July 30, 2021: The King of Carry Trades

July 30, 2021: The King of Carry Trades
Doug Noland Posted on July 31, 2021

The Shanghai Composite sank 4.3% this week – and was down as much at 6.7% at intraday Wednesday lows. The Hang Seng China Financials Index was 5.7% lower intraday Wednesday, before closing the week down 3.8%. The China Financials Index closed Friday down 8.4% y-t-d. Hong Kong’s Hang Seng Index dropped 5% this week (9.3% lower at Wednesday’s low), trading down to the lowest level since November.

Chinese private education, real estate development and technology stocks were hammered on a confluence of central government regulatory actions. While media attention has been focused on the tech and education crackdowns, more far-reaching policy measures are directed at overheated apartment markets.

July 28 – Bloomberg: “After a years-long campaign to tame property prices, China is upping the ante to break a stubborn cycle of gains that’s made homes increasingly unaffordable. In recent days, China jacked up mortgage rates in a major city, vowed to accelerate the development of government subsidized rental housing, and moved to increase scrutiny on everything from financing of developers and newly-listed home prices to title transfers. Echoing Xi Jinping’s famous words that ‘housing is for living in and not for speculation,’ Vice Premier Han Zheng added that the sector shouldn’t be used as a short-term tool to stimulate the economy. The intensified focus on real estate — an industry that was already under the scanner — mirrors broader crackdowns on businesses such as education that are seen as widening social inequities.”

Additionally, from the above Bloomberg article: “Another signal came from the unusually large number of government entities that vowed recently to strengthen measures on everything from project development and home sales, to rental and property management services. Eight policy bodies said in a joint statement that they would step up penalties for misconduct. In the line of fire will be developers that default on debt repayments, delay deliveries on pre-sold homes or elicit negative news or market concerns. Local bureaucrats’ careers are on the line. Officials in cities that lack sufficient regulations and experience rapid price spikes will be held accountable, Zhang Qiguang, an official for the Ministry of Housing and Urban-Rural Development said on July 22.”

Markets were rattled by Beijing’s aggressive policy approach despite increasingly unstable securities markets. There was confusion, and at least a few analysts voiced a newfound worry: perhaps Chinese leadership no longer cares about market reaction. What might this mean for the beloved “national team” repeatedly called upon for the patriotic duty of propping up sinking stock prices? Yet, things clearly go beyond domestic policy measures and market reverberations. Beijing has adopted a new approach generally – and their determination suggests they’re moving forward irrespective of what anyone thinks. They don’t care.

July 28 – Bloomberg (Chang Shu): “For decades, China’s economic and financial policy has followed the logic of international engagement and constraints. In setting monetary policy, the People’s Bank of China took its lead from the Federal Reserve. Seeking capital for growth, major firms aspired to a prestigious U.S. IPO. Friday’s meeting of the Politburo confirms that, going forward, China will attempt to chart a more independent course. The spirit of China’s new catch phrase — ‘set our own agenda’ — pervades the politburo statement, and has far-reaching implications for China’s monetary policy, and engagement with global markets. The emphasis of macro policy autonomy in Friday’s statement is in line with our view that the People’s Bank of China is ready to go separate ways from the Federal Reserve.”

A semblance of normalcy seemed to have returned by late Wednesday. From Bloomberg: “Wednesday’s hastily arranged meeting led by China Securities Regulatory Commission Vice Chairman Fang Xinghai was the latest sign of Beijing’s discomfort with a selloff that sent the nation’s key stock indexes to the brink of a bear market. State-run media have published a series of articles suggesting the rout is overdone, while some analysts have speculated government-linked funds have begun intervening to support the market.”

And from Reuters: “In a front page commentary on Wednesday, the state-owned Securities Times said that systemic risks ‘do not exist in the A-share market overall.’ ‘The macroeconomy is still in a steady rebound stage, and short-term fluctuations do not change the long-term positive outlook for A-shares’…”

Systemic risks might not “exist in the A-share market overall,” yet renminbi volatility Wednesday was beginning to suggest vulnerability for the Chinese currency. The dollar vs. renminbi abruptly spiked to 6.51, the high since April 19th. Meanwhile, China sovereign CDS surged three points to trade to the highest level (41.5) since April, this after beginning 2021 at 29 bps.

July 27 – Bloomberg (Jeanny Yu and Livia Yap): “A deepening selloff in Chinese stocks spread to the bond and currency markets on Tuesday as unverified rumors swirled that U.S. funds are offloading China and Hong Kong assets. The speculation… triggered a late afternoon bout of selling by traders in Asia who had already been dumping stocks in the crosshairs of Beijing’s sweeping regulatory crackdowns. The Hang Seng Tech Index plunged as much as 10% in Hong Kong, the yuan slid to its weakest since April against the dollar and Chinese bonds sank. The dramatic moves underscored how fragile investor confidence has become after a months-long regulatory onslaught by Beijing that only seems to be getting worse.”

The PBOC was ready to do its part to calm the situation, injecting extra liquidity ($4.6bn) into the system early Thursday. The Shanghai Composite rallied 1.5% in Thursday trading, with the growth stock ChiNext Index up 5.3% and the Hang Seng Tech Index surging 8%. The renminbi rallied, closing the week up 0.31% versus the dollar to 6.46.

While the renminbi and Chinese equities mustered a late-week rally, the same cannot be said for key bond prices. Behemoth developer Evergrande’s bond (8 ¾ 2025) price sank nine points to a record low 44.7. Yields surged 700 bps this week to 36.33%, with a two-week gain of almost 1,400 bps. Evergrande yields ended May just below 14%.

An index of Chinese high-yield bonds surged 220 bps to 12.79%, up 310 bps in two weeks to the high since March 2020. This index yielded 8.20% at the end of May. Developer offshore bonds were under heavy liquidation. Easy Tactic bond yields spiked 1,300 bps to 28.9%, and Kaisa Group yields surged almost 500 bps this week to 19.6%.

Troubled “asset management company” Huarong’s CDS jumped 50 bps, ending the week at a two-month high 1,177. Huarong CDS closed March at 149 bps. Huarong bonds (5.5% 2025) dropped almost 6 points this week to 73.4, with yields surging 156 bps to 15.79%.

The week was notable for Chinese contagion gaining momentum. Yields for the Bloomberg Barclays Asia USD High Yield Bond Index surged over 100 bps this week, surpassing 9% for the first time since March 2020. Yields have jumped 150 bps in two weeks, after trading at 6.65% in late-May.

July 27 – Bloomberg (Ameya Karve): “Pain from regulatory crackdowns in China is starting to spread to some of the safest corners of Asian credit, adding to mounting signs of fallout across the region’s financial markets. Yield premiums on Asian dollar bonds rose as much as 3 bps Tuesday, traders said. That leaves them set for the biggest expansion in over 3 months and for a third straight day of widening, according to a Bloomberg Barclays index. The moves mark a shift after such higher-rated securities had been doing better recently, even as junk bonds in the region felt the pinch from rising concerns about Chinese defaults. Prices on some Asian high-yield dollar bonds also fell Tuesday, extending losses after recently hitting their lowest levels in almost nine months.”

