MARKET NEWS / CREDIT BUBBLE WEEKLY

June 21, 2024: Greatest Threat

MARKET NEWS / CREDIT BUBBLE WEEKLY
June 21, 2024: Greatest Threat
Doug Noland Posted on June 22, 2024

Let’s get started with domestic. Ten-year Treasury yields traded this week at the lowest level since March. Markets have taken this as confirmation of economic weakening. The market closed Friday pricing a 4.85% policy rate at the Fed’s December meeting, implying two rate cuts (48 bps).

Mohamed El-Erian is emboldened, penning his “The Fed Needs to Cut Sooner Rather Than Later” piece this week for the Financial Times: “The stronger argument for the importance of timing relates to the state of the economy. Mounting, though not yet universal, data signal economic weakening, including deteriorating forward-looking indicators.”

As for forward-looking indicators, I remain skeptical that the economy will meaningfully weaken so long as financial conditions remain extraordinarily loose. Corporate debt issuance remains exceptional. Meanwhile, state and local governments have joined the party.

June 20 – Bloomberg (Joe Mysak): “The municipal bond market this week soaked up a record 27th deal of $1 billion or more, with overall borrowing accelerating at a torrid pace. Debt sales are being driven in part by a decline in borrowing costs over the past few weeks… Top-rated borrowers can borrow money for 10 years at about 2.80%… That’s down from 3.09% at the end of May. The previous annual record for so-called mega-deals was in 2020, when 26 were sold, totaling $46.49 billion… Through Wednesday, 27 muni megadeals totaling $42.96 billion have been sold. So far this year, states and localities have sold $221.4 billion in long-term debt, 42.8% ahead of last year’s pace.”

This “torrid pace” of borrowing will boost spending. Markets disregarded the strong Services ISM report from a couple weeks back. Strength was corroborated by Friday’s stronger-than-expected PMI data. My analysis weights the much larger service sector above manufacturing activity, but it’s worth noting that the Manufacturing PMI rose to the highest level (51.7) since March. The Employment component gained to the strongest reading since September 2022. At 55.1, the Services PMI rose to the high since April 2022.

The PMI release included a notable quote from S&P Global Market Intelligence Chief Economist Chris Williamson (compliments of Bloomberg’s Vince Golle): “The upturn is broad-based, as rising demand continues to filter through the economy. Although led by the service sector, reflecting strong domestic spending, the expansion is being supported by an ongoing recovery in manufacturing.”

Still, there are ample signs of economic weakness. To be sure, the U.S. Bubble Economy is extraordinarily unbalanced. Yet the overall economy maintains sufficient momentum to sustain inflationary pressures and keep the Fed on the sideline. The Atlanta Fed GDPNow indicator remains above 3.0%. The U.S. economy is incredibly vulnerable, though perpetuating “Terminal Phase” excess only exacerbates fragilities. So far, trouble at the “periphery” (i.e., France) has supported loose conditions at the “core”. Probabilities for a destabilizing global “risk off” deleveraging continue to rise.

With French elections (June 30th and July 7th) rapidly approaching, Wall Street remains summer-time free and easy. They may talk reckless tax and spend and anti-reform policies, but France’s far-left and far-right parties surely wouldn’t risk a market crisis. Besides, Marine Le Pen has her sights on the 2027 presidential election prize. As the thinking goes, she’ll keep one eye on the markets, as she dons her most engaging political moderate guise.

June 17 – Bloomberg (Alice Gledhill and Farah Elbahrawy): “French stocks gained and bonds posted small moves as traders weighed assurances from far-right leader Marine Le Pen that she’d work with President Emmanuel Macron should she prevail in national elections… Concern about political volatility after Macron called a snap vote for later this month spurred a flight to haven assets last week, wiping out $258 billion from the market capitalization of the country’s stocks. On Monday, traders initially seized on Le Pen’s comments that she won’t try to push Macron out, but sentiment remains fragile before the first round of voting on June 30.”

Le Pen’s comments comforted markets eager to believe the previous week’s instability was an overreaction. German yields reversed as much as eight bps higher Monday, as the France/Germany 10-year yield spread narrowed. By the end of the week, however, the spread had widened another three bps to a 12-year high of 80 bps. French 10-year yields jumped eight bps this week – exceeding Portuguese yields by five bps and coming within eight bps of Spain.

Much of the early-week relief decline in European bank and high-yield (“crossover”) CDS had also faded by Friday. Subordinated bank debt CDS declined six on the week, an unconvincing reversal following the previous week’s 31.5 bps spike. High yield CDS reversed only seven of the 42 bps surge. BNP Paribas CDS gained another two to 53 bps, the high since December 2023. Societe Generale CDS rose three to 62 bps – also the high since December. Individual European bank (senior) CDS generally rose to multi-month highs.

June 21 – Bloomberg (Jenny Che): “Marine Le Pen’s far-right National Rally would win first round of the French legislative election with 35%, according to latest Ifop-Fiducial poll of voting intentions… National Rally gains 1 point since previous survey… Alliance of left-wing parties would get 29%… President Emmanuel Macron’s group would get 21.5%… National Rally would get 200-240 seats; left-wing alliance would get 180-210; Macron’s group would get 80-110.”

I don’t sense a fear of financial crisis is top of mind (outside of, perhaps, European debt markets). It’s late in the speculative cycle, so U.S. market complacency is not surprising. Markets have inflated so big, bold, and dominant that the notion of European politicians going rogue and triggering a crisis seems implausible to most. But if France’s extremist party leaders are these days intimidated by the financial markets, they do a decent job of concealing it.

June 21 – Bloomberg (William Horobin): “France’s leftist alliance unveiled plans to address the country’s economic challenges with a vast increase in taxation and public spending, and reaffirmed it would abolish several of Emmanuel Macron’s pro-business reforms. By 2027, when the president’s mandate ends, the New Popular Front is budgeting €90 billion ($96.2bn) annually to boost purchasing power, €30 billion to protect the environment, and a further €30 billion to repair public services — totaling roughly 5.4% of last year’s gross domestic product. That would be matched by extra revenue including from levies on multinationals and financial transactions, it said. ‘The Macron era is over,’ Socialist Party Senator Alexandre Ouizille told a news conference on Friday. ‘In a few days, there’ll be nothing left of it.’”

Under the headline, “Why Far Right Won’t Spark a Euro Crisis,” The Wall Street Journal’s Greg Ip wrote: “Since a debt crisis beginning in Greece in 2009 almost destroyed the euro, investors have been alert to anything that threatens the survival of the European Union or the common currency shared by 20 of its 27 members. But an RN [Pen’s National Rally Party] victory wouldn’t qualify. As Europe’s far-right parties have crept closer to power, their stated goals have shifted from leaving the EU to reforming it from within. The underappreciated story of Europe’s election season isn’t the fragility of the EU and euro, but their resilience.”

The European monetary union was arguably at greater risk during the 2011/12 (Italian-led) European debt crisis (compared to 2009) – a cataclysm that provoked Mario Draghi’s “bumblebee” speech and history-altering “whatever it takes” money printing. The ECB’s balance sheet had doubled from 2011’s $2.0 TN to surpass $4.0 TN in early 2017 – only to almost reach $9.0 TN following egregious pandemic monetary inflation. Massive central bank buying and market backstopping promoted government borrowing excess and material debt ratio deterioration. France’s debt at 111% of GDP is similar to Italy’s level when Italian bonds in 2011 suffered a crisis of confidence (yields spiking to 7%).

I’ll assume the extremist parties are not today hankering to blow apart the EU and the euro currency. But how willing will a far-right and far-left-dominated French parliament be to work with the EU to shrink France’s deficit (currently 5.5% of GDP) back below the 3% limit?

June 19 – Bloomberg (Jorge Valero, William Horobin and Alessandra Migliaccio): “France and Italy were reprimanded by the European Union for running big deficits, the first stage in a confrontation that will test the bloc’s resolve and could in theory prompt billions of euros in fines. The announcement by the European Commission… is all the more consequential with French legislative elections looming that have rattled investors on the prospect that a winner from either the far-right or the left will only further bloat the country’s public finances. In total, seven nations newly face censure by officials for running budget shortfalls above the bloc’s 3% limit, leaving them subject to the bloc’s so-called Excessive Deficit Procedure that requires remedial action and can lead to fines for non compliance.”

France is at the “core” of the EU and the euro – and it’s reasonable to assume that the new parliament would flout the deficit rules and remain in non-compliance indefinitely.

The ECB has its so-called “Transmission Protection Instrument”, or TPI, that was conceived as a mechanism to backstop periphery bond markets “to counter unwarranted, disorderly market developments if these pose a serious threat to the smooth transmission of monetary policy across the euro area.” Basically, the ECB believed that if markets understood the central bank was ready to purchase bonds in the event of a significant widening of spreads (to cap peripheral yields), the marketplace wouldn’t panic and dump (Greek and Italian) bonds during periods of instability.

From QE to APP, OMT, LTRO, TLTRO, MRO, PEPP, and TPI – the “whatever it takes” ECB developed a liquidity facility to rectify seemingly any unfavorable market development. And all these programs worked to bankroll a fabricated stability – relatively stable markets that accommodated borrowing excess and resulting deficit spending significantly in excess of EU rules. Now what? Austerity would inflict hardship on an already indignant population.

