample liquidity and “precise and forceful” support similarly fell on deaf ears.

Meanwhile, there was increasingly assertive currency intervention.

Monday Bloomberg headline: “PBOC Maintains Yuan Support with Fix 668 Pips Stronger than Estimates.”

August 15 – Bloomberg (Tian Chen): “China’s yuan is plumbing fresh lows for the year with the central bank’s favorite tool for guiding the managed currency quickly losing its effectiveness. The onshore yuan on Monday closed at the largest discount since December to the People’s Bank of China’s daily reference rate, a sign Beijing is failing to bolster worsening confidence caused by weaker-than-expected economic data and heightening credit risks.”

Tuesday from Bloomberg: “China Cuts Rates by Most Since 2020 as Economic Woes Deepen” and “PBOC Maintains Yuan Support with Fix 783 Pips Stronger than Estimates.”

Wednesday from Bloomberg: “China Escalates Battle Against Yuan Bears with Fixing Guidance.”

Thursday: “China Ramps Up Yuan Defense with Most Forceful Fixing on Record,” “China Told State Banks to Escalate Yuan Intervention” and “Dollar-Yuan Gets Super-Sized PBOC Pushback (1,041 Pips).”

Friday: “China Targets Yuan Bears with Most Forceful Fixing Guidance”

Despite it all, the renminbi closed the week 0.6% lower versus the dollar – down 5.30% y-t-d and just below trading lows back to 2008. Dynamics have changed, with evidence mounting that Beijing is losing control.

Most analysts are scratching their heads, pondering why it’s taking Beijing so long to bring out the stimulus “bazookas.” For one, they likely question the effectiveness of the big $600 billion “GFC” response, believing instead that directed measures are more suitable to address current issues. Sufficient stimulus to jolt the entire economy would today be in the Trillions. They seem to want to avoid massive deficit spending. But mostly, I think Beijing is terrified of a currency crisis.

Authoritarian Communist leadership has become the masters of control. They aggressively censor the Internet for content they find objectionable. They limit public protests and crush any dissent. They limit kids’ video and screen time. There are an estimated 600 million surveillance cameras keeping a watchful eye. They tabulate individual “social credit scores” to keep their citizens in check. They have cracked down on private-sector businesses, with the communist party taking more control over all facets of the economy. Beijing increasingly commands the banking system and entire financial sector. The so-called “national team” still holds a semblance of control over the stock market. And they have recently taken tighter control over news flow, even threatening repercussions for the dissemination of unfavorable economic views.

But they can’t control currency markets. Let’s assume they’ve studied the catastrophic 1997 “Asian Tiger” crisis. The domino collapse of Asian currencies (i.e., South Korea, Indonesia, Malaysia, Philippines…) triggered panicked capital flight, bond market meltdowns, banking system insolvency, economic depression and, in some cases (i.e., Indonesia), complete social breakdown.

China’s circumstances are different. Most notably, the country runs big trade surpluses and has accumulated a huge international reserve position (at least partially squandered by lending to high-risk countries) – factors integral to such a protracted Bubble period.

Still, China’s unsound financial structure leaves its currency increasingly vulnerable to a Crisis of Confidence. Aggregate financing inflated $20.3 TN, or 67%, over the past five years, in what has certainly been history’s greatest expansion of non-productive debt. Total Bank Assets inflated $35.4 TN, or 181%, over the past decade. The unfolding real estate collapse will leave a multi-trillion dollar hole in the Chinese financial system.

Bubbles are notorious for unequal distributions of wealth. China’s Bubble has enriched a segment of society with wealth beyond anything previously imagined. Wealthy Chinese today see what is unfolding in Beijing and their country – and will be working diligently to get as much money out of China as possible. A further tightening of capital controls appears inevitable.

There is another key source of currency vulnerability that operates surreptitiously: speculative leverage. How big is the China “carry trade”? With China’s financial sector offering enticing yields and the PBOC actively managing the renminbi (loose peg to the dollar), the backdrop has certainly been conducive to leveraged speculation. Why not borrow for free in a weak Japanese currency for levered holdings of high-yielding instruments in an appreciating Chinese currency? Could speculative leverage be in the Trillions?

While it is not the type of rigid currency peg whose breakdown led to the Asian Tiger debacle, China’s currency regime has been about the next worst thing. China’s developers borrowed over $200 billion in U.S. dollar-denominated debt. China’s banking system has been an aggressive borrower in foreign currencies, much of it in dollars. This structure creates vulnerability to a disorderly currency devaluation.

Bloomberg’s Jonathan Ferro: “Ben Lazar of eToro wrote a line yesterday, Mohamed, and he said something like ‘[China] is an economic giant and financial markets minnow’. Is this an economic giant that we need to pay attention to, or a financial market minnow that we can ignore? What I’m getting at, Mohamed, is this a contagion issue – is there a prospect that this bleeds out to broader markets worldwide or not?”

Mohamed El-Erian: “It won’t bleed out through the financial channel, because financially they’re not as big as they are economically.”

I respect Mr. El-Erian and appreciate his experience and analytical framework. He knows better.

Global markets remain highly synchronized. The “financial channel” is key. As we’ve witnessed repeatedly, de-risking/deleveraging doesn’t remain contained within a country’s borders. In the event of a global crisis, U.S. markets will not be immune. Chinese finance is a clear and present risk to global financial stability. And there is evidence that Crisis Dynamics attained important momentum this week. China sovereign CDS surged 23 this week to 85 bps, the biggest weekly gain since September 2022.

China today has the largest banking system in the world – rapidly approaching $60 TN. Ominously, China’s “big four” bank CDS spiked higher this week. Bank of China CDS surged 22 (biggest move since November) to 86 bps. China Construction Bank jumped 21 (biggest since October) to 98 bps, Industrial and Commercial Bank 21 (October) to 98 bps, and China Development Bank 17 to 90 bps.

Not surprisingly, the developer bond collapse continues in earnest. It’s worth noting that “last man standing” Vanke CDS spiked 404 to 884 bps, while the company’s bond yields surged 336 bps to 12.04%. Remember the “AMCs” – the “bad bank” asset management companies created back in 1999 to clean up a troubled banking system? Huarong CDS spiked 161 this week to 652 bps – the biggest move since March. China Orient surged 45 to a near record high 372 bps, and China Cinda rose 38 to 282 bps.

China’s CSI 300 equities index dropped 2.6%, with a two-week fall of 5.9%. Hong Kong’s Hang Seng Index was clobbered 5.9% – and was down 8.1% in two weeks to trade at lows since November. The Hang Seng China Financials Index slumped 5.6% (down 9.3% y-t-d), also to lows since November. This index is now basically unchanged from a decade ago. Japan’s Nikkei 225 Index dropped 3.2%, Australia’s ASX 200 2.6%, and Singapore’s Straits Times index 3.7%. Major indices were down 3.7% in South Korea, 4.4% in Vietnam, 1.8% in the Philippines, 1.5% in Thailand and 1.3% in Taiwan.

