June 17, 2022: Bursting Bubbles and Failed Experiments

June 17, 2022: Bursting Bubbles and Failed Experiments
Doug Noland Posted on June 18, 2022

We’re striving for context and perspective. In this incredible environment, feelings of insecurity and apprehension are inescapable. But we can work hard to minimize confusion.

A Bubble: “A self-reinforcing but inevitably unsustainable inflation.” An Experiment: “A test; trial; a tentative procedure or policy; an operation or procedure carried out under controlled conditions in order to discover an unknown effect or law.” The former definition is Noland’s and the latter Webster’s.

We are witness to momentous secular change unfolding in real time. The FOMC hiked rates 75 bps Wednesday, the largest rate boost since Greenspan’s lone 75 bps move more than 27 years ago (November 1994). For anything bigger, it’s back to the Volcker era.

The 1994 tightening cycle and attendant acute bond/derivatives market upheaval fundamentally altered Federal Reserve doctrine. It’s been gradualism ever since. All policy moves had to be well telegraphed to the markets. In effect, rates would be cautiously raised to ensure little market impact, hence no actual tightening of financial conditions.

The previous fateful cycle has run its course. Gradualism is out. Importantly, the Fed’s current objective is to meaningfully tighten financial conditions specifically to control runaway inflation. While the Fed remains as committed as ever to transparency, this comes with a major caveat: the FOMC can now be forced into changing its mind in a blink of an eye. Powell and the committee’s recently telegraphed 50 bps June hike was abruptly scrapped for 75. Fed guidance, the bedrock of bond market expectations and pricing in recent decades, has been turned to sand.

June 15 – Bloomberg (Mohamed A. El-Erian): “For its sake and that of both the domestic and global economy, the central bank desperately needs to regain control of the inflation narrative. The persistent failure to do so in the past 12 months is turning the perception of the Fed from the world’s most powerful central bank — long respected for its ability to anchor global financial stability — to an institution that too closely resembles an emerging-market bank that lacks credibility and inadvertently contributes to undue financial volatility. Regaining control of the inflation narrative is critical to the Fed’s policy effectiveness, its reputation and its political independence.”

It’s easy to agree with Mr. El-Erian: go out and regain the inflation narrative! But for the Fed to accomplish such a feat would basically require jettisoning policy doctrine that has evolved over the past three decades – the very doctrine underpinning the great Experiment in unfettered contemporary market-based finance.

Former ECB President Jean-Claude Trichet (2003-2011) was fond of saying “we never pre-commit.” The critical role of a central bank is to resolutely promote stable money and Credit. Committing to a set course only incentivizes market operators to exploit a predictable path of policy measures. Examples would include leveraged speculation to profit from future rate moves, the structure of the yield curve, currency devaluation and asset inflation more generally. In its most dangerous form, market participants push risk and speculative leverage envelopes in response to foolproof central bank liquidity and market backstops. I’m reminded of the Hyman Minsky insight, “stability is de-stabilizing.” Manipulating a false sense of stability in financial markets is ensuring trouble.

A cycle that commenced in the early nineties has run its course, and the Fed has no alternative than to adapt to new inflation realities. Tinkering with the markets proved a most slippery slope, from Greenspan to Bernanke to Yellen and Powell. Somehow, manipulating market expectations evolved to become a centerpiece of contemporary monetary management. The entire doctrine was developed with bolstering financial markets the focal point.

Trillions of liquidity were injected into the markets as the primary mechanism for inflating securities prices, loosening system finance and stimulating wealth-effect household and business spending. When resulting highly speculative markets wavered, Bernanke was there to “push back against a tightening of financial conditions.” A market downdraft early in his term had Powell executing a dizzying pivot. When cracks emerged in the summer of 2019, the Fed restarted QE. In response to collapsing Bubbles, the Fed desperately unleashed $5 TN (as global CBs added Trillions more).

The Fed is wishful thinking if it actually believes it will stabilize inflation back down near its 2% target. For a few decades, the Fed has had the luxury of directing its policy focus to the financial markets. Consumer price inflation was relatively contained and stable. It was also aberrational.

The inflating global Bubble backdrop created the perception of an expanding economic pie. The forces of cooperation and integration were powerful. Importantly, China, benefiting from a confluence of unlimited cheap finance and globalization, unleashed a historic investment boom. The resulting massive increase in the supply of low-cost manufactured goods (from China and EM more generally) was fundamental to subdued consumer price inflation in the face of historic Credit excess.

This anomalous inflationary dynamic, with asset prices rising more forcefully than consumer prices, proved powerfully self-reinforcing. Global liquidity excess fueled the ongoing investment boom, stoking both growth dynamics and insistent asset inflation. Downward pressures on goods prices, a key inflationary dynamic, were misinterpreted as manifestations of deep-seated disinflationary forces. Then, as asset Bubbles inevitably faltered, the battle cry quickly turned to a whatever it takes fight against the scourge of deflation. Increasingly fanatical monetary inflation repeatedly revived Credit, asset and economic Bubbles.

A historic cycle has, finally, come to its conclusion. Multiple Interconnected Historic Experiments are failing concurrently – unfettered global finance, inflationist central bank doctrine, market and economic structure.

History – distant and recent – teaches that Credit is Inherently Unstable. Market-based Credit, within a backdrop of central bank inflationism and resulting speculative excess, is acutely unstable. A retrograde multi-decade Experiment in central bank market manipulation and egregious monetary excess fed the misperception of financial stability and soundness – for Credit, Credit markets, stocks, derivatives and “structured finance.”

Over time, the entire global financial structure was underpinned by new paradigm central bank policy doctrine. How could governments endlessly create Trillions of new liabilities (i.e. bonds), while prices of these (increasingly unsound) securities only inflated higher? Central bank policies. Defaults – or even market illiquidity – would never be tolerated. In a world of such great uncertainty, how could the perception take hold that stocks were a sure bet to always increase in price? Central banks and their “whatever it takes” liquidity backdrop. Why is there such little concern for booms in about every type of risky lending, leveraged speculation and crazy manias? Central Banks. Better yet, how could derivatives markets willfully disregard past debacles and expand to hundreds of Trillions on the specious assumption of liquid and continuous markets?

The life of a central banker has turned incredibly more complicated. A new cycle of significantly higher and unstable inflation has taken hold. It’s the downside of global Bubble Dynamics – a shrinking pie, insecurity, angst, and disintegrating relationships and alliances – along with conflict. The Ukrainian war, tit for tat sanctions, and the new Iron Curtain. Meanwhile, cost structures over the years have inflated tremendously in previously low-cost economies China and EM more generally. And with new Inflation Dynamics now favoring energy, commodities and hard assets over suspect financial assets, central bank liquidity injections will increasingly gravitate to real things and away from securities (reinforcing consumer price inflation and imperiling the central bank market liquidity backstop).

The week’s good news – that should not be easily dismissed – was that markets made it through quarterly options/derivatives expiration without a serious accident. It was anything but a sure thing. Things were looking dicey.

Still, Crisis Dynamics have attained important momentum.

June 17 – Bloomberg (Michael P. Regan): “It was one of the most dramatic weeks in the short history of the cryptocurrency market, bookended by the type of announcements investors fear the most from a counterparty: We’re sorry, but we just can’t return your money right now. In between, a nascent technocratic industry with grand ambitions to reinvent the financial system was rocked repeatedly by echoes of past crises in the old system. It was a week of margin calls, forced selling and important collateral being exposed as way too illiquid in a time of crisis. There were rumblings of hedge-fund blowups, tales of opportunistic predatory trading, job cuts and loud denials of problems from key players proven wrong almost immediately. Amid it all, the myth was shattered once and for all that this new crypto financial system was somehow immune to – or even able to benefit from — the economic fundamentals currently punishing the old system.”

A modern day bank run, with an unsettling semblance of a collapsing Ponzi Scheme. And as spectacular as this imploding speculative Bubble has become – with millions of unsuspecting “investors” suffering painful losses – from a systemic perspective, it pales in comparison to the unfolding collapse of the Everything Bubble.

It was an especially bloody week in the equities market. In what was the week’s theme across markets, there was No Place to Hide. Indeed, the equities marketplace has mutated into a perilous minefield. The week was notable for the year’s outperforming sectors being taken to the woodshed. The Philadelphia Oil Services Index collapsed 19.8%. The “defensive” Dow Jones Utilities Index was hammered 9.5%. The materials and metals stocks, relative bright spots in bear market darkness, succumbed to the gloom. The S&P500 Materials Index fell 8.3%, and the Philadelphia Gold & Silver Index (XAU) sank 8.7%

And on the subject of “No Place to Hide,” heightened currency market instability deserves comment. After trading below 1.00 late in Wednesday trading, the Swiss franc (vs. $) approached 1.04 in Thursday’s and Friday’s sessions (following the SNB’s surprise rate hike). Reaching a 105.79 intraday high late in Wednesday trading, the Dollar Index then suffered a quick 2.2% downdraft into Thursday afternoon – before recovering. The dollar/yen traded at a 24-year high 135.5 in Wednesday trading, sank to 131.5 Thursday, only to almost rally back to 135.5 in Friday action. The euro (vs. $) traded down to 1.036 Wednesday, rallied to 1.060 Thursday and fell back to 1.045 in Friday trading.

