July 9, 2021: Beijing Flinches

July 9, 2021: Beijing Flinches
Doug Noland Posted on July 10, 2021

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Market drama is reappearing. Ten-year Treasury yields traded down to 1.25% in Thursday trading, a notable 35 bps six-week decline to a five-month low. German bund yields dropped to negative 0.34%, the low since March. French 10-year yields were back down to zero Thursday, before closing the week at 0.05%. Swiss yields traded down to negative 0.34%, about 20 bps below their May peak.

Global equities were under significant pressure. At Friday lows, Japan’s Nikkei Index was down 4.7% for the week and near 2021 lows (ending the week 2.9% lower). Japan’s TOPIX Bank Index fell 3.5% this week to lows since February (down 16% from March highs). South Korea’s Kospi Index dropped almost 3%, before a Friday afternoon rally cut losses for the week to 1.9%. Hong Kong’s Hang Seng Index was down more than 5% at Friday lows to the lowest level since December 30th – before ending the week with a 4.1% decline. Hong Kong’s China Financials Index dropped another 4.1% this week to 2021 lows, boosting losses since June 1st to 13.5%.

While Asia suffered the brunt of this week’s sell-off, the great U.S. bull market indicated heightened vulnerability. The S&P500 opened Thursday trading down 1.6%. Bank stocks dropped 2.8%, pushing the three-session decline to 5.8%. Friday’s 3.5% rally cut the week’s losses to 1.2%. The broader market has turned highly volatile, indicative of an important change in trend. The small cap Russell 2000 was down 4.9% at Thursday lows, only to rally 4.0% to end the week 1.2% lower.

July 9 – Bloomberg: “China’s central bank cut the amount of cash most banks must hold in reserve, a move that went further than many economists had expected and suggested growing concerns about the economy’s faltering recovery. The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for most banks… That will unleash about 1 trillion yuan ($154bn) of long-term liquidity into the economy and will be effective on July 15, the central bank said.”

Global markets rallied solidly Friday, confirming the view that Chinese developments have become a key market driver. The S&P500 rallied 1.1% in Friday trading. Germany’s DAX jumped 1.7%, France’s CAC40 rose 2.1%, and Italy’s MIB gained 1.7%. European Bank stocks were down 4% for the week at Thursday lows, before rallying 2.4% Friday.

Friday’s PBOC bank reserve ratio cut is an intriguing development. Beijing has been focused on a cautious stimulus pullback. Officials recognize the myriad risks associated with runaway Credit growth and speculative Bubbles in housing and securities markets. I’ve doubted this “tightening” process would proceed smoothly. Things over recent weeks clearly turned increasingly problematic. I have posited that intensifying Chinese Credit stress has been an unappreciated force behind collapsing Treasury and global yields.

The PBOC was eager to communicate that the reserve adjustment did not signal a change to its “prudent monetary policy.” Quite a high-wire balancing act. The last thing Beijing wants at this point is to further stoke asset market speculative excess. From Reuters: “Part of the liquidity released will help financial institutions to repay maturing medium-term lending facility (MLF) loans, and will also help ease liquidity pressure caused by tax payments, [the PBOC] said.”

Surely, the PBOC’s move goes beyond liquidity management. The last reserve cut was in April 2020, in the heart of the pandemic economic downturn. The release of Q2 GDP data is due next week. While down from Q1’s 18.3% annualized expansion, GDP is expected to have expanded at an 8.0% pace. June exports are forecast to have increased 15%, with a huge $44 billion trade surplus. The data are not consistent with the narrative that the PBOC was forced to respond to rapidly deteriorating growth dynamics.

Wednesday from China’s State Council: “China will increase the financial support for the real economy, especially the micro, small and medium-sized enterprises. To that end, the country will adopt monetary tools such as cuts in the reserve requirement ratio (RRR) for banks at an appropriate time.”

The “appropriate time” arrived expeditiously. Beijing’s pivot to a reserve requirement cut had me expecting weak June Credit data. Lending, however, was reported Friday much stronger-than-expected. Aggregate Financing expanded a blistering $566 billion during June, 27% ahead of estimates. This was almost double May’s $296 billion, to the strongest expansion since January’s $800 billion. New Loans rose $327 billion, 42% above estimates.

At $225 billion, Corporate Loan growth was almost double May’s $124 billion, to the strongest expansion since March. At $1.292 TN, y-t-d Corporate loan growth is running only 4.6% below comparable 2020 – while 34% ahead of comparable 2019. Corporate Loans have expanded 11.2% over the past year, 25.5% for two years, 39.6% over three and 66.2% over five years.

Consumer Loans expanded $134 billion during June, the biggest increase since March’s $177 billion. At $707 billion, y-t-d Consumer Loan growth is running 29% ahead of comparable 2020. Consumer Loans have expanded 15.1% over the past year, 31% over two years, 54% over three and 126% over five years.

Government Bonds expanded $116 billion, the briskest growth since September 2020 ($156bn). At $377 billion, y-t-d growth is running 36% below last year’s record level. Government Bonds have expanded 16.8% over one year, 36.7% over two and 62.7% over three years.

Aggregate Financing expanded $2.735 TN during the year’s first half. And while this was down 15% from the first-half 2020 Credit onslaught, it is nonetheless an alarming amount of new Credit. At $1.969 TN, y-t-d New Loans are actually running 5.5% ahead of comparable 2020 (32% ahead of 2019).

China’s State Council was certainly not spooked into an unexpected reserve ratio cut due to a precipitous Credit slowdown. And there’s no indication of an abrupt change in the economic backdrop. China’s Services PMIs were weaker-than-expected, but Manufacturing surveys indicate ongoing strength. Producer price pressures remain elevated, with PPI up 8.8% y-o-y in June.

Analysts (and reporters) struggled to make sense of China’s hasty policy shift: “PBOC’s Surprise Preemptive RRR Cut to Extend Recovery.” “China’s Central Bank Pivots to Easing as Growth Risks Build.” “China Signals Easier Monetary Policy, Reviving Worries About Weaker Growth.” “China’s Dovish Switch Ignites Fears Over Global Recovery Trade.” “China’s Reserve Ratio Cut Raises Growth Fears, Divides Market.” “PBOC is ‘Confusing’ Markets with Talk of RRR Cut: JPMorgan.”

Is it coincidence that Beijing drops a policy surprise as global bond yields astonish to the downside? There has been over recent weeks a marked weakening in Chinese Credit. Ominously, Credit stress has been mounting despite exceptionally strong lending and economic growth. I believe Beijing’s “pivot” is in response to the recent acceleration in the pace of Credit market deterioration and the associated risk of problematic dislocations.

July 7 – Bloomberg (Rebecca Choong Wilkins): “Chinese junk dollar bonds suffered the worst selloff since the pandemic roiled markets last year, as investor concerns about China Evergrande Group drag on the sector. Yields on the nation’s riskier notes have been climbing for two weeks to 10.2% through Tuesday… Evergrande’s notes have been the worst performers among Chinese dollar debt with its 2025 bond down 5.5 cents so far this week to 60.7 cents. There are signs of contagion rippling through China’s riskier debt market as growing concern over the health of Asia’s biggest issuer of junk bonds weighs on the sector. Property developers are facing fresh pressures to reduce their debt loads as Beijing looks to curb risk in its financial markets.”