“Pain… in China is starting to spread to some of the safest corners of Asian Credit…” Now that’s a development that should pique interest. Prior to this week, heightened Credit stress was mainly contained within China’s high-yield sector – and for the most part isolated to offshore bond issues. But trouble at China’s “periphery” has broken loose – with (de-risking/deleveraging) contagion negatively impacting perceived safer Chinese and Asian Credit. This week witnessed an important escalation of mounting global market instability.

Faith in Beijing took a hit this week. Chinese officials have an agenda, and they clearly don’t care as much about global markets – including their offshore bond market – as market participants have wanted to believe. But there remains the view that Beijing will ensure adequate system Credit growth and ample liquidity. Yet the policy backdrop has clearly become more uncertain and the market environment increasingly hostile. The levered players have to rein in risk.

It’s central to my thesis that China has been a hotbed of “hot money” inflows. In an era of unprecedented global leveraged speculation, I believe China evolved into the King of Levered Carry Trades. How could the enterprising global leveraged speculating community not have gravitated to China’s enticing yields, especially with a currency essentially pegged to the U.S. dollar. Better yet, China’s major developers and “AMCs” offered high yields coupled with implicit Beijing backing. Resulting market distortions and excess dwarf even those from the U.S. mortgage finance Bubble period.

I believe Beijing today recognizes the Bubble got completely away from them. They clearly failed to learn the lessons from their study of the Japanese Bubble fiasco. And it is today worth remembering that the Japanese government belatedly moved to rein in Bubble excess in response to increasingly deleterious impacts to equality and social stability. While they recognized Bubble risk, they were blind to the degree of financial and economic fragility that had accumulated over the cycle.

President Xi and his communist central committee surely recognize the enormous risk to social stability posed by ongoing Bubble excess. Is there any country in the world experiencing a more inequitable distribution of wealth than China?

“Houses are built to be lived in, not for speculation.” Difficult for me to believe President Xi has a more favorable view of bond market speculation – a dynamic key to funding fiascos at Huarong, Evergrande and so many others (companies and local governments).

If I had to venture a guess, I would say Xi and friends have had about enough of the current global financial structure. Seeing trouble on the horizon, they’re going to attempt to get their house in order. Beijing is coming down hard on speculation – in stocks, apartments and bonds. They’ll assume state-directed bank lending and deficit spending can ensure adequate Credit growth to meet growth objectives. But if they recognized the degree of underlying fragility, they would have moved years earlier.

I heard this week analysis that Chinese reform efforts are a positive development, ensuring long-term growth and stability. I recall similar commentary regarding the tightening of U.S. subprime mortgage Credit back in late-2007. Arguably long-term constructive, but not before unwieldy end-of-cycle excess followed shortly by a collapsing Bubble.

July 30 – Bloomberg (Rebecca Choong Wilkins): “China’s riskier dollar bonds once beloved by global investors for their juicy yields are now dragging down returns. Single B rated notes have lost 17.5% this year, spurring a 7.3% retreat among the broader universe of junk debt… Fresh property curbs and China Evergrande Group’s cash woes have this week pressured some newly issued developer bonds, which dominate the region’s junk debt. ‘This fragile sentiment toward property HY would likely persist in the near term,’ according to a note from ICBC International analysts led by Angus To.”

How gigantic is the Chinese levered “Carry Trade”? How much “hot money” has flooded into Chinese stocks and bonds over recent years? China has provided the marginal source of global Credit. I suspect leveraged speculation in Chinese bonds has been integral to global liquidity excess. This week was important. Collapsing bond prices for a group of companies with over $1 TN in combined liabilities. Chinese high-yield bonds trading as if almost the entire sector was going bust. Renminbi vulnerability revealed. Contagion jumping to Asia and EM more generally. Confirmation that China’s Bubble has been pierced, with dire ramifications for Bubbles across the globe.

July 28 – Bloomberg (Ye Xie and Christopher Anstey): “You’re in good company if you can’t figure out why U.S. Treasury yields are tumbling. Jerome Powell isn’t sure either. Bonds have relentlessly rallied for months, even as inflation spikes to 13-year highs. Textbooks and Wall Street lore say yields should be jumping instead of diving in the face of that. The Federal Reserve chairman weighed in on the puzzle when asked about it Wednesday. ‘We’ve seen long-term yields come down significantly,’ Powell said at a press conference… ‘I don’t think that there’s a real consensus on what explains the moves between the last meeting and this meeting.’”

I relate to Rob in the Workday commercial, who repeatedly yells “Workday” during a Zoom call when his coworkers are trying to explain why they’re losing business to a competitor. Why have Treasury and global bond yields been collapsing in the face of surging inflation? The faltering Chinese Bubble. The Faltering Chinese Bubble! Fragile global Bubbles!!! “Hey Doug, you’re on mute.”

The Fed missed another opportunity this week to get the process started. Treasuries (10-yr yields down 5 bps this week to 1.22%) are essentially signaling it’s over before things even get started. Powell’s post-meeting press conference was considered dovish and (like Chinese policymaking) confusing. The Fed’s in a real pickle here. Powell is struggling to justify ongoing historic monetary inflation in the face of the most intense inflationary shock in decades. Our Fed Chair has the Republicans breathing down his neck, along with an increasingly divided (and vocal) FOMC. Public confidence is in the greatest jeopardy since the seventies. It’s an especially precarious position, especially considering the unfolding global backdrop.

For the Week:

The S&P500 declined 0.4% (up 17.0% y-t-d), and the Dow slipped 0.4% (up 14.1%). The Utilities added 0.4% (up 4.9%). The Banks gained 0.8% (up 24.7%), and the Broker/Dealers rose 1.0% (up 22.5%). The Transports dropped 2.0% (up 15.6%). The S&P 400 Midcaps jumped 1.2% (up 17.2%), and the small cap Russell 2000 gained 0.8% (up 12.8%). The Nasdaq100 fell 1.0% (up 16.1%). The Semiconductors rose 2.3% (up 20.1%). The Biotechs were little changed (up 0.1%). With bullion gaining $12, the HUI gold index rallied 5.7% (down 8.7%).

Three-month Treasury bill rates ended the week at 0.04%. Two-year government yields slipped a basis point to 0.19% (up 6bps y-t-d). Five-year T-note yields dipped two bps to 0.69% (up 33bps). Ten-year Treasury yields fell five bps to 1.22% (up 31bps). Long bond yields declined two bps to 1.89% (up 25bps). Benchmark Fannie Mae MBS yields dropped five bps to 1.68% (up 33bps).

Greek 10-year yields fell five bps to 0.60% (down 2bps y-t-d). Ten-year Portuguese yields slipped two bps to 0.17% (up 14bps). Italian 10-year yields were unchanged at 0.62% (up 8bps). Spain’s 10-year yields were unchanged at 0.27% (up 22bps). German bund yields fell four bps to negative 0.46% (up 11bps). French yields declined two bps to negative 0.11% (up 23bps). The French to German 10-year bond spread widened two to 35 bps. U.K. 10-year gilt yields dipped two bps to 0.57% (up 37bps). U.K.’s FTSE equities index was little changed (up 8.9% y-t-d).