Contagion was forceful. Emerging Market (EM) CDS jumped 19 to 222 bps, the largest weekly gain since the banking crisis week of March 17th. Vietnam CDS rose 13 to 128 bps, Philippines 12 to 114 bps, and Indonesia 12 to 93 bps. Outside of Asia, Panama CDS surged 21 (largest gain since September 2022) to 118 bps, Colombia 21 (largest since March) to 229 bps, Brazil 18 (March) to 192 bps, Peru 16 (March) to 87 bps, and Mexico 10 (March) to 115 bps.

EM local currency yields spiked 132 bps in Brazil to a two-month high 11.24%. Mexico yields jumped 27 bps to 9.33%, and Colombia surged 46 bps to 10.89%.

De-risking/deleveraging had EM dollar bonds under notable pressure. Dollar yields in Peru jumped 27 bps to a five-month high 5.67%; Philippines 31 bps to a five-month high 5.26%; Indonesia 29 bps to a nine-month high 5.27%; Brazil 23 bps to a near 10-month high 6.59%; Mexico 19 bps to a nine-month high 5.95%; and Chile 22 to a nine-month high 5.42%.

With China’s Bubble deflating and Crisis Dynamics having placed an iron grip, there’s a long unanswered question that again becomes germane: Is China “developed” or “developing”? Does it have sound and battle tested institutions? Is the country governed by seasoned, professional, and adept policymakers? Has its Credit system and financial institutions been managed effectively and prudently?

I will continue to argue that China remains king of emerging markets despite its incredible growth and now massive financial system and powerful economy. Gross mismanagement has created acute financial and economic fragilities. It poses a huge risk to global stability – financial, economic, and geopolitical. The bursting of the Chinese Bubble is likely to be a catalyst for bursting global bubbles.

The Atlanta Fed GDPnow model forecasts 5.8% 3rd quarter U.S. GDP growth. Economic resilience has economists downplaying the impact of a Chinese slowdown. I would not extrapolate current growth dynamics. The economic upsurge is the upshot of a dramatic post-banking crisis loosening of financial conditions. It started with over $700 billion of liquidity injections (Fed and FHLB), followed by a short squeeze and unwind of hedges, and then huge FOMO flows and derivatives-related “melt-up” dynamics.

Financial conditions will now tighten. “Risk on” has begun the transition to “risk off,” with the system now vulnerable to an abrupt change in the liquidity backdrop. That EM and U.S. markets (in particular) succumbed to “melt-up” dynamics in the face of festering Chinese issues only exacerbated vulnerabilities.

Importantly, the liquidity-induced market and economic upsurges underpinned inflation dynamics. And it was remarkable again this week to see Crisis Dynamics unfold in China (with intensifying global contagion) – and yet U.S. yields marched higher. MBS yields surged another 17 bps to a 16-year high of 6.14%. Ten-year Treasury yields rose nine bps to 4.25%. It has me contemplating the possibility that de-risking/deleveraging has begun a problematic tightening of global market liquidity. Meanwhile, U.S. banks (BKX) were slammed 5.6% this week. To be sure, developments out of China are more serious than what U.S.-based analysts are saying.

For the Week:

The S&P500 fell 2.1% (up 13.8% y-t-d), and the Dow lost 2.2% (up 4.1%). The Utilities dropped 1.9% (down 11.6%). The Banks sank 5.6% (down 18.9%), and the Broker/Dealers declined 0.8% (up 9.9%). The Transports dropped 3.1% (up 17.2%). The S&P 400 Midcaps fell 3.1% (up 6.1%), and the small cap Russell 2000 slumped 3.4% (up 5.6%). The Nasdaq100 dropped 2.2% (up 34.3%). The Semiconductors declined 1.5% (up 36.8%). The Biotechs lost 1.4% (down 2.3%). With bullion down $24, the HUI gold equities index sank 6.3% (down 6.7%).

Three-month Treasury bill rates ended the week at 5.2725%. Two-year government yields gained five bps this week to 4.94% (up 51bps y-t-d). Five-year T-note yields rose eight bps to 4.39% (up 38bps). Ten-year Treasury yields jumped 10 bps to 4.26% (up 38bps). Long bond yields gained 11 bps to 4.38% (up 41bps). Benchmark Fannie Mae MBS yields surged 17 bps to 6.14% (up 76bps).

Greek 10-year yields added three bps to 3.92% (down 65bps y-t-d). Italian yields rose eight bps to 4.33% (down 37bps). Spain’s 10-year yields gained four bps to 3.68% (up 16bps). German bund yields were unchanged at 2.62% (up 18bps). French yields added a basis point to 3.16% (up 18bps). The French to German 10-year bond spread widened one to 54 bps. U.K. 10-year gilt yields jumped 15 bps to 4.68% (up 100bps). U.K.’s FTSE equities index dropped 3.5% (down 2.5% y-t-d).

Japan’s Nikkei Equities Index sank 3.1% (up 20.5% y-t-d). Japanese 10-year “JGB” yields rose five bps to 0.64% (up 21bps y-t-d). France’s CAC40 fell 2.4% (up 10.7%). The German DAX equities index declined 1.6% (up 11.9%). Spain’s IBEX 35 equities index lost 1.8% (up 12.6%). Italy’s FTSE MIB index dropped 1.8% (up 17.1%). EM equities were under pressure. Brazil’s Bovespa index dropped 2.3% (up 5.2%), while Mexico’s Bolsa index was little changed (up 9.8%). South Korea’s Kospi index sank 3.3% (up 12.0%). India’s Sensex equities index slipped 0.6% (up 6.8%). China’s Shanghai Exchange Index fell 1.8% (up 1.4%). Turkey’s Borsa Istanbul National 100 index dropped 2.6% (up 36.4%). Russia’s MICEX equities index declined 1.4% (up 44.4%).

Investment-grade bond funds posted outflows of $575 million, and junk bond funds reported negative flows of $1.090 billion (from Lipper).

Federal Reserve Credit declined $17.7bn last week to $8.154 TN. Fed Credit was down $747bn from the June 22nd, 2022, peak. Over the past 205 weeks, Fed Credit expanded $4.427 TN, or 119%. Fed Credit inflated $5.343 TN, or 190%, over the past 562 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $4.8bn last week to $3.449 TN. “Custody holdings” were up $68bn, or 2.0%, y-o-y.

Total money market fund assets surged $39.7bn to a record $5.570 TN, with a 23-week gain of $676bn (31% annualized). Total money funds were up $1.008 TN, or 22.1%, y-o-y.

Total Commercial Paper slipped $5.3bn to $1.166 TN. CP was down $24bn, or 2.0%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 27 bps to 7.22% (up 209bps y-o-y) – the high back to 2002. Fifteen-year rates jumped 26 bps to 6.65% (up 210bps). Five-year hybrid ARM rates declined seven bps to 6.71% (up 232bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up seven bps to 7.58% (up 191bps).

Currency Watch:

August 16 – Bloomberg: “China ramped up its efforts to stem losses in the yuan by offering the most forceful guidance since October through its daily reference rate for the managed currency. The People’s Bank of China set the so-called fixing for the yuan at 7.2076 per dollar on Thursday compared to an average estimate of 7.2994…, the largest gap since October. The attempted boost for the currency comes as broad dollar strength combined with evidence of China’s sluggish economy helped push the onshore yuan toward a 16-year low on Wednesday.”