An index of Chinese yield-high dollar bond yields ended the week at 10.43%, up about 70 bps for the week. This index traded with a yield of 8.00% as recently as May 26th. The yield surge over the past six weeks has been the sharpest since the March 2020 crisis period.

Troubled behemoth developer Evergrande’s four-year bond yields traded above 25% this week. Modern Land China’s three-year yields jumped to 18.8% (one-month gain 400bps). Developer Sichuan Languang Development Co. is a risk of defaulting on a payment due Sunday.

The marketplace is losing confidence in some of China’s big developers. But when it comes to heightened systemic risk, all eyes are for now on the colossal “asset management companies” (AMCs). China Huarong CDS jumped 137 bps this week to a one-month high 1,138 bps. Fellow AMC China Orient’s CDS increased eight bps to a near record 250 bps, having more than doubled since April.

July 6 – Bloomberg (Rebecca Choong Wilkins and Ailing Tan): “China’s corporate credit market is the world’s biggest, after the U.S. It’s also one of the safest. The government has backstopped even the most reckless companies, fending off defaults where they were arguably long overdue. But those days are now drawing to a close as Beijing forces more accountability on its weakest companies to reduce moral hazard. The defaults are coming. In China, the current default rate is around 1%; in more developed markets, it’s closer to 2% to 3%. Removing government support in order to close that gap is a delicate process. Allow too many firms, or the wrong ones, to fail, and investors’ faith in the overall market will wobble, triggering precisely the crisis that Beijing wants to avoid.”

Will Beijing stand behind the debt of troubled Haurong and the other AMCs? Evergrande and the big developers? Local government special purpose vehicles (SPVs)? To be sure, the entire $12 TN Chinese Credit market rests on faith in central government backing. And let’s not overlook the Chinese banking system, which will approach $55 TN of assets this year. Beijing must begin preparing for history’s greatest bank recapitalization challenge.

July 9 – Bloomberg (Tian Chen): “China’s switch toward monetary easing is making it lucrative for traders to borrow cash to buy sovereign bonds, a strategy disliked by Beijing for its potential to increase financial risks. The volume of overnight repurchase contracts surged to 4.1 trillion yuan ($632bn) Thursday, the highest since January, while the cost of such agreements spiked the most in a week on Friday. That suggests traders may be using the interbank market to raise funds so they can profit from a rally in government bonds that’s pushed 10-year yields to the lowest in almost a year. The so-called carry trade became popular on bets the central bank would loosen policy to buoy growth…”

I have posited that Chinese Credit, with limitless quantities of securities with enticing yields, evolved over this cycle into a hotbed of leveraged “carry trade” speculation. Clearly, enormous speculative leverage has accumulated in the Chinese government debt market. How much in the domestic bond market?

And what is the scope of speculative leverage in offshore dollar-denominated Chinese bonds, especially higher-yielding developer and “AMC” bonds? Globally attractive yields coupled with implicit Beijing backing, a surefire recipe for one of history’s spectacular Bubbles. Has speculative leverage begun to unwind, and does this development help explain the instability taking hold in the Chinese high-yield dollar bond market?

Chinese Credit and speculative excess are integral to the global Bubble – arguably the marginal source of global Credit (while challenging central banks as the marginal source of liquidity). And through the lens of the “Core vs. Periphery” analytical framework, instability (de-risking/deleveraging) typically emerges at the “Periphery” and then begins working its way toward the “Core.” Risk aversion and deleveraging undermine marketplace liquidity, and waning liquidity and confidence over time encroach upon the “Core.” Simplistically, if leveraged speculators get hammered in Chinese bonds, they’ll be forced to slash risk elsewhere.

It’s somewhat confounding why it took the marketplace so long to lose confidence in Lehman’s short-term liabilities. A creeping process suddenly careened at lightning speed. I won’t venture a guess as to when the market panics over Beijing’s unworkable Credit system backstop. But it seemed clear this week that contagion effects attained important momentum.

July 4 – Bloomberg (Alice Huang): “Financial strains among Chinese property developers are hurting the Asian high-yield debt market, where the companies account for a large chunk of bond sales. That’s widening a gulf with the region’s investment-grade securities, which have been doing well amid continued stimulus support. Yields for Asia’s speculative-grade dollar bonds rose 41 bps in the second quarter…, versus a 5 bps decline for investment-grade debt. They’ve increased for six straight weeks, the longest stretch since 2018, driven by a roughly 150 bps increase for Chinese notes.”

For the Week:

The S&P500 increased 0.4% (up 16.3% y-t-d), and the Dow added 0.2% (up 13.9%). The Utilities rose 1.0% (up 2.6%). The Banks fell 1.2% (up 27.1%), and the Broker/Dealers dropped 1.8% (up 22.7%). The Transports fell 1.3% (up 18.7%). The S&P 400 Midcaps were little changed (up 17.3%), while the small cap Russell 2000 declined 1.1% (up 15.5%). The Nasdaq100 gained 0.7% (up 15.0%). The Semiconductors fell 1.1% (up 17.3%). The Biotechs dipped 0.4% (up 3.0%). While bullion gained $21, the HUI gold index declined 0.5% (down 10.2%).

Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields dipped two bps to 0.215% (up 9bps y-t-d). Five-year T-note yields dropped seven bps to 0.79% (up 42bps). Ten-year Treasury yields fell six bps to 1.36% (up 45bps). Long bond yields declined five bps to 1.99% (up 34bps). Benchmark Fannie Mae MBS yields dipped three bps to 1.78% (up 44bps).

Greek 10-year yields declined four bps to 0.75% (up 13bps y-t-d). Ten-year Portuguese yields slipped two bps to 0.33% (up 30bps). Italian 10-year yields dipped a basis point to 0.76% (up 22bps). Spain’s 10-year yields declined two bps to 0.35% (up 31bps). German bund yields dropped six bps to negative 0.29% (up 28bps). French yields fell four bps to 0.05% (up 39bps). The French to German 10-year bond spread widened two to 34 bps. U.K. 10-year gilt yields fell five bps to 0.66% (up 46bps). U.K.’s FTSE equities index was about unchanged (up 10.2% y-t-d).

Japan’s Nikkei Equities Index sank 2.9% (up 1.8% y-t-d). Japanese 10-year “JGB” yields declined one basis point to 0.03% (up 1bps y-t-d). France’s CAC40 slipped 0.4% (up 17.6%). The German DAX equities index added 0.2% (up 14.4%). Spain’s IBEX 35 equities index fell 1.5% (up 8.7%). Italy’s FTSE MIB index declined 0.9% (up 12.7%). EM equities were mostly lower. Brazil’s Bovespa index lost 1.7% (up 5.4%), and Mexico’s Bolsa declined 0.9% (up 12.9%). South Korea’s Kospi index slumped 1.9% (up 12.0%). India’s Sensex equities index slipped 0.2% (up 9.7%). China’s Shanghai Exchange added 0.2% (up 1.5%). Turkey’s Borsa Istanbul National 100 index was little changed (down 6.7%). Russia’s MICEX equities index declined 0.3% (up 17.2%).

Investment-grade bond funds saw inflows of $4.004 billion, and junk bond funds posted positive flows of $728 million (from Lipper).