I won’t profess great insight into France’s election. I certainly can’t claim expertise in the inner workings of the EU or ECB. But I’ve analyzed my share of crises. And this one has potential to surprise many folks – to shock manic markets that have pushed risk-taking to the limits. Potentially, the first debt crisis in a “core” economy since the “great financial crisis”.

The EU’s second largest economy – with the largest ($2.6 TN) government debt market – is likely at the brink of political crisis. Markets, having grown accustomed to not worrying about debt crises, could confront one that doesn’t fit within the parameters of ECB bailout mechanisms. The TPI is structured specifically to “combat deteriorations in financing conditions not warranted by country-specific fundamentals…” Benefitting nations “must pursue sound and sustainable fiscal and macroeconomic policies”.

“In particular, the criteria include: (1) compliance with the EU fiscal framework: not being subject to an excessive deficit procedure (EDP), or not being assessed as having failed to take effective action in response to an EU Council recommendation under Article 126(7) of the Treaty on the Functioning of the European Union (TFEU)… (2) absence of severe macroeconomic imbalances: not being subject to an excessive imbalance procedure (EIP)… (3) fiscal sustainability: in ascertaining that the trajectory of public debt is sustainable, the Governing Council will take into account, where available, the debt sustainability analyses by the European Commission… (4) sound and sustainable macroeconomic policies…”

The ECB must be praying it won’t have to get involved. A huge bailout for France, especially with “Eurosceptics” and extremists effectively in control of the government, would be controversial to say the least. And while markets imagine Le Pen playing nice (until ’27), all bets are off in a crisis environment. Understandably, supporters on both the left and right will expect the ECB to immediately quell crisis dynamics. Quick to point blame at the ECB and EU, an angry population will pressure political leaders to not cave to the demands of Frankfurt or Brussels.

The euro was little changed this week, failing to muster even a mild relief recovery. As they say, crises unfold gradually and then suddenly. If the first vote is inconclusive (i.e., no party wins a majority), some semblance of clarity may have to wait until July 7th. And even post-election, it could take weeks or even months to gain a clear understanding of the direction of political leadership and policymaking.

But it’s difficult to see a scenario that doesn’t involve an unfolding (at best) political crisis. And highly levered European debt markets ensure fragility. The prospect of a political and debt crisis at Europe’s “core” doesn’t instill confidence in the euro currency.

In a more normal backdrop, markets at least in the near-term would afford the euro the benefit of the doubt. But this is a global environment seemingly on the cusp of acute instability. The Japanese yen dropped 1.5% versus the dollar to end Friday with the weakest closing price all the way back to April 1990. China’s renminbi slipped to the weakest level since November.

It doesn’t take a wild imagination to envisage a scenario where weakness in the euro, yen and renminbi feeds on itself, propelling destabilizing dollar strength that slams the vulnerable emerging markets. As I noted in last week’s CBB, instability at Europe’s “core” and attendant euro worries create a potential de-risking/deleveraging catalyst. And “risk off” would catch extremely over-levered and complacent markets by surprise.

June 21 – MarketWatch (Joseph Adinolfi): “Trading in bullish calls tied to megacap growth and tech stocks outnumber bearish puts by the widest margin on record… Options traders piled into bullish bets on megacap growth stocks like Nvidia Corp. at a record pace this week, surpassing the previous pandemic-era peak. On average, trading in bullish call contracts exceeded bearish puts by roughly 4.5 million contracts during the five days through Friday… Calls tied to Nvidia were the most popular options ahead of Friday’s June ‘triple witching’ expiration, even surpassing activity in contracts tied to the S&P 500 and a popular ETF SPY that tracks the benchmark index…”

June 21 – Bloomberg (Rita Nazareth): “Wall Street’s massive expiration of options not only left stock traders more cautious, it also drove one of the leaders of the bull market to a roller-coaster ride. Volume soared at the close of trading. It was estimated that $5.5 trillion expired during the quarterly event ominously known as triple witching’ in which derivatives contracts tied to equities, index options and futures mature. Nearly 18 billion shares changed hands on US exchanges Friday. That’s over 55% above the three-month average.”

Nothing to see in Europe. Not with Nvidia/AI/big tech melting up into a $5.5 TN quarterly options expiration. Reasonable odds of peak mania. And what is the probability of full-scale war erupting between Israel and Hezbollah? Rising.

Hadn’t heard much of the “basis trade” for a bit – that is until Thursday’s Bloomberg Intelligence (Brian Meehan) Report: “Biggest Bond Market Threat: Massive Basis Trade.” “Assessing the risk of the cash-futures basis market reveals near-record net short positions at the front end of the curve — the two-, five- and 10-year contracts – while the rest is neutral. At the same time, open interest in Treasury futures is at an all-time high of $2.5 trillion, up 40% from the last basis blowout in 2020, while the leveraged net short has more than doubled to $875 billion in 18 months. The warning signal is loud and clear: Any stress in the repo market that leads to forced liquidations of those massive basis positions is the greatest threat the market has ever seen.”

Unfolding stress in Europe pressuring Treasury yields lower while bolstering the dollar. Looser financial conditions buoying the U.S. Bubble Economy, holding Fed rate cuts at bay. Higher yields and perceived safe haven U.S. financial markets acting as magnets for liquidity, as global risk aversion and de-leveraging gather momentum.

Leveraged speculation has never so dominated every nook and cranny of global finance. Global de-risking/deleveraging “is the Greatest Threat markets have ever seen.”

For the Week:

The S&P500 added 0.6% (up 14.6% y-t-d), and the Dow rallied 1.5% (up 3.9%). The Utilities declined 0.8% (up 9.6%). The Banks recovered 1.6% (up 6.1%), and the Broker/Dealers gained 0.7% (up 11.6%). The Transports rallied 2.1% (down 4.9%). The S&P 400 Midcaps rose 1.3% (up 5.4%), and the small cap Russell 2000 increased 0.8% (down 0.2%). The Nasdaq100 added 0.2% (up 17.1%). The Semiconductors declined 1.1% (up 32.6%). The Biotechs gained 1.1% (down 3.1%). While bullion slipped $11, the HUI gold index jumped 2.0% (up 9.8%).

Three-month Treasury bill rates ended the week at 5.2175%. Two-year government yields increased three bps this week to 4.73% (up 48bps y-t-d). Five-year T-note yields rose four bps to 4.27% (up 43bps). Ten-year Treasury yields gained three bps to 4.26% (up 38bps). Long bond yields rose five bps to 4.40% (up 37bps). Benchmark Fannie Mae MBS yields added two bps to 5.70% (up 43bps).

Italian yields added a basis point to 3.94% (up 24bps y-t-d). Greek 10-year yields slipped one basis point to 3.63% (up 58bps). Spain’s 10-year yields dipped a basis point to 3.29% (up 29bps). German bund yields rose five bps to 2.41% (up 39bps). French yields jumped eight bps to 3.21% (up 65bps). The French to German 10-year bond spread widened three bps to 80 bps. U.K. 10-year gilt yields gained three bps to 4.08% (up 55bps). U.K.’s FTSE equities index rallied 1.1% (up 6.5% y-t-d).

Japan’s Nikkei Equities Index declined 0.6% (up 15.3% y-t-d). Japanese 10-year “JGB” yields rose three bps to 0.98% (up 36bps y-t-d). France’s CAC40 recovered 1.7% (up 1.1%). The German DAX equities index gained 0.9% (up 8.4%). Spain’s IBEX 35 equities index increased 0.4% (up 9.2%). Italy’s FTSE MIB index rallied 2.0% (up 9.7%). EM equities were mixed. Brazil’s Bovespa index rose 1.4% (down 9.6%), and Mexico’s Bolsa index gained 1.1% (down 8.0%). South Korea’s Kospi index added 0.9% (up 4.9%). India’s Sensex equities index increased 0.3% (up 6.9%). China’s Shanghai Exchange Index fell 1.1% (up 0.8%). Turkey’s Borsa Istanbul National 100 index jumped 2.9% (up 44.2%). Russia’s MICEX equities index sank 2.9% (up 0.8%).

Federal Reserve Credit dipped $706 million last week to $7.221 TN. Fed Credit was down $1.669 TN from the June 22, 2022, peak. Over the past 249 weeks, Fed Credit expanded $3.494 TN, or 94%. Fed Credit inflated $4.410 TN, or 157%, over the past 606 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $20.7bn last week to a 14-month low $3.310 TN. “Custody holdings” were down $116 billion y-o-y, or 3.4%.

Total money market fund assets fell $22.3 billion to $6.098 TN. Money funds were up $646bn, or 11.9%, y-o-y.

Total Commercial Paper surged $20.3bn to $1.289 TN. CP was up $146bn, or 12.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped eight bps to an 11-week low 6.87% (up 24bps y-o-y). Fifteen-year rates declined four bps to 6.13% (up 10bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up three bps 7.36% (up 29bps).