August 17 – Bloomberg: “Chinese authorities told state-owned banks to step up intervention in the currency market this week, in a push to prevent a surge in yuan volatility… Senior officials are also considering the use of tools such as cutting banks’ foreign-exchange reserve requirements to prevent a rapid depreciation in the currency… The request came as the yuan fell toward 7.35 per dollar, a level that top leadership has been paying close attention to… Authorities were also checking whether domestic companies helped accelerate yuan declines by conducting speculative trades against it…”

August 16 – Financial Times (Max Seddon and Anastasia Stognei): “President Vladimir Putin was set to discuss ramping up currency controls with Russian policymakers… after an extraordinary 3.5 percentage point rate rise failed to halt the rouble’s slide… Putin planned to hear proposals from Russia’s finance ministry to require exporters to convert some of their foreign currency earnings, most of which are currently held abroad, into roubles, the people said. The finance ministry’s proposals… would require exporters to sell up to 80% of their foreign currency revenue within 90 days after delivery and ban companies that refused to comply from receiving government subsidies.”

For the week, the U.S. Dollar Index increased 0.5% to 103.38 (down 0.1% y-t-d). On the upside, the British pound increased 0.3%. On the downside, the Norwegian krone declined 2.1%, the Swedish krona 2.0%, the Australian dollar 1.4%, the Brazilian real 1.3%, the New Zealand dollar 1.0%, the South Korean won 1.0%, the Canadian dollar 0.8%, the euro 0.7%, the Swiss franc 0.6%, the Singapore dollar 0.4%, the Japanese yen 0.3%, the Mexican peso 0.3%, and the South African rand 0.3%. The Chinese (onshore) renminbi declined 0.62% versus the dollar (down 5.30%).

Commodities Watch:

August 15 – Bloomberg (Mitchell Ferman): “The steep drop in output from US shale wells is turning out to be worse than expected, forcing oil drillers to work even harder to keep production from slipping, research firm Enverus said… The firm’s conclusion that there won’t be a surge of American oil production comes after the amount of crude extracted from US shale wells doubled in the past decade. The falling output rate over time highlights a fact of life for US shale explorers: oil wells are most prolific in early months of production, with gushers quickly turning to trickles. That reality is why oil output boomed during the shale revolution of the 2010s as companies chased production growth at all costs.”

The Bloomberg Commodities Index declined 1.3% (down 7.6% y-t-d). Spot Gold fell 1.3% to $1,889 (up 3.6%). Silver increased 0.3% to $22.75 (down 5.0%). WTI crude dropped $1.94, or 2.3%, to $81.25 (up 1%). Gasoline fell 4.8% (up 15%), and Natural Gas sank 7.9% to $2.55 (down 43%). Copper increased 0.6% (down 2%). Wheat fell 2.2% (down 23%), while Corn gained 1.1% (down 29%). Bitcoin sank $3,320, or 11.3%, to $26,070 (up 57%).

Global Bank Crisis Watch:

August 15 – CNBC (Hugh Son): “A Fitch Ratings analyst warned that the U.S. banking industry has inched closer to another source of turbulence — the risk of sweeping rating downgrades on dozens of U.S. banks that could even include the likes of JPMorgan… The ratings agency cut its assessment of the industry’s health in June, a move that analyst Chris Wolfe said went largely unnoticed because it didn’t trigger downgrades on banks. But another one-notch downgrade of the industry’s score, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers, Wolfe told CNBC… ‘If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions,’ Wolfe said.”

UK Crisis Watch:

August 16 – Reuters (Andy Bruce and William Schomberg): “Worries about persistently high inflation in Britain grew… as key measures of price growth monitored by the Bank of England failed to ease in July, despite a sharp drop in the headline inflation rate. The annual consumer price inflation rate cooled to 6.8% from June’s 7.9%… Core inflation, which excludes energy and food prices, remained at 6.9%, unchanged from June, and higher than expectations in the Reuters poll for a reading of 6.8%.”

August 15 – Bloomberg (James Hirai and Dayana Mustak): “Traders are once again entertaining the prospect of an outsized interest-rate hike in the UK, setting the nation’s battered bond market up for further losses. Analysts at firms including Saxo Bank A/S and TD Securities said policymakers could boost the size of next month’s interest-rate increase to 50 bps after data showed wages grew at the fastest pace on record. Money markets now imply almost one-in-three odds of a half-point hike in September.”

Market Instability Watch:

August 15 – Bloomberg (Farah Elbahrawy and Jessica Menton): “Investors are the least pessimistic on stocks since February of last year, before the Federal Reserve began one of the most aggressive tightening cycles in decades, according to Bank of America Corp.’s latest global survey of fund managers. In another sign of rising optimism, investor allocation to equities is now the least underweight since April 2022… A broad measure of BofA’s fund manager sentiment is based on cash positions, equity allocation and economic growth expectations.”

August 14 – Bloomberg (Lu Wang): “The craze for fast-expiring options is ramping to unprecedented heights in a stock market that has lately been given to severe intraday moves. It’s probably not a coincidence. About 1.86 million so-called zero-day contracts — those tied to S&P 500 with a maturity less than 24 hours — changed hands on Thursday, making up a record 55% of the index’s total volume… Halfway into August, the options known as zero days to expiration, or 0DTE, have seen four of their top 10 most-traded sessions ever. Their mushrooming popularity coincides with a shift in the market’s backdrop that has made tools for fleeting speculation more tempting.”

August 17 – Bloomberg (Lu Wang): “The fresh boom in stock options that expire within 24 hours has grabbed all the attention on Wall Street trading desks — spurring a Goldman Sachs… warning that the activity is fueling the recent market selloff. Now, the grown-up versions of the derivatives are back in the spotlight in the monthly event known as OpEx. Some $2.2 trillion of longer-dated contracts tied to stocks and indexes are scheduled to mature on Friday, according to an estimate by Rocky Fishman, founder of derivatives analytical firm Asym 500.”

August 17 – Bloomberg (Yumi Teso and Masahiro Hidaka): “Japan’s 20-year bond auction met weak demand, pushing a measure of investor appetite to the lowest level since 1987… The so-called tail, or the difference between average and cut-off prices, at the sale reached its longest since 1987. A long price tail is a sign of poor demand at a debt auction… Yields on 20-year government debt jumped 7.5 bps shortly after the auction, briefly rising to 1.375%, the highest since January…”

August 12 – Financial Times (George Steer): “Trend-following hedge funds have piled into global equities as market volatility has fallen and stocks climb on investors’ hopes that interest rate rises are close to their peak. Commodity trading advisers — hedge funds that rely on pattern-detecting algorithms and statistical models to direct trading across markets — have in recent weeks increased their exposure to equities to the highest level since before the pandemic, according to Deutsche Bank. CTAs managing hundreds of billions of dollars in assets now have net long futures positions on Wall Street’s S&P 500, Europe’s Euro Stoxx 50, London’s FTSE 100 and Japan’s Nikkei 225, among other indices, Deutsche said.”