Federal Reserve Credit last week added $8.3bn to $8.048 TN. Over the past 95 weeks, Fed Credit expanded $4.321 TN, or 116%. Fed Credit inflated $5.237 Trillion, or 186%, over the past 452 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $5.8bn to $3.528 TN. “Custody holdings” were up $126bn, or 3.7%, y-o-y.

Total money market fund assets declined $16.4bn to $4.511 TN. Total money funds declined $145bn y-o-y, or 3.1%.

Total Commercial Paper rose $25.5bn to $1.134 TN. CP was up $127bn, or 12.6%, year-over-year.

Freddie Mac 30-year fixed mortgage rates dropped nine bps to an almost five-month low 2.90% (down 13bps y-o-y). Fifteen-year rates fell six bps to 2.20% (down 31bps). Five-year hybrid ARM rates slipped two bps to 2.52% (down 50bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down a basis point to 3.07% (down 19bps).

Currency Watch:

For the week, the U.S. Dollar Index was little changed at 92.13 (up 2.5% y-t-d). For the week on the upside, the Japanese yen increased 0.8%, the Swiss franc 0.7%, the British pound 0.6%, the South African rand 0.2%, and the euro 0.1%. On the downside, the Brazilian real declined 3.8%, the South Korean won 1.2%, the Canadian dollar 1.0%, the Norwegian krone 0.9%, the Australian dollar 0.5%, the Mexican peso 0.5%, the Singapore dollar 0.3%, and the Swedish krona 0.3%. The Chinese renminbi declined 0.09% versus the dollar this week (up 0.74% y-t-d).

Commodities Watch:

July 6 – CNBC (Patti Domm): “Disagreement within OPEC could trigger a more a volatile period for oil, with prices jumping on lack of new supply or sinking suddenly if member countries decide to release crude independently. Oil prices initially surged to a six-year high on news that the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, ended their meeting Monday with no action and no new meeting date. A proposed plan by OPEC, Russia and other allies to bring 400,000 barrels a day back to the market was disrupted by the United Arab Emirates’ objection to other aspects of the deal.”

July 6 – Financial Times (David Sheppard): “The failure of the Opec+ group to secure a deal on raising oil supplies has propelled crude prices to their highest level in at least three years… The group agrees on the need to raise oil production, as demand has started to outstrip supply. But the United Arab Emirates, one of the most powerful members of the group after Saudi Arabia and Russia, has objected to extending an agreement first forged in April last year — when oil prices were tumbling — unless the group agrees to revisit how the emirates’ production target is calculated. This might seem a minor objection when the group wants to raise supply anyway, but the UAE has invested billions of dollars in increasing production capacity. It feels the so-called baseline used to calculate its production target is outdated…”

July 7 – Financial Times (Simeon Kerr, Anjli Raval and Derek Brower): “So sour are Saudi-Emirati relations that neither side could agree on how Monday’s private discussions concluded between Opec members and allies. People close to the United Arab Emirates said a formal meeting of oil ministers had been postponed. Their Saudi Arabian counterparts argued it had been cancelled and blamed the UAE for torpedoing a deal to raise output at a time when resurgent demand has already pushed up crude prices by 50% this year… The clash has opened a rift at the heart of Opec that threatens the ability of the cartel… to deliver oil market stability and could yet see the UAE, a member since 1967, leave the group. There is growing unanimity among Emirati officials surrounding de facto leader Sheikh Mohammed bin Zayed al-Nahyan that it could be in the UAE’s best interests to go it alone…”

The Bloomberg Commodities Index fell 1.6% (up 19.8% y-t-d). Spot Gold rallied 1.2% to $1,808 (down 4.8%). Silver fell 1.4% to $26.10 (down 1.1%). WTI crude slipped 60 cents to $74.54 (up 54%). Gasoline dipped 0.3% (up 63%), and Natural Gas declined 0.7% (up 45%). Copper gained 1.6% (up 24%). Wheat sank 5.8% (down 4%). Corn fell 10.8% (up 7%). Bitcoin was little changed this week at $33,666 (up 15.8%).

Coronavirus Watch:

July 5 – Financial Times (Neri Zilber): “The BioNTech/Pfizer vaccine is less effective at halting the spread of the Delta variant than previous strains of coronavirus, according to a preliminary study by Israel’s health ministry. Data collected over the past month suggest the vaccine is 64% effective at preventing infection among those who are fully inoculated… Efficacy against previous strains of the virus was estimated at 94%. However, the figures… indicate the vaccine is 93% effective against serious illness and hospitalisation.”

July 8 – Reuters (Renju Jose): “Australia’s New South Wales (NSW) state… reported its biggest daily rise in locally acquired cases of COVID-19 this year as officials struggle to stamp out a growing cluster of the highly infectious Delta variant. The spike in cases after two weeks of a hard lockdown in Sydney, Australia’s largest city, raised the prospect of a further extension in restrictions, with officials blaming illegal family visits for a continuing rise in infections.”

July 7 – CNBC (Yen Nee Lee): “Among countries with both high vaccination rates and high rates of Covid-19 infection, most rely on vaccines made in China, a CNBC analysis shows. The findings come as the efficacy of Chinese vaccines faces growing scrutiny, compounded by a lack of data on their protection against the more transmissible delta variant. CNBC found that weekly Covid cases, adjusted for population, have remained elevated in at least six of the world’s most inoculated countries — and five of them rely on vaccines from China.”

Market Mania Watch:

July 5 – Financial Times (Eric Platt): “Investors are pouring into global equity funds with a fervour never seen before. About $580bn has been added to the sector in the first half of 2021, putting the category on track for a record inflow, according to… EPFR. Strategists with Bank of America estimate that if the pace of inflows continues at the same clip for the remainder of the year, equity funds will take in more money in 2021 than in the previous 20 years combined.”

July 5 – Wall Street Journal (Caitlin McCabe): “Retail investors keep pouring money into markets, even as many of their favorite meme stocks and cryptocurrencies have languished. In June, so-called retail investors bought nearly $28 billion of stocks and exchange-traded funds on a net basis, according to… Vanda Research’s VandaTrack, the highest monthly amount deployed since at least 2014. That even trumped the amount retail traders spent in January during the first meme-stock frenzy… When the Covid-19 pandemic ushered in a wave of first-time traders, many market observers suspected these investors would retreat when the economy reopened. Instead, individual investors have grown in number: More than 10 million new brokerage accounts are estimated to have been opened in the first half of this year… That is around the total for all of 2020.”

July 6 – Bloomberg (Katherine Greifeld): “Retail investors poured money into markets as equities embarked on a nearly record-run of all-time highs in June. Whether they’ll stick around when volatility inevitably resurfaces remains to be seen. Last month, TD Ameritrade’s Investor Movement Index — a measure that has tracked clients’ positioning in the market since 2010 — rose to the highest level on record… The influx came as trading volume dropped off while the S&P 500 hit five consecutive record closes to end the month, en route to the longest streak since 1997.”

July 6 – Financial Times (Michael Mackenzie): “Net inflows into US bond funds are far outpacing those for comparable equity instruments this year, confounding expectations that inflation fears would erode the appeal of fixed-income holdings. Bond mutual funds and exchange traded funds have added $372bn as of June 23, compared with a gain of $160bn for equities, according to the Investment Company Institute. Bond funds are on pace to eclipse the $446bn of inflows in 2020 and $459bn in 2019.”