Wild currency instability is consistent with the unfolding market accident thesis. Everything points to an especially brutal week for the leveraged speculating community. As losses mount, hands weaken (waning loss tolerance). During the initial phase of de-risking/deleveraging, players tend to liquidate fringe positions causing performance pain – expecting/hoping a market rally will make paring chunky core positions (with big hits to performance) unnecessary. Hope morphed into fear this week, with favored hedge fund stocks and sectors under intense selling pressure. No Place to Hide means no choice but to de-risk/deleverage.

With huge systemic ramifications, the corporate Credit market has swiftly approached the point of major dislocation. Market Structure begins to malfunction when market yields spike concurrently with widening Credit spreads and surging CDS prices.

June 14 – Bloomberg (Katie Greifeld): “Rare market stresses are emerging in the world of bond ETFs as volatility grips Wall Street ahead of the crucial Federal Reserve meeting. Cash prices in two of the largest high-yield exchange-traded funds closed at steep discounts to the value of their underlying assets on Monday, as bonds posted historic losses in the hawkish aftermath of last week’s shock inflation print. The $13.4 billion iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) ended Monday 1.2% below its net asset value — the largest dislocation since March 2020. The $6.8 billion SPDR Bloomberg High Yield Bond ETF (JNK) closed at a 1.8% discount, in the biggest divergence since 2016. Such price inconsistencies are normally repaired by specialized traders known as authorized participants… But heightened volatility can complicate that process, particularly with fixed-income ETFs, which trade much more frequently than the debt securities they hold.”

June 16 – Bloomberg (Natalie Harrison): “Spreads on US junk-rated corporate bonds, an important gauge of risk that signals higher defaults when it increases, surpassed 500 bps for the first time since November 2020. The figure, which measures the extra yield investors demand to hold the debt instead of US Treasuries, increased 31 bps on Thursday to 508 bps, according to the Bloomberg US Corporate High Yield index. Junk spreads have surged 100 bps the past two weeks…”

“Stock Markets Plunge Again as Flurry of Interest Rate Hikes Fuels Recession Fears.” “Investors Brace for Recession, More Market Turmoil After Fed’s Supersized Hike.” “Stock Slump Worsens as Recession Worries Grow.”

I would posit that the stock market this week responded foremost to heightened stress, illiquidity, and the risk of serious dislocation in corporate Credit. How does an economy slide from a 3.6% unemployment rate and 11 million available jobs to recession? Dislocation in the Credit market.

The reversal of speculative finance appears unalterable. De-risking/deleveraging Dynamics have attained powerful momentum that I doubt will be subdued. High-Yield CDS prices jumped 44 this week to 576 bps (high since May 2020), with a stunning two-week surge of 103 bps (largest 2-wk gain since April 2020). Perhaps even more noteworthy, Investment-Grade CDS rose eight this week to trade above 100 bps for the first time since April 2020 – with the 18 bps two-week surge the largest since March 2020. Bank CDS rocketed higher, with double-digit surges – and highs since March 2020 – for the most powerful U.S. financial institutions (JPMorgan, Goldman, Morgan Stanley, Citigroup, and Bank of America).

June 17 – Bloomberg (Brian Smith): “After the market pitched the first full-week (non-seasonal) primary supply shutout since the onset of the pandemic, underwriters lack confidence in the near-term deal calendar… After rising to nearly 5% this week – a level not seen since the global financial crisis – the Bloomberg US Agg Corporate YTW index dwarfs the 3.60% average coupon on the US IG Corporate Investment Grade index. Investors are becoming more selective… US investment-grade bond funds have now seen 12 straight weeks of cash withdrawals, the longest outflow streak on record… with a massive $8.7bn outflow for the week ended June 15.”

June 17 – Bloomberg (Carmen Arroyo and Jill R. Shah): “The safest portion of the $1 trillion collateralized loan obligation market is falling into lockstep with its structured product peers as spreads widen, causing money managers to change tack. The bonds, which are backed by bundles of business loans, have held fast as the rest of the market priced in looming recession risks and widespread volatility. While most structured products cheapened in the span of a few weeks, CLO pricing remained tight, especially as their floating-rate coupons cushioned investors from the Federal Reserve’s intense campaign of interest rate hikes. But this is no longer the case.”

The week was notable for Crisis Dynamics making a decisive thrust from the Periphery toward the Core. From booming to no deals this week in investment-grade corporate Credit. Waning resilience for top-rated “structured finance” securitizations. This points to a major tightening of corporate Credit. Pertinent questions: What role has structured finance played in this year’s booming demand for top-tier corporate Credit? How much speculative leverage has accumulated in perceived safe fixed-income securities, and how will a surprising tightening within the investment-grade debt market impact perceptions of creditworthiness?

Powell did his best to calm the markets following the Fed’s extraordinary 75 bps rate hike. Likely done with 75 bps moves. Basically, front-loading what the committee anticipates will be a modest tightening cycle.

Powell: “On QT, we’ve communicated really clearly to the markets about what we’re going to do there. Markets seem to be okay with it. We’re phasing it in. Treasury issuance is down quite a lot, quite a lot from where it’s been. So, I have no reason to think – markets are forward looking and they see this coming. I have no reason to think it will lead to illiquidity and problems. It seems to be kind of understood and accepted at this point.”

It was briefly addressed almost in passing; such a critical and increasingly pressing issue – the Fed’s balance sheet. There has been complacency both in the markets and within the Fed regarding QT, which, best I can tell, centers around the couple Trillion in “repos” held at the Fed, perceived as part of excess system liquidity. Especially with this week’s intensifying de-risking/deleveraging dynamic, I believe the unwind of speculative leverage is in the process of triggering acute liquidity crisis.

There’s a lot of market grumbling. The Fed is failing to communicate effectively. They don’t seem to have a cohesive plan. It is monetary management on the fly.

And this brings us back to Bubbles and Experiments – to Bursting Bubbles and Failed Monetary Experiments. Market Structure developed over decades on a foundation of low interest rates and the security of the Fed’s liquidity backstop. The focus of monetary policy doctrine evolved to prioritize asset inflation and sustaining securities markets Bubbles. Today, myriad historic Bubbles are deflating, with unparalleled risk of illiquidity, panic, runs and collapses. Meanwhile, runaway inflation has forced a shift in Fed focus away from the financial markets.

Only the Fed’s liquidity backstop will thwart financial collapse. Meanwhile, the timing and scope of Federal Reserve support are up in the air. It’s crisis management time, at home and abroad. You know the global financial environment is perilous when China’s collapsing Bubble backdrop suddenly appears a pillar of relative stability. EM dominoes starting to fall. Kuroda’s crazy JGB (Japanese government bond) Bubble about to blow. The ECB’s European bond Bubble blowup this week spurring an emergency meeting and yet another round of high-risk desperate measures.

June 16 – Bloomberg (Jorge Valero): “European Central Bank President Christine Lagarde told euro-area finance ministers that the ECB’s new anti-crisis tool will kick in if the borrowing costs for weaker nation rise too far or too fast, according to people briefed… At a meeting in Luxembourg Thursday, Lagarde explained to ministers that the new mechanism that central bank officials are devising is intended to prevent irrational market movements from putting pressure on individual euro nations as ECB embarks on its first interest-rate hikes in more than a decade, the people said… She said the instrument may be triggered if bond spreads widen beyond certain thresholds or if market movements exceed a certain speed.”

June 17 – Financial Times (Sam Fleming and Martin Arnold): “Germany’s finance minister has challenged the European Central Bank over the spectre of bond market fragmentation in the eurozone, saying he did not see particular hazards in current market conditions. Christian Lindner told the ECB’s president in a closed-door session that he was not worried by recent moves in spreads between bond yields in the euro area… His words came after the ECB held an emergency meeting… in which its governing council pledged to accelerate plans to create a ‘new anti-fragmentation instrument’ — a reference to the widening gap in the cost of borrowing between more stable sovereigns such as Germany and more vulnerable member states such as Italy.”

For the Week:

The S&P500 sank 5.8% (down 22.9% y-t-d), and the Dow fell 4.8% (down 17.7%). The Utilities were clobbered 9.0% (down 10.8%). The Banks fell 4.6% (down 24.0%), and the Broker/Dealers lost 3.6% (down 23.8%). The Transports declined 3.7% (down 21.9%). The S&P 400 Midcaps sank 7.6% (down 21.9%), and the small cap Russell 2000 slumped 7.5% (down 25.8%). The Nasdaq100 dropped 4.8% (down 31.0%). The Semiconductors sank 8.9% (down 34.7%). The Biotechs were little changed (down 21.0%). With bullion down $32, the HUI gold index sank 7.7% (down 6.7%).

Three-month Treasury bill rates ended the week at 1.5375%. Two-year government yields jumped 12 bps to 3.18% (up 245bps y-t-d). Five-year T-note yields rose nine bps to 3.34% (up 208bps). Ten-year Treasury yields gained seven bps to 3.23% (up 172bps). Long bond yields rose nine bps to 3.28% (up 138bps). Benchmark Fannie Mae MBS yields jumped another 20 bps to 4.66% (up 259bps).