August 17 – Bloomberg (Srinivasan Sivabalan): “The emerging-market selloff that started in equities and spread to currencies this month has now gripped bonds, as traders rush to unwind bets they made on expectations for interest-rate cuts. The average cost to hedge against a default among 20 emerging economies rose Thursday, heading for the biggest monthly increase since June 2022. Asia led a selloff in the dollar-debt and currency markets as China’s economic, financial and property crises weigh on the continent’s growth outlook. Local-currency bond yields spiked the most in Hungary, Romania and Pakistan.”

August 13 – Reuters (Yoruk Bahceli): “Financial markets barely flinched when Fitch stripped the United States of its top credit rating, but it served as a reminder of longer-term structural risks investors in government bonds are yet to grasp. The immediate focus in the aftermath of the Aug. 1 downgrade has been on U.S. governance, but Fitch Ratings also flagged higher rates driving up debt service costs, an aging population and rising healthcare spending… David Katimbo-Mugwanya, head of fixed income at EdenTree Investment Management, a 3.7 billion-pound ($4.71bn) charity-owned investor, said with the move highlighting reflecting elevated debt levels at a time when interest rates will likely remain high, debt sustainability was back in focus. ‘I think it really brings home that shift being a regime shift rather than a cyclical one,’ Katimbo-Mugwanya said.”

August 16 – Financial Times (Vanessa Houlder and Nathalie Thomas): “The world is reeling from record-breaking heatwaves, wildfires and rainfall. Devastating floods have ravaged northern China. Wildfires have ripped through Canada, southern Europe and, in recent days, the Hawaiian island of Maui. The human toll from these disasters, which experts say are becoming more common and more intense due to human-induced climate change, can be counted first of all in the thousands of lives lost. But it can also be measured in the economic value destroyed, and potentially created, as governments shift policies to contain or mitigate the climate crisis. In a world that is rapidly becoming more vulnerable to extreme weather events, outdated assumptions about asset values also need recalibrating. The big danger is of a ‘climate Minsky moment’, the term for a sudden correction in asset values as investors simultaneously realise those values are unsustainable.”

Bubble and Mania Watch:

August 17 – Bloomberg (Lisa Lee and John Sage): “The $1.5 trillion private credit market just set a fresh record for the largest loan in its history. With growing firepower, direct lenders are poised to take ever more deals away from banks and from the junk bond and leveraged loan markets. Private lenders including Oak Hill Advisors LP, Blue Owl Capital Inc. and HPS Investment Partners LLC are providing a $5.3 billion loan package to Finastra Group Holdings Ltd., a fintech firm owned by Vista Equity Partners… It’s been a dramatic rise. Even as recently as four years ago, a $1 billion private loan was a rare event and anything above $2 billion was simple aspiration.”

August 13 – Reuters (Lewis Jackson): “Australian developer Lendlease Group has paused work on an A$1.9 billion ($1.23bn) office and apartment complex in San Francisco in the troubled West Coast real estate market… California’s commercial real estate market is one of the hardest hit globally as home working culls demand for office space just as rising rates crunch property values and lift debt servicing costs.”

August 13 – Yahoo Finance (Kerry Hannon): “The number of workers looting their retirement savings is escalating. In the second quarter, the tally of folks taking hardship withdrawals from their 401(k) was up 12% compared to the first three months of the year and leapt 36% year over year, according to… Bank of America, which tracks about 4 million clients’ employee benefit programs. Borrowing from retirement savings was also up. The percentage of 401(k) participants who got a loan from their workplace plan stash in the second quarter was 2.5%, up from 1.9% in the first three months of the year.”

Ukraine War Watch:

August 13 – Reuters (Guy Faulconbridge): “A Russian warship… fired warning shots at a cargo ship in the southwestern Black Sea as it made its way northwards, the first time Russia has fired on merchant shipping beyond Ukraine since exiting a landmark UN-brokered grain deal last month. In July, Russia halted participation in the Black Sea grain deal that allowed Ukraine to export agricultural produce via the Black Sea. Moscow said that it deemed all ships heading to Ukrainian waters to be potentially carrying weapons.”

U.S./Russia/China/Europe Geo Watch:

August 13 – Reuters (Ben Blanchard): “Taiwan will not be afraid nor back down in the face of authoritarian threats, the island’s vice president told supporters on a U.S. visit that Beijing has condemned, while reiterating a willingness to talk to China. William Lai, also frontrunner to be Taiwan’s next president at January elections, is in the United States on what is officially a transit stop on his way to Paraguay for the inauguration of its new president.”

August 16 – Bloomberg: “China called Taiwan’s vice president a ‘troublemaker’ whose views risk sparking a conflict, a sign that Lai Ching-te is likely to have testy relations with Beijing if he becomes the island’s next leader. Lai used a recent stop in the US to encourage ‘separatism,’ Beijing’s Taiwan Affairs Office said… It called a pledge Lai made… that he would maintain peace in the Taiwan Strait ‘a complete lie.’ ‘Such a person will only bring risks of fierce war,’ the office that handles Beijing’s relations with Taipei said. China’s military followed up with a more blunt warning directed at Lai. Its PLA Daily published an editorial… saying Taiwan independence would mean the breakout of a war and that its pursuit would be a ‘road to ruin.’ Invoking one of the Communist Party’s favorite proverbs to threaten Taiwan, it said, ‘Those who play with fire will perish by it!’”

August 16 – Bloomberg (Aliaksandr Kudrytski): “China’s defense chief arrived in Belarus for a three-day visit to strengthen ties with the staunch Russian ally as NATO member states bolster border security with the nation. Defense Minister Li Shangfu, who is aiming to intensify military ties with nations across the globe, flew from Russia and was welcomed Wednesday in Minsk by his counterpart, Viktor Khrenin…”

De-globalization and Iron Curtain Watch:

August 16 – Financial Times (Demetri Sevastopulo): “The US, Japan and South Korea are to create a leader-level hotline and hold annual military exercises as part of a landmark trilateral agreement that will help Washington and its Asian allies boost deterrence against North Korea and China. President Joe Biden will announce the move with Japanese prime minister Fumio Kishida and South Korean president Yoon Suk Yeol at Camp David… ‘We’re going to invest in technology to have a three-way hotline for the leaders and others inside their governments to communicate,’ Campbell said…”

Inflation Watch:

August 15 – Reuters (Laura Sanicola and Shariq Khan): “U.S. motorists hoping to squeeze out one last trip before the Labor Day holiday and school begins are finding pump prices that have surged to their highest level this year on tighter gasoline supplies. Consumers tend to get a break from steeper fuel costs as peak vacation travel ebbs. But strong demand and a series of refinery outages have pushed the national average retail price to $3.86 per gallon…, – 7% higher than a month ago. In California and Washington, prices have surged above $5 a gallon.”