July 9 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global bond funds lured the biggest weekly inflow in more than three months… According to Refinitiv Lipper data, global bond funds received inflows worth $19 billion in the week to July 7, the biggest since the week ended April 7.”

July 4 – CNBC (Ari Levy): “From Krispy Kreme to China’s Didi Chuxing, the busiest week for U.S. IPOs in 17 years produced a windfall for Wall Street’s top investment banks. A cybersecurity company, drug developers and a Turkish e-commerce platform were all in on the action. At least 14 companies raised $100 million or more in offerings…, the most active stretch for debuts since 2004. In total, underwriters generated close to $400 million in fees for assisting with the IPOs.”

July 8 – Financial Times (Miles Kruppa): “The number of start-ups valued above $1bn grew rapidly in the second quarter, as venture capitalists increased the size and pace of their investments following several blockbuster public listings in the US. Private investors assigned billion-dollar valuations to a record 136 start-ups between April and June, according to… CB Insights, more than the total for all of last year. The US produced the majority of the billion-dollar private companies… Asia contributed 33 during the quarter, compared to 29 for the full year in 2020.”

Market Instability Watch:

July 8 – Financial Times (Colby Smith, Joe Rennison and Eric Platt): “A furious plunge in Treasury yields is reverberating through global financial markets, propelling shares of fast-growing tech companies to new records and driving down corporate borrowing costs, but raising fresh concern about the outlook for financial returns. An investor consensus that took months to build, namely that robust economic growth and elevated inflation would bring about substantially higher interest rates, has been coming apart, and the pain for those caught in that trade has heightened with moves in the past couple of days.”

July 3 – Bloomberg (Katie Greifeld): “Some of the hottest retail trades have been hijacked by professional money managers. From unprofitable tech companies, to Chinese electric vehicle makers, to… Virgin Galactic Holdings Inc., institutional cash is in the driver’s seat according to Ben Onatibia and Giacomo Pierantoni of VandaTrack Research. Just look at the $25 billion ARK Innovation ETF (ticker ARKK), which has rallied by 29% since mid-May. In that period, appetite for the fund among individual investors actually cooled, according to Vanda data… Purchases from individual traders has been ‘very underwhelming,’ indicating that ‘institutional investors have been responsible for the rallies in EV, Hydrogen, Space and other speculative stocks,’ Onatibia wrote…”

July 7 – Bloomberg (Ameya Karve): “The longest slump in Asia’s riskiest bonds in almost three years is starting to attract investors who see increasing value in some of the securities. Average prices of high-yield dollar notes from Asian issuers have continued to decline this week after tumbling for five straight weeks in the longest such stretch since November 2018… That’s further widening the gulf with U.S. junk bonds, whose average prices have risen to the highest since 2014. The declines in Asia stem from mounting concerns about Chinese borrowers, particularly lower-rated property developers that are grappling with government restrictions on their debt loads and that account for a large chunk of the region’s junk bond market.”

July 5 – Financial Times (Steve Johnson): “Tesla’s entry into the S&P 500 has cost investors tracking or benchmarked against the index of blue-chip US stocks more than $45bn since December. The electric vehicle pioneer was already the world’s seventh-largest listed company when it was finally admitted to the S&P at the end of 2020… Its stock had rallied 764% in the 12 months beforehand — partly in anticipation of forced buying on entry to the S&P 500 — and its market capitalisation equaled the total market cap of the nine largest automakers by sales volume…, according to Research Affiliates… Tesla’s share price then fell in the six months after its admission…”

Inflation Watch:

July 6 – Bloomberg (Alexandre Tanzi): “The cost of renting a home is soaring in cities across the U.S., squeezing the finances of low-income households and posing a threat to the consensus that pandemic inflation will soon fade away. The median national rent climbed 9.2% in the first half of 2021, according to Apartment List… Surveys by the New York Fed and Fannie Mae suggest renters are braced for further hikes of 7% to 10% in the coming year. Higher rents are the kind of price increase that’s hard to reverse -– unlike many of the ones that have accompanied the economy’s reopening, from lumber to used cars.”

July 8 – Bloomberg (Brendan Murray): “The cost to ship a boxload of goods to the U.S. from China edged close to $10,000 as the world’s biggest economy keeps vacuuming up imports amid slower recoveries from the pandemic from Europe to Asia. The spot rate for a 40-foot container from Shanghai to Los Angeles increased to $9,631, up 5% from the previous week and 229% higher than a year ago, according to the Drewry World Container Index… A composite index, reflecting eight major trade routes, rose to $8,796, a 333% surge from a year ago. Drewry said it expects rates to increase further in the coming week.”

July 7 – Reuters (Andrea Shalal): “The International Monetary Fund… said further fiscal support in the United States could fuel inflationary pressures and warned that the risk of a sustained rise in prices could require raising interest rates earlier-than-expected. Higher U.S. interest rates, in turn, could lead to a sharp tightening of global financial conditions and significant capital outflows from emerging and developing economies, IMF Managing Director Kristalina Georgieva said… The IMF’s assessment of U.S. inflation risks comes amid sharp criticism by Republican lawmakers of President Joe Biden’s multi-trillion-dollar plans to boost spending on infrastructure, child care, community college tuition and expanded coverage of home care for the elderly and disabled.”

Biden Administration Watch:

July 9 – Wall Street Journal (Brent Kendall and Ryan Tracy): “President Biden on Friday will sign a broad executive order that aims to promote competitive markets across the U.S. economy and limit corporate dominance that the White House says puts consumers, workers and smaller firms at a disadvantage. The order, the centerpiece of a new Democratic emphasis on restraining the nation’s most powerful companies, lays out a detailed attack plan for what the Biden administration sees as trouble spots across industries, from the mundane—hearing aids and baggage fees—to some of the most cutting-edge issues facing the government, such as first-ever antitrust regulations for internet platforms.”

July 6 – Reuters (Leigh Thomas and Andrea Shalal): “A long road strewn with potential political pitfalls lies ahead for countries seeking to end a race to the bottom on international corporate tax, even though 130 of them have agreed to overhaul the way multinationals are taxed. Nearly all 139 countries involved in talks at the Paris-based Organisation for Economic Cooperation and Development (OECD) last week backed plans for new rules on where companies’ profits are taxed, and a rate of at least 15%. With ink barely dry on the agreement, jubilant politicians in higher-tax countries declared that what French Finance Minister Bruno Le Maire termed the ‘most important international tax deal in a century’ had ended tax competition among governments.”

July 7 – Reuters (Trevor Hunnicutt): “President Joe Biden made the case for spending trillions of dollars on U.S. infrastructure, paid for by higher taxes on corporations…, as opposition builds from U.S. business groups. In a speech Biden focused on what he called ‘human infrastructure’ priorities that did not make it into a $1.2 trillion bipartisan deal struck with Republicans. The policies include tax rebates for parents, free preschool and community college, healthcare and clean energy subsidies as well as 12 weeks of paid medical leave, financed by raising corporate taxes on U.S. companies. Biden said a minimum tax of 15% on companies that manage to avoid paying taxes would raise $240 billion and could be used to finance his plans, which he acknowledged are ‘really expensive.’”