Greek 10-year yields sank 37 bps to 4.01% (up 270bps y-t-d). Ten-year Portuguese yields fell 10 bps to 2.70% (up 224bps). Italian 10-year yields dropped 17 bps to 3.60% (up 243bps). Spain’s 10-year yields slipped three bps to 2.75% (up 218bps). German bund yields jumped 15 bps to 1.66% (up 184bps). French yields gained 11 bps to 2.20% (up 201bps). The French to German 10-year bond spread narrowed four to 54 bps. U.K. 10-year gilt yields rose five bps to 2.50% (up 153bps). U.K.’s FTSE equities index dropped 4.1% (down 5.0% y-t-d).

Japan’s Nikkei Equities Index sank 6.7% (down 9.8% y-t-d). Japanese 10-year “JGB” yields declined three bps to 0.25% (up 16bps y-t-d). France’s CAC40 slumped 4.9% (down 17.8%). The German DAX equities index lost 4.6% (down 17.4%). Spain’s IBEX 35 equities index declined 2.9% (down 6.5%). Italy’s FTSE MIB index fell 3.4% (down 20.3%). EM equities remained under pressure. Brazil’s Bovespa index sank 5.4% (down 4.8%), and the Mexico’s Bolsa index declined 0.9% (down 9.9%). South Korea’s Kospi index sank 6.0% (down 18.0%). India’s Sensex equities index dropped 5.4% (down 11.8%). China’s Shanghai Exchange Index gained 1.0% (down 8.9%). Turkey’s Borsa Istanbul National 100 index slipped 0.4% (up 36.4%). Russia’s MICEX equities index rose 3.0% (down 37.8%).

Investment-grade bond funds saw hefty outflows of $8.708 billion, and junk bond funds recorded negative flows of $5.705 billion (from Lipper).

Federal Reserve Credit last week increased $12.3bn to $8.893 TN. Over the past 144 weeks, Fed Credit expanded $5.166 TN, or 139%. Fed Credit inflated $6.082 Trillion, or 216%, over the past 501 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $3.1bn to $3.398 TN. “Custody holdings” were down $141bn, or 4.0%, y-o-y.

Total money market fund assets declined $11.7bn to $4.541 TN. Total money funds were down $37bn, or 0.8%, y-o-y.

Total Commercial Paper sank $31.4bn to $1.126 TN. CP was down $55bn, or 4.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 55 bps to 5.78% (up 285bps y-o-y) – the high since November 2008. Fifteen-year rates jumped 43 bps to 4.81% (up 257bps) to the high since June 2009. Five-year hybrid ARM rates rose 21 bps to 4.1% (up 181bps) – the high back to January 2010. Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 32 bps to 5.89% (up 270bps) – the high since March 2011.

Currency Watch:

June 15 – Bloomberg (Chester Yung and Tania Chen): “Hong Kong bought local dollars for a second straight day, as the currency fell to the weak end of its trading band on mounting speculation of an increasingly hawkish Federal Reserve. The Hong Kong Monetary Authority bought HK$25.6 billion ($3.3bn) worth of the city’s dollars on Wednesday, after the currency once again traded on the weak end of its permitted trading range… It bought a total of HK$13.7 billion the previous day to support the currency.”

For the week, the U.S. Dollar Index increased 0.5% to 104.65 (up 9.4% y-t-d). For the week on the upside, the Swiss franc increased 1.9%. On the downside, the Brazilian real declined 3.2%, the Norwegian krone 3.0%, the Canadian dollar 2.0%, the Mexican peso 1.9%, the Australian dollar 1.8%, the South Korean won 1.5%, the Swedish krona 1.4%, the South African rand 1.0%, the New Zealand dollar 0.7%, the British pound 0.6%, the Japanese yen 0.5%, the euro 0.2%, and the Singapore dollar 0.2%. The Chinese (onshore) renminbi slipped 0.11% versus the dollar (down 5.37% y-t-d).

Commodities Watch:

June 16 – Bloomberg (Alex Longley and Francine Lacqua): “Oil markets are tighter than Goldman Sachs Group Inc.’s top commodity researcher had expected just a few months ago… ‘The markets moved faster and the fundamental tightness is deeper than what we would have thought three or six months ago,’ Jeff Currie, head of commodities research at the bank, said… ‘This is where we should be, but it is a lot deeper than we would have initially thought. Energy and food right now, as we go into the summer months, are severely skewed to the upside.’”

The Bloomberg Commodities Index sank 6.4% (up 27.8% y-t-d). Spot Gold declined 1.7% to $1,839 (up 0.6%). Silver slipped 1.0% to $21.67 (down 7.0%). WTI crude slumped $11.11 to $109.56 (up 46%). Gasoline plunged 9.1% (up 70%), and Natural Gas sank 21.5% (up 86%). Copper dropped 6.2% (down 10%). Wheat dipped 2.2% (up 36%), while Corn added 1.5% (up 29%). Bitcoin collapsed $8,520, or 29.6%, this week to $20,520 (down 56%).

Market Instability Watch:

June 13 – Bloomberg (Srinivasan Sivabalan and Maria Elena Vizcaino): “Treasury yields posted their biggest two-day jump in decades on Monday, roiling assets around the world in one of the strongest signs yet that the era of easy money is coming to an end. Global markets blew through milestones that seemed far-fetched even a few days ago. Yields on three-year US Treasuries soared, capping the biggest two-day rise since 1987.”

June 14 – Bloomberg (Ye Xie): “It’s fast and it’s furious and it’s toxic for other asset classes. It’s the rise in 10-year US real yields — seen by some as the true benchmark for borrowing costs — which have soared over 150 bps in the past 60 trading days, while the Federal Reserve turned ever-more hawkish. Investors calculate real yields by adjusting nominal ones for inflation. That’s the biggest surge since the US government started selling inflation-protected securities in the late 1990s, surpassing routs during the global financial crisis and the Taper Tantrum of 2013.”

June 14 – Bloomberg (Josyana Joshua): “A fresh selloff in the world’s biggest bond market is ramping up funding costs across Corporate America as investment-grade yields spike to the highest since October 2009. The yield on the benchmark Bloomberg high-grade index closed at 4.89% on Monday… — recalling levels last seen in the depths of the global financial crisis and higher than than the 4.58% rate in the March 2020 pandemic rout.”

June 13 – Bloomberg (Alexandra Harris): “Treasury securities across all tenors are trading well below the rate on overnight general collateral repurchase agreements, creating dislocations in the funding markets, as Treasury yields soar in a continuation of Friday’s post-CPI repricing. ‘As customers sell their positions to dealers, there’s limited liquidity in the off-the-run markets so the dealers short-sell currents,’ Curvature Securities executive vice president Scott Skyrm says… This increased buying and selling volume leads to more settlement activity, which then leads to more fails, according to Skyrm. ‘Market participants reduce their investments and leverage and go into ‘cash,’ leaving more actual cash in the repo market.’”

June 15 – Bloomberg (John O’Donnell, Huw Jones and Marc Jones): “A markets sell-off has brought back memories of the euro zone debt crisis more than a decade ago, highlighting divisions that have plagued the currency bloc’s efforts to forge a closer bond. While the years since the debt crisis have seen the 19 countries in Europe’s euro area centralise and toughen bank controls, many planned economic reforms in Italy and elsewhere were watered down as vast money printing buoyed the economy. Spurred by fears higher borrowing costs will choke economic growth, the markets rout has exposed cracks in the uneasy alliance which… is held together largely by the central bank rather than a government with power to tax and spend…”

June 14 – Bloomberg (Chikako Mogi and Toru Fujioka): “The Bank of Japan ramped up the defense of its policy framework Tuesday after yields came under renewed upward pressure, unveiling a further set of unscheduled buying operations, including purchases of much longer maturities. The central bank boosted scheduled purchases of five-to-10-year debt after the benchmark yield failed to come down from 0.255% — above the upper end of its 0.25% tolerance band.”

June 16 – Reuters (Tom Westbrook and Alun John): “Japan’s government bond market is being pushed to breaking point in a contest between foreign speculators and the Bank of Japan, creating challenges for loan pricing and bond sales and raising the prospect of government financing tangles down the track. Extreme stress was evident on Wednesday, when the Bank of Japan (BOJ) spent more than 700 billion yen ($5.2bn) buying bonds to defend its 10-year yield ceiling, only to see 10-year futures suffer their steepest plunge in almost a decade… Wednesday’s turnover was the highest in a year…”

June 16 – Financial Times (Nikou Asgari): “Credit Suisse is set to pay nearly double-digit interest rates for its latest bond offering as investors demand high compensation from the crisis-ridden bank. The Swiss lender is due to pay 9.75% in interest on its new debt that is being sold late on Thursday, according to people familiar… The bank will raise at least $1.5bn and its bond offering comes amid a sell-off in financial markets as major central banks raise interest rates in an effort to tame spiralling inflation.”