Currency Watch:

June 19 – Bloomberg: “China set the yuan’s daily reference rate at its weakest since November in a sign policymakers are loosening their grip on the currency. The People’s Bank of China set the so-called fixing at 7.1192 per dollar, an increase of 33 ticks, the most in about two months. The move comes as the dollar inches closer to this year’s peak, with traders betting on higher-for-longer interest rates in the US.”

June 21 – Reuters (Winni Zhou and Ankur Banerjee): “A sliding yuan and extensive outflows of cash from the mainland into Hong Kong show China’s domestic investors are shelving expectations for any immediate recovery in their home markets and fleeing to the closest better-yielding assets. The yuan has dropped to seven-month lows this week, alongside a reversal in equity investment flows into China… ‘Sentiment on China soured over the past month as the market has rallied ahead of improvement in macro data which continues to disappoint,’ said Gary Tan, a Singapore-based portfolio manager at Allspring Global Investments.”

June 16 – Reuters (Xie Yu): “Hong Kong investment products such as insurance and high-yield time deposits are seeing resurgent demand from wealthy Chinese who are aiming to shield returns from a domestic economic and property sector downturn and also a weaker currency. The trend became evident last year but has accelerated in recent months after China relaxed investment rules for the ‘wealth connect’ programme in February, Hong Kong wealth managers said.”

For the week, the U.S. Dollar Index 0.3% to 105.832 (up 4.4% y-t-d). For the week on the upside, the South African rand increased 2.3%, the Mexican peso 1.9%, the Norwegian krone 1.0%, the Australian dollar 0.4%, the Canadian dollar 0.3%, and the Swedish krona 0.1%. On the downside, the Japanese yen declined 1.5%, the Brazilian real 1.0%, the South Korean won 0.7%, the New Zealand dollar 0.4%, the Swiss franc 0.4%, the British pound 0.3%, the Singapore dollar 0.1%, and the euro 0.1%. The Chinese (onshore) renminbi slipped 0.07% versus the dollar (down 2.22% y-t-d).

Commodities Watch:

June 18 – Wall Street Journal (Joseph Hoppe): “Central banks around the world expect global reserves of gold to increase over the next year, while pessimism toward the U.S. dollar has grown, according to a new report. More than four in five respondents expect reserve managers to increase global holdings of bullion, the highest proportion on record since the annual survey began, the World Gold Council’s report said. Nearly 30% of the banks plan to add to their own reserves within the next year, including 13% of banks in advanced economies. Banks in emerging markets kept their positive attitude toward gold’s future in reserves, but were now joined in this view by 57% of advanced economy central banks, up from 38% in 2023.”

The Bloomberg Commodities Index declined 0.7% (up 3.1% y-t-d). Spot Gold slipped 0.5% to $2,322 (up 12.6%). Silver was little changed at $29.554 (up 24.2%). WTI crude jumped $2.28, or 2.9%, to $80.73 (up 13%). Gasoline surged 4.8% (up 19%), while Natural Gas dropped 6.1% to $2.705 (up 8%). Copper fell 1.0% (up 14%). Wheat sank 8.4% (down 11%), and Corn fell 3.3% (down 8%). Bitcoin dropped $1,650, or 2.5%, to $64,235 (up 51%).

Middle East War Watch:

June 18 – Reuters (Maya Gebeily and Steven Scheer): “Israeli Foreign Minister Israel Katz warned… that a decision on an all-out war with Hezbollah was coming soon, even as the United States tries to avert any escalation. U.S. envoy Amos Hochstein was sent to Lebanon to try and cool tensions following an increase in cross-border fire along Lebanon’s southern frontier that has escalated to Hezbollah hinting it could attack Haifa, Israel’s third-largest city… Katz said… that in the wake of threats by Sayyed Hassan Nasrallah, the group’s head, to damage Haifa’s ports that are operated by Chinese and Indian companies, ‘we are getting very close to the moment of deciding on changing the rules of the game against Hezbollah and Lebanon’.”

June 18 – Financial Times (James Shotter): “The Israeli military… said senior officers had approved ‘operational plans for an offensive in Lebanon’, as fears grow that Israel and Hizbollah could slide into a full-blown conflict. The Lebanese militant group and Israeli forces have been trading fire on an almost daily basis since the beginning of the war between Israel and Hamas in Gaza, but exchanges escalated last week… The announcement came hours after Hizbollah… released a nine-minute video of what it said was footage gathered by its surveillance drones of parts of Israel, including the port in the northern city of Haifa. In addition to views of the port… the undated footage included what Hizbollah said were images of other military infrastructure. The video drew a furious response from Israel, with foreign minister Israel Katz warning that his government was ‘very close to the moment of decision to change the rules against Hizbollah and Lebanon’.”

June 19 – Financial Times (Raya Jalabi and James Shotter): “Hizbollah leader Hassan Nasrallah has warned that the Lebanese militant group would fight ‘without rules and without limits’ if its conflict with Israel widens. In a televised address, Nasrallah also threatened neighbouring Cyprus for the first time, saying Hizbollah would consider the country ‘part of the war’ if it allowed Israel to continue using Cypriot airports and bases for military exercises… The speech comes as fears have risen of a full-blown war between Hizbollah and Israel, with belligerent rhetoric escalating and the Lebanese militant group this week issuing surveillance drone footage of sites in Israel.”

June 19 – Wall Street Journal (Rory Jones): “Tensions heated up along Israel’s Lebanese border, as the Israeli military approved a plan for a possible invasion of its northern neighbor and Hezbollah showed off what it said was drone surveillance of northern Israeli cities. The Israeli military plans outline an assault into Lebanon should a larger-scale conflict between Israel and Hezbollah break out. The operation would need approval from the Israeli government.”

June 19 – Reuters (Jonathan Saul): “Urgent action must be taken in the Red Sea to stop attacks on merchant shipping by Yemen’s Houthis, leading industry groups said…, after the sinking of a second ship. Iran-aligned Houthi militants first launched drone and missile strikes on the important trade route in November in what they say is solidarity with Palestinians in Gaza. In more than 70 attacks, they have also seized one vessel and its crew and killed at least three seafarers… ‘It is deplorable that innocent seafarers are being attacked while simply performing their jobs, vital jobs which keep the world warm, fed, and clothed,’ the world’s top shipping associations said…”

June 20 – Bloomberg (Alex Longley): “The sinking of a coal-carrier by a sea drone has boosted the risk of navigating the vital Bab el-Mandeb chokepoint to a new level and is driving a fresh surge in insurance costs. The British navy said… the only visible objects in the last known location of the Tutor dry-bulk carrier… were some debris and an oil slick. Yemen’s Houthi militants managed to strike it with a seaborne drone, killing one crew member and injuring others. They said they eventually sank it with explosives.”

Ukraine War Watch:

June 19 – Bloomberg (Soo-Hyang Choi): “North Korean leader Kim Jong Un pledged to ‘unconditionally support’ Russia in its invasion of Ukraine at talks with President Vladimir Putin in Pyongyang that emphasized deepening ties amid US concerns about arms supplies to the Kremlin’s war machine… ‘I would like to stress that the birth of this treaty, the most powerful treaty in the history of North Korea-Russia relations, was possible thanks to President Putin’s outstanding foresightedness and bold determination,’ Kim said…”

June 21 – BBC (Kelly Ng): “Vladimir Putin has warned South Korea it would be making ‘a big mistake’ if it arms Ukraine in the war against Russia. His comments come after Seoul said it was considering such a possibility, in response to Russia and North Korea’s new pact to help each other in the event of ‘aggression’ against either country. Moscow ‘will… [make] decisions which are unlikely to please the current leadership of South Korea’ if Seoul decides to supply arms to Kyiv, Mr Putin told reporters…”

France Instability Watch:

June 18 – Bloomberg (Simon White): “Political uncertainty in France is leading to increasing scrutiny of its finances. Though France is regarded as part of Europe’s economic core, it now displays debt and deficit dynamics that are worse in many respects than the periphery countries of Greece, Italy, Spain and Portugal. French yields are rising at a pace that will soon push them higher than some on the periphery. There is also the risk of global contagion. Turmoil in France has the potential to spill abroad via banks, one of the main vectors of global financial contagion when there is a crisis. French banks are the fourth biggest international lenders after Japan, the US, and the UK, with $2.4 trillion of foreign loans on their balance sheets. The US, followed by Italy and Japan are the biggest borrowers from banks in France, while UK, US and Japanese banks have lent the most to France.”

June 16 – Telegraph (Anne-Elisabeth Moutet): “As some 500,000 Left-wingers marched in France’s cities yesterday, shouting anti-Fascist slogans, never had Lenin’s phrase seemed more apposite: ‘There are decades where nothing happens; and there are weeks where decades happen.’ Upended by Emmanuel Macron’s decision last week to call a snap election after the hard-Right National Rally won over a third of the vote in the European elections, French politics is now in a state of chaos. Macron deliberately chose the shortest constitutionally-compatible timeline, with a first round to be held on June 30, and the runoff on July 7. Defiance, hostility and suspicion reign between adversaries, but also among so-called allies, forced by circumstances into unnatural coalitions.”