Federal Reserve Watch:

July 7 – Reuters (Howard Schneider): “Federal Reserve officials last month felt substantial further progress on the U.S. economic recovery ‘was generally seen as not having yet been met,’ but agreed they should be poised to act if inflation or other risks materialized, according to the minutes of the central bank’s June policy meeting. In minutes that reflected a divided Fed wrestling with new inflation risks but still relatively high unemployment, ‘various participants’ at the June 15-16 meeting felt conditions for reducing the central bank’s asset purchases would be ‘met somewhat earlier than they had anticipated.’ Others saw a less clear signal from incoming data and cautioned that reopening the economy after a pandemic left an unusual level of uncertainty which required a ‘patient’ approach to any policy change, stated the minutes… Still, ‘a substantial majority’ of the officials saw inflation risks ‘tilted to the upside,’ and the Fed as a whole felt it needed to be prepared to act if those risks materialized.”

July 7 – Reuters (Jonnelle Marte): “Federal Reserve officials continued to discuss in June how they could potentially structure a permanent facility for supporting U.S. money markets, according to minutes from the central bank’s last policy meeting… A ‘substantial majority’ of Fed policymakers reiterated their support for such a program, which would allow eligible financial institutions to borrow cash on a short-term basis as needed, saying ‘the potential benefits of such a facility outweighed the potential costs,’ the minutes from the June 15-16 meeting stated. Several participants said the facility must be positioned as a ‘backstop’ for markets…”

U.S. Bubble Watch:

July 6 – Bloomberg (Laura Cooper): “Signs of slowing activity emerged in June with U.S. ISM services printing at 60.1. While that missed market expectations for a 63.5 reading, it captures a U.S. economy that remains strong — and comes after last month’s record high. The prices paid index registered 79.5 — down slightly from the month prior. That’s an encouraging sign of easing constraints after its manufacturing peer came in at the highest in the index history going back to 1979.”

July 8 – Bloomberg (Reade Pickert): “U.S. consumer credit surged in May by the most on record, reflecting a jump in non-revolving loans that underscores solid household spending. Total credit climbed $35.3 billion from the prior month after an upwardly revised $20 billion gain in April… On an annualized basis, borrowing rose 10% in May. Economists… had called for a $18 billion gain. Non-revolving credit, which includes auto and school loans, increased $26.1 billion, the most on record. Revolving credit, which includes credit cards, rose $9.2 billion after declining in the previous month.”

July 8 – Wall Street Journal (AnnaMaria Andriotis): “Americans are borrowing again, in some cases at levels not seen in more than a decade. Consumer demand for auto loans and leases, general-purpose credit cards and personal loans was up 39% in April compared with the same period last year, according to… Equifax Inc. It was also up 11% compared with April 2019… Lenders are meeting the moment. Equifax said lenders extended a record number of auto loans and leases in March, the latest month for which data are available. They also bumped up credit-card originations, issuing more general-purpose credit cards than any other March on record… ‘There’s a significant increase in consumer-credit demand and a growing appetite to use credit on things like those vacations that were postponed for 18 months,’ said Tom Aliff, senior vice president… at Equifax.”

July 6 – Bloomberg (Olivia Rockeman): “U.S. service providers expanded in June by less than forecast as a measure of employment contracted, reflecting employers’ struggle to attract workers in industries like hotels and restaurants. The Institute for Supply Management’s services index fell to 60.1 last month from a record 64 in May… Orders and business activity also settled back… The ISM’s measure of order backlogs was the highest in the group’s data back to 1997. At the same time, an index of services employment dropped to the lowest level this year, slumping to 49.3 from 55.3… ‘The rate of expansion in the services sector remains strong, despite the slight pullback in the rate of growth from the previous month’s all-time high,’ Anthony Nieves, chair of the ISM’s Services Business Survey Committee, said… ‘Challenges with materials shortages, inflation, logistics and employment resources continue to be an impediment to business conditions.’”

July 7 – Associated Press (Christopher Rugaber): “U.S. employers posted a record-high number of open jobs for the second straight month as a rapidly rebounding economy generates intense demand for workers. The number of available jobs on the last day of May rose slightly to 9.21 million, from 9.19 million in April… That is the highest since records began in December 2000… The number of people quitting their jobs slipped in May from a record high in April, but remains elevated. And the percentage of workers getting laid off hit a record low in May… The figures point to a tight job market, with employers forced to pay more to attract workers yet still struggling to fill open jobs. And many workers are leaving jobs for better-paying positions at other companies.”

July 7 – CNBC (Lisa Rizzolo): “Mortgage demand fell for the second week in a row, as low inventory and high home prices continue to weigh on the housing market… Home purchase applications dropped 1% for the week and came in 14% lower than a year ago. ‘Swift home-price growth across much of the country, driven by insufficient housing supply, is weighing on the purchase market and is pushing average loan amounts higher,’ said Joel Kan, MBA’s associate vice president…”

July 7 – CNBC (Lauren Feiner): “State attorneys general are again going after Google with an antitrust lawsuit, this time alleging the company abused its power over app developers through its Play Store on Android. The case marks the fourth antitrust lawsuit lodged against the company by U.S. government enforcers in the past year… Attorneys general from 36 states and the District of Columbia, coming from both parties, are listed as plaintiffs in the latest case, which was filed in the Northern District of California…”

July 7 – Yahoo Finance (Ethan Wolff-Mann): “The wealth of the richest 0.00001% of the U.S. now exceeds that of the prior historical peak, which occurred in the Gilded Age, according to economist Gabriel Zucman. In the late 19th century, the U.S. experienced rapid industrialization and economic growth, creating an inordinate amount of wealth for a handful of families. This era was also known for its severe inequality; and some have called the period that began around 1990 a ‘Second Gilded Age.’ Back then, just four families represented the richest 0.00001% – today’s equivalent is 18 families. Zucman, a French economist whose doctoral advisor was the historical economist Thomas Piketty… released data… showing that as of July 1, the top 0.00001% richest people in the U.S. held 1.35% of the country’s total wealth.”

July 4 – Financial Times (Patrick Temple-West): “Corporate executives have saved millions of dollars by selling large chunks of shares just before the stock began to underperform, according to new research that suggests company officials cash out when misfortune is just around the corner. When company insiders have used pre-arranged stock trading schemes to quickly sell $50m or more in a single day, the company’s stock subsequently underperformed its peers…, according to… Daniel Taylor, an accounting professor at the Wharton School and director of its forensic analytics lab.”

July 8 – Bloomberg (Lizette Chapman): “Mark Shininger is a like a lot of millennials who played with Pokémon cards during grade school. He traded the collectibles with his friends… until eventually he tired of the hobby, stowed the cards neatly in boxes and grew up. Then last year as the pandemic wore on, Shininger began hearing about vintage Pokémon card sales, sometimes reaching into the hundreds of thousands of dollars. So the 24-year-old mechanical engineer… dug up his old collection… He logged the creatures into a spreadsheet and turned his childhood passion into a $4,500 side hustle… Fueled by nostalgia, new ways to sell online and a surplus of free time during the pandemic, the value of certain Pokémon cards has skyrocketed in recent months. In 2020 overall trading card sales climbed a record 142% on EBay… That momentum has continued into this year. EBay listings of Pokémon cards were up 1,046% in the first quarter.”