June 15 – Reuters (Patturaja Murugaboopathy and Gaurav Dogra): “Global equity funds have shed over 7% this month due to a slump in stock prices as higher inflation levels fuel worries about more aggressive policy tightening by major central banks. Global bond funds have declined 3.5% on average, while money market funds fell 1.4%, data from Refinitiv Lipper showed. With the sharp declines this month, global equity funds have lost one-fifth of their net asset value on average…”

June 14 – Bloomberg (Lu Wang and Melissa Karsh): “The smart money dumped stocks at the fastest pace on record as a vicious selloff sent the S&P 500 into a bear market. Hedge funds tracked by Goldman Sachs Group Inc. offloaded US equities for a seventh straight day Monday, with the dollar amount of selling over the last two sessions exploding to levels not seen since the firm’s prime broker began tracking the data in April 2008… In the note published Tuesday, Goldman said short sales at its hedge-fund clients climbed ‘aggressively,’ with broad-based investing strategies — or macro products — like exchange-traded funds dominating the flows.”

Bursting Bubble/Mania Watch:

June 14 – CBS (Irina Ivanova): “Many technology companies that expanded during the pandemic are now pulling back, laying off workers and retracting job offers as the U.S. economy slows. On Tuesday, the cryptocurrency exchange Coinbase said it was cutting its workforce by 18%, or about 1,100 people… The slump is affecting a wide range of companies. Coinbase’s cuts come one day after cryptocurrency company BlockFi, which had grown nearly sixfold in 2021, announced it was laying off about 250 people. Privacy and marketing company OneTrust last week let go 950 employees, Stitch Fix cut 330 and identity-verification company ID.me dismissed 130. Transportation company Bird slashed a similar number, while PolicyGenius gave pink slips to 170. And that’s just in the past two weeks.”

June 11 – Washington Post (Gerrit De Vynck and Rachel Lerman): “After a decade of exuberance, Silicon Valley start-ups, venture capitalists and established tech companies alike are cutting investment and firing workers, prompting some in the tech world to openly predict a U.S. recession is on the way. Facebook and Amazon have slowed their frantic hiring paces, while highflying newer companies including scooter company Bird and email client Superhuman have laid off workers. Tesla chief executive Elon Musk recently told employees he has a ‘super bad feeling’ about the economy, and venture capital firm Lightspeed Venture Partners warned in a blog post that ‘the boom times of the last decade are unambiguously over.’”

June 16 – Reuters (Lisa Pauline Mattackal and Medha Singh): “Major cryptocurrency volatility has hit stablecoins, typically considered the market’s safer-havens, with investors pulling money out of the sector and several losing the peg to their underlying assets. The market capitalization of stablecoins had plummeted to $156.8 billion on Thursday, from around $181 billion at the start of May, CoinGecko data showed. Tether, the world’s largest stablecoin, briefly dropped to $0.993 on Wednesday…”

June 13 – Bloomberg (Suvashree Ghosh, Sidhartha Shukla and Muyao Shen): “A month after the implosion of the Terra stablecoin sent the crypto market reeling, another crisis is causing fresh angst across the entire digital-asset universe. Celsius Network Ltd., one of the biggest lenders in crypto and a key player in the world of decentralized finance, said late Sunday that it was pausing withdrawals, swaps and transfers following weeks of speculation over its ability to make good on the outsize returns it offered on certain of its products, including yields as high as 17%. The move effectively halted a platform with registered entities across the globe and billions of dollars worth of digital coins under management, accelerating a selloff in the broader market…”

June 14 – Wall Street Journal (Gregory Zuckerman): “Plunging cryptocurrency prices are starting to throw a wrench into the plans of firms that deal in bitcoin and related areas, amplifying the impact of an already brutal market retreat. Heading into 2022, crypto deal making was hot as companies sought to stake positions in an evolving industry. So far this year, there have been 42 announced acquisitions of crypto-related companies, a pace that would exceed last year’s 60 deals, according to Dealogic. But it has been nearly two months since the last deal was announced… Among the firms potentially caught in an uncomfortable limbo: Mike Novogratz’s crypto merchant bank, Galaxy Digital Holdings Ltd., which agreed in the spring of 2021 to buy crypto-custody specialist BitGo in a deal that hasn’t closed.”

June 14 – CNBC (Arjun Kharpal): “Bitcoin tumbled below $23,000 on Monday, hitting its lowest level since December 2020, as investors dump crypto amid a broader sell-off in risk assets… The world’s largest cryptocurrency bitcoin dropped below the $23,000 mark, according to CoinDesk data. At one point bitcoin fell about 17% to trade around $22,764.”

June 15 – Bloomberg (Lu Wang): “While hedge funds were busy bailing from stocks at a record pace as the S&P 500 plunged into a bear market, Corporate America was furiously buying. As the benchmark index notched successive drops of more than 2.9% on Friday and Monday, Goldman Sachs Group Inc.’s unit that executes share buybacks for clients saw volume spiking to 2.8 times last year’s daily average on the first day and more than triple the average on the second. Each session ranked as the firm’s busiest of this year.”

June 15 – Reuters (Gertrude Chavez-Dreyfuss): “China’s holdings of U.S Treasuries tumbled in April to their lowest since May 2010…, with Chinese investors likely cutting losses as Treasury prices fell after Federal Reserve officials signaled sizable rate hikes to temper soaring inflation. Chinese holdings dropped to $1.003 trillion in April, down $36.2 billion from $1.039 trillion the previous month… China’s stock of Treasuries in May 2010 was $843.7 billion…”

June 16 – Bloomberg (Will Louch and Dani Burger): “Private owners of assets face a ‘crisis of value’, after years of prices being driven higher by rock-bottom interest rates, according to two senior private equity figures. ‘Right now in the private markets it has been a crisis of value,’ Gabriel Caillaux, head of General Atlantic’s business in EMEA, said… ‘The excesses happened because valuations ran up and you had a whole new set of actors that came in who made the deal cycle a little bit too accelerated.’ Some deals have been mis-priced because of the sustained period of low interest rates, particularly in health and technology, Scott Kleinman, co-president of Apollo Global Management Inc. said.”

June 15 – Bloomberg (Sridhar Natarajan, Hema Parmar and Miles Weiss): “As wealthy investors clamored to get into Tiger Global Management’s ever-soaring bets on startups, JPMorgan Chase & Co.’s ability to funnel cash to the high-flying money manager became the envy of rivals. Now, with Tiger’s public investments cratering and all eyes on what happens to its stakes in private companies, the bank’s prestigious offering to clients is cutting the other way. JPMorgan raced past the likes of Morgan Stanley and Goldman Sachs…. to source more capital for Chase Coleman’s Tiger empire just as it neared its zenith. That made JPMorgan’s customers, collectively, one of the top sources of cash for Tiger’s newest and largest-ever venture-capital fund, contributing $1.9 billion to the vehicle known as PIP 15 before fundraising closed in March. Months before that, the bank tapped a similar client pool to amass $2.9 billion for a new venture fund for Philippe Laffont’s Coatue Management.”

June 15 – Bloomberg (Olivia Raimonde and Davide Scigliuzzo): “Wall Street banks face the high-risk, low-reward scenario of selling around $50 billion of leveraged loans to fund buyouts before yields ascend even more after taking pain on recent deals sold at steep discounts. There’s little room to maneuver for the banks, who committed to doing the deals months ago… ‘At the end of the day, using your balance sheet to win business is not a riskless trade, and given the tremendous move in bond yields, we will likely continue to see backstopped deals print with significant discounts to par, transferring wealth from banks to financial sponsors,’ said Christian Hoffmann, a portfolio manager for Thornburg Investment Management Inc.”

June 15 – Financial Times (Brooke Masters): “Twenty years ago next week, a massive accounting scandal hit a leading US growth company, drove it into bankruptcy and spurred tighter accounting and securities laws that still shape America today. No, not Enron. The Texas energy group, which collapsed six months earlier, has become shorthand for corporate fraud… But it was the… telecoms company WorldCom, which admitted in June 2002 to booking billions of dollars in inflated profits, that finally spurred the passage of the Sarbanes-Oxley corporate accountability law. The lesson for today’s investors is more than WorldCom’s fraud, however. A Wall Street darling, the company soared through the 1990s, gobbling up rivals and telling investors that the rise of the internet would drive huge increases in network demand. But it hit a wall amid the 2000s dotcom crash…”

Russia/Ukraine War Watch:

June 12 – Associated Press (David Keyton and John Leicester): “Ukrainian and British officials warned Saturday that Russian forces are relying on weapons able to cause mass casualties as they try to make headway in capturing eastern Ukraine and fierce, prolonged fighting depletes resources on both sides. Russian bombers have likely been launching heavy 1960s-era anti-ship missiles in Ukraine, the U.K. Defense Ministry said. The Kh-22 missiles were primarily designed to destroy aircraft carriers using a nuclear warhead. When used in ground attacks with conventional warheads, they ‘are highly inaccurate and therefore can cause severe collateral damage and casualties,’ the ministry said. Both sides have expended large amounts of weaponry in what has become a grinding war of attrition…, placing huge strains on their resources and stockpiles.”