June 18 – Bloomberg (Abhinav Ramnarayan and Tasos Vossos): “President Emmanuel Macron’s surprise election call last week has highlighted France’s prominence in European credit markets. Whether it’s blue-chip, junk bonds or collateralized loan obligations, euro-denominated credit markets have been battered after the French president’s June 9 decision threw the country into political chaos. IHS Markit’s crossover index of credit default swaps, a key indicator of European credit risk, had its biggest spike in well over a year last week, rising 42 bps. The driver of this rout, in large part, is France. The nation’s firms account for the biggest component in the main categories of the region’s debt, so any damage in the Republic’s corporate loans and bonds will drag the whole index down.”

June 21 – Bloomberg (Frank Connelly): “France’s leftist alliance plans public spending of €200 billion ($214bn) for its priorities over the next five years if it wins the snap election as it seeks to reverse President Emmanuel Macron’s labor and pension reforms and boost growth. Jean-Luc Melenchon, whose far-left France Unbowed party is part of the coalition, brushed off any concerns about the extra spending, saying he expects the state to get revenue of €230 billion over the same period thanks to a ‘boost in activity.’ ‘Every election, the program of the left is equated to the country’s ruin,’ he told Le Figaro… ‘Social spending creates well-being, which allows consumption, which produces jobs and tax revenue.’”

June 17 – Reuters (Balazs Koranyi and Francesco Canepa): “The European Central Bank’s chief economist said… there was no need for the ECB to come to France’s rescue by buying bonds because recent market turmoil fuelled by political uncertainty was ‘not disorderly’… Philip Lane said he remained confident inflation will fall back to the ECB’s 2% target in 2025 after four years of unusually brisk price growth following the COVID pandemic and Russia’s invasion of Ukraine… But Lane said the latest market moves did not fulfil one of the key conditions for ECB intervention – that a rise in risk premiums is disorderly and unwarranted. ‘What we are seeing in the markets is a repricing but it is not in the world of disorderly markets right now,’ Lane said…”

June 18 – Bloomberg (William Horobin): “Bank of France Governor Francois Villeroy de Galhau repeated his call to avoid deepening budget deficits after a sell off of French assets as investors fret over the fiscal outlook for France after snap elections. Speaking on the eve of an expected European Commission move to put France on the list of countries that face infringement procedures for excessive deficits, Villeroy told a conference of economists at his institution that ‘we owe our fellow citizens all the respect, consideration, and truth that they expect.’”

June 18 – Financial Times (Leila Abboud, Adrienne Klasa and Sarah White): “France’s corporate bosses are racing to build contacts with Marine Le Pen’s far right after recoiling from the radical tax-and-spend agenda of the rival leftwing alliance in the country’s snap parliamentary elections. Four senior executives and bankers told the Financial Times that the left — which polls suggest is the strongest bloc vying with Le Pen — would be even worse for business than the Rassemblement National’s unfunded tax cuts and anti-immigration policies. ‘The RN’s economic policies are more of a blank slate that business thinks they can help push in the right direction,’ a Cac 40 corporate leader said of Le Pen’s party… ‘The left is not likely to water down its hardline anti-capitalist agenda.’”

June 19 – Financial Times (Ben Hall and Ian Johnston): “France’s far-right and hard-left parties have for years made generous spending promises in answer to people’s grievances against President Emmanuel Macron and his centrist government. Now they may come first and second in snap elections for the National Assembly on June 30 and July 7, with Macron’s alliance a distant third, according to opinion polls. The possibility of the far-right Rassemblement National (RN) in government, victory for the leftwing Nouveau Front Populaire (NFP) alliance or the most likely scenario of a hung parliament full of fiscal populists has rattled investors, business leaders and France’s EU partners. ‘Will the next government compromise or will it go crazy? If they go crazy… then it’s a massive crash,’ said Silvia Ardagna, chief European economist at Barclays.”

June 17 – Financial Times (Gideon Rachman): “France’s far right would like — henceforth — to be known simply as ‘the right’. One can see the logic. The Rassemblement National, the far-right party, is well ahead in the polls for fast-approaching legislative elections in France. Meanwhile the traditional right is in meltdown. If the RN becomes the largest group in the French parliament in July, the party will have redefined French conservatism. The question of whether to rebrand the far right as the right resonates well beyond France. There is a similar issue in the US, where Donald Trump has transformed the Republican party in his own image. The traditional pro-market, internationalist party of George HW Bush barely exists today. Trump’s ‘America First’ nativism now commands the conservative movement.”

June 17 – Bloomberg (Ania Nussbaum, Ewa Krukowska and Jorge Valero): “France’s political turmoil is causing concern in some European Union capitals that initiatives like joint military spending and a fresh push to support Ukraine could fall by the wayside. Doubts are growing over beefing up EU defense outlays through collective financing — an idea that President Emmanuel Macron backs strongly, according to people familiar with the matter. There’s also a fear that the snap legislative elections he called this month will undermine his role as one of Kyiv’s top cheerleaders, including his plan to dispatch army trainers to Ukraine.”

June 18 – Bloomberg (Daisuke Sakai): “Two Japanese institutional investors with holdings of French government bonds said they’re unlikely to buy more of the debt for now despite its cheapness, citing concern that political turmoil will trigger further declines”

Taiwan Watch:

June 18 – Reuters (Ben Blanchard and Faith Hung): “Only military strength can keep the peace with China and the Taiwanese people will not give in to Chinese coercion, Taiwan President Lai Ching-te said… as the United States agreed on a speeded-up arms package… Lai said Taiwan’s people ‘love peace’. ‘But peace must rely on strength, which is to say avoiding war by preparing for war to achieve peace. Empty promises are not true peace,’ he said. China’s national policy is to annex Taiwan, Lai added. ‘Apart from using force, in recent years they have even been using non-traditional coercive measures to force Taiwan to succumb but Taiwan will not give in,’ he said.”

June 16 – Financial Times (Kathrin Hille): “Taiwan’s president Lai Ching-te has implored the country’s armed forces to shake off its legacy as the army of the Chinese Nationalist party and urgently focus on its mission of defending against an unprecedented threat from China. Lai addressed instructors, cadets and veterans of the country’s top military school at a celebration of its founding as Whampoa Military Academy in China 100 years ago. ‘All instructors and cadets should understand the challenges and mission of the new era… The biggest challenge is to face the strong rise of China, which is destroying the status quo across the Taiwan Strait and viewing the annexation of Taiwan and the elimination of the Republic of China as its national cause.”

June 16 – Reuters (Ben Blanchard and Ann Wang): “China views the annexation and ‘elimination’ of Taiwan as its great national cause, Taiwan President Lai Ching-te said on Sunday, telling cadets at the military’s premier academy they must know their enemy and not give in to defeatism. Lai has faced sustained personal attacks from China, which views Taiwan as its own territory, since assuming office last month, with Beijing calling him a ‘separatist’… Lai said today’s cadets must recognise the challenges of the ‘new era’.”

June 21 – Financial Times (Kathrin Hille): “China has officially defined behaviour aimed at Taiwan independence as a criminal act, threatening punishments up to the death penalty for perpetrators, in a move that analysts said would further inflame tensions across the Strait. The Supreme People’s Court, the Supreme People’s Procuratorate, the ministries for public security and state security and the justice ministry jointly announced on Friday ‘guidelines for punishing ‘Taiwan independence’ diehard separatists for committing crimes of secession and the incitement of secession’. The new rules lay out the general definition of the crimes, and the standards for punishment on the basis of existing law such as China’s criminal code, its Criminal Procedure Law and the 2005 Anti-Secession Law aimed at Taiwan, state news agency Xinhua said.”

Market Instability Watch:

June 17 – Bloomberg (Natalia Kniazhevich): “Wall Street strategists are rushing to raise their targets for the S&P 500 Index, but hedge funds are growing increasingly cautious about equities due to the Federal Reserve’s reluctance to cut interest rates, softer economic data and narrow stock market breadth. Hedge funds decreased their long-short gross leverage, which measures their overall exposure to the market, by the most since March 2022, according to a note from Goldman Sachs…”

June 19 – Financial Times (Martin Arnold): “Eurozone countries are facing ‘significant fiscal burdens’ from ageing populations, extra defence spending and climate change, making it more urgent that they cut their high debt levels, the European Central Bank has warned. Officials at the central bank estimate Eurozone countries have to reduce their budget deficits by an average of 5 percentage points of GDP, which would require savings or extra revenue of €720bn at current output levels. The ECB’s assessment of the budgetary challenges confronting the 20 members of the single currency bloc came as the European Commission reprimanded France and six other countries for breaching EU fiscal rules, increasing investor anxiety about the sustainability of public finances.”

June 16 – Bloomberg (Naomi Tajitsu, Greg Ritchie, and Philip Aldrick): “The specter of the UK’s epic market meltdown two years ago is looming large over politicians as Britain prepares to go to the polls on July 4. The fear of so-called bond vigilantes… is coloring almost all discussion of Britain’s finances on the campaign trail. From Keir Starmer’s repeated references to the turmoil precipitated by Liz Truss’s unfunded tax cuts, to Rishi Sunak’s push to brand his opponent as an irresponsible tax-and-spender, debt is a near-constant talking point. Markets appear to be listening.”