Japan’s Nikkei Equities Index fell 1.0% (down 0.6% y-t-d). Japanese 10-year “JGB” yields were unchanged at 0.02% (unchanged y-t-d). France’s CAC40 added 0.7% (up 19.1%). The German DAX equities index fell 0.8% (up 13.3%). Spain’s IBEX 35 equities index dipped 0.5% (up 7.5%). Italy’s FTSE MIB index gained 0.9% (up 14.1%). EM equities were mixed. Brazil’s Bovespa index dropped 2.6% (up 2.3%), while Mexico’s Bolsa gained 1.2% (up 15.4%). South Korea’s Kospi index lost 1.6% (up 11.4%). India’s Sensex equities index dipped 0.7% (up 10.1%). China’s Shanghai Exchange sank 4.3% (down 2.2%). Turkey’s Borsa Istanbul National 100 index jumped 3.1% (down 5.7%). Russia’s MICEX equities index rallied 1.0% (up 14.7%).

Investment-grade bond funds saw inflows of $294 million, and junk bond funds posted positive flows of $996 million (from Lipper).

Federal Reserve Credit last week expanded $25.2bn to a record $8.199 TN. Over the past 98 weeks, Fed Credit expanded $4.473 TN, or 120%. Fed Credit inflated $5.389 Trillion, or 192%, over the past 455 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.1bn to a six-month low $3.514 TN. “Custody holdings” were up $107bn, or 3.1%, y-o-y.

Total money market fund assets rose $14.9bn to $4.502 TN. Total money funds declined $68bn y-o-y, or 1.5%.

Total Commercial Paper increased $6.6bn to $1.139 TN. CP was up $120bn, or 11.7%, year-over-year.

Freddie Mac 30-year fixed mortgage rates increased two bps to 2.80% (down 19bps y-o-y). Fifteen-year rates dipped two bps to 2.10% (down 41bps). Five-year hybrid ARM rates fell four bps to 2.45% (down 49bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down a basis point to 3.02% (down 10bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.8% to 92.17 (up 2.5% y-t-d). For the week on the upside, the South African rand increased 1.7%, the Swiss franc 1.5%, the Swedish krona 1.1%, the British pound 1.1%, the Mexican peso 1.0%, the euro 0.8%, the Japanese yen 0.8%, the Canadian dollar 0.7%, the Norwegian krone 0.6%, the Singapore dollar 0.5%, and the South Korean won 0.1%. On the downside, the Australian dollar declined 0.3% and the Brazilian real dipped 0.2%. The Chinese renminbi increased 0.31% versus the dollar in a volatile week of trading (up 1.02% y-t-d).

Commodities Watch:

July 29 – Bloomberg (Kim Chipman): “Sun-baked U.S. spring wheat fields have been so badly hurt by drought this year that some farmers are expecting to harvest what they’re dubbing a ‘half a crop…’ All told, the harsh conditions will send yields for spring wheat in the state plunging to 29.1 bushels an acre this year, according to… estimates following the Wheat Quality Council’s crop tour. While that’s slightly higher than the most-recent estimate from the U.S. Department of Agriculture, it would still mean a drop of 41% from last year’s harvest.”

The Bloomberg Commodities Index added 0.6% (up 23.3% y-t-d). Spot Gold rose 0.7% to $1,814 (down 4.4%). Silver recovered 1.9% to $25.49 (down 3.5%). WTI crude rallied $1.88 to $73.95 (up 52%). Gasoline rose 1.9% (up 66%), while Natural Gas dropped 3.6% (up 54%). Copper gained 1.9% (up 27%). Wheat jumped 2.9% (up 10%). Corn added 0.4% (up 13%). Bitcoin rallied $7,799 this week to $41,584 (up 43%).

Coronavirus Watch:

July 26 – Bloomberg (Julie Steenhuysen, Alistair Smout and Ari Rabinovitch): “The Delta variant is the fastest, fittest and most formidable version of the coronavirus that causes COVID-19 the world has encountered, and it is upending assumptions about the disease even as nations loosen restrictions and open their economies, according to virologists and epidemiologists. Vaccine protection remains very strong against severe disease and hospitalizations caused by any version of the coronavirus, and those most at risk are still the unvaccinated, according to interviews with 10 leading COVID-19 experts. But evidence is mounting that the Delta variant, first identified in India, is capable of infecting fully vaccinated people at a greater rate than previous versions, and concerns have been raised that they may even spread the virus, these experts said.”

July 26 – Reuters: “Antibodies triggered by Sinovac Biotech’s COVID-19 vaccine declined below a key threshold from around six months after a second dose for most recipients, but a third shot had a strong booster effect, a lab study showed. Chinese researchers reported the findings from a study of blood samples from healthy adults aged between 18-59 in a paper… Among participants who received two doses… only 16.9% and 35.2% respectively still had neutralising antibodies above what researchers regard as a detectable threshold level six months after the second shot…”

July 28 – Wall Street Journal (Sumathi Reddy): “The Delta variant of the virus that causes Covid-19 is often described as highly transmissible. So, what does that actually mean? Scientists studying Covid-19 say that Delta’s increased contagiousness means we need to update our thinking about exposure risks. Because people infected with Delta carry higher levels of virus than with earlier strains, the old rules of thumb no longer apply, they say—including the conventional wisdom that it takes 15 minutes of close contact with someone to get infected. Delta has already changed public-health advice about masking. The Centers for Disease Control and Prevention on Tuesday recommended that vaccinated people resume masking indoors in certain parts of the country. And local officials have begun to reinstate mask mandates, including in Los Angeles County and St. Louis County.”

July 28 – Bloomberg (Anna Edney): “The beginning of the school year is imminent, and superintendents around the country aren’t sweating bus schedules and bell times but Covid-19 vaccination rates and mask rules as the pandemic threatens to disrupt K-12 education for the third year running. School leaders face complex pressures with millions of students preparing to return. The spreading delta strain of the coronavirus is highly contagious, though it still appears that children typically fare better with the virus than their elders do. But they may bring deadly infections home.”

July 26 – Wall Street Journal (Joseph Walker): “Nearly a year and a half into the pandemic, researchers are still struggling to find effective, easy-to-use drugs to treat Covid-19. Ten drugs have been cleared or recommended in the U.S. for use. Two of those later had their authorizations rescinded after they failed to work. The government recently paused shipments of a third because it wasn’t effective against new variants. The best medicines for early treatment are cumbersome to administer, and drugs for those in the hospital can only do so much for patients who are already severely ill. ‘We’re really limited, to be honest,’ says Daniel Griffin, chief of infectious disease at healthcare provider network ProHealth New York. ‘We do not have any dramatic treatments.’”

Market Mania Watch:

July 24 – Financial Times (Ortenca Aliaj): “There was a sense of reality starting to bite when financiers behind one of the great booms in markets in recent years gathered last month for the annual investor conference of the Wall Street charity Robin Hood Foundation. Robin Hood chose as its headline guest Jay-Z, the rapper whose songs include Can’t Knock the Hustle. But some at a conference panel on so-called special purpose acquisition vehicles seemed ready to acknowledge the game has changed. For more than a year now, Spacs have been on a tear. The blank cheque companies raised some $180bn in the year to July, according to Refinitiv data, and became a driving force in two crucial segments of the market — initial public offerings and mergers and acquisitions.”