June 11 – Reuters (Natalia Zinets): “Up to 300,000 tonnes of grain may have been stored in warehouses that Kyiv says were destroyed by Russian shelling last weekend, deputy agriculture minister Taras Vysotskyi said….”

Economic War/Iron Curtain Watch:

June 15 – Bloomberg: “Russia stepped up the use of energy as a weapon by further cutting natural gas shipments via its biggest pipeline to Europe, prompting Germany to accuse the Kremlin of trying to drive up prices. Gazprom PJSC is curbing gas supplies via its Nord Stream pipeline to Germany by 60%… The move adds to a 15% reduction in flows to Italy, the continet’s second-largest customer of Russian gas, putting more pressure on already tight European energy markets and sending gas prices surging more than 25%.”

June 13 – Associated Press (Krutika Pathi and Elaine Kurtenbach): “India and other Asian nations are becoming an increasingly vital source of oil revenues for Moscow despite strong pressure from the U.S. not to increase their purchases, as the European Union and other allies cut off energy imports from Russia… Such sales are boosting Russian export revenues at a time when Washington and allies are trying to limit financial flows supporting Moscow’s war effort. A report by the… Centre for Research on Energy and Clean Air, an independent think tank… said Russia earned 93 billion euros ($97.4bn) in revenue from fossil fuel exports in the first 100 days of the country’s invasion of Ukraine, despite a fall in export volumes in May.”

June 15 – Bloomberg (Arne Delfs): “German Economy Minister Robert Habeck said he believes a decision Tuesday by Gazprom PJSC to cut gas flows through the key Nord Stream pipeline by 40% was ‘politically motivated’ and not due to technical issues as the Russian company stated. Maintenance work on the pipeline that would have a ‘relevant’ impact on supply isn’t due to be carried out by Siemens Energy AG until the fall and, in any case, wouldn’t affect 40% of the infrastructure, Habeck told reporters… ‘In that sense, I have the impression that what happened yesterday is a political decision and not a decision that can be justified in technical terms,’ he said.”

China/Russia/U.S. Watch:

June 15 – Bloomberg: “Chinese President Xi Jinping held his second phone call with Vladimir Putin since his Russian counterpart invaded Ukraine in late February, where he reiterated support for Russia’s security concerns… The report of the conversation, which took place on Xi’s 69th birthday, largely repeated China’s prior comments on Russia including a call for Putin and other nations to work toward a solution on Ukraine. ‘China is willing to continue mutual support with Russia on issues related to sovereignty, security and issues of major concern,’ Xi said… A Kremlin account of the call said the Chinese president noted the ‘legitimacy of Russia’s actions in protecting its fundamental national interests in the face of security challenges created by external forces.’”

June 12 – Bloomberg (Ravi Buddhavarapu): “China’s defense minister accused the U.S. of ‘smearing’ Beijing and said Washington is trying to ‘hijack’ countries in the Indo-Pacific region. Wei Fenghe, speaking at the Shangri-La Dialogue…, said the burden of improving the troubled U.S.-China ties lies on Washington. ‘We request the U.S. side to stop smearing and containing China. Stop interfering in China’s internal affairs. The bilateral relationship cannot improve unless the U.S. side can do that,’ he told delegates at… Asia’s top defense conference. ‘However, if you want confrontation, we will fight to the end. The two militaries should make positive efforts for a positive relationship,’ Wei added.”

Europe/Russia/China Watch:

June 15 – Reuters (Stephanie van den Berg): “NATO must build out ‘even higher readiness’ and strengthen its weapons capabilities along its eastern border in the wake of Russia’s invasion of Ukraine, the military alliance’s chief said…. Secretary General Jens Stoltenberg was speaking after informal talks in the Netherlands with Dutch Prime Minister Mark Rutte and the leaders of Denmark, Poland, Latvia, Romania, Portugal and Belgium ahead of a wider NATO summit in Madrid… ‘In Madrid, we will agree a major strengthening of our posture,’ he said. ‘Tonight we discussed the need for more robust and combat-ready forward presence and an even higher readiness and more pre-positioned equipment and supplies.’”

Inflation Watch:

June 14 – Reuters (Lucia Mutikani): “U.S. producer prices increased solidly in May as the cost of gasoline surged, another sign of stubbornly high inflation… The producer price index for final demand rose 0.8% last month after advancing 0.4% in April. A 1.4% jump in the prices of goods accounted for nearly two-thirds of the rise in the PPI. Goods prices, which rose 1.3% in April, were driven by soaring costs for energy products… Wholesale gasoline prices rebounded 8.4% after falling 3.0% in April, making up 40% of the rise in the costs of goods. Jet fuel increased 12% after shooting up 14.8% in April. There were also increases in the cost of residential natural gas, steel mill products and diesel fuel… Excluding food and energy, goods prices rose 0.7% after increasing 1.1% for two straight months.”

June 13 – Bloomberg (Alex Tanzi): “US consumers expect prices to rise even faster over the next year, and that will propel spending to a record, according to a survey from the Federal Reserve Bank of New York. One-year ahead median inflation expectations climbed in May to 6.6% from 6.3%, tying the highest reading since the survey began in June 2013. That’s going to take a bigger bite out of Americans’ wallets, as forecasts for household spending jumped for a fifth month by a series high 9%…”

June 14 – Financial Times (Amanda Chu and Justin Jacobs): “Americans are feeling the pain of petrol inflation every time they pull up to the pump. But a supersized surge in the cost of diesel is adding to economically damaging price rises just about everywhere else. The national average price of diesel hit a fresh peak of $5.72 a gallon this week, up 75% over the past year… It is one of the sharpest fuel cost increases on record… The surge in the price of diesel, a workhorse fuel, is coursing through the US economy, helping to push price increases in the world’s largest economy to 40-year highs.”

June 13 – Wall Street Journal (Kirk Maltais): “Soybean prices have soared some 30% this year to a record, a surge that promises further pain for consumers facing the most severe bout of food inflation in a decade. The continuous contract for soybeans on the Chicago Board of Trade ended trading Thursday at $17.69 a bushel, topping the previous high of $17.68, set in September 2012 when drought scorched the U.S. crop.”

Biden Administration Watch:

June 10 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “US defence secretary Lloyd Austin accused China of stepping up coercive behaviour towards Taiwan as he stressed that Washington would maintain its military capacity to resist any force that threatened the country. Speaking at the IISS Shangri-La Dialogue defence forum in Singapore, Austin said China was engaging in provocative behaviour across the Indo-Pacific region that ranged from dangerous naval and aerial manoeuvres to increasingly assertive military activity around Taiwan. ‘We’ve witnessed a steady increase in provocative and destabilising military activity near Taiwan,’ Austin said… ‘That includes PLA aircraft flying near Taiwan in record numbers in recent months.’”

June 14 – Reuters (David Brunnstrom, Humeyra Pamuk, Michael Martina and Ben Blanchard): “The United States… backed Taiwan’s assertion that the strait separating the island from China is an international waterway, a further rebuff to Beijing’s claim to exercise sovereignty over the strategic passage. The Taiwan Strait has been a frequent source of military tension since the defeated Republic of China government fled to Taiwan in 1949 after losing a civil war with the communists… In recent years, U.S. warships, and on occasion those from allied nations such as Britain and Canada, have sailed through the strait, drawing Beijing’s anger. On Monday, China’s Foreign Ministry said the country ‘has sovereignty, sovereign rights and jurisdiction over the Taiwan Strait’ and called it ‘a false claim when certain countries call the Taiwan Strait ‘international waters’.’”

Federal Reserve Watch:

June 15 – Washington Post (Rachel Siegel): “The Federal Reserve’s missteps in waiting too long to tackle the greatest run-up in prices in four decades has shaken trust across markets and the American public that it is up to the task of curbing inflation. On the eve of a high-stakes Fed policy announcement, investors, economists and policymakers were on edge over how sharply the Fed would raise interest rates to deal with inflation, which hit a new peak in May… The S&P 500 has fallen into bear market territory… Even more concerning are new signs that families have lost faith in the Fed’s policies. Consumer sentiment in June sank to a low not seen since the 1980 recession…”

U.S. Bubble Watch:

June 16 – Bloomberg (Alexandra Semenova): “Initial jobless claims ticked down last week, but were higher than forecast… First-time filings for unemployment insurance in the U.S. totaled 229,000 for the week ended June 11, falling from the prior week’s upwardly revised 232,000… Last week’s figure held near the highest level since mid-January when the Omicron-driven wave of COVID-19 sent droves of employees home from work.”

June 15 – Yahoo Finance (Alexandra Semenova): “U.S. retail sales registered a bigger-than-expected drop in May as motor vehicle sales plunged and record gasoline prices prompted households to cut back spending on other items… Retail sales fell 0.3% last month, down sharply from April’s downwardly revised 0.7% increase, following 0.9% initially reported. May’s print also marked the first decline in five months… Weakness in May’s print was led by a slowdown in car purchases as vehicles and borrowing got more expensive. Sales at motor vehicle and parts dealers fell 3.5% in May. Without the autos component of the report, retail sales rose 0.5% during the month. Spending at gas stations was up 4%, with last month’s sales rising 43.2% against the prior year.”