AI Bubble Watch:

June 19 – Wall Street Journal (Asa Fitch): “Nvidia became the world’s most valuable listed company Tuesday thanks to the demand for its artificial-intelligence chips, leading a tech boom that brings back memories from around the start of this century. Nvidia’s chips have been the workhorses of the AI boom, essential tools in the creation of sophisticated AI systems that have captured the public’s imagination… The last time a big provider of computing infrastructure was the most valuable U.S. company was in March 2000, when networking-equipment company Cisco took that spot at the height of the dot-com boom. Cisco was riding the wave of a different revolution—the internet—where its products powered that budding industry. Like Nvidia, Cisco also surpassed Microsoft to become the most valuable company.”

June 21 – Bloomberg (Sagarika Jaisinghani): “The ongoing artificial intelligence frenzy that briefly made Nvidia Corp. the world’s most valuable company this week also drove record inflows into tech funds, said Bank of America Corp. strategists. About $8.7 billion flowed into tech funds in the week through June 19, according to a note from the bank citing EPFR Global data. ‘The ‘all roads lead to Nvidia’ trade is once again bolstered’ as Europe falters amid the political turmoil in France, strategist Michael Hartnett said.”

June 18 – Bloomberg (Jeran Wittenstein): “Nvidia Corp. insiders have sold shares worth more than $700 million this year as the stock continues to push deeper into record territory amid unrelenting demand for its chips. Executives and directors have unloaded about 770,000 Nvidia shares so far, excluding the effect of the company’s 10-for-1 stock split on June 10 for the sake of comparison. That’s the most in a half year period since the first six months of 2023 when about 848,000 shares were sold…”

Bubble and Mania Watch:

June 20 – Bloomberg (Alexandra Semenova): “The economy is growing, lower interest rates are on the horizon, artificial intelligence technology is set to create a utopia of corporate efficiency, and nothing can stop the soaring stock market. After being burned last year by doom-and-gloom calls that failed to materialize, equities strategists can’t turn bullish fast enough, making bears a rarity as the S&P 500 Index keeps setting new records… ‘It’s not just the excessive valuation,’ said David Rosenberg, founder and president of Rosenberg Research. ‘It’s the market sentiment, the complacency, the extraordinary popular delusions of maddening crowds.’”

June 17 – Bloomberg (Sonali Basak and John Sage): “Private equity investors are clamoring for their payouts. A risky approach to meeting their demands is setting records — and getting more popular. Dividend recapitalizations, where owners of lower-rated companies raise debt in the firm’s name to hand cash to investors, have soared in the first half of 2024. Some $30.2 billion of leveraged loans to pay for these checks have been sold so far this year, according to PitchBook…, matching the amount in 2021, which was the most in at least a decade.”

Global Banking Watch:

June 18 – Bloomberg (Taiga Uranaka): “Norinchukin Bank will consider investing in a range of assets as it braces for massive losses on the sale of roughly 10 trillion yen ($63bn) in US and European sovereign bonds. Japan’s biggest agricultural bank will dispose of the foreign bonds gradually during the fiscal year ending March, a company spokesman said in an email. It expects a net loss of 1.5 trillion yen for the year, triple the previous estimate of 500 billion yen. Collateralized loan obligations are an investment option, the spokesman said… It will also look at investing in domestic and overseas bonds, stocks and project financing. Its unrealized losses have been reflected in its capital ratio and won’t affect the bank’s soundness, the spokesman added. With an investment portfolio equivalent to $357 billion, Norinchukin is one of the largest Japanese investors in international financial markets.”

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

June 18 – Financial Times (Toru Tsunashima, Chris Cook, Max Seddon and Chloe Cornish): “Russia is scouring China for second-hand machine tools using shadowy networks of buyers, as the Kremlin races to secure vital equipment to increase arms production. Moscow’s covert strategy for obtaining precision machinery, uncovered by researchers, attempts to sidestep increasingly restrictive western sanctions and export controls… The operations, run through networks of opaque companies, tap a stock of older high-end machine tools made by western companies that remain in China after decades of sales to local factories.”

De-globalization and Iron Curtain Watch:

June 21 – Reuters (Joe Cash and Maria Martinez): “Beijing warned on Friday that escalating frictions with the European Union over electric vehicle imports could trigger a trade war, as Germany’s economy minister arrived in the Chinese capital with the proposed tariffs high on his agenda. Robert Habeck’s three-day trip to China is the first by a senior European official since Brussels proposed hefty duties on imports of Chinese-made electric vehicles to combat excessive subsidies. That has unleashed countermeasures by China and harsh criticism from Chinese leaders.”

June 17 – Reuters (Joe Cash): “China has opened an anti-dumping investigation into imported pork and its by-products from the European Union, a step that appears mainly aimed at Spain, the Netherlands and Denmark, in response to curbs on its electric vehicle exports. The investigation announced by China’s commerce ministry… will focus on pork intended for human consumption, such as fresh, cold and frozen whole cuts, as well as pig intestines, bladders and stomachs. The probe will begin on June 17.”

June 20 – Bloomberg (Philip J. Heijmans): “As Russian President Vladimir Putin and Chinese Premier Li Qiang wrapped up separate meetings in Southeast Asia this week, the two partners in the BRICS economic bloc encountered a region keen to join a group seen as a hedge against Western-led institutions… For countries seeking to mitigate the economic risks of intensifying US-China competition, joining BRICS is an attempt to straddle some of those tensions. In Southeast Asia, many nations depend economically on trade with China while also simultaneously welcoming the security presence and investment Washington provides.”

June 20 – Reuters (Sakura Murakami): “Japan imposed trade restrictions on China-based companies as part of a fresh round of sanctions against individuals and groups supporting Russia’s war on Ukraine, the foreign ministry said… The new sanctions also target firms in India, Kazakhstan, and Uzbekistan. It marks the first time Japan has imposed sanctions on China-based firms in connection with the war in Ukraine, according to Japan’s foreign ministry.”

June 21 – Bloomberg (Brian Platt): “Prime Minister Justin Trudeau’s government is preparing potential new tariffs on Chinese-made electric vehicles to align Canada with actions taken by the US and European Union, according to people familiar… The government still has to make final decisions on how to proceed, but it’s likely to announce soon the start of public consultations on tariffs that would hit Chinese exports of EVs into Canada…”

Inflation Watch:

June 18 – Yahoo Finance (Rick Newman): “Inflation is abating, and many economists think prices for most things will settle back into normal ranges within a year or so. But America’s 86 million homeowners face a new form of sticker shock likely to get worse, not better: rising insurance costs largely caused by climate change. Americans who live in well-known hurricane, tornado, flood, or wildfire zones have long borne the risks of natural disasters. But severe weather risk… is now spreading to parts of the country that have never had to deal with them before. ‘We used to have billion-dollar hurricanes,’ said Bob Bunting, CEO of the Climate Adaptation Center… ‘Now we have billion-dollar thunderstorms. There are increased disruptions everywhere, and the general nature of insurance is it’s getting more expensive.’ He added, ‘There is nowhere to hide from this.’”

June 18 – Wall Street Journal (Will Parker): “Apartment dwellers got a break recently when rent growth slowed and fell in parts of the country following years of steep increases. That relief appears to be ending. Rents in several Northeast and Midwest cities, such as Kansas City, Mo., and Washington, D.C., are rising this year. While asking rents for new leases nationally are running nearly flat over the past 12 months, those figures are heavily influenced by the Sunbelt, where record-high supply has turned rent growth negative in some cities… The least affordable home-sales market in decades is compelling more renters to stay put. Large apartment owners say fewer renters are moving out to buy homes than ever before…”

June 17 – Wall Street Journal (Nicole Friedman): “Board members of the Highland Park Community Association in Mission Viejo, Calif., braced last year for a rise in insurance costs. Yet they were still shocked to receive a quote for over $170,000, which was more than four times what the association paid in 2022. Another 12 insurers declined to offer quotes, because wildfire risk has made insurers less willing to do business in California. The new policy provides up to $70.9 million in property coverage to this community of 208 townhomes and condominiums. But in the case of wildfire damage, the maximum coverage would be $2 million, said Mark Speros, the board’s president. ‘It was like a bombshell,’ he said. The board raised residents’ dues by 20%, the most the association allows per year, to $474 a month.”

June 20 – Bloomberg (Brendan Murray): “The spot rate for shipping goods in containers to Europe from Asia rose for a ninth straight week, the longest stretch of rising prices since the pandemic disrupted global supply chains in 2021. The rate for a 40-foot container to Genoa, Italy, from China hit $7,029 over the past week, the highest level since September 2022, according to the Drewry World Container Index… The cost to Rotterdam increased to $6,867. Both rates have essentially doubled since April. For the busy trade route from Shanghai to Los Angeles, the rate rose for a seventh straight week, to $6,441.”