August 14 – Bloomberg (Jonnelle Marte and Alex Tanzi): “US consumers’ near-term inflation expectations declined in July for a fourth month, reaching the lowest level since April 2021, according to a Federal Reserve Bank of New York survey. Median one-year-ahead inflation expectations fell to 3.5% last month from 3.8% in June… Expectations for what inflation will be at the three-year and five-year horizons each ticked down to 2.9%, from 3%.”

August 17 – Bloomberg (Naureen S. Malik): “Texas spot electricity prices soared by more than 60-fold, climbing toward the $5,000 price cap as the state grid faces some of the tightest conditions for power supplies so far this summer. Real-time prices on the grid jumped to about $4,750 a megawatt-hour Thursday at 3:45 p.m. local time, up from the grid average of $75 at the same time Wednesday…”

Federal Reserve Watch:

August 16 – Bloomberg (Matthew Boesler): “Federal Reserve officials at their policy meeting in July largely remained concerned that inflation would fail to recede and that further interest-rate increases would be needed. At the same time, cracks in that consensus were also becoming more apparent. ‘Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,’ according to minutes of the US central bank’s July 25-26 policy meeting… But two Fed officials favored leaving rates unchanged or ‘could have supported such a proposal’…”

August 15 – Bloomberg (Jonnelle Marte): “As Federal Reserve officials close in on the end of their tightening campaign, the debate is shifting from how high interest rates need to go to how long they should stay elevated. Inflation pressures are easing, which could give policymakers room to keep interest rates at or near current levels for the time being. Still, price gains remain well above the central bank’s 2% target… Introducing the discussion over how long officials may keep rates steady even if inflation continues to decelerate could help them push back on expectations for rate cuts and allow them to keep putting downward pressure on the economy.”

August 11 – Financial Times (Kate Duguid and Nicholas Megaw): “The Federal Reserve’s drive to shrink its swollen balance sheet is poised to hit $1tn this month… The US central bank bought trillions of dollars of government bonds and mortgage-backed securities to help stabilise the financial system during the early stages of the Covid-19 pandemic, but last spring started letting its holdings mature without replacing them.”

U.S. Bubble Watch:

August 16 – Yahoo Finance (Josh Schafer): “Eight months after 2023 kicked off with widespread recession calls across Wall Street, the Atlanta Fed is projecting the economy will grow nearly 6% in the third quarter. On Tuesday, the Atlanta Fed’s GDPNow estimate moved up to 5.8% from 5.0% a day prior after fresh data from the Census Bureau’s showed housing starts increased 3.9%. in June. If the 5.8% GDP growth number held, it’d mark the most robust period of economic growth since the fourth quarter of 2021.”

August 15 – CNBC (Jeff Cox): “Consumer spending held up well in July as inflation slowed, with retail sales turning in a stronger-than-expected showing for the month… The advanced retail sales report showed a seasonally adjusted increase of 0.7% for the month, better than the 0.4% Dow Jones estimate. Excluding autos, sales rose a robust 1%, also against a 0.4% forecast. Both readings were the best monthly gains since January. July’s numbers were boosted by a 1.9% jump in spending at online retailers, while sporting goods and related stores increased 1.5% and food service and drinking places rose 1.4%. On the downside, furniture sales slumped 1.8% and electronics and appliance stores reported a 1.3% drop.”

August 16 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding surged in July and permits for future construction rose amid an acute shortage of previously owned houses, but mortgage rates climbing back to near two-decade highs could slow the housing market improvement… Single-family housing starts, which account for the bulk of homebuilding, jumped 6.7% to a seasonally adjusted annual rate of 983,000 units last month. They rose 9.5% year-on-year in July. The increase in groundbreaking was led by the West, where single-family starts soared 28.5%. Starts rose 12.5% in the Midwest. But they fell 3.4% in the Northeast and declined 1.3% in the densely populated South.”

August 17 – Bloomberg (Jennifer Epstein and Prashant Gopal): “A recent surge in US mortgage rates has pushed affordability to the lowest level in nearly four decades. For house hunters, waiting for any relief is a risky gamble. It’s been a hard lesson. Last year’s slowdown brought a brief respite from the price gains of the pandemic boom but that’s now vanished, with home values recovering the nearly $3 trillion they’d lost. Now, one measure of borrowing costs has climbed back up to a level last seen in 2001, and the Federal Reserve has indicated it may hike rates further, raising the risk that mortgage rates may push toward 8%.”

August 16 – Bloomberg (Reade Pickert): “The US 30-year mortgage rate rose to 7.16% last week, matching the highest since 2001 and crimping both sales and refinancing activity. The contract rate on a 30-year fixed mortgage rose 7 bpss to 7.16% in the week ended Aug. 11… The gauge of home-purchase applications slipped for a fifth-straight week to the second-lowest level since 1995.”

August 17 – Dow Jones (Jeffry Bartash): “Many businesses are hiring and labor market tight… The number of Americans who applied for unemployment benefits last week fell by 11,000 to 239,000, underscoring the strength of the labor market and remarkably low level of layoffs taking place in the economy. New jobless claims retreated from a revised 250,000 in the prior week… New jobless claims declined in 43 of the 53 states and territories that report these figures to the federal government.”

August 16 – Bloomberg (Vince Golle): “US factory production rose in July for the first time in three months, boosted by a surge in motor-vehicle output that helped manufacturing to stabilize. Output increased 0.5% from June, erasing the prior month’s decline… Total industrial production, which includes mining and utilities, jumped 1%, the most since the start of the year. Factory production was led by a 5.2% surge in motor-vehicle output. The annualized rate of car assemblies increased to 11.87 million units, the fastest rate since the end of 2018.”

August 16 – Bloomberg (Laura Curtis): “Excess savings US households built up during the pandemic will probably be exhausted in the current quarter, according to… the Federal Reserve Bank of San Francisco… ‘Our updated estimates suggest that households held less than $190 billion of aggregate excess savings by June,’ San Francisco Fed researchers Hamza Abdelrahman and Luiz Oliveira said… ‘There is considerable uncertainty in the outlook, but we estimate that these excess savings are likely to be depleted during the third quarter of 2023.’”

August 15 – Associated Press (Stephen Groves and Lisa Mascaro): “Congressional leaders are pitching a stopgap government funding package to avoid a federal shutdown after next month, acknowledging the House and Senate are nowhere near agreement on spending levels to keep federal operations running. House Speaker Kevin McCarthy raised the idea of a months-long funding package, known as a continuing resolution, to House Republicans… On Tuesday, Senate Majority Leader Chuck Schumer said the two leaders had spoken about such a temporary measure. It would extend federal funding operations into December to allow more time to work on the annual spending bills.”

August 14 – Wall Street Journal (Dan Strumpf): “China’s deepening economic slump is damaging the fortunes of big American companies deeply rooted there, with some growing increasingly pessimistic that the country’s long-awaited postpandemic boom will materialize… In some cases, they are warning of further trouble to come as growth grinds to a near halt and economic readings are dour. The slowdown is registering in earnings results across a range of companies, from chemical giants DuPont and Dow to heavy-equipment suppliers such as Caterpillar. Some companies expressed disappointment with Beijing’s stimulus measures and cut their sales outlook for the country into this year.”