Market Instability Watch:

July 27 – Bloomberg (Marcus Ashworth): “Forget your plans for a quiet, relaxing summer. The stock markets of the world’s second largest economy are tumbling; and when Chinese equities turn bearish, it can be brutal. At one point during Hong Kong trading day on Wednesday, the Hang Seng Index fell close to 20% below its February peak. This is unlikely to be a localized event. The big fear is a rerun of China’s stock market rout of summer 2015 which saw a 45% selloff. There were further major selloffs in early 2016 and 2018. The knock-on effect for emerging markets then saw average credit spreads rise by a quarter and the MSCI emerging markets equity ETF fall by over 25% in the second half of 2015 into early 2016. China’s latest stumble could lead to skinned knees around the world.”

July 27 – Reuters (Andrew Galbraith): “A Chinese state-owned securities newspaper urged calm on Wednesday after investors dumped mainland shares for a second day on worries over the impact of tighter government regulations. Regulatory moves aimed at the education, property and technology sectors sparked heavy selling this week in Chinese markets, and have left global investors bruised and uncertain over the outlook for investments… In a front page commentary on Wednesday, the state-owned Securities Times said that systemic risks ‘do not exist in the A-share market overall.’ ‘The macroeconomy is still in a steady rebound stage, and short-term fluctuations do not change the long-term positive outlook for A-shares,’ the commentary said.”

July 28 – Bloomberg (Caleb Mutua): “Increasing credit stress in China stemming from a government crackdown on a range of industries could spread to U.S. investors’ credit portfolios. Global high-yield fund managers suffering losses in their Asia credit portfolios could look to lower risk across their holdings, or to sell more liquid, high-performing bonds such as U.S. speculative-grade notes to meet redemptions, according to UBS Group AG head of credit strategy Matthew Mish. That selling pressure could weigh on valuations for the securities that are at record highs. ‘Managers may choose to reduce risk preemptively or if there’s less liquidity in Asia credit,’ Mish said… ‘They may also sell in part because regional valuation differences are extreme.’”

July 26 – Bloomberg (James Hirai and William Shaw): “The real yield on 10-year Treasuries fell to a record low as concerns mounted over the outlook for economic growth even as investor flows fueled appetite for inflation-linked debt. The real rate, which strips out the expected impact of inflation over the next decade, fell as much as six bps to minus 1.13%.”

July 28 – Bloomberg (Christopher Condon and Liz Capo McCormick): “A panel of former top global economic policy makers… warned that major trading disruptions in U.S. Treasuries are likely to increase unless reforms are made, adding to pressure on American regulators to fix structural issues that contributed to last year’s market meltdown. ‘Confidence in the U.S. Treasury market, and its ability to function efficiently even in times of stress, is critical to the stability of the global financial system,’ former Treasury Secretary Timothy Geithner, who led a blue-ribbon panel reviewing trading in U.S. government securities, said… ‘Episodes of market dysfunction are not only likely to continue but to occur with increasing frequency’ unless market-making capacity for Treasuries trading is increased or the U.S. halts the rapid build-up of its debt outstanding, the group said.”

July 26 – Financial Times (Shubham Saharan and Eric Platt): “Traders have dramatically scaled back their expectations for how much the Federal Reserve will increase interest rates in the years ahead… Prices of eurodollar futures, which are used by traders to bet on the direction of interest rates in the months ahead, have rallied sharply over the past three months in a sign of changing views. As those prices have risen, the rates on eurodollar futures… have fallen. The price action indicates that traders believe US rates will rise much less than they did in April or May…”

July 27 – Reuters (Karin Strohecker): “China’s equity markets suffered outflows of $600 million on Tuesday after bleeding $2 billion on Monday… ‘These are very weak figures compared to the first half of 2021, when monthly inflows averaged $5.8 billion,’ said Jonathan Fortun Vargas, economist at the IIF. ‘This is likely due to Beijing’s regulatory actions in the past week.’”

Inflation Watch:

July 29 – Wall Street Journal (Nick Kostov): “The makers of some of the world’s bestselling food and drink brands warned they would need to keep raising prices as they grapple with the strongest inflation in years. Nestlé SA, Diageo PLC, Anheuser-Busch InBev SA and Danone SA all said Thursday that sales were rising as key markets rebound from the pandemic, but that the recovery was also leading to rapidly increasing costs for ingredients, packaging and transport. Nestlé said its ice creams had gotten more expensive, spirits giant Diageo has raised prices on brands like Baileys and Casamigos tequila, and Budweiser brewer AB InBev is exploring higher prices for its beers. Meanwhile, Danone, which makes Activia yogurt and Evian water, said it would increase prices across all of its categories to try preserve its profitability.”

July 29 – Bloomberg (Corinne Gretler and Thomas Buckley): “The world’s biggest makers of coffee, beer, whiskey and yogurt all warned of higher costs, clouding their outlook even as sales bounce back faster than expected from the pandemic. Rising prices for raw materials ranging from oil and aluminum to corn and the agave used to make tequila are squeezing profit margins for consumer goods producers, who are so far struggling to pass those costs on to shoppers. ‘What we’ve seen this year is some kind of a turning point, where after several years of low inflation, all of a sudden it accelerated very strongly,’ said Mark Schneider, chief executive officer of Nestle SA.”

July 30 – Wall Street Journal (Sharon Terlep): “Procter & Gamble Co. gave a somber outlook for the year ahead, predicting slower sales and historically high costs for raw materials and transportation as inflation picks up and the global health crisis continues.”

July 27 – CNBC (Silvia Amaro): “The International Monetary Fund warned… there’s a risk inflation will prove to be more than just transitory, pushing central banks to take pre-emptive action. The issue is currently dividing the investment community, which has been busy contemplating whether a recent surge in consumer prices is here to stay. In the U.S., the consumer price index came in at 5.4% in June — the fastest pace in almost 13 years… For the most part, the… institution sees these price pressures as transitory. ‘Inflation is expected to return to its pre-pandemic ranges in most countries in 2022,’ the Fund said in its latest World Economic Outlook update…”

July 26 – CNBC (Weizhen Tan): “The floods in China and Europe are yet ‘another body blow’ for global supply chains, the CEO of a shipping firm told CNBC… ‘Rarely does a week go past without something new,’ says Tim Huxley, CEO of Mandarin Shipping. Shipping has already seen massive disruptions this year. As parts of the world rebounded from the pandemic, increased spending led to a shortfall of containers, creating delays and driving up prices. Then in April, one of the world’s largest container ships became wedged in the Suez Canal, halting traffic for nearly a week. The waterway is one of the busiest in the world, with about 12% of trade passing through it.”

July 27 – Reuters (Alwyn Scott): “Global commercial insurance prices rose 15% in the second quarter of 2021, but marked their third consecutive quarter of slower increases, insurance broker Marsh & McLennan Companies Inc said… The 15% increase in the quarter through June 30 follows an 18% rise in the first quarter of 2021, and a 22% rise in the fourth quarter of 2020, Marsh said. Prices have been rising since late 2017.”