Federal Reserve Watch:

June 18 – Reuters (Lindsay Dunsmuir): “The U.S. central bank should only start to cut interest rates after ‘months, and more likely quarters’ of falling inflation, moderating demand and expanding supply, St. Louis Federal Reserve President Alberto Musalem said…, in his first public comments… since becoming head of the regional Fed bank. ‘I will need to observe a period of favorable inflation, moderating demand and expanding supply before becoming confident that a reduction in the target range for the federal funds rate is appropriate. These conditions could take months, and more likely quarters to play out,’ Musalem told the CFA Society St. Louis.”

June 20 – Bloomberg (Craig Torres): “Federal Reserve Bank of Richmond President Thomas Barkin said he needs further clarity on the path of inflation before lowering interest rates. ‘My personal view is let’s get more conviction before moving,’ Barkin said… When asked if the Fed could do one rate cut and hold at that level, Barkin said it depends on the economy. If current conditions hold, he said it may not be the best time to give guidance on timing about subsequent policy adjustments. ‘There are times where we will want to give forward guidance and have given forward guidance… This doesn’t feel like one of those times to me. It doesn’t feel like a forward guidance time.’”

June 16 – Reuters (Ann Saphir): “Minneapolis Federal Reserve President Neel Kashkari… said it’s a ‘reasonable prediction’ that the U.S. central bank will cut interest rates once this year, waiting until December to do it. ‘We need to see more evidence to convince us that inflation is well on our way back down to 2%,’ Kashkari said…”

June 18 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Boston President Susan Collins said the US central bank should be patient as it considers when to lower interest rates, despite recent encouraging data on inflation. ‘It is too soon to determine whether inflation is durably on a path back to the 2% target,’ Collins said… ‘We should not overreact to a month or two of promising news.’ ‘The appropriate approach to monetary policy continues to require patience,’ she added…”

U.S. Economic Bubble Watch:

June 18 – Reuters (David Lawder): “The U.S. budget deficit will jump to $1.915 trillion for fiscal 2024, topping last year’s $1.695 trillion gap as the largest outside the COVID-19 era, the Congressional Budget Office said…, citing increased spending for a 27% increase over its previous forecast. The CBO said in an update to its budget outlook that higher outlays for student loan relief, Medicaid healthcare for the poor, higher Federal Deposit Insurance Corp costs to resolve bank failures and U.S. aid to Ukraine and Israel make up the bulk of a $408 billion increase in this year’s projected deficit since February, when it forecast a $1.507 trillion deficit.”

June 18 – New York Times (Alan Rappeport): “The United States is on a pace to add trillions of dollars to its national debt over the next decade, borrowing money more quickly than previously expected, at a time when big legislative fights loom over taxes and spending. The Congressional Budget Office said… that the U.S. national debt is poised to top $56 trillion by 2034, as rising spending and interest expenses outpace tax revenues. The mounting costs of Social Security and Medicare continue to weigh on the nation’s finances, along with rising interest rates, which have made it more costly for the federal government to borrow huge sums of money. As a result, the United States is expected to continue running large budget deficits… Over the next 10 years, the annual deficit is projected to swell to $2.9 trillion. As a share of the economy, debt held by the public in 2034 will be 122% of gross domestic product, up from 99% in 2024.”

June 18 – Bloomberg (Josh Schafer): “Retail sales increased at a slower-than-expected pace in May as high interest rates and inflation continued to weigh on consumers. Retail sales increased 0.1%, less than the 0.3% economists had expected. In April, retail sales ticked down 0.2%… Excluding autos and gas, retail sales increased 0.1%, below estimates for a 0.4% increase but above the 0.3% decline in April. Within the report, gasoline stations led the declines, falling 2.2% from the month prior.”

June 20 – Reuters (Lucia Mutikani, Lindsay Dunsmuir and Dan Burns): “Fewer Americans enrolled for first-time unemployment benefits last week…, though the latest data showed the number of people on benefits rolls overall was the highest since January, a sign that the U.S. job market continues to cool… Initial claims for state unemployment benefits declined 5,000 to a seasonally adjusted 238,000 for the week ended June 15…”

June 20 – Bloomberg (Reid Champlin): “Mortgage rates in the US dropped for a third consecutive week, falling to the lowest level since early April. The average for a 30-year, fixed loan was 6.87%, down from 6.95% last week, Freddie Mac said… While the string of recent declines helps ease some of the pressure on homebuyers, many remain on the sidelines.”

June 20 – Bloomberg (Michael Sasso): “New home construction in the US slumped in May to the slowest pace in four years, as higher-for-longer interest rates sap the housing industry’s momentum from earlier this year. Housing starts decreased 5.5% to a 1.28 million annualized rate last month… Building permits… fell 3.8% to a 1.39 million annual rate, also the weakest since June 2020. The declines in starts and permits were broad across multifamily and single-family units. Authorized permits for single-family homes dropped for a fourth straight month to the slowest pace in a year.”

June 19 – Yahoo Finance (Rebecca Chen): “Real estate prices surged nationwide when the pandemic hit. Bidding wars, all-cash offers, and contingency removals became commonplace. Now, the tide has turned in some markets. Home prices in some large US cities declined in April, according to global mortgage data and technology provider Intercontinental Exchange (ICE). San Antonio and Austin in Texas, and Tampa, Florida — among the most popular cities during the pandemic — saw the biggest monthly price declines… ‘The key differentiator we’re seeing in terms of growing inventory levels in Florida and Texas is a rise in sellers’ willingness to list their homes for sale,’ said Andy Walden, vice president of enterprise research strategy at ICE Mortgage. Nine major US markets have seen new listings exceed pre-pandemic averages, he said, and eight of those are in Texas or Florida.”

June 20 – CNBC (Charlotte Morabito): “Buy now, pay later options are becoming more accessible to consumers. A quarter of Americans surveyed in April 2024 said they used buy now, pay later services in the past 12 months, according to… NerdWallet. The number of buy now, pay later loans increased nearly 1,100% between 2019 and 2021, according to… the Consumer Financial Protection Bureau. The rapid growth has some analysts concerned because where there are loans, there is debt — but exactly how much debt is still unclear. A December 2023 report from Wells Fargo concluded that the ‘Buy Now, Pay Later market may be small now, but if we don’t know how fast it’s growing, it logically follows that we simply cannot know when it will be a problem.’ ‘We’ve often referred to this as phantom debt, where it’s sort of flying under the radar and not really something that anybody has a good grasp on,’ Shannon Grein, one of the authors of the December note, told CNBC.”

June 16 – Financial Times (Patrick Temple-West): “US bosses’ pay is increasing at the fastest rate for at least 14 years, according to figures that critics say illustrate how ballooning reward packages such as Elon Musk’s risk exacerbating social inequality. In 2024, median chief executive pay at S&P 500 companies has risen by 12%, according to ISS Corporate… That compares with a 4.1% year-on-year increase in US wage growth… Musk this week secured an emphatic victory in a shareholder vote on his $56bn package of stock options — the largest in US history.”

China Watch:

June 20 – Bloomberg: “It started with a cryptic quote from President Xi Jinping buried in a 172-page book on the financial sector. Three months later, plans for potentially the biggest shift in years in how China conducts monetary policy are starting to surface. Pan Gongsheng, governor of the People’s Bank of China, …gave the clearest acknowledgment that the monetary authority is looking into trading government bonds in the secondary market as a way to regulate liquidity. The PBOC is studying the implementation with the finance ministry and it will be a gradual process, he said in a speech. That responds to Xi’s directive to ‘enrich the monetary policy toolbox’ and ‘gradually increase government bond buying and selling in central bank open market operation’ in a speech during a financial policy meeting last year, made public only in the book published in March.”

June 20 – Wall Street Journal: “A speech by China’s central bank chief signals that it is looking to update its monetary tool kit with potential changes that economists say herald a major policy revamp, bringing it closer to practices adopted by its western peers. Pan Gongsheng, governor of the People’s Bank of China, said… the monetary authority might restart trading Treasury bonds in secondary markets, a policy shift that could rewrite the way Beijing manages liquidity. Over the past decade, the PBOC has mainly relied on various lending facilities and cuts to banks’ reserve requirements to ease monetary settings… Apart from bond trading, Pan also hinted at simplifying China’s current policy rates to allow a single short-term rate to play a bigger role in guiding banks.”

June 19 – Financial Times (Thomas Hale and Cheng Leng): “China’s central bank chief has warned markets to expect weaker credit growth, in a speech that highlighted the impact of a prolonged property slowdown on the world’s second-largest economy. Pan Gongsheng, governor of the People’s Bank of China, told a major financial forum… that real estate and local government financing vehicles account for a large share of China’s Rmb250tn ($34.5tn) of bank lending. ‘Not only is this area no longer growing, but it is actually declining,’ he said. ‘It is natural that the growth rate of credit has declined alongside a shift from high-speed to ‘high-quality development’,’ he told the Lujiazui Forum, referencing the high volume of existing lending. ‘Many loans in China are not efficient,’ he added.”

June 19 – Bloomberg: “China’s central bank chief hinted at a blueprint for a new toolkit that could open the door to its biggest policy overhaul in years, as officials try to bolster growth in the world’s No.2 economy. Pan Gongsheng, governor of the People’s Bank of China, gave the clearest signal yet that the authority may start trading government bonds in the secondary market… That shift has the potential to rewire how the central bank injects money into the economy and regulate liquidity.”