Fixed-Income Watch:

August 16 – Bloomberg (Tanaz Meghjani and Jill R. Shah): “Risky companies are defaulting on loans far faster than high-yield bonds in the wake of the Federal Reserve’s most aggressive credit-tightening campaign in decades. The one-year default rate for US loan borrowers has soared to 4%, surpassing the 2.7% pace of delinquency for high-yield bonds by a whopping 1.3 percentage points, according to… Morgan Stanley. It’s the first time in 30 years that the clip of loan defaults led junk bonds by such a margin. ‘The higher cost of debt is flowing through immediately for loan borrowers,’ Amanda Lynam, head of macro credit research at BlackRock Inc., said… ‘But it’s taking some time for the high-yield bond universe.’”

China Watch:

August 15 – Wall Street Journal (Nathaniel Taplin): “The economic news out of China this summer has been, in a word, grim. But the headline figures, as bad as they are, may be hinting at a more fundamental issue: Beijing has failed to convince households that their financial future is secure in the post-Covid era… There is plenty of ugly news to choose from: exports are falling, foreign investment is drying up and the overall job market is weakening again. But perhaps the most compelling explanation is this: Households have suffered an enormous, and possibly permanent, loss of confidence in both their future income prospects and the safety and value of their main financial asset, housing. And in both cases, Beijing’s recent policies deserve much of the blame, which may be one reason economic data has suddenly become so sensitive.”

August 17 – Associated Press (Joe McDonald): “Chinese leader Xi Jinping has called for patience in a speech released as the ruling Communist Party tries to reverse a deepening economic slump and said Western countries are ‘increasingly in trouble’ because of their materialism and ‘spiritual poverty’… Xi, the country’s most powerful leader in decades, called for China to ‘build a socialist ideology with strong cohesion’ and to focus on long-term goals of improving education, health care and food supplies for China’s 1.4 billion people instead of only pursuing short-term material wealth.”

August 16 – Bloomberg: “Chinese policymakers moved to improve fragile market sentiment… with a step up in its recent support for the yuan and an injection of cash to the financial system. The People’s Bank of China injected the largest amount of short-term cash since February one day after it slashed interest rates on a slew of monetary tools. Minutes before the liquidity addition, the central bank also offered the most forceful guidance to yuan traders since October via its daily reference rate for the managed currency. Officials have also taken measures to address the sliding stock market. Chinese authorities asked some investment funds this week to avoid being net sellers of equities…”

August 17 – Reuters (Liangping Gao, Ella Cao and Kevin Yao): “China’s central bank said… it would keep liquidity reasonably ample and keep its policy ‘precise and forceful’ to support the country’s economic recovery… Data for July has highlighted the intensifying pressure on the economy on a number of fronts… The People’s Bank of China (PBOC) will ‘better leverage the dual functions of aggregate and structural monetary policy tools and firmly support the recovery and development of the real economy,’ the bank said in its second-quarter monetary policy implementation report.”

August 16 – Reuters (Qiaoyi Li, Liangping Gao, Jason Xue, Ziyi Tang, Ryan Woo, Matt Tracy and Davide Barbuscia): “Missed payments on investment products by a leading Chinese trust firm and a fall in home prices have added to worries that China’s deepening property sector crisis is stifling what little momentum the economy has left. Zhongrong International Trust Co., which traditionally had sizable real estate exposure, missed payments on dozens of investment products since late last month, a senior official told angry investors. China’s $3 trillion shadow banking sector is roughly the size of Britain’s economy, and concerns about its outsized exposure to property and risks to the wider economy have grown over the past year.”

August 14 – Bloomberg: “Founded in 1995 as a lumber business, Zhongzhi Enterprise Group Co. grew to become a financial conglomerate with more than 1 trillion yuan ($138bn) under management. Now it risks becoming the latest Chinese financial giant to fail. The under-the-radar group, often dubbed China’s Blackstone by local media, operates at the heart of China’s once high-flying shadow banking market, which regulators have sought to corral since 2017. The firm has now raised alarm bells across Chinese markets after affiliated firms missed payments on some investment products.”

August 16 – Bloomberg: “The Chinese shadow banking giant whose liquidity crisis has fanned fears about financial contagion is planning to restructure its debt and has hired KPMG LLP to conduct an audit of its balance sheet… Zhongzhi Enterprise Group Co. hired KPMG in late July to review its balance sheet amid a worsening liquidity crunch… The Beijing-based company plans to restructure debt and sell assets after the review in order to repay investors, the people said. The company manages more than 1 trillion yuan ($137bn) of assets.”

August 16 – Financial Times (Thomas Hale, Wang Xueqiao and Cheng Leng): “On a messaging platform hosted by the Shanghai Stock Exchange where investors can put queries directly to companies, the focus this week has been on missed payments from a sprawling financial conglomerate. ‘Dear investor,’ wrote chemical business Shanghai Chemspec in one of a dozen similarly worded reassurances from listed groups, ‘the company has not bought any wealth management products from Zhongrong or Zhongzhi.’ Zhongrong, partly owned by investment group Zhongzhi, is one of the biggest players in a $2.9tn shadow financing market, referred to as the trust industry. Doubts over its health have added to mounting concerns about the state of China’s economy, which is struggling to recover after the Covid-19 pandemic. ‘When the crisis was only concentrated around Zhongzhi wealth management companies, the market was not so panicked,’ said Karen Wu, an analyst at CreditSights. With Zhongrong, ‘the crisis has actually accelerated’.”

August 14 – Bloomberg: “China’s banking regulator has set up a task force to examine risks at Zhongzhi Enterprise Group Co., one of the nation’s top private wealth managers, after a unit missed payments on multiple high-yield investment products. The National Financial Regulatory Administration established a working group last month to gauge the outstanding debt and risks at one of the main financing arms of Beijing-based Zhongzhi, which oversees more than 1 trillion yuan ($138bn) of assets…”

August 13 – Financial Times (Thomas Hale and Hudson Lockett): “Shares in Country Garden slumped to a record low on Monday after the Chinese developer suspended trading in at least 10 of its mainland bonds, spurring a wider sell-off in property-linked stocks. The company… missed international bond payments last week in a sign that a two-year liquidity crisis across the real estate sector was threatening to escalate. Shares in the group fell as much as 18.4% in Hong Kong…”

August 14 – Reuters (Clare Jim and Shuyan Wang): “China’s largest private real estate developer Country Garden is seeking to delay payment on a private onshore bond for the first time, the latest sign of a stifling cash crunch in the property sector, piling pressure on Beijing to step in… Once considered a more financially sound developer, Country Garden’s woes could also have a chilling effect on homebuyers and financial firms, with more private developers close to a tipping point if Beijing’s support does not materialise soon.”

August 15 – Bloomberg: “A potential default at developer giant Country Garden… has led to greater skepticism of the efficacy of China’s property policy help. A group of builders that have received assistance in the form of state guarantees on yuan note sales have suffered the most in recent days, after Country Garden’s stumble showed that such aid hasn’t been sufficient to help avoid repayment risks. Chinese authorities unveiled the bond plan a year ago to help select developers raise funds as offshore borrowing costs surged and new-home sales — a key source of cash — slumped. Country Garden was one of the initial participating builders.”