July 28 – Bloomberg (Mark Burton and Jack Farchy): “Aluminum is heading for a seismic shift as a long-running supply glut starts to fade, setting the stage for shortages and a price rally that could run for years. Demand is set to surge on the back of climate-change investment, and mega-producer China — which accounts for more than half of global output — is cracking down on smelting to reduce pollution and meet green targets. Those combined forces mean the oversupply that’s dominated the market for more than a decade is on the way out, leaving buyers bracing for a new era of scarcity and higher costs.”

Biden Administration Watch:

July 28 – CNBC (Jacob Pramuk): “The Senate voted Wednesday to advance a bipartisan infrastructure plan, a critical step toward Democrats passing their sweeping economic agenda. Senators voted 67-32 to push the bill forward; 17 Republicans and all 50 Democrats voted yes. The vote opens the process to debate and amend the proposal, which would put $550 billion into transportation, broadband and utilities. While senators who backed the procedural motion could oppose a final package, Wednesday’s vote bodes well for its chances of passage.”

July 24 – New York Times (Jim Tankersley and Cecilia Kang): “President Biden has assembled the most aggressive antitrust team in decades, stacking his administration with three legal crusaders as it prepares to take on corporate consolidation and market power with efforts that could include blocking mergers and breaking up big companies. Mr. Biden’s decision this past week to name Jonathan Kanter to lead the Justice Department’s antitrust division is the latest sign of his willingness to clash with corporate America to promote more competition in the tech industry and across the economy. Mr. Kanter has spent years as a lawyer fighting behemoths like Facebook and Google on behalf of rival companies.”

July 25 – Bloomberg (Nancy Cook): “The White House is shifting the way it talks about inflation, as polls show increasing voter concern and Republicans try to use rising prices to kill off President Joe Biden’s sweeping plans to spend trillions of dollars on social programs and infrastructure projects. Out: wonky words like ‘transitory’ and complicated statistical explanations for price indicators. In: plain-language explanations from the president himself, who sought in remarks last week to acknowledge ordinary Americans’ jitters about higher costs — for items ranging from housing, food and gas to lumber and used cars — while reassuring them that the increases will fade in time.”

Federal Reserve Watch:

July 28 – Reuters (David Randall and Gertrude Chavez-Dreyfuss): “Investors looking for clear guidelines on when the Federal Reserve will begin tapering its massive bond purchases were left waiting Wednesday, with all eyes next on the annual Jackson Hole conference of central bankers in August. The central bank has been buying $120 billion in fixed income assets per month – $80 billion in Treasuries and $40 billion in mortgage-backed securities – to support the economy as it recovers from the impact of the coronavirus pandemic, and markets have been fixated on when the Fed will start tapering. Powell said in June that there had been initial discussions about when to pull back.”

July 28 – Bloomberg (Catarina Saraiva and Rich Miller): “Federal Reserve officials are moving closer to when they can start reducing massive support for the U.S. economy, though Chair Jerome Powell said there was still some way to go. ‘We’re not there. And we see ourselves as having some ground to cover to get there,’ he told a press conference Wednesday after the Federal Open Market Committee held interest rates in a range near zero and maintained asset purchases at $120 billion a month until ‘substantial further progress’ was made on employment and inflation.”

U.S. Bubble Watch:

July 28 – Reuters (Lucia Mutikani): “The U.S. trade deficit in goods increased in June as imports continued to rise amid strong economic activity, suggesting trade likely remained a drag on growth in the second quarter. The U.S. economy has rebounded more quickly from the pandemic compared to its global rivals, thanks to massive fiscal stimulus, low interest rates and vaccinations against COVID-19… ‘The widening in the advance nominal goods deficit in June is further evidence that net exports will be a drag on second- quarter GDP,’ said Ryan Sweet, a senior economist at Moody’s Analytics… The goods trade deficit increased 3.5% to $91.2 billion last month… Imports of goods advanced 1.5% to $236.7 billion.”

July 30 – CNBC (Jeff Cox): “An inflation indicator that the Federal Reserve uses as its key guide rose 3.5% in June, a sharp acceleration that was nonetheless right around Wall Street expectations… The personal consumption expenditures price index, which excludes food and energy, was expected to increase 3.6% at a time when the U.S. economy has seen its highest inflation pressures in more than a decade. That gain was slightly ahead of the 3.4% May increase and represents the biggest move since July 1991.”

July 29 – CNBC (Jeff Cox): “The U.S. economy rose at a disappointing rate in the second quarter in a sign that the U.S. has escaped the shackles of the Covid-19 pandemic but still has more work to do… Gross domestic product, a measure of all goods and services produced during the April-to-June period, accelerated 6.4% on an annualized basis. That was slightly better than the 6.3% gain in the first quarter, which was revised down slightly. While that would have been strong prior to the pandemic, the gain was considerably less than the 8.4% Dow Jones estimate.”

July 27 – Reuters (Lucia Mutikani): “U.S. consumer confidence inched up to a 17-month high in July, with households’ spending plans rising even as concerns about higher inflation lingered, suggesting the economy maintained its strong growth clip early in the third quarter… The Conference Board said its consumer confidence index ticked up to a reading of 129.1 this month, the highest level since February 2020, from 128.9 in June. Economists polled by Reuters had forecast the index would fall to 123.9. Consumers’ inflation expectations over the next 12 months dipped to 6.6% from 6.7% last month.”

July 25 – Financial Times (Joshua Franklin and Imani Moise): “The lending businesses of large US banks are doubling down on wealthier customers, as well-to-do Americans borrow to buy second homes, invest in the stock market and potentially lighten their tax bills. The combined value of loans made by the wealth management arms of JPMorgan…, Bank of America, Citigroup and Morgan Stanley surpassed $600bn in the second quarter, up 17.5% from a year earlier. This represented 22.5% of the banks’ total loan books, up from 16.3% in mid-2017. Banks are comfortable making these loans because they have a record of very low losses… Market turmoil during the early stages of the Covid-19 pandemic last year prompted wealth managers to ask customers to pledge extra collateral.”

July 25 – Politico (Kellie Mejdrich): “New financial services built on cryptocurrency are offering consumers the ability to borrow and trade billions of dollars without the oversight of bankers or their regulators. Washington is now scrambling to catch up, amid concerns of illegal activity and mounting consumer risks. Decentralized finance, or DeFi, operates on technology that powers digital currencies like Bitcoin and Ether. The services replicate the functions of traditional lenders and exchanges but operate autonomously and automatically across computer networks. Regulators across the country are now working to get their arms around DeFi, including the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve and the Office of the Comptroller of the Currency. Watchdogs are warning that some DeFi activities are probably illegal under federal law and pose serious danger to consumers…”

July 27 – CNBC (Diana Olick): “Home prices continue to break records, as strong demand slams up against weak supply. Nationally, home prices were 16.6% higher than in May 2020, the highest reading in the S&P CoreLogic Case-Shiller report’s 30-plus years… The 10-city composite annual increase was 16.4% in May versus 14.5% in April. The 20-city composite gained 17% year over year… All 20 cities reported higher price increases in the year ending May 2021 versus the year ending April 2021. Phoenix, San Diego and Seattle reported the highest year-over-year gains among the 20 cities in May. Phoenix led the way with a 25.9% year-over-year price increase, followed by San Diego with a 24.7% increase and Seattle with a 23.4% increase.”