June 14 – Reuters (Lucia Mutikani): “U.S. small-business confidence edged down in May as worries about high inflation persisted, according to a survey…, which also showed demand for labor remained strong… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index dipped 0.1 point last month to 93.1. The share of owners expecting better business conditions over the next six months hit a record low… The NFIB survey showed 51% of businesses reported job openings they could not fill, up four points from April. The vacancies were for both skilled and unskilled labor, with worker shortages most acute in the construction, manufacturing, retail, and wholesale industries. Small business job openings are more than 20 percentage points higher than the historical average.”

June 16 – Bloomberg (Olivia Rockeman): “New US home construction dropped in May, highlighting the impacts of ongoing supply chain challenges and sinking sales as mortgage rates rise. Residential starts declined 14.4% last month to a 1.55 million annualized rate, the lowest in more than a year… April construction was revised sharply higher to a 1.81 million rate, which was the strongest since 2006. Applications to build… fell to an annualized 1.7 million units, the lowest since September. The monthly decline in starts was the largest since April 2020…”

June 15 – Reuters (Lucia Mutikani): “Confidence among U.S. single-family homebuilders dropped to a two-year low in June as high inflation and rising mortgage rates reduced affordability for entry-level and first-time buyers, a survey showed… The National Association of Home Builders/Wells Fargo Housing Market index fell two points to 67 this month, the lowest reading since June 2020. It was the sixth straight monthly decline in the index… The component measuring traffic of prospective buyers fell five points to 48, marking the first time this gauge has fallen below the breakeven level of 50 since June 2020.”

June 15 – Wall Street Journal (Orla McCaffrey): “Americans have more equity in their homes than ever before. Total U.S. home equity increased almost 20% in the first quarter to $27.8 trillion, a record high, according to the Federal Reserve. The increase is another consequence of a red-hot housing market… Rising home values are boosting the finances of the Americans who already own them… About 60% of equity was withdrawn via cash-out refinances in 2021, according to mortgage-data firm Black Knight. Homeowners are likely to turn to home-equity lines of credit, said Andy Walden, vice president of enterprise research strategy at Black Knight.”

June 14 – CNBC (Diana Olick): “Mortgage rates jumped sharply this week, as fears of a potentially more aggressive rate hike from the Federal Reserve upset financial markets. The average rate on the popular 30-year fixed mortgage rose 10 bps to 6.28% Tuesday, according to Mortgage News Daily. That followed a 33 bps jump Monday. The rate was 5.55% one week ago.”

June 16 – Bloomberg (John Gittelsohn and Paulina Cachero): “Mortgage rates in the US surged the most in more than three decades, ratcheting up pressure on would-be homebuyers and cooling the housing market. The average for a 30-year loan jumped to 5.78%, up from 5.23% last week… That was the largest one-week increase since 1987.”

June 16 – CNBC (Sarah O’Brien): “For consumers in search of an affordable new car, there’s little relief on the horizon. The monthly costs to finance a vehicle purchase have hit record highs. Consumers face monthly payments averaging $656 for a new car, financed at 5.1% over 70.5 months, according to… Edmunds.com. For used cars, the average monthly payment is $546, with an average rate of 8.2% and loan length of 70.8 months.”

June 14 – Financial Times (Joe Rennison): “Lenders are extending fewer loans to the car buyers with the riskiest profiles, a sign that they are bracing for an economic slowdown that could test people’s ability to pay their debts. The pullback in credit to so-called subprime borrowers comes as used-car prices remain high and record petrol prices increase the cost of driving a car. Interest rates are rising as the Federal Reserve works to contain inflation. ‘A whole swath of consumers are just not going to be able to get cars,’ said Jennifer Thomas, a portfolio manager at Loomis Sayles.”

June 15 – Bloomberg (Brett Pulley and Michael Sasso): “With a booming economy and major corporations increasingly locating operations in his city, Atlanta Mayor Andre Dickens said that he wants the government to find ways to place restrictions on property investors who are contributing to a surge in the region’s home prices. Dickens… said that he envisions something similar to the Community Reinvestment Act — a federal law designed to encourage banks to meet the needs of all borrowers — to prevent Atlanta communities from being overtaken by deep-pocketed real estate investors.”

Economic Disruption Watch:

June 17 – Bloomberg (Vanessa Dezem): “European natural gas prices headed for the biggest weekly gain since the early stages of Russia’s war in Ukraine as Moscow’s deepening supply cuts reverberate across the region. Benchmark futures rose as much as 8.4%, before paring gains to take this week’s advance to about 50%. Eni SpA will receive just half of what it requested from Gazprom PJSC on Friday, compared with about two-thirds the previous day. German energy giant Uniper SE said it’s receiving 60% less gas than ordered from Russia.”

Fixed-Income Bubble Watch:

June 14 – Bloomberg (Amanda Albright): “The municipal market is once again contending with a wave of selling pressure. The amount of bonds out for the bid on Bloomberg’s platform climbed to $2.1 billion on Monday as the market saw its worst day since April 2020, with a one-day loss of 1.5%…”

China Watch:

June 15 – Bloomberg (Tom Hancock): “Official Chinese economic statistics for May told a story of a lockdown-wounded economy improving on the back of stronger industrial output and investment – but a deeper look suggests an economy still contracting. Headline industrial output in May grew an unexpected 0.7% from a year earlier, but output of electricity was down 3.3% and power consumption was down 1.3% for the same period… ‘We believe some fundamentals might be worse than the official data suggest,’ economists at Nomura Holdings Inc. wrote…, pointing to falling production of power, cement, crude steel, autos and smartphones, and also an index of road freight which was almost 19% lower than a year earlier. That decline may have continued into this month, with truck activity down more than 20% in the first two weeks of June…”

June 16 – Bloomberg: “China’s home prices fell for a ninth month in May, signaling demand remains weak despite increased government support for the slumping property market. New home prices in 70 cities… dropped 0.17% last month from April, when they slid 0.3%… Chinese households have turned to hoarding cash this year, a sign that people are bracing for tougher times even as some cities emerge from crippling Covid lockdowns.”

June 15 – Bloomberg: “China’s property market showed a tentative sign of improvement in May, with new-home sales posting the first month-on-month gain this year. Residential sales rose 26% from April, the first increase since December, according to Bloomberg calculations based on official figures released Wednesday. From a year earlier, sales dropped 42% in May, easing from a 49% decline in the previous month.”

June 15 – Bloomberg: “China’s stop-start reopening may be too little, too late to save some cash-strapped property developers. Among 32 builders that have defaulted since the start of last year or are currently facing debt-repayment pressure, at least 13 have derived more than a third of their sales from the Yangtze River Delta area anchored by Shanghai…”

June 14 – Bloomberg (Ailing Tan): “The amount of dollar bonds from Chinese issuers yielding more than 15% has totaled $78.7 billion… Nearly 91% amount from 213 bonds with such yield were issued by real estate firms. Country Garden Holdings Co. topped all issuers with 16 bonds on the list…”

June 14 – Reuters (Tania Chen): “China’s central bank abstained from cutting a key policy interest rate, avoiding further policy divergence from the US that could add pressure on the yuan. The People’s Bank of China kept the rate on its one-year medium-term lending facility at 2.85% on Wednesday… The PBOC also rolled over the 200 billion yuan ($29.7bn) of maturing MLF loans.”

June 15 – Wall Street Journal (Cao Li and Serena Ng): “Foreign investors cut their holdings of Chinese bonds by another $16 billion in May, a month that saw the yuan hit its lowest level in 20 months… May marked a fourth straight month of outflows from Chinese yuan-denominated bonds, and took the total drawdown since February to about $61 billion. The pullback is easily the largest since the Chinese bond market was made more accessible to foreigners in mid-2017, with the launch of the Bond Connect trading link with Hong Kong.”

June 14 – Reuters (Samuel Shen and Andrew Galbraith): “China Construction Bank Corp (CCB) started selling 60 billion yuan ($8.9bn) in bonds on Wednesday, joining peers as they rush to replenish capital in response to tighter regulations and government calls to support a virus-hit economy. China’s government has asked banks to help stabilise the world’s second-largest economy by lending to small firms and sectors which bore the brunt of COVID-19 containment measures in some of the country’s biggest cities in the last few months… Capital ratios of Chinese banks are above regulatory limits, but they suffer from inadequate capital generation, as well as ‘the push from the government in asking banks to give up part of their profits’ with cheaper loans to help stimulate economic activity, said economist Gary Ng at Natixis in Hong Kong.”

June 13 – Financial Times (Ryan McMorrow, Sun Yu and Tabby Kinder): “Over the past year, China’s once overworked but well-compensated tech workers have seen an erosion of office perks, job cuts, headcount freezes and stalling or falling pay. Trouble at smaller, unprofitable companies gradually expanded to highly profitable groups including social media group Tencent and ecommerce leader Alibaba. Last month, executives at Tencent and Alibaba vowed ‘cost control’ was at the top of their agenda… Tencent executive James Mitchell said the company was slowing hiring and adding ‘lower-cost heads’ to curb expenses.”