August 14 – Reuters (Roshan Abraham, Susan Mathew and Danilo Masoni): “Turmoil at China’s largest private developer Country Garden could set off a ‘vicious cycle’ of financing stress on the country’s real estate investment trusts (REITs), brokerage J.P. Morgan warned… The brokerage flagged issues at Chinese conglomerate Zhongzhi Enterprise Group… ‘Unlike banks, which have holding power and are able to roll over credit to wait for an eventual resolution, alternative financing channels such as trusts may default once trust investors are unwilling to roll over the products,’ J.P.Morgan analysts led by Katherine Lei said…”

August 16 – Reuters (Clare Jim): “China’s financially beleaguered property developer Country Garden promised ‘five-star living’ to the masses in less popular, smaller cities but focusing on those areas has come back to haunt it. China’s largest developer by sales value before this year, Country Garden’s debt crisis has raised fears that its contagion will spread through the already sputtering economy, the world’s second-largest. Smaller Chinese cities, whose revenues have already been deteriorating, could have a glut of unfinished homes, a social problem Beijing is trying to avoid.”

August 16 – Bloomberg (John Cheng): “The property credit exposure for trust products in China was 1,556 billion yuan ($214bn) as of 1Q23, and estimated losses could reach 278 billion yuan based on 17.8% loss rate, according to… Goldman Sachs. ‘Given the recent bet asset value markdowns and redemptions, we expect growth in trust products to slow, which could result in tighter property financing conditions, and affect banks’ earnings and balance sheets,’ analyst Shuo Yang writes…”

August 17 – Bloomberg (Bruce Grant): “A debt crisis in the Chinese property market is escalating following Country Garden’s missed bond payments last week. About 60% or $116 billion of the outstanding Chinese offshore real estate bonds are labeled as distressed. Dollar bonds extended their slump over the past week, while a measure of liquidity indicates more pain is in store for poorly-capitalized private developers.”

August 15 – Bloomberg: “China home prices dropped for a second month in July, a further sign of the deepening property downturn that’s weighing on the world’s second-largest economy. New-home prices in 70 cities… fell 0.23% last month from June, when they slipped 0.06%, National Bureau of Statistics figures showed… Prices slid 0.47% in the secondary market… Last month’s price decline was widespread, with 49 cities out of the 70 tracked by the government seeing new-home values drop from a month earlier, the most this year.”

August 12 – Wall Street Journal (Cao Li): “After a short-lived sales rebound earlier this year, China’s property market has fallen back into a deep slump, developers are having more cash-flow problems and Chinese authorities are trying more ways to revive housing demand. Potential home buyers are expecting prices to fall and think better deals will emerge if they sit and wait. Real-estate agents in China and economists say home sales are declining again because Chinese citizens have come to expect more property-purchase subsidies from local governments, price cuts from developers and cheaper mortgages from banks… China’s housing market has been in a downward spiral for two years. Last month, the country’s 100 largest property developers sold new homes worth the equivalent of $49 billion—the lowest monthly sum in three years, according to China Real Estate Information, a private industry tracker. The sales were down a third from June and from the same period a year ago. They were also 59% less than the total in July 2021.”

August 17 – Bloomberg (Ailing Tan): “Bonds from at least 83 Chinese companies totaling $80.2 billion face repayment pressure… That involves 354.30 billion yuan worth of notes and $31.78 billion of offshore bonds. At least 23 companies are local government funding vehicles, entailing 186.6 billion yuan worth of local notes and $1.37 billion of offshore bonds…”

August 17 – Bloomberg: “Daily outflows of overseas funds from Chinese stocks tied a record streak amid worsening sentiment on the nation’s economy and the government’s efforts to get it back on track. Foreign investors shed another 1.5 billion yuan ($208 million) worth of equities listed in Shanghai and Shenzhen via the trading link Thursday, in the ninth-straight day of outflows. That ties the longest stretch of net selling since just after Bloomberg began tracking the data in December 2016.”

August 15 – Bloomberg: “China’s abrupt decision to pause releasing data on its soaring youth jobless rate this week was the latest sign the Asian giant is increasingly restricting sensitive information — especially when it’s unflattering to the nation’s faltering economy. The unemployment rate of people aged 16-24 fell into that prickly category, after hitting a record of 21.3% in June. One fifth of young people being out of work is a troubling statistic for a ruling Communist Party obsessed with maintaining social stability.”

August 13 – Financial Times (Emma Boyde): “Huge inflows over the past two weeks to just four exchange traded funds tracking China’s blue-chip CSI 300 index have prompted speculation that Beijing’s ‘national team’ is at work trying to support the economy. Z-Ben, a Shanghai-based consultancy, noted that in just eight trading days the four ETFs had attracted $4.4bn in inflows, bringing their combined assets to more than $25bn and potentially suggesting involvement by the national team — a term coined in 2015 to describe large state-affiliated institutions that intervened to prop up the stock market.”

August 13 – Bloomberg (Bei Hu and Nishant Kumar): “Foreign investors are losing interest in China, and hedge funds that target the world’s second-biggest economy are paying the price. The number of active China-focused hedge funds has slipped for the first time since at least 2012, with only five new funds launched this year as of June, according to… Preqin Ltd. Another 18 funds were liquidated… The contraction marks a major shift for offshore China hedge funds, which accounted for almost half of new funds in Asia as recently as 2021 as investors sought to ride the wave of the once high-flying economy and capital markets…”

August 17 – Bloomberg: “Investors from across China who put money in a troubled shadow bank said police officers visited their homes and urged them to avoid public protests, the latest sign authorities are worried about unrest as fears grow of financial contagion. Dozens of people who invested in Zhongzhi Enterprise Group Co.’s wealth management products have received what they described as cordial visits from police in recent weeks…”

August 14 – Bloomberg: “Chinese state-run media outlets are adding credence to speculation that an executive who helps wealthy families move their money to the US was among those detained last week for illegal currency trading, as President Xi Jinping’s government moves to prevent capital outflows in the face of economic woes. Shanghai police announced Thursday they had detained five people for illegal foreign currency transactions worth some 100 million yuan ($13.8 million), including a woman surnamed He, age 54, who ran an immigration services company.”

Central Banker Watch:

August 17 – Bloomberg (Ott Ummelas and Kari Lundgren): “Norway’s central bank raised borrowing costs to the highest level since the 2008 financial crisis and signaled it still plans another quarter-point hike in the current tightening cycle. Norges Bank lifted its key deposit rate… by 25 bpss to 4%, the 12th increase since September 2021… It said the rate ‘will most likely be raised further in September’…”

Global Bubble Watch:

August 17 – Bloomberg (Garfield Reynolds and Michael Mackenzie): “Global government bond yields extended their climb — with the US 30-year reaching the highest point since 2011 and other benchmarks returning to 2008 levels — as resilient economic data challenges the view that central banks rates are peaking. In early US trading Thursday the 30-year Treasury yield rose as much as seven basis points to 4.42%… The equivalent UK yield jumped to a 15-year high, while its German counterpart approached the highest since 2011.”