July 27 – Wall Street Journal (Nicole Friedman): “Home-price growth climbed to a new record in May… The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 16.6% in the year that ended in May, up from a 14.8% annual rate the prior month. May marked the highest annual rate of price growth since the index began in 1987.”

July 26 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes tumbled to a 14-month low in June and sales in the prior month were weaker than initially estimated, the latest signs that expensive lumber and shortages of other building materials were hurting the housing market… Higher production costs are forcing builders to scale back, keeping supply tight and boosting home prices to the detriment of first-time buyers. ‘Home builders continue to hold back on contracts for new homes given input cost and availability uncertainties, with significant uncertainty about what it will cost to build a house and when it can be delivered,’ said David Berson, chief economist at Nationwide… ‘Until builder costs and supply-chain problems become less of an impediment, it is hard to see new sales picking up significantly in the near term.’”

July 28 – CNBC (Diana Olick): “The popular 30-year fixed mortgage rate fell back to the lowest level since February last week, and the 15-year fixed set a record low. That sent borrowers to their lenders, looking to save money on their monthly payments. Applications to refinance a home loan jumped 9% last week from the previous week… The refinance share of mortgage activity increased to 67.2% of total applications from 64.9% the previous week.”

July 26 – Wall Street Journal (Nicole Friedman and Sami Sparber): “Foreign purchases of U.S. homes declined for a fourth straight year as the Covid-19 pandemic sharply limited international travel. Foreigners bought $54.4 billion in U.S. residential real estate in the year ended in March, down 27% from the prior year, according to… the National Association of Realtors. That is the lowest level on record since NAR began collecting the data in 2011… Foreign investment in U.S. residential real estate peaked in the year ended March 2017 at $153 billion…”

July 25 – Wall Street Journal (Nicole Friedman): “Once a poster child for the foreclosure crisis, Phoenix’s housing market is booming again, boosted by robust population growth and relative affordability. Phoenix was a hot market before the pandemic, and it has been a major beneficiary of new remote-work policies… Even as home prices in Phoenix soar, housing in the area is still cheap compared with many other big cities in the West. The Phoenix-area median existing-home price was $399,900 in June, up 31.1% from a year earlier…”

July 27 – Associated Press (Christopher Rugaber): “The signs and banners are dotted along suburban commercial strips and hanging in shop windows and restaurants, evidence of a new desperation among America’s service-industry employers: ‘Now Hiring, $15 an hour.’ It is hardly the official federal minimum wage — at $7.25, that level hasn’t been raised since 2009 — but for many lower-skilled workers, $15 an hour has increasingly become a reality. Businesses, particularly in the restaurant, retail and travel industries, have been offering a $15 wage to try to fill enough jobs to meet surging demand… And many of the unemployed, buoyed by stimulus checks and expanded jobless aid, feel able to hold out for higher pay. The change since the pandemic has been swift.”

July 30 – Bloomberg (Max Reyes): “You’re shopping online, about to hit the checkout button, when something catches your eye. It’s an intriguing offer. Instead of buying your item the old-fashioned way with your credit or debit card, you can pay for it in an even more old-fashioned way, familiar to anyone who shopped at department stores before plastic became ubiquitous: on an installment plan. ‘Buy now, pay later’ programs are growing fast, both on e-commerce sites and at physical retail checkout counters in the U.S. Stores generally offer the programs through third-party financial technology companies including Affirm, Afterpay, and Klarna.”

Fixed-Income Bubble Watch:

July 29 – Financial Times (Ortenca Aliaj and Eric Platt in New York, and Anna Nicolaou): “Blank-cheque companies are turning to expensive sources of financing to push their deals over the line in a fresh sign of stress in what had been one of the hottest corners of Wall Street. Several companies that recently announced plans to go public by merging with a special purpose acquisition company, or Spac, have recently raised cash to fund the deals by issuing convertible bonds… Spacs are shell companies that raise money by listing on the stock market before hunting for a target to merge with, but they typically require more capital to fund the stake being acquired. The target companies have tended to raise that extra cash from institutional investors who write big equity cheques via a mechanism known as Pipe financing.”

China Watch:

July 29 – Wall Street Journal (Keith Zhai and Quentin Webb): “China moved to ease investor concerns about crackdowns on listed companies, with a top regulator privately telling global financial firms that Beijing will consider the market impact before introducing future policies… Fang Xinghai, vice chairman of the China Securities Regulatory Commission, spoke to representatives of global banks including Goldman Sachs… and UBS Group AG, as well as some investment firms on Wednesday evening… Yi Huiman, the securities regulator’s chairman, was also present at the closed-door meeting in Beijing, they added. After the meeting, and following a series of upbeat articles in state media, Chinese technology stocks listed in New York and Hong Kong jumped, helping pull broader markets higher and clawing back some of their recent steep declines.”

July 28 – Bloomberg: “China’s central bank broke out of its usual pattern of daily liquidity operations, as it boosted a cash injection into the financial system, soothing market nerves frayed by regulatory crackdowns. The People’s Bank of China added 30 billion yuan ($4.6 billion) of liquidity into the financial system with seven-day reverse repurchase agreements…”

July 28 – Bloomberg: “China’s securities regulator convened executives of major investment banks on Wednesday night, attempting to ease market fears about Beijing’s crackdown on the private education industry. The hastily arranged call, which included attendees from several major international banks… was led by China Securities Regulatory Commission Vice Chairman Fang Xinghai, people familiar with the matter said… Some bankers left with the message that the education policies were targeted and not intended to hurt companies in other industries, the people said.”

July 30 – Bloomberg: “China Evergrande’s dollar bond due October 2022 is poised for its biggest fall since Sept. 25, as investor concern intensified over a potential liquidity crunch at the firm after assets of an onshore subsidiary was frozen by a local court. The 11.5% note fell 7.6 cents on the dollar to 39.2 cents.”

July 30 – Bloomberg (Rebecca Choong Wilkins): “Huarong dollar notes are extending declines Friday with some bonds on track for their worst weekly losses since May… Firm’s 5.5% note due 2025 fell 5.9 cents to 72.9 cents over the past five days, the steepest weekly drop since the week ended May 21.”

July 28 – Financial Times (Thomas Hale and Sun Yu): “A brutal 12 months for Evergrande is going from bad to worse as the highly indebted property group’s billionaire chair and its investors contend with financing woes, credit downgrades and a U-turn on an expected payout. Shares in Evergrande tumbled 12% on Tuesday in Hong Kong after the group, which has almost Rmb2tn ($309bn) of liabilities, announced it would cancel a planned special dividend. That marked the latest blow for Hui Ka Yan, who was once China’s richest person, thanks to Evergrande’s role in China’s sweeping waves of urbanisation. His personal fortune, which stood at $34bn last July, has taken a substantial hit following a 72% plunge in the developer’s share price over the past year.”