June 16 – Reuters (Engen Tham): “A protest planned by hundreds of bank depositors in central China seeking access to their frozen funds has been thwarted because the authorities have turned their health code apps red… The depositors were planning to travel to the central province of Henan this week from across China to protest against an almost two-month block on accessing at least $178 million of deposits, which has left companies unable to pay workers and individuals unable to access savings.”

Central Banker Watch:

June 15 – Financial Times (Martin Arnold and Adam Samson): “The European Central Bank has sought to tackle fears that the eurozone is on the cusp of another debt crisis, saying it would speed up work on a new policy tool to counter surging borrowing costs in the region’s weaker eurozone economies. After an emergency meeting on Wednesday, the central bank’s governing council pledged to accelerate plans to create a ‘new anti-fragmentation instrument’ — a nod to the widening gap in the cost of borrowing between more stable sovereigns such as Germany and more vulnerable member states. Bond yields of countries such as Italy and Spain shot up to their highest level for eight years after ECB rate-setters last Thursday announced plans to stop buying more bonds and start raising interest rates. The surge in borrowing costs has revived fears about a potential repeat of the damaging debt crises in 2012 and 2014 that nearly tore the eurozone apart.”

June 14 – Financial Times (Martin Arnold): “The European Central Bank has ‘no limits’ in its commitment to defend the euro, board member Isabel Schnabel said…, stressing its willingness to launch a new instrument to counter any ‘disorderly’ jump in the borrowing costs of weaker eurozone economies. The comments by Schnabel… were designed to reassure investors that the ECB is determined to prevent a recent sell-off in the bonds of certain countries from triggering another debt crisis in the region. Borrowing costs for heavily indebted countries such as Italy and Spain have shot to eight-year highs since the ECB last week signalled an end to its ultra-loose monetary policy of the past decade by announcing plans to stop buying more bonds and to start raising interest rates.”

June 16 – Bloomberg (Jana Randow and Alessandra Migliaccio): “Bond-buying under any new anti-crisis tool from the European Central Bank would probably involve selling other securities in its portfolio so purchases don’t upset efforts to curb record inflation, according to people familiar… Policy makers are determined to neutralize any interventions in debt markets so they don’t exacerbate upward price pressures, said the people…”

June 16 – Bloomberg (Allegra Catelli and Libby Cherry): “The Swiss National Bank unexpectedly increased interest rates for the first time since 2007, shifting away from a battle to tame a stronger currency to focus on inflation that threatens to get out of hand. It raised its policy rate by 50 bps to -0.25%, a dramatic move that sent the franc surging more than 2% against the euro, bringing parity between the two currencies into view.”

June 16 – Bloomberg (David Goodman and Philip Aldrick): “The Bank of England raised interest rates for a fifth straight meeting and sent its strongest signal yet that it’s prepared to unleash larger moves if needed to tame inflation. The nine-member Monetary Policy Committee voted 6-3 to increase the benchmark lending rate by 25 bps to 1.25%. Policy makers led by Governor Andrew Bailey hinted that they may join a growing global trend for larger hikes if inflation continues to soar…”

June 17 – Bloomberg (Toru Fujioka and Chikako Mogi): “Bank of Japan Governor Haruhiko Kuroda held firm with rock-bottom interest rates, defying an intensifying global wave of central bank tightening and concentrated market pressure on the yen and government bonds. The central bank kept its policy settings for yield curve control and asset purchases… In a rare move, the bank added a reference to foreign exchange rates to its list of risks for the first time since 2012, following the yen’s rapid weakening to a 24-year low earlier this week.”

June 15 – Bloomberg (Maria Eloisa Capurro): “Brazil raised its key interest rate by half a percentage point and signaled another hike in August… The central bank lifted the Selic to 13.25%…, extending a cycle that’s boosted rates 11.25 percentage points since March 2021. In a statement, policy makers wrote it’s appropriate to tighten policy ‘significantly into even more restrictive territory’ given the unfavorable consumer price outlook.”

Global Bubble and Instability Watch:

June 13 – Wall Street Journal (Dave Sebastian): “New listings in China are breaking records even as turbulent markets cast a pall over the global initial-public-offering business. The disconnect shows how markets in Shanghai and Shenzhen remain relatively shielded from developments elsewhere, bankers say… IPOs in China raised more than $33.8 billion so far this year, up from more than $30.4 billion a year earlier, according to Dealogic. This year’s tally is the highest figure since at least 2009… In contrast, the global dollar value of IPOs fell 71% to more than $90.2 billion over the same period. In Hong Kong, IPO volumes have tumbled 92% from a year ago to nearly $2.2 billion, the lowest point since 2009.”

June 12 – Bloomberg (Karl Lester M. Yap and Marcus Wong): “Bond investors are avoiding Asia’s emerging markets as the region’s resilience to the global inflation threat shows signs of cracking… ‘We are becoming wary of Asian bonds on the deteriorating inflation backdrop,’ said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken… ‘Even though domestic demand in the region is still recovering, the inflation backdrop will prompt even the most reluctant central banks to tighten.’”

June 16 – Bloomberg (Evelyn Cheng): “A measure of risk levels for debt in Asia has surpassed its 2009 financial crisis high, thanks to a surge in downgrades of Chinese property developers since late last year, ratings agency Moody’s said… Among the relatively risky category of Asian high-yield companies outside Japan that are covered by Moody’s, the share with the most speculative ratings of ‘B3 negative’ or lower has nearly doubled from last year — to a record high of 30.5% as of May, the firm said.”

June 15 – Bloomberg (Garfield Clinton Reynolds): “Australian bonds became the latest to succumb to the accelerating global meltdown in government debt, with yields jumping at a pace last seen in 1994. The selloff was triggered by concern a wage-price spiral will break out after Australia’s industrial relations tribunal raised the national minimum wage by a larger-than-expected 5.2%. Rate-sensitive three-year bonds tumbled anew on the news, with yields surging to a 10-year closing high of 3.69%. That’s a 57 bps spike in two days, the largest since June 1994.”

June 16 – Bloomberg (Swati Pandey): “Sydney property prices are expected to fall by up to 20% as rising interest rates amplify affordability challenges in one of the world’s most expensive markets. Such a result would likely augur nationwide declines. Australia & New Zealand Banking Group Ltd. economists predict housing in the nation’s largest city will drop by one-fifth this year and next.”

Europe Watch:

June 14 – Financial Times (Tommy Stubbington and Martin Arnold): “Investors are questioning how far Italy’s borrowing costs can rise before they rip a hole through the heavily-indebted country’s economy… Yields have shot higher in the bloc since the European Central Bank last week signalled an end to the stimulus measures it ramped up at the onset of the coronavirus pandemic. ECB president Christine Lagarde confirmed plans to withdraw a large-scale bond-buying programme and to initiate interest rate rises next month to tackle record levels of inflation. In turn, Italy has found itself in the market’s crosshairs, because of its need to refinance a borrowing load of around 150% of gross domestic product. Investors are dusting off calculations from the eurozone debt crisis a decade ago as they try to understand when the rise in yields could start to imperil finances for the Italian government as well as for companies and households.”

June 11 – Financial Times (Nikou Asgari): “Investors are starting to worry again about high levels of government debt in the eurozone, as the prospect of rising interest rates revives concerns that have largely lain dormant in recent years. Borrowings by debt-laden countries including Italy, Greece and Spain have increased in the decade since the region’s sovereign debt crisis… Markets were more willing to fund those large debt piles while borrowing costs were ultra-low and the European Central Bank was continuing with its massive bond-buying programme. But the ECB’s plans to withdraw such stimuli… mean the bonds of these southern European nations are once again under pressure.”

June 13 – Wall Street Journal (Matthew Dalton): “For decades, European industry relied on Russia to supply low-cost oil and natural gas that kept the continent’s factories humming. Now Europe’s industrial energy costs are soaring in the wake of Russia’s war on Ukraine, hobbling manufacturers’ ability to compete in the global marketplace. Factories are scrambling to find alternatives to Russian energy…, bringing production to a halt. Europe’s producers of chemicals, fertilizer, steel and other energy-intensive goods have come under pressure over the last eight months as tensions with Russia climbed ahead of the February invasion. Some producers are shutting down…”

June 16 – Financial Times (Guy Chazan, David Sheppard, Nastassia Astrasheuskaya and Roman Olearchyk): “The German government has appealed to the population to conserve energy after Russia cut supplies through a critical Baltic Sea pipeline bringing gas to Europe. Deputy chancellor Robert Habeck said the situation was ‘serious’ and that companies and citizens should do what they could to save energy. ‘Every kilowatt hour helps in this situation,’ he said… Russia’s state-controlled gas exporter Gazprom has cut flows through the Nord Stream pipeline by 60% in recent days, citing technical problems. But Germany claims the move is political…”

EM Bubble Watch:

June 13 – Bloomberg (Tugce Ozsoy): “The cost to insure against a debt default by Turkey’s government in the next five years surged, heading for the highest closing level in almost two decades. Credit default swaps rose as high as 870 bps on Monday, reflecting investor concerns over a deepening rout in the lira and the government’s reliance on unorthodox monetary policies to support it. The advance took the CDS contracts above the level reached during the 2008 global financial crisis and all the way back to 2003…”

June 14 – Reuters (Manoj Kumar and Nidhi Verma): “High global energy and raw material prices combined with a weak rupee fueled the fastest annual rise in India’s wholesale prices in more than 30 years… Wholesale prices, akin to producer prices, climbed 15.88% in May from year ago levels, staying in double-digits for a 14th straight month, and was, according to economists, India’s highest since September 1991.”