Fixed-Income Bubble Watch:

July 9 – Wall Street Journal (Julia-Ambra Verlaine): “Investors’ headlong embrace of risk passed a new milestone in recent sessions: The return that investors receive for investing in the riskiest U.S. companies fell below inflation. A rally in corporate debt rated below investment grade has pushed yields to record lows around 4.54%, according to ICE Bank of America data, while consumer prices rose 5% in May compared with a year earlier. That marks the first time on record junk-bond yields have dropped below the rate of inflation, according to Bespoke Investment Group. The move upends the conventional logic of investing in bonds…”

July 6 – Bloomberg (Jeremy Hill): “Investors looking to make a buck on corporate distress can only hope the post-pandemic world is more accommodating. Rock-bottom interest rates, a reopening economy and yield-starved investors mean all but the most-troubled businesses have managed to borrow their way out of trouble. Credit markets may not be so friendly if the projections underlying that borrowing prove too rosy once post-Covid results come out, according to Phil Brendel of Bloomberg Intelligence. ‘The market will shift from pricing on projections and start looking more at actuals,’ Brendel said… ‘We’re at credit bubble levels of distressed debt. So credit markets are vulnerable to a significant correction.’”

July 8 – Bloomberg (Lisa Lee): “The market for collateralized loan obligations crossed the $1 trillion threshold globally, a symbolic milestone that signals the maturing of an asset class once considered an esoteric corner of the credit world. The amount of outstanding U.S. and European CLOs has swelled to $1.009 trillion, according to… JPMorgan… CLOs, which repackage leveraged loans into bonds with different ratings, have seen strong growth, with $81 billion of new issuance by the midpoint of this year…”

China Watch:

July 8 – Bloomberg: “China made a surprise shift… by signaling the economy needs additional central bank support… The State Council, China’s equivalent of a cabinet, hinted the People’s Bank of China could make more liquidity available to banks to boost lending… Economists pinned China’s pivot on emerging signs that a robust recovery is starting to cool as commodity prices soar, consumers remain cautious and global supply-chain problems hit businesses. Sporadic restrictions to contain virus outbreaks continue to hamper sentiment.”

July 7 – Bloomberg: “As China Evergrande Group tries to quell concerns about its financial health, the property giant has gone to great lengths to publicize its shrinking debt load. What the developer rarely mentions, however, is that it’s also ramping up issuance of short-term IOUs. While not technically classified as debt, Evergrande’s growing reliance on such financing — known in China as commercial bills — suggests the company faces mounting liquidity pressure as banks and bond investors increasingly shy away from providing it with longer-term funds. Evergrande’s main onshore subsidiary had about $32 billion of commercial bills outstanding as of December… Some bills issued by its units are now trading in the secondary market at implied yields as high as 36%…”

July 7 – Financial Times (Hudson Lockett and Tabby Kinder): “Beijing has sent shockwaves through global financial circles with plans to tighten restrictions on overseas listings of Chinese companies, in a development that could threaten more than $2tn worth of shares on Wall Street. But the vague and sprawling nature of the announcement…, which followed a crackdown on New York-listed ride-hailing group Didi, has sown confusion among traders and investment bankers… The announcement came from China’s top leaders and stated that the reforms were ‘guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era’.”

July 9 – Bloomberg: “When China Evergrande Group founder Hui Ka Yan appeared at the Communist Party’s 100th anniversary celebration in Tiananmen Square on July 1, investors cheered at the implication that the embattled property tycoon still enjoyed favor in Beijing. Behind the scenes, the message Hui received from China’s top financial regulator was far more sobering. In a meeting at the nation’s capital shortly before the July 1 festivities, officials at the Financial Stability and Development Committee urged Hui to solve his company’s debt problems as quickly as possible…”

July 7 – Bloomberg: “Regulators in Beijing are planning rule changes that would allow them to block a Chinese company from listing overseas even if the unit selling shares is incorporated outside China, closing a loophole long-used by the country’s technology giants… The China Securities Regulatory Commission is leading efforts to revise rules on overseas listings that have been in effect since 1994 and make no reference to companies registered in places like the Cayman Islands, said the people… Once amended, the rules would require firms structured using the so-called Variable Interest Entity model to seek approval before going public in Hong Kong or the U.S… The proposed change is the first indication of how Beijing plans to implement a crackdown on overseas listings flagged by the country’s State Council on Tuesday.”

July 6 – Bloomberg (Filipe Pacheco and Matt Turner): “Didi Global Inc. plunged Tuesday in U.S. trading as the ride-hailing company faced scrutiny over its data security and a broader Chinese crackdown on companies listing their shares abroad. China’s State Council issued a sweeping warning to China’s biggest companies, vowing to tighten oversight of data security and overseas listings. That announcement followed the opening of a security review by China’s internet regulator last week and a demand for app stores to remove Didi.”

July 8 – Reuters (Stella Qiu and Ryan Woo): “China’s factory gate inflation eased in June after a government crackdown on runaway commodity prices, but the annual rate stayed uncomfortably high and underlined growing strains on the economy… The producer price index (PPI) increased 8.8% from a year earlier, compared with a 9.0% rise in May…”

July 4 – Reuters (Stella Qiu and Ryan Woo): “Growth in China’s services sector slowed sharply in June to a 14-month low, weighed down by a resurgence of COVID-19 cases in southern China…, adding to concerns the world’s second-largest economy may be starting to lose some momentum. The Caixin/Markit services Purchasing Managers’ Index (PMI) fell to 50.3 in June, the lowest since April 2020 and down significantly from 55.1 in May.”

July 4 – Bloomberg: “Local governments in China have more than doubled bond sales to roll over maturing debt this year, helping to ease their repayment risk. Cities and provinces sold about 1.9 trillion yuan ($293bn) of so-called refinancing bonds in the first six months of the year… That’s a sharp increase from about 700 billion yuan sold in the same period of 2020, and 660 billion yuan in 2019.”

July 7 – Bloomberg (Richard Frost, Sofia Horta e Costa and Coco Liu): “China’s move to rein in two of the most powerful corporate trends of the past decade — the rise of data-hungry tech titans and the flood of Chinese listings in the U.S. — is rippling through markets as investors brace for a new era of tighter oversight from Beijing. A gauge of Chinese technology stocks traded in Hong Kong fell as much as 1.9% on Wednesday to approach its lowest level since November. The index has slumped more than 30% since its February high…”

July 8 – Bloomberg (Jeanny Yu): “A key gauge of Chinese stocks traded in Hong Kong neared a bear market as Beijing’s latest crackdown drives investors to dump shares of the nation’s technology giants. The Hang Seng China Enterprises Index tumbled by 3.2% on Thursday, extending its loss since a February high to just shy of 20%. The gauge was dragged down by some of the biggest internet names including Meituan, Alibaba Group Holding Ltd. and Tencent Holdings Ltd., which were down by at least 3.7%. Hong Kong’s benchmark Hang Seng Index slid 2.9%, wiping out gains for the year.”

July 5 – Wall Street Journal (Newley Purnell): “Facebook Inc., Twitter Inc. and Alphabet Inc. Google have privately warned the Hong Kong government that they could stop offering their services in the city if authorities proceed with planned changes to data-protection laws that could make them liable for the malicious sharing of individuals’ information online.”