July 26 – Bloomberg: “China Evergrande Group surprisingly decided against declaring a special dividend after investors were spooked by news that banks and ratings companies are growing wary of the debt-laden developer. The board chose to cancel the proposal less than two weeks after flagging it to investors. It took into consideration the current market environment, the rights of shareholders and creditors, and the long-term development of businesses… Led by Chairman Hui Ka Yan, the world’s most indebted developer has been trying to convince bond and stock holders that it has ample ammunition to make good on its borrowings, while also countering short-sellers.”

July 29 – Bloomberg: “Two more companies said China Evergrande Group failed to pay its bills on time, adding to signs of a cash crunch at the world’s most indebted developer. Huaibei Mining Holdings Co Ltd. filed a lawsuit against Evergrande…, alleging a unit of the company missed payments… Another company, Peace Tree Wood Ltd., said Evergrande missed payments on 2 million yuan of commercial bills. Evergrande’s suppliers are increasingly resorting to publicizing their beefs with the developer to seek payments.”

July 27 – Bloomberg (Ailing Tan): “Defaults in China’s local corporate bond market have exceeded last year’s total as the country doubles down on efforts to reduce risk and curb moral hazard in its financial markets. Missed payments on the securities have climbed to 140.5 billion yuan ($21.7bn) this year, surpassing last year’s full-year total.”

July 26 – Wall Street Journal (Stephanie Yang): “China’s main technology-sector regulator ordered the country’s internet giants to fix certain anticompetitive practices and data security threats, building on a regulatory campaign to reform how China’s largest tech companies operate. China’s Ministry of Industry and Information Technology… said Monday that its new six-month rectification program was aimed at correcting a range of industry issues, including disrupting market order, infringing on users’ rights, mishandling user data and violating other regulations.”

July 26 – Financial Times (Tom Mitchell, Sun Yu and Ryan McMorrow): “When Chinese president Xi Jinping told a group of educators in March that the country’s school tutoring sector was ‘a chronic disease’, it seemed like just another warning about inequality and other social ills in the run-up to celebrations to mark the centennial of the Chinese Communist party. But unbeknown to the $100bn-a-year industry, the cure that China’s president had in mind would go far beyond existing efforts to rein in the country’s largest technology companies and amount to what some analysts have called a ‘death penalty’. The education sector had previously boomed on the back of demand from increasingly well-off Chinese parents… However, former government officials, industry executives and analysts say Xi’s sudden crackdown is entirely consistent with his ideological determination that ‘government, military, society and schools — the party is leader of all’.”

July 26 – Bloomberg: “China announced a broad set of reforms for private education companies, seeking to decrease workloads for students and overhaul a sector it says has been ‘hijacked by capital.’ The new regulations… ban companies that teach school curriculums from making profits, raising capital or going public. They can no longer offer tutoring related to the school syllabus on weekends or during vacations. They also can’t give online or academic classes to children under the age of six, a segment of the population that had increasingly been pushed to start studying early.”

July 25 – Reuters (Samuel Shen and Andrew Galbraith): “China is stepping up restrictions on financing to local government financing vehicles (LGFVs) to mitigate risks from hidden debt, the official Securities Times reported… Several banks and insurers are connecting their systems with a platform of the Ministry of Finance that monitors liability and expenditure of LGFVs, the newspaper said… Local governments have been under pressure to boost economic growth through infrastructure spending via LGFVs, but the risk of defaults has raised jitters in financial markets as Beijing has signalled it will allow some heavily-indebted LGFVs to fail. In future, banks and insurers will refrain from providing fresh liquidity to those platforms that enjoy implicit guarantees from local governments, and will prevent hidden debts from increasing, the report said.”

July 26 – Bloomberg (Jeanny Yu): “Chinese property management stocks tumbled on Monday, after Beijing vowed to “notably improve order” in the market and regulate a wide range of industry activities.”

July 24 – CNBC (Joanna Tan): “China’s antitrust regulator has ordered Tencent to give up its exclusive music licensing rights and slapped a fine on the company for anti-competitive behavior, as Beijing continues to crack down on its internet giants at home.”

July 28 – Bloomberg: “After a week of market turmoil, China watchers are looking for signals from a key Politburo meeting this week on whether there’s more pain to come and if the central bank will step in with support. The July meeting of the Communist Party’s top leadership is typically when they review the economy’s performance in the first half and set policy priorities for the rest of the year. It’s taken on heightened significance this time around after authorities roiled financial markets with a spate of regulatory overhauls that tightened the state’s grip on industries from private education to technology and property.”

July 26 – Bloomberg: “Chinese companies’ use of debt to pay for overseas expansion is on track to shrink to a seven-year low thanks in part to Beijing’s sweeping regulatory crackdown. Foreign currency-denominated loans taken out by Chinese firms to finance outbound mergers and acquisitions shrank to $2.6 billion in the first half of this year… That’s worse than the $3.4 billion a year ago in the depths of the pandemic. Anything less than about $1.7 billion in the second half would make this year the weakest for this corner of the debt market since 2014.”

Global Bubble Watch:

July 27 – Reuters (David Lawder): “The International Monetary Fund… maintained its 6% global growth forecast for 2021, upgrading its outlook for the United States and other wealthy economies but cutting estimates for developing countries struggling with surging COVID-19 infections. The divergence is based largely on better access to COVID-19 vaccines and continued fiscal support in advanced economies… ‘Close to 40% of the population in advanced economies has been fully vaccinated, compared with 11% in emerging market economies, and a tiny fraction in low-income developing countries,’ Gita Gopinath, the IMF’s chief economist, said…”

July 26 – Bloomberg (Shuli Ren): “From the U.S. to the European Union, governments are clearly uneasy with the pervasive power of Big Tech: The influence of their social media platforms on elections, the security of the vast amount of consumer data they store, and the exploitation of gig economy workers who don’t enjoy health insurance or receive overtime pay. In the U.S., Congressional hearings have been conducted and anti-trust lawsuits filed, but nothing substantial has come about. Judging by the Nasdaq 100 Stock Index, Big Tech in the West is still thriving. China’s political leadership perceives the same set of problems as well. But China is willing to go a lot further to rein in the clout of its tech giants.”

July 27 – Bloomberg (Michael Heath): “Australia’s inflation surged last quarter, joining developed-world counterparts in spiking from 2020’s lockdown-induced weakness, though a renewed Covid outbreak is set to damp pressures ahead. Inflation accelerated to 3.8% in the three months through June from a year earlier, the fastest pace since 2008… But highlighting the impact of one-off factors like free childcare that fueled the gain, the key core measure that strips out volatility only climbed an annual 1.6%.”

Japan Watch:

July 25 – Reuters (Daniel Leussink): “Japan’s factory activity expanded at the slowest pace in five months in July…, underscoring the world’s third-largest economy’s struggle to stage a convincing recovery from the coronavirus pandemic.”