June 13 – Wall Street Journal (Alexander Saeedy and Anthony Harrup): “Crédito Real built a booming business lending at high interest rates to Mexican teachers and other government workers. The loans were paid back through payroll deduction, reducing the risk of nonpayment. Now it is planning to file for bankruptcy in Mexico after it has faced growing skepticism over how it has been reporting its earnings and measuring the size of its loan portfolio. Investors pulled the plug on the lender amid questions over why roughly half of the value of its loan portfolio, or around $1.1 billion, consisted of unpaid interest… It would be the second nonbank lender in Mexico specializing in payroll loans to restructure following scrutiny of their accounting and allegations of concealed losses.”

Japan Watch:

June 13 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Haruhiko Kuroda is quickly discovering the unpopularity of his remarks on inflation after a local media poll found a majority of the public saying he shouldn’t be at the helm of the central bank. The Kyodo News survey… found that 59% of respondents deem Kuroda to be unfit for the job of governor. The poll was released on the same day that Kuroda apologized again for his comments on how consumers were becoming more tolerant of prices. The yen also slid to 24-year low Monday, further amplifying the price pressure on Japan’s households as energy and food prices continue to soar.”

June 16 – Bloomberg (Masaki Kondo): “The Bank of Japan would face a huge loss on its super-sized holdings of government bonds if it were to buckle under ever greater market pressure and abandon its easy monetary policy as hedge funds rush to short the debt securities. Thanks to its quest to boost prices in deflation-prone Japan, the BOJ now owns 526 trillion yen ($4 trillion) of government bonds — almost half the total — an amount that rivals the size of the economy.”

June 16 – Bloomberg (Masaki Kondo): “With all the focus on Japan’s 10-year sovereign bonds, liquidity has deteriorated significantly in almost all other corners of the market. Bid-ask spreads have increased amid soaring market volatility, with the gap for some maturities at the widest since late last year. The exception is the spread for 10-year notes, which remains relatively tight due to the Bank of Japan’s offer to buy unlimited quantity of this tenor.”

June 16 – Reuters (Tom Westbrook and Alun John): “Japan ran its biggest single-month trade deficit in more than eight years in May as high commodity prices and declines in the yen swelled imports… The growing trade deficit underscores the headwinds the world’s third-largest economy faces from a slide in the yen and surging costs of fuel and raw materials… Imports soared 48.9% in the year to May… That outpaced a 15.8% year-on-year rise in exports in the same month, resulting in a 2.385 trillion yen ($17.80bn) trade deficit, the largest shortfall in a single month since January 2014.”

Leveraged Speculation Watch:

June 13 – Bloomberg (Bei Hu and Nishant Kumar): “For years, it’s been one of the best calling cards that hedge fund startups in Asia could ask for: getting support from billionaire Zhang Lei or gaining experience at his Hillhouse Capital Group. After leveraging that Hillhouse pedigree to raise a combined $20 billion, the offshoot funds are losing some of their luster. Most have posted double-digit declines this year on the same Chinese tech, consumer and health-care sectors that Hillhouse itself backed to mint so many millionaires. None of the nine Hillhouse next-generation funds Bloomberg tracked has been spared. Franchise Capital Management lost two-thirds of its value in the 14 months to April… Brilliance Asset Management’s flagship fund dropped 27% in the first four months of 2022…, while a retail version dropped 47% from a February 2021 peak to June 2.”

June 15 – Financial Times (Laurence Fletcher): “A hedge fund backed by legendary investor Julian Robertson has shut its doors after nearly 13 years of trading in the latest sign of the tough conditions for managers trying to bet on the rise and fall of stock prices. New York-based Tiger Legatus Capital Management, founded by former Viking Global Investors trader Jesse Ro, told investors… it would liquidate its fund and return capital after recent disappointing returns.”

June 17 – Wall Street Journal (Serena Ng): “Cryptocurrency-focused hedge fund Three Arrows Capital Ltd. has hired legal and financial advisers to help work out a solution for its investors and lenders, after suffering heavy losses from a broad market selloff in digital assets, the firm’s founders said… ‘We have always been believers in crypto and we still are,’ Kyle Davies, Three Arrows’s co-founder, said… ‘We are committed to working things out and finding an equitable solution for all our constituent.’ The nearly decade-old hedge fund… had roughly $3 billion in assets under management in April this year.”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 17 – CNN (Rachel Ramirez and Brandon Miller): “The West saw an aspect of the climate crisis play out this week that scientists have warned of for years. In the middle of a prolonged, water shortage-inducing megadrought, one area, Yellowstone, was overwhelmed by drenching rainfall and rapid snowmelt that — instead of replenishing the ground over a matter of weeks or months — created a torrent of flash flooding that ripped out roads and bridges and caused severe damage to one of the country’s most cherished national parks. In the meantime, drought conditions persisted in the Southwest, where water is desperately needed to replenish the country’s largest reservoirs, and provide relief to regions tormented by record-setting wildfires.”

June 13 – Associated Press: “More than 100 million Americans are being warned to stay indoors if possible as high temperatures and humidity settle in over states stretching through parts of the Gulf Coast to the Great Lakes and east to the Carolinas. The National Weather Service Prediction Center… said Monday 107.5 million people will be affected by combination of heat advisories, excessive heat warnings and excessive heat watches through Wednesday.”

June 17 – Associated Press (Paulo Santalucia): “Water is so low in large stretches of Italy’s largest river that local residents are walking through the middle of the expanse of sand and shipwrecks are resurfacing. Authorities fear that if it doesn’t rain soon, there’ll be a serious shortage of water for drinking and irrigation for farmers and local populations across the whole of northern Italy.”

Covid Watch:

June 16 – Wall Street Journal (Sarah Neville, John Burn-Murdoch and Jamie Smyth): “European countries are experiencing a surge in Covid-19 hospital admissions driven by sub-variants of the highly infectious Omicron strain, threatening a fresh global wave of the disease as immunity levels wane and pandemic restrictions are lifted. Admissions have risen in several countries including France and England… The BA.5 sub-variant of Omicron now accounts for more than 80% of new infections in Portugal. In Germany, where admissions have been rising for over a week, the share of Covid-19 infections ascribed to BA.5 doubled at the end of last month. Experts warn that the widespread scaling back of testing and surveillance may be compromising the ability of countries to spot new mutations and react quickly.”

Geopolitical Watch:

June 17 – Reuters (Martin Quin Pollard): “China launched its third aircraft carrier on Friday, the Fujian, named after the province opposite self-ruled Taiwan, sending a statement of intent to rivals as it modernises its military. President Xi Jinping has made overhauling the world’s largest armed forces a central part of his agenda, seeking to project power well beyond China’s shores… Champagne, colourful ribbons, water cannons and smoke were deployed to celebrate the carrier’s launch and official naming at a ceremony at the Jiangnan shipyard in Shanghai…”

June 12 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “China’s defence minister began his speech at the Shangri-La Dialogue security conference by claiming inaccurately that China had never started a war against another country. Yet minutes later, General Wei Fenghe warned the audience of officials and security experts from Indo-Pacific countries that the People’s Liberation Army would ‘crush’ any effort by Taiwan to pursue independence. ‘The US fought a civil war for its unity. China never wants such a civil war. We will resolutely crush any attempt to pursue Taiwanese independence,’ Wei told the audience…”

June 11 – Wall Street Journal (Niharika Mandhana): “U.S. Defense Secretary Lloyd Austin said China was taking a more aggressive approach to its territorial claims and warned that Chinese aircraft and ships were increasingly engaging in provocative behavior in the Indo-Pacific. Speaking at a defense conference…, he said the U.S. is working to strengthen ‘guardrails against conflict,’ including by keeping the lines of communication fully open with China’s defense leaders. ‘We do not seek a new Cold War, an Asian NATO, or a region split into hostile blocs,’ he said. ‘We will defend our interests without flinching, but we’ll also work toward our vision for this region—one of expanding security, one of increased cooperation, and not one of growing division.’”

June 13 – Reuters (Ben Blanchard): “The Taiwan Strait is an international waterway and Taiwan’s government supports U.S. warships transiting it, the foreign ministry said…, rebuffing claims from China to exercise sovereignty over the strategic passage. The narrow strait has been a frequent source of military tension since the defeated Republic of China government fled to Taiwan in 1949 after losing a civil war with the communists, who established the People’s Republic of China.”

June 14 – Reuters (Ahmed Rasheed): “Moqtada al-Sadr has raised the stakes in the struggle for Iraq with a major political escalation that could lead to conflict with his Iran-backed rivals or force a compromise in their tussle over government. Frustrated at being unable to form an administration eight months after his party won the biggest share of seats in parliament, the Shi’ite Muslim cleric steered Iraqi politics into uncharted territory on Sunday when his lawmakers quit.”

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