August 16 – Bloomberg (Abeer Abu Omar): “Saudi Arabia’s stockpile of US Treasuries fell to the lowest level in more than six years, as the kingdom allocates more of its oil wealth to riskier assets. The Gulf country in June sold more than $3 billion in US government debt, offloading the securities for a third consecutive month to bring its holdings to $108.1 billion… The neighboring United Arab Emirates sold nearly $4 billion. The Arab Gulf region’s petrostates are seeking out new avenues for investing to get higher returns in a world where a backlash is building against the hegemony of the US dollar.”

August 16 – Bloomberg: “Global investors including BlackRock Inc. and Allianz SE may be key stakeholders to watch in Country Garden Holdings Co.’s debt crisis given their recent exposure to the embattled Chinese property developer’s dollar bonds. BlackRock held $358.5 million of Country Garden dollar bonds, according to a filing dated Aug. 14. Allianz’s position was $301 million based on a June 30 filing. That was also when filings from others including Fidelity International Ltd. and HSBC Holdings Plc showed they were holders.”

Japan Watch:

August 15 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Japan’s economy expanded at a much faster clip than forecast, as a surge in exports more than offset weaker-than-expected results for both business investment and private consumption. Gross domestic product grew at an annualized pace of 6% in the second quarter, marking the strongest growth since the last quarter of 2020… The figure exceeded economists’ forecast of 2.9% growth.”

August 17 – Reuters (Tetsushi Kajimoto): “Japan’s exports fell in July for the first time in nearly 2-1/2 years, dragged down by faltering demand for light oil and chip-making equipment, underlining concerns about a global recession as demand in key markets such as China weaken. Japanese exports fell 0.3% in July year-on-year…, compared with a 0.8% decrease expected… It followed a 1.5% rise in the previous month.”

EM Bubble Watch:

August 14 – Bloomberg (Scott Squires, Ignacio Olivera Doll and Giovanna Bellotti Azevedo): “Argentina is hiking interest rates and devaluing its currency as assets went into free fall Monday after a populist who vowed to burn down the central bank won surprisingly strong support in a primary vote. The government rushed to devalue its official exchange rate as much as 18% to around 350 pesos per dollar and hiked its key interest rate by 21 percentage points to 118% in a drastic policy shift as it runs out of funds to defend its currency. The peso fell as much as 14% on parallel markets to a record low before paring losses, while the nation’s already-distressed debt led declines across emerging markets.”

August 17 – Bloomberg (Walter Brandimarte and Manuela Tobias): “Argentina’s presidential frontrunner Javier Milei would freeze relations with China and pull South America’s second-biggest economy out of the Mercosur trade bloc with Brazil, foreign policy proposals that are as radical as his economics. In an interview following his unexpected primary victory…, the outsider candidate has given… the biggest insight yet in how he would conduct Argentina’s affairs on the world stage. ‘People are not free in China, they can’t do what they want and when they do it, they get killed’ he told Bloomberg…, referring to Beijing’s government. ‘Would you trade with an assassin?’”

August 15 – Reuters (Alexander Marrow and Marc Jones): “Russia’s central bank hiked its key interest rate by 350 bps to 12% on Tuesday, an emergency move to try and halt the rouble’s recent slide after a public call from the Kremlin for tighter monetary policy. The extraordinary rate meeting came after the rouble plummeted past the 100 threshold against the dollar on Monday, dragged down by the impact of Western sanctions on Russia’s balance of trade and as military spending soars.”

August 15 – Wall Street Journal (Chao Deng): “Energy-rich countries across the Middle East and North Africa are struggling to keep power flowing to their own citizens during intense summer heat, with Egypt the latest to impose rolling blackouts. The outages here have prompted concerns that Cairo’s domestic gas supply is running low. Iran and Iraq, both oil exporters, are also facing blackouts as blistering temperatures envelop the region… A lack of electricity to run air conditioners, fridges and fans led to small protests on the streets of Baghdad this month. Similarly, in some cities in Iran, where electricity usage hit a record last month, the weight of demand has caused power networks to collapse in recent weeks.”

Leveraged Speculation Watch:

August 16 – Reuters (Carolina Mandl): “Global hedge funds are ‘aggressively’ selling Chinese stocks amid heightened concerns over the country’s property sector and a weak batch of economic data, a Goldman… report showed. All types of stocks were sold, but A-shares, those listed in the domestic stock market, led the sell-off, comprising 60% of it, the bank said. ‘Hedge funds have net sold Chinese stocks in eight of the last ten sessions on the prime book through 8/14,’ it said, adding its clients divested both their long and short positions.”

Social, Political, Environmental, Cybersecurity Instability Watch:

August 14 – Wall Street Journal (Telis Demos): “Hawaii’s deadly wildfires are a tragic illustration of a phenomenon roiling the insurance industry: increasing losses from what were historically considered ‘secondary’ catastrophes. So-called secondary perils are more frequent than primary perils such as hurricanes or earthquakes, and generally less severe individually. But events such as wildfires, major thunderstorms, river floods and landslides have been collectively racking up increasingly sizable insurance losses in recent years… Swiss Re… noted that widespread thunderstorms in the U.S… have accounted for nearly 70% of global insured natural catastrophe losses in the first six months of this year. Wildfires, too, have been significant insurance events in recent years.”

August 14 – Financial Times (Christine Murray in Mexico City and Oliver Telling): “A severe drought in Panama is leading to unusually long delays and tough restrictions along one of the world’s most important trade routes, illustrating the challenge climate change poses to global commerce. High temperatures and one of the driest years on record have led authorities in the Central American country, which is usually one of the world’s wettest, to lower the number of crossings and bar ships with heavy loads from using the Panama Canal.”

Geopolitical Watch:

August 13 – Reuters (Hyonhee Shin and Joyce Lee): “North Korean leader Kim Jong Un has called for an increase in missile production to help secure ‘overwhelming military power’ and be ready for war, state media KCNA said…, as South Korea and the United States gear up for annual military drills. Kim gave the order as he visited key munitions factories that produce tactical missiles, missile launch platforms, armoured vehicles and artillery shells on Friday and Saturday.”

August 15 – The Hill (Brad Dress): “South Korean President Yoon Suk Yeol… called for greater defense and security cooperation with the U.S. ahead of a key summit later this week with President Biden and Japan’s prime minister. In a nationally televised address, Yoon told South Koreans that the threat from North Korea’s ‘communist totalitarian’ state ‘is a reality’ and was persisting against their vision for peace and liberal democracy.”

August 15 – Reuters (Hyonhee Shin): “South Korean President Yoon Suk Yeol said… this week’s summit with the leaders of the United States and Japan will set a new milestone in trilateral cooperation in the face of North Korea’s evolving nuclear and missile threats. In a speech marking the anniversary of his country’s liberation from Japan’s 1910-45 colonial rule, Yoon emphasised a need to step up security cooperation with Washington and Tokyo, through reconnaissance assets and real-time sharing of data on the North’s nuclear weapons and missiles.”

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