June 18 – Bloomberg: “China should shake off its ‘taboo’ regarding quantitative easing… and recognize that it may be necessary in the interest of stoking economic growth, a former People’s Bank of China adviser said. Chinese policymakers have long rejected QE, which was used by most advanced economy central banks as a stimulus tool after they had lowered interest rates toward zero. It’s sometimes been associated with stagnant economic growth and excessive public debt, and by some critics as evidence of Western economies’ decline. ‘China doesn’t have to embark on massive QE just yet,’ Yu Yongding, who sat on the PBOC’s monetary policy committee between 2004 and 2006, wrote… ‘But it’s necessary we shake off the thinking that QE is a taboo first so that we can launch it immediately when needed.’”

June 16 – Bloomberg: “China’s home prices fell at a faster pace in May… New-home prices in 70 cities… slid 0.71% from April, the most since October 2014… Values of existing homes dropped 1%, the sharpest decline since at least 2011 when China started using the current data collection method… Price declines also deepened from a year earlier. New-home prices slid 4.3% and used-home values tumbled 7.5%…”

June 16 – Reuters (Ella Cao, Liangping Gao and Ryan Woo): “Property investment in China fell 10.1% in the first five months of 2024 from a year earlier, after dropping 9.8% in January-April, even as policymakers doubled down on efforts to support the ailing sector and shore up consumer confidence. Property sales by floor area in January-May fell 20.3% from a year earlier, compared with a 20.2% slump in January-April… New construction starts measured by floor area fell 24.2% on year, after a 24.6% drop in the first four months. Funds raised by China’s property developers were down 24.3% from a year earlier after a 24.9% fall in January-April.”

June 17 – Reuters (Liangping Gao and Marius Zaharia): “China’s latest property support measures have boosted transactions in its biggest cities, but activity in smaller localities is struggling to get off the ground, pointing to more pain ahead for most of the country’s real estate market. On May 17, China cut minimum mortgage rates and downpayments and instructed municipalities to buy unsold apartments to turn them into social housing, sparking dozens of announcements from cities easing policies under the new guidelines. Small samples of transactions data and interviews with 10 real estate agents across China show the measures had an uneven impact throughout the country…”

June 20 – Bloomberg (Pearl Liu and Dorothy Ma): “Four defaulted Chinese developers are headed into Hong Kong court hearings on liquidation demands next week, marking one of the busiest such stretches ever for the sector. The focus is on Kaisa Group Holdings Ltd., once a symbol of the boom years in China’s credit markets, which has its hearing Monday. That’s followed on Wednesday by Shimao Group Holdings Ltd., whose landmark projects include five-star hotels in Shanghai. The companies must show they have made progress in restructuring their debt, or run the risk of judges ordering their assets to be sold off to repay creditors.”

June 21 – Bloomberg: “Two global credit ratings firms lowered their forecasts for China’s property market, as an accelerating slump in home prices hampers the country’s efforts to rescue the sector. S&P Global Ratings now expects residential sales to drop 15% this year, more than the 5% decline it projected earlier. That will put sales below 10 trillion yuan ($1.4 trillion), around half the peak in 2021… Fitch Ratings… cut its annual sales estimate to a decrease of 15%-20%, worse than an earlier estimate of a 5%-10% drop. The ratings firms’ bleaker outlook suggests they have little confidence that recent stimulus measures will end the property slump…”

June 21 – Bloomberg: “China’s electric vehicle industry received at least $231 billion in government subsidies and aid from 2009 through to the end of last year, even as the amount of support per vehicle has declined, according to a new research. Slightly more than half the total amount of support was in the form of sales tax exemptions, according to the research from Scott Kennedy, a China specialist at the Center for Strategic and International Studies. The rest is made up of nationally approved buyer rebates, government funding for infrastructure such as charging stations, government procurement of EVs as well as R&D support programs…”’

June 18 – Reuters: “The task of controlling floods in China is becoming increasingly arduous, President Xi Jinping said on Tuesday, calling for all-out efforts to safeguard lives and property as powerful storms pounded provinces from the interior to the eastern coast. About a dozen people have been reported killed in floods or rain-induced mudslides in recent days with the annual flooding season in southern Chinese provinces in full swing.”

Central Bank Watch:

June 20 – Bloomberg (Tom Rees): “The Bank of England breathed fresh life into hopes for an imminent cut in interest rates, hinting that more of its officials may be close to backing a pivot away from the highest borrowing costs in 16 years. Investors priced in more than a 50% chance of a move in August… The UK central bank left the key rate on hold at 5.25%…, but said the decision not to ease was ‘finely balanced’ for some of the nine members on the Monetary Policy Committee. Governor Andrew Bailey said it was ‘good news’ that inflation fell back to its 2% target for the first time in almost three years but that officials wanted to be sure that pressure on prices is subdued before acting.”

June 19 – Reuters (John Revill): “The Swiss National Bank cut interest rates… for the second time running, pointing to easing price pressures that allowed it to maintain its position as a front-runner in the global policy easing cycle now underway. The Swiss franc weakened against other currencies and stocks gained after the central bank cut its policy rate by 25 bps to 1.25%, as expected…, following a quarter-point reduction in March… ‘The underlying inflationary pressure has decreased again compared to the previous quarter,’ SNB Chairman Thomas Jordan said. ‘With today’s lowering of the SNB policy rate, we are able to maintain appropriate monetary conditions.’”

Europe Watch:

June 21 – Reuters (Jonathan Cable): “Euro zone business growth slowed sharply this month as demand fell for the first time since February, a survey found, with the bloc’s services industry showing some signs of weakening while the downturn in manufacturing took a turn for the worse… HCOB’s preliminary composite Purchasing Managers’ Index, compiled by S&P Global, sank to 50.8 this month from May’s 52.2, confounding expectations in a Reuters poll for a rise to 52.5.”

June 19 – Reuters (Sachin Ravikumar and Kylie Maclellan): “Three opinion polls on Wednesday predicted a record defeat for British Prime Minister Rishi Sunak’s Conservatives at a July 4 election, forecasting the Labour Party would comfortably win a large majority after 14 years in opposition. Polling by YouGov showed Keir Starmer’s Labour was on track to win 425 parliamentary seats in Britain’s 650-strong House of Commons, the most in its history. Savanta predicted 516 seats for Labour and More in Common gave it 406. YouGov had the Conservatives on 108 and the Liberal Democrats on 67, while Savanta predicted the Conservatives would take 53 parliamentary seats and the Liberal Democrats 50. More in Common forecast 155 and 49 seats respectively.”

June 16 – Reuters (David Milliken): “Three British opinion polls released late on Saturday presented a grim picture for Prime Minister Rishi Sunak’s Conservative Party, and one pollster warned that the party faced ‘electoral extinction’ in July 4’s election. The polls come just over halfway through the election campaign, after a week in which both the Conservatives and Labour set out their manifestos, and shortly before voters begin to receive postal ballots.”

June 21 – Bloomberg (Reed Landberg): “Britain’s private sector companies reported slower growth and stronger pressures to increase prices in the lead up to the general election, a closely watched industry survey showed. S&P Global’s composite Purchasing Managers’ Index slipped to 51.7 in June from 53 the month before, the lowest reading since November… The report also showed inflationary pressures, driven by a jump in wages and rising prices for goods.”

June 17 – Financial Times (Martin Arnold): “Germany’s largest industrial union is gearing up for a battle over pay in the country’s manufacturing heartlands after it called for a 7% wage rise for millions of electrical and metal workers. IG Metall said… its board recommended negotiators seek the pay rise for a 12-month period for 3.9mn workers in the sector, which is the backbone of Germany’s wider economy and a bellwether for wage agreements in other sectors.”

June 19 – Reuters (Tom Sims): “Hundreds of thousands of bank employees in Europe’s largest economy are fighting for pay increases of up to 16% to cope with rising living costs and unions are warning of possible strikes. Pay negotiations for Germany’s public and private bank employees follow a spike in costs that has hit ordinary workers hard, while the banks have benefited from the higher interest rates imposed to combat inflation.”

Japan Watch:

June 17 – Bloomberg (Toru Fujioka and Yoshiaki Nohara): “Bank of Japan Governor Kazuo Ueda kept the door open to a possible interest rate increase in July, defying market skepticism over the potential for such action after the bank said it would take another big step toward quantitative tightening next month via a cut in its bond buying. ‘The reduction of bond buying and a policy rate hike are separate issues,’ Ueda said… ‘There is a good chance for the policy rate to be raised, depending on data and information over the economy, inflation and financial conditions.’”

June 18 – Bloomberg (Toru Fujioka): “Bank of Japan board members discussed the possibility of pursuing a faster pace of policy normalization amid ongoing risks that the weak yen’s effect on inflation might force a response by the bank, according to minutes from the April policy meeting. ‘Some members pointed out that exchange rates were one of the important factors affecting economic activity and prices, and that monetary policy responses would be necessary’ if currencies affect the inflation outlook, including spurring upside risks, according to the minutes…”

June 16 – Reuters (Leika Kihara and Takahiko Wada): “The Bank of Japan is likely to trim bond buying by around 24 trillion yen ($152bn) annually in new guidance due next month, but forgo raising interest rates at least until September, former board member Makoto Sakurai said… At its policy meeting on Friday, the BOJ decided to start trimming its huge bond purchases and announce a detailed plan in July on reducing its nearly $5 trillion balance sheet, taking another step toward unwinding its massive monetary stimulus.”