July 26 – Reuters (Linda Sieg): “Millions of Japanese watched the Olympics opening ceremony and many are cheering on their athletes, but the shadow of COVID-19 is so far preventing Prime Minister Yoshihide Suga from getting a boost in his soggy support ahead of an election this year. Voter support for Suga slid nine points to 34%, its lowest since he took office last September…”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 28 – Financial Times (Pilita Clark): “In just over a week, if all goes as planned, a colossal report on the state of the global climate will emerge from the UN’s Intergovernmental Panel on Climate Change. This is the sixth analysis of its kind in 31 years and, like the other five, it will be a sweeping scientific assessment of how and why the planet is warming. Yet this report will be different. It will arrive as the impact of a shifting climate seems brutally apparent, not just on remote Himalayan glaciers or Arctic sea ice, but right in front of frightened human eyes. In the past four weeks alone, wildfires virtually burnt a Canadian village off the map after it shattered the national record with heat of 49.6C. Floodwaters tore through German towns like a tsunami, tossing cars like corks. Terrified Chinese subway passengers stood in chest-high water as nearly a year’s worth of rain fell in three days.”

July 24 – Bloomberg: “Extreme weather is slamming crops across the globe, bringing with it the threat of further food inflation at a time costs are already hovering near the highest in a decade and hunger is on the rise. Brazil’s worst frost in two decades brought a deadly blow to young coffee trees in the world’s biggest grower. Flooding in China’s key pork region inundated farms and raised the threat of animal disease. Scorching heat and drought crushed crops on both sides of the U.S.-Canada border. And in Europe, torrential rains sparked the risk of fungal diseases for grains and stalled tractors in soaked fields.”

July 24 – Reuters (Rajendra Jadhav and Manoj Kumar): “Rescue teams in India struggled through thick sludge and debris… to reach dozens of submerged homes as the death toll from landslides and accidents caused by torrential monsoon rain rose to 125. Maharashtra state is being hit by the heaviest rain in July in four decades, experts say. Downpours lasting several days have severely affected the lives of hundreds of thousands, while major rivers are in danger of bursting their banks.”

July 28 – Bloomberg (Brian Eckhouse and Brian K. Sullivan): “California’s grid operator asked consumers to conserve power, the latest such request to ease soaring electricity demand amid hot weather. The California Independent System Operator called for voluntary conservation Wednesday from 4 p.m. to 9 p.m., citing high energy demand… Dangerous heat has repeatedly strained the Golden State’s grid this year, prompting repeated pleas from officials asking for reduced electricity use to avoid blackouts. It’s increasingly becoming California’s new normal.”

Leveraged Speculation Watch:

July 28 – Bloomberg (Katia Porzecanski, Hema Parmar and Brandon Kochkodin): “After making a fortune in China for two decades, Tiger Global Management is taking a hit from the nation’s unexpectedly widespread regulatory crackdown. Chase Coleman’s $65 billion firm, at least by one measure, leads U.S. hedge fund peers with exposure to the country and has seen some of its biggest stakes plunge during this week’s selloff in Chinese stocks. Tiger Global held $8.6 billion in American depositary receipts of Chinese companies as of March 31, topping the list of 340 hedge funds that publicly disclose such holdings.”

Geopolitical Watch:

July 27 – Reuters (Nandita Bose): “President Joe Biden… warned that if the United States ended up in a ‘real shooting war’ with a ‘major power’ it could be the result of a significant cyber attack on the country, highlighting what Washington sees as growing threats posed by Russia and China. Cybersecurity has risen to the top of the agenda for the Biden administration after a series of high-profile attacks on entities such as network management company SolarWinds, the Colonial Pipeline company, meat processing company JBS and software firm Kaseya hurt the U.S. far beyond just the companies hacked. Some of the attacks affected fuel and food supplies in parts of the United States. ‘I think it’s more than likely we’re going to end up, if we end up in a war – a real shooting war with a major power – it’s going to be as a consequence of a cyber breach of great consequence and it’s increasing exponentially, the capabilities,’ Biden said…”

July 26 – Reuters (Michael Martina and David Brunnstrom): “With no indication of a U.S.-China leaders’ summit in the works…, relations between Beijing and Washington appear to be at a standstill as both sides insist the other must make concessions for ties to improve. U.S. officials had stressed that Deputy Secretary of State Wendy Sherman’s trip to the northern Chinese port city of Tianjin to meet Foreign Minister Wang Yi and other officials was a chance to ensure that stiffening competition between the two geopolitical rivals does not veer into conflict. But the combative statements that emerged from the meeting – albeit coupled with suggestions from officials that closed-door sessions were marginally more cordial – mirrored the tone set in Alaska in March, when the first senior-level diplomatic talks under President Joe Biden were overshadowed by rare public vitriol from both sides.”

July 26 – Bloomberg (Iain Marlow and Alfred Cang): “Defense Secretary Lloyd Austin sought to reassure the Asia-Pacific that the U.S. was committed to engagement in the region, while vowing to challenge what he called China’s aggression. ‘We will not flinch when our interests are threatened,’ Austin said… ‘Yet we do not seek confrontation.’ Austin’s remarks focused on U.S. ties with Association of Southeast Asian Nations… But he also stressed that the U.S. and its partners faced a common challenge in China. The former U.S. Army general told the event… that Washington would work ‘with partners to deter coercion and aggression across the spectrum of conflict,’ including Chinese maritime claims in regional waters and assertive military actions.”

July 26 – Financial Times (Tom Mitchell and Demetri Sevastopulo): “China accused the US of treating it as an ‘imaginary enemy’ and said relations were mired in a dangerous ‘deadlock’, as the two countries held their second top-level meeting since President Joe Biden took office. Xie Feng, vice foreign minister, said Washington wanted to ‘reignite a sense of national purpose by establishing China as an imaginary enemy’ and urged it to change what he called its ‘extremely dangerous China policy’. His comments came during meetings with Wendy Sherman, US deputy secretary of state, in the first face-to-face encounter between top US and Chinese officials since their respective top officials sparred in Alaska in March.”

July 29 – Reuters (Polina Ivanova): “Russia and China will conduct joint military exercises involving 10,000 troops in mid-August, the Interfax news agency cited the Russian defence ministry as saying… Moscow has sought to boost relations with China since 2014, when its political ties with the West sank to post Cold-War lows over the annexation of Crimea from Ukraine.”

July 27 – Reuters (David Brunnstrom): “The Pentagon and Republican congressmen… aired fresh concerns about China’s build-up of its nuclear forces after a new report saying Beijing was building 110 more missile silos. An American Federation of Scientists (AFS) report… said satellite images showed China was building a new field of silos near Hami in the eastern part of its Xinjiang region. The report came weeks after another on the construction of about 120 missile silos in Yumen, a desert area about 240 miles (380 km) to the southeast. ‘This is the second time in two months the public has discovered what we have been saying all along about the growing threat the world faces and the veil of secrecy that surrounds it,’ the U.S. Strategic Command said…”

July 25 – CNBC (Stephanie Landsman): “Economist Stephen Roach warns Beijing’s crackdown against U.S.-listed China stocks will have widespread market implications. Roach, who is considered one of the world’s leading experts on Asia, believes the actions are signaling the early stages of a cold war. ‘I am a congenital optimist when it comes to China. But I find these actions really quite disturbing,’ the former Morgan Stanley Asia chairman told CNBC’s ‘Trading Nation’… ‘China is going after the core of its new entrepreneurial driven economy, and it’s going after their business models.’ According to Roach, the tensions between the world’s two largest economies could get to levels not seen since the early 1970s.”

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