Global Bubble Watch:

July 6 – Bloomberg: “Central banks are starting to tip-toe away from the emergency stimulus they deployed to fight the pandemic-driven global recession. Federal Reserve Chair Jerome Powell and colleagues have begun debating when and how to slow their asset-purchase program, while the People’s Bank of China is already curbing credit growth. Brazil, Mexico, Turkey, the Czech Republic and Russia have hiked interest rates and others are starting to publicly detail how they may pull back support. The global pivot will still be gradual. The European Central Bank and Bank of Japan are likely to keep doling out aid to their economies, while even those turning hawkish still bet the recent surge in inflation will soon pass and are pledging to avoid roiling financial markets. The path of the delta variant could also still upend sentiment and demand. Balance sheets will keep expanding, albeit at a slower pace, and borrowing costs will stay close to historic lows.”

July 5 – Financial Times (Tabby Kinder, Hudson Lockett and Mercedes Ruehl): “More than two-thirds of Chinese groups that have listed in the US this year have sunk below their initial public offering price, despite record levels of fundraising, as growing regulatory scrutiny hit investor sentiment. The poor share price performance comes after 34 Chinese companies raised $12.4bn in New York floats in the first half of 2021, data from… Dealogic showed, an all-time high on both counts.”

July 7 – Bloomberg (Mark Gongloff): “One point three million U.S. dollars sounds like too many dollars to pay for a house that’s practically falling down, until you consider it’s in the suburb of a major city in a developed country that beat Covid-19, is relatively safe from nuclear fallout, and has a toothbrush fence. That’s how much an Auckland ‘dunger,’ which is the New Zealandish word for ‘dump,’ sold for in January. If it sold today, it would probably go for more.”

July 8 – Financial Times (Melanie Gerlis): “Auction sales were up 230% in the first half of 2021, the first evidence that the industry has bounced back quickly from the impact of the Covid-19 crisis. Data from Pi-eX finds that sales at Sotheby’s, Christie’s and Phillips, the largest international auction houses, hit a total $5.8bn by June 30, up from $1.75bn in 2020. While the gain is heavily flattered by last year’s hiatus, Pi-eX finds that the total is also a smidge ahead of the $5.77bn recorded… in 2019… Revenue from online-only auctions almost doubled, from $337m to $660m between 2020 and 2021, but the real gains came from going live again… Sales here rose from $1.4bn to $5.1bn.”

Central Banker Watch:

July 8 – Bloomberg (Carolynn Look and Jeannette Neumann): “The European Central Bank raised its goal for inflation and may let it overshoot the target for a while, giving officials more discretion in how to bolster the economy after years of lackluster performance. In the culmination of an 18-month review…, policy makers agreed to seek consumer-price growth of 2% over the medium-term with a ‘symmetric’ aim. The ECB said that when interest rates are near their effective lower bound, as now, the economy will need ‘especially forceful’ monetary stimulus that could ‘imply a transitory period in which inflation is moderately above target.’ The new wording is a significant change from the previous ‘below, but close to, 2% over the medium term,’ which some monetary officials felt was too vague and led to calls for tighter policy too soon.”

July 9 – Bloomberg (Jana Randow and Carolynn Look): “Bundesbank President Jens Weidmann said the European Central Bank won’t deliberately seek higher inflation rates to make up for previous undershoots, underlining the compromise made between more-hawkish and more-dovish policy makers on their new price-stability strategy. The ECB raised its inflation goal to 2% on Thursday in a unanimous decision after an 18-month debate, and acknowledged that temporary overshoots might occur when interest rates are near their lower limit, as now… ‘We are not striving for either lower or higher rates,’ Weidmann said… ‘That was important to me.’”

July 8 – Financial Times (Martin Arnold): “The European Central Bank has set itself a new 2% inflation target and said it will tolerate temporarily exceeding this when needed, in a shift that gives policymakers more flexibility to keep interest rates at historic lows for longer. The change, which was announced… as part of the… institution’s first review of its strategy since 2003, marks an important break with the conservative monetary doctrine of Germany’s Bundesbank that formed the bedrock of the euro’s creation. The… central bank also announced plans to tackle climate change risks by tilting its asset purchases and collateral rules away from heavy carbon-emitting companies that are not aligned with the EU’s climate goals. It addressed soaring house prices by promising to incorporate the cost of owning a home into how inflation is measured.”

July 4 – Reuters (Toby Sterling): “Rising inflation in Europe may not be temporary, Dutch central bank president Klaas Knot said… ‘Inflation is not dead,’ said Knot, known as one of the more hawkish members of the European Central Bank’s governing council. ‘We should not over-estimate our ability to determine what is temporary inflation and what is not,’ he said. The ECB forecasts inflation of 1.9% this year due to what it views as temporary factors amid a recovery after the coronavirus pandemic. For 2022, the bank forecasts inflation to fall back to 1.5%. Its long-term inflation target is near, but slightly below 2%.”

Europe Watch:

July 6 – Financial Times (Ben Hall): “Central Europe is at the forefront of a surge in inflationary pressures in Europe. Inflation in Poland hit 4.7% in May before easing to 4.4% in June. Hungary has the highest inflation in the EU at 5.1%. Some of this is due to transitory factors. But there are also reasons to think price pressures are here to stay in these two countries, creating potential tensions between their central banks and their free-spending nationalist governments. It also risks putting a dent in their carefully cultivated reputations for macroeconomic orthodoxy.”

EM Watch:

July 6 – Reuters (Gabriel Stargardter and Maria Carolina Marcello): “Brazilian President Jair Bolsonaro was involved in a scheme to skim salaries of his aides while a federal deputy, website UOL reported…, citing what it said were audios of his former sister-in-law explaining his role in the alleged racket. The scheme… involves hiring close associates as employees and then receiving a cut of their public salaries back from them. Rio de Janeiro state prosecutors have formally pressed charges against federal Senator Flavio Bolsonaro, the president’s eldest son, over his alleged participation in a similar racket when he was a state lawmaker.”

July 5 – Bloomberg (Cagan Koc and Burhan Yuksekkas): “Turkish inflation accelerated faster than all estimates last month, reducing the likelihood of a summer interest-rate cut sought by the country’s president. Consumer prices rose an annual 17.5% through June, up from 16.6% the previous month… Producer prices rose an annual 42.9% through last month, the most since October 2018, gains likely to eventually filter through to consumers.”