June 20 – Bloomberg (Erica Yokoyama): “Japan’s inflation accelerated on the back of rising energy costs, a result that backs the case for the central bank to consider raising interest rates in coming months. Consumer prices excluding fresh food rose 2.5% in May from a year ago, quickening from 2.2% in April…”

Emerging Market Watch:

June 18 – Reuters (Tanvi Mehta): “Peak demand for power in India’s hot, arid northern plains hit a record on Monday, the government said as it continues to implement measures to meet high energy consumption, although the weeks’ long heatwave is forecast to abate soon. The India Meteorological Department (IMD) has predicted above-normal temperatures for June in the northwest and central parts of the country, making it one of the longest heatwave spells.”

Leveraged Speculation Watch:

June 17 – Reuters (Nell Mackenzie and Anousha Sakoui): “Hedge fund managers making bets on mergers and acquisitions outperformed those deploying other strategies with a return of 7.7% in the first five months of 2024, Goldman Sachs said…, as deal-making rebounded… Worldwide M&A was worth $1.3 trillion during the first five months of 2024, a 23% increase versus the same period of 2023, but below the $1.8 trillion recorded in January-May 2022, according to LSEG data.”

June 21 – Bloomberg (Nishant Kumar): “Millennium Management is planning to raise new cash equivalent to about 10% of its $68 billion in assets as the multistrategy hedge fund giant looks to bolster its ability to access capital when needed. The New York-based investment firm is in talks with investors to get their commitments in a so-called draw-down fund that will allow Millennium to call the cash at will…”

June 20 – Bloomberg (Anya Andrianova and Vinícius Andrade): “The South African rand is emerging as the new favorite bet against the low-yielder Japanese yen, stealing the spotlight from the Mexican peso for the lucrative carry trade, according to Jefferies… The rand’s appeal grew in the wake of a May 29 election that reassured investors of a more business-friendly approach. By contrast, there has been a lack of clarity on policies from Claudia Sheinbaum, who won the vote in Mexico on June 2 to become the country’s first female president-elect.”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 20 – Axios (Rebecca Falconer): “An intensifying heat wave that’s striking the Midwest to the Northeast has seen multiple new maximum temperature records set or tied this week, with more to come… Officials in several states have activated emergency operations and opened cooling centers in response to the lingering heat dome that left over 100 million people under heat alerts… New York Gov. Kathy Hochul has activated emergency operations that are in effect through Friday for parts of the state impacted by the heat dome and Boston Mayor Michelle Wu declared a heat emergency that’s effective through Thursday… Southern New England saw multiple daily temperature records set, including in Boston, which hit 98°F on Wednesday.”

June 21 – Bloomberg (Kara Carlson, Evan Gorelick and Jake Bleiberg): “A dealership in Phoenix is handwriting paper contracts and gauging creditworthiness with guesswork. A Jeep owner in Alabama keeps calling about when a replacement part will be in stock. A family in New Jersey is waiting for word on when they can take delivery of their new Audi. Such is life for auto retailers and their customers across the US and Canada after CDK Global — a software provider to some 15,000 dealers — was waylaid by debilitating cyberattacks. The barrage began June 19, costing US dealers a burst of business on a federal holiday. CDK has warned that a second incident Thursday is likely to keep its systems down for several more days. The attacks have had a crippling effect on an industry that topped $1.2 trillion in sales last year just in the US.”

June 19 – Reuters (Robert Harvey): “Global fossil fuel consumption and energy emissions hit all-time highs in 2023, even as fossil fuels’ share of the global energy mix decreased slightly on the year, the industry’s Statistical Review of World Energy report said… Growing demand for fossil fuel despite the scaling up of renewables could be a sticking point for the transition to lower carbon energy as global temperature increases reach 1.5C (2.7F), the threshold beyond which scientists say impacts such as temperature rise, drought and flooding will become more extreme.”

June 21 – Reuters (Aleksandar Vasovic, Daria Sito-Sucic, Stevo Vasiljevic and Fatos Bytyci): “A major power outage hit Montenegro, Bosnia, Albania and most of Croatia’s coast on Friday, disrupting businesses, shutting down traffic lights and leaving people sweltering without air conditioning in the middle of a heatwave. Montenegro’s energy minister said the shutdown had been caused by a sudden increase in power consumption brought on by high temperatures, and by the heat itself. Power distribution systems are linked across the Balkans for transfers and trading.”

June 19 – Bloomberg (Stephan Kueffner): “A blackout hit the whole of Ecuador on Wednesday, leaving the nation of 18 million without power. Energy Minister Roberto Luque blamed the massive outage on a incident with a transmission line in southern Ecuador which triggered a ‘cascading disconnection.’ The blackout was the first of its kind in 20 years and ‘shows how fragile our system is, and reflects the energy crisis we’re experiencing,’ Luque told reporters…”

June 19 – Bloomberg (Eamon Akil Farhat): “China’s energy use per person surpassed Europe’s for the first time last year as demand from technology and manufacturing industries continued to climb. The country ramped up coal-fired generation, but also added more renewable capacity than the rest of the world combined, according to the Energy Institute’s annual Statistical Review… Chinese consumption is being driven by the expansion of data centers, 5G infrastructure and car charging, while many factories are also running at full tilt to meet demand for goods overseas.”

Geopolitical Watch:

June 20 – Financial Times (Song Jung-a and Kana Inagaki): “Japan and South Korea have sounded the alarm over deepening military collaboration between Russia and North Korea after Vladimir Putin and Kim Jong Un signed a far-reaching strategic partnership that included mutual assistance against ‘aggression’. North Korea’s official news agency… released the text of the agreement, which included a pledge to deploy ‘all means at its disposal without delay’ to provide ‘military and other assistance’ in the event that one of the signatories was invaded or in a state of war… South Korea’s foreign ministry… expressed regret over the strategic partnership… and warning that their co-operation on military technology would violate UN Security Council resolutions. ‘We will sternly respond to any act threatening our security with the international community, including our allies, after conducting thorough analysis on [Putin’s] visit to North Korea and their comprehensive strategic partnership agreement,’ the ministry said.”

June 15 – Reuters: “Iran called upon the Group of Seven… to distance itself from ‘destructive policies of the past’, the Iranian Foreign Ministry spokesperson Nasser Kanaani said, referring to a G7 statement condemning Iran’s recent nuclear programme escalation. On Friday, the G7 warned Iran against advancing its nuclear enrichment programme and said they would be ready to enforce new measures if Tehran were to transfer ballistic missiles to Russia. ‘Any attempt to link the war in Ukraine to the bilateral cooperation between Iran and Russia is an act with only biased political goals,’ Kanaani said…”

June 20 – Financial Times (Demetri Sevastopulo): “The Philippines has secretly reinforced a dilapidated warship marooned on a South China Sea reef that is central to an increasingly dangerous dispute with Beijing… In recent months, the Philippine military has conducted missions to reinforce the Sierra Madre, which is lodged on the disputed Second Thomas Shoal in the Spratly Islands…. It did so due to rising concern that the rusting ship was in danger of breaking apart. The Philippines ran the Sierra Madre aground in 1999 to help reinforce its claim to the reef, over which China also asserts sovereignty as part of an expansive claim — opposed by its neighbours — over most of the South China Sea.”

June 20 – Wall Street Journal (Niharika Mandhana): “The Chinese coast guard came in small boats with axes, long knives and spears. They used the crude weapons to slash and puncture the Philippine military’s rubber craft. One Chinese boat rammed a Philippine boat at high speed, severing the thumb of a Filipino seaman who was holding on to the side of his ride. During Monday’s frantic events in the South China Sea, the Chinese coast guard crew also boarded a Philippine boat, smashed its outboard motor and communications equipment, and grabbed the Filipino crew’s cellphones. They seized seven disassembled rifles that were packed in cases for delivery to a Philippine outpost, the Philippine military said. ‘Only pirates do this,’ said Gen. Romeo Brawner Jr., the Philippine military’s chief of staff. ‘Only pirates board, steal, and destroy ships, equipment and belongings.’”

June 16 – The Hill (Nick Robertson): “The Chinese nuclear arsenal is expanding and quickly, according to a report from the Stockholm International Peace Research Institute (SIPRI) published this week. The number of operational nuclear warheads globally is increasing every year, the report found, with the most rapidly-increasing stockpile belonging to China. The institute predicted the Chinese arsenal of active intercontinental nuclear missiles could grow to match the American and Russian armaments by 2030.”

June 17 – Reuters (David Ljunggren): “The Canadian Liberal government, criticized by opposition legislators for sending a patrol ship to Havana while Russian vessels were there, on Monday said the visit was meant to send a message of deterrence to Moscow. The Canadian navy patrol ship sailed into the harbor early on Friday, two days after the arrival of a Russian nuclear-powered submarine and a frigate.”

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