July 7 – Reuters (Andrey Ostroukh): “Russian annual inflation accelerated in June to its fastest rate since August 2016…, providing the central bank with strong argument to raise interest rates again this month to rein in consumer price growth. The consumer price index (CPI) rose 6.5% in June in year-on-year terms after rising 6.0% in the previous month…”

July 7 – Bloomberg (Andrea Jaramillo and Oscar Medina): “Jose Manuel Restrepo, the finance minister of Colombia, is diplomatic when asked about the downgrades that credit-rating companies dealt his government this year. ‘They were just doing their job,’ he says. But he then reels off — in a rapid-fire, somewhat defiant tone — a laundry list of things that he says proves that Colombia is doing everything that S&P Global Ratings and Fitch…, along with investors, are asking it to do to regain investment-grade status. Generate economic growth? Yes. Boost tax revenue? Yes. Address the current-account deficit? Yes. ‘We are following all the things we should do to continue sending that message of trust in the economy,’ he said…”

Japan Watch:

July 4 – Reuters (Daniel Leussink): “Japan’s services sector activity shrank for the 17th straight month in June as the coronavirus dampened demand at home and abroad, underscoring sluggish momentum for the world’s third-largest economy. The decline in the services industry kept overall private-sector activity in contraction for a second month…”

July 7 – Reuters (Leika Kihara): “Japanese bank lending rose at its slowest annual pace in more than eight years in June as corporate fund demand to weather coronavirus-linked cash constraints subsided, central bank data showed… Total deposits parked at commercial banks continued to rise and hit a fresh record last month… ‘The balance of bank lending remains at elevated levels, but corporate fund demand seems to be subsiding,’ a Bank of Japan official told reporters…”

Leveraged Speculation Watch:

July 7 – Reuters (Sujata Rao, Saikat Chatterjee and Karen Pierog): “An unwinding of bets by some hedge funds against 10-year U.S. Treasuries, the world’s safest asset, explains the sudden ructions in bond markets, traders and fund managers told Reuters… Yields on 10-year Treasuries, which move inversely to prices, recently stood at around 1.30%… after falling to a more than four-month low… They are now more than 45 bps below a January 2020 high of 1.77% hit in March. The drop in bond yields paints a gloomy picture for the popular ‘reflation’ trade, which has seen investors pile into economically-sensitive stocks that tend to do well when yields rise, including banks and energy companies.”

July 8 – Bloomberg (Katia Porzecanski, Hema Parmar, and Katherine Burton): “Gabe Plotkin’s Melvin Capital Management ended the first half of 2021 down 46% as the hedge fund struggled to bounce back from a vicious attack by Reddit traders on its short positions. The firm, which plunged in January as its bearish bets on companies including GameStop Corp. and AMC Entertainment Holdings Inc. were besieged by a retail-driven buying spree, was up about 1% in June…”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 6 – Reuters (Raphael Satter): “Between 800 and 1,500 businesses around the world have been affected by a ransomware attack centered on U.S. information technology firm Kaseya, its chief executive said… Fred Voccola, the… company’s CEO, said… it was hard to estimate the precise impact of Friday’s attack because those hit were mainly customers of Kaseya’s customers. Kaseya is a company which provides software tools to IT outsourcing shops: companies that typically handle back-office work for companies too small or modestly resourced to have their own tech departments. One of those tools was subverted…, allowing the hackers to paralyze hundreds of businesses on all five continents.”

July 5 – Wall Street Journal (Robert McMillan): “The boss of the company at the heart of a widespread hack that has affected hundreds of businesses said he briefed the White House and that attackers are demanding a single $70 million ransomware payment. The cyberattack that started to unfold Friday is estimated to have hit hundreds of mostly small and medium-size businesses and tens of thousands of computers. It quickly set off alarms in U.S. national security circles over concern that it could have far-reaching effects.”

July 9 – Financial Times (Leslie Hook and Steven Bernard): “Global temperatures set new records during the month of June, which was the warmest June on record in North America and the fourth warmest for the world overall. The unusual heat was revealed in satellite data from Copernicus Climate Change Service, part of an EU-wide programme, showing particularly extreme temperatures in the Russian Arctic, across the western US and Canada, and in parts of Europe. Scientists have said that global warming contributed to the high temperatures. Climate change made the heatwave in North American 150 times more likely, according to research from the World Weather Attribution group.”

July 2 – Wall Street Journal (Kara Dapena and Lindsay Huth): “Widespread drought is fueling an early ramp-up of wildfire season, with more than half of the U.S. wildland firefighting resources already committed and a growing portion of the Western U.S.—one of the largest swaths in recent years—at above-normal risk for significant wildfires in July. More than 30,000 fires have already burned nearly 1.5 million acres this year… Drought now encompasses more than 90% of the West. This level of wildfire activity is unusual for June and early July. Many notable fires of the past few years have occurred later in the season…”

July 8 – CNBC (Emma Newburger): “California Gov. Gavin Newsom on Thursday asked residents to curb household water consumption by 15% as the U.S. West grapples with a prolonged drought and record-breaking temperatures.”

July 5 – Wall Street Journal (Jesse Newman): “As another severe drought takes its toll in California, some farmers are backing away from one of their most profitable crops: almonds. For years the nuts have been one of California’s star crops, exported in bulk and used in food products throughout the supermarket. Now, farmers in parched parts of the state are bulldozing thousands of acres’ worth of almond orchards that cannot be irrigated… The drought, which began last year, has spread across nearly all of the western U.S. Combined with looming restrictions on groundwater usage, it is prompting a reckoning in California’s $6 billion almond industry, which grows about 80% of the world’s supply. The situation is reshaping the state’s food sector, forcing farmers to reassess which crops they will have the water to produce, and where.”

Geopolitical Watch:

July 2 – Reuters (Idrees Ali and Jonathan Landay): “American troops pulled out of their main military base in Afghanistan on Friday, leaving behind a piece of the World Trade Center they buried 20 years ago in a country that could descend into civil war without them. The quiet departure from Bagram Air Base brought an effective end to the longest war in U.S. history. It came as the Taliban insurgency ramps up its offensive throughout the country after peace talks sputtered.”

July 6 – Reuters (Tetsushi Kajimoto, Kiyoshi Takenaka and Gabriel Crossley): “Japan’s deputy prime minister said the country needed to defend Taiwan with the United States if the island was invaded…, angering Beijing which regards Taiwan as its own territory. China has never ruled out using force to reunite Taiwan with the mainland and recent military exercises by China and Taiwan across the Straits of Taiwan have raised tensions. ‘If a major problem took place in Taiwan, it would not be too much to say that it could relate to a survival-threatening situation (for Japan),’ Japan’s deputy prime minister Taro Aso said… A ‘survival-threatening situation’ refers to a situation where an armed attack against a foreign country that is in a close relationship with Japan occurs, which in turns poses a clear risk of threatening Japan’s survival.”

July 7 – Global Times (Song Zhongping): “Japan has gone too far and stretched its hands too long. Japan has no right to dictate issues related to China’s internal affairs. Making inflammatory comments on the Taiwan question shows that Japan is following US’ policy of using the island as an important bridgehead to contain China. Such remarks from a Japanese politician made shortly before the memorial day of July 7 Incident of 1937, when Japan invaded China, proves that Japan’s colonial ideology, especially toward the island of Taiwan, has not disappeared for a single day. Yet Japan needs to remember that its survival depends on whether Japan understands its situation correctly – not on how China is prepared to resolve the Taiwan question.”

July 3 – Reuters (Tom Balmforth): “Russian warplanes practiced bombing enemy ships in the Black Sea during training exercises, Russia said…, amid friction with the West over NATO drills in the region and following a recent incident with a British warship.”

July 4 – Reuters (Alexander Marrow): “A British warship’s entry into what Moscow considers Russian territorial waters near Crimea last month is the kind of provocation that demands a tough response, the Kremlin said… President Vladimir Putin said… Russia… could have sunk the warship. Moscow challenged the right of HMS Defender to pass through waters near Crimea, something London said it had every right to do. Russia annexed Crimea from Ukraine in 2014 but most of the world still recognises it as part of Ukraine. Peskov… said the incident was ‘a well-planned provocation’ and that Putin’s reaction had made it clear that any repetition would provoke a reponse.”

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June 21, 2024: Greatest Threat
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June 7, 2024: Summer of Discontent and Instability
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