Is the market bottom in, or is this more a replay of the fleeting Q1 quarter-end bear market rally? Is the “fix in” for European bonds? Does Kuroda’s foolhardy cling to “whatever it takes” buy some additional time for the perilous Japanese bond Bubble? Does the sharp commodities market reversal and some weaker data take pressure off the Fed and global central bank community? Could all the global market ructions be evidence of an unfolding existential threat to the global leveraged speculating community?
Jumping 6.4%, the S&P500 more than recovered the previous week’s big loss. The Nasdaq Biotech Index surged 14.0%, while the Nasdaq Industrials rose 9.0%. The Nasdaq100 rallied 7.5%, the Utilities 7.4%, and the Biotechs 8.7%.
Meanwhile, commodities and related equities remained under pressure for the second straight week. The Bloomberg Commodities Index dropped another 4.3%, with a two-week loss of 10.4%. Natural Gas’s 10.4% drop boosted its two-week collapse to almost 30%. By the look of things, it appears that some long/short and momentum strategies saw their longs under pressure as their shorts rallied.
There is certainly a short squeeze element to the rally. The Goldman Sachs Most Short Index surged 11.2% this week. Okta spiked 22.5%, Etsy 16.0%, Norwegian Cruise Lines 15.7%, Lucid Group 15.5%, Docusign 13.5%, and Moderna 12.7%. The S&P Retail ETF jumped 7.3%. The S&P500 Automobile Manufacturing Index surged 14.4%.
In wild instability, U.S. high-yield CDS sank 47 bps this week, reversing the previous week’s 44 bps surge. Investment-grade CDS declined six bps after jumping eight. Huge bond fund outflows continue. While generally declining a couple basis points, bank CDS prices were notable for reversing only a fraction of the previous week’s surge.
Italian 10-year yields fell 14 bps this week to 3.46%, with yields now down 52 bps from June 14 intraday highs. Greek yields sank 25 bps to 3.77%, ending the week almost 100 bps lower than June 14 highs (4.74%). Portuguese yields are down 60 bps (to 2.52%) and Spanish yields 58 bps (to 2.55%) from highs of only eight sessions ago.
The ECB’s emergency meeting to address mounting “fragmentation” risk reversed the intense deleveraging dynamics that were overwhelming periphery European debt markets.
June 20 – Financial Times (Martin Arnold): “The European Central Bank is determined to nip ‘in the bud’ any fragmentation in borrowing costs between eurozone countries, its president Christine Lagarde said…, warning anyone doubting this was ‘making a big mistake’. Appearing before EU lawmakers in Brussels, Lagarde defended the ECB’s decision, made at an emergency meeting last week, to accelerate work on a new policy tool to counter a recent surge in the borrowing costs of more vulnerable countries. ‘You have to kill it in the bud,’ the ECB president said… ‘Fragmentation will be addressed if the risk of it arises; and it will be done so with the appropriate instruments, with the adequate flexibility; it will be effective; it will be proportionate; it will be within our mandate and anybody who doubts that determination will be making a big mistake.’”
Madame Lagarde is channeling her best Mario Draghi. A key passage from Draghi’s fateful 2012 “bumble bee” speech: “But there is another message I want to tell you. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
The ECB’s balance sheet was less than $3 TN when Draghi unleashed “whatever it takes” inflationism. Numerous QE-style programs later, and assets are approaching $8 TN. Not surprisingly, massive monetary inflation failed to resolve deep structural issues at Europe’s troubled periphery.
While there will be short-term effects and copious volatility, I doubt markets are all that intimidated by the “anyone who doubts” will be “making a big mistake” tough guy bluster. “Madame inflation” faces quite a challenge convincing the Germans, financial markets and most interested parties that another bout of rank inflationism at this point will lead to anything other than higher inflation and only more instability. Lagarde will be playing a game of chicken – feigning Draghi’s overused, abused and depleted instrument – against battalions of emboldened market operators.
June 20 – Bloomberg (Chikako Mogi): “Tokyo’s bond market began the week on a much calmer footing as traders mulled unprecedented intervention by the Bank of Japan, which dragged benchmark yields back below their closely watched ceiling. Ten-year yields edged higher to 0.23% Monday in the aftermath of the BOJ’s 10.9 trillion yen ($81bn) of government bond purchases last week, the most on record… The central bank ramped up bond buying as benchmark yields breached its 0.25% tolerated limit amid a global debt selloff.”
I’m not opposed to a central bank using its balance sheet in “buyer of last resort” operations to thwart financial collapse. If such operations are anything but rare, there are serious stability issues that must be addressed. When employed, a central bank should begin reversing balance sheet crisis measures as soon as the system stabilizes. Central bankers must be on guard to ensure that their balance sheet operations never incentivize levered speculation.
What the Bank of Japan’s Haruhiko Kuroda has been doing is monetary policy insanity. Another $81 billion – just last week, in central bank inflationism running completely amuck – all to maintain a 25 bps ceiling on 10-year Japanese government bond (JGB) yields. This week’s additional small decline pushed the yen’s 2022 loss to almost 15% (trading this week at a 24-year low).
June 22 – Financial Times (Tommy Stubbington and Leo Lewis): “Investors are digging in for a battle with the Bank of Japan this summer, as they crank up bets that the global tide of rising inflation will goad the central bank into giving up its efforts to keep bond yields close to zero. Foreign fund managers’ renewed enthusiasm for wagers against Japanese government bonds — a trade that has backfired so frequently over the past two decades it earned the nickname ‘widow-maker’ — also puts them at odds with the majority of Japanese investors who think the BoJ will stick to its guns despite the collapse of the yen to a 24-year low. At last week’s policy meeting, the Japanese central bank renewed its pledge to buy as much government debt as it takes to keep 10-year borrowing costs below 0.25%. This commitment to so-called yield curve control, a long-standing feature of monetary policy in an economy that has for decades struggled to generate meaningful inflation, places Japan increasingly out of step with a headlong dash to higher interest rates around the world.”
I’m on record questioning whether the euro experiment survives coming global financial and economic crises. Recent cracks in European periphery bonds are sounding an early warning, something clearly not lost on ECB officials. Likely more pressing, the blowup in Kuroda’s JGB yield peg gamble might be only weeks away. At this point, market operators (i.e. the leveraged speculating community) smell blood. Shorting JGBs at a 25 basis point yield – in today’s backdrop of surging global inflation and bond yields – provides a rare risk vs. reward opportunity for speculating in a multi-trillion dollar market. I am reminded of last gasp, desperation policy measures – and final short squeeze in the Thai baht – back in the halcyon days of June 1997, just before all bloody hell broke loose.
And while on the subject of the mid-nineties…
“It’s true we’ve moved a lot – but we’ve moved a lot from a very low level. I like to allude to the 1994 tightening in the U.S… The ’94 tightening was 300 bps in a year – including a 75 bps move in November of ’94. That tightening episode caused some disruption that year, in 1994. However, I’ve always felt that one set up the U.S. economy for a stellar performance in the second half of the 1990s. U.S. real GDP grew rapidly during that period; that’s when you got the very best labor markets that you’ve seen in the U.S. post-war era. And, so, a lot of good things happened in the second half of the nineties, and I hope we can get something like that again this time. But we are moving quickly, but we’re moving from a low level and from the very accommodative monetary policy that we put in place to try to combat the pandemic.” St. Louis Fed President James Bullard, June 20, 2022
I’m always interested in what’s on James Bullard’s mind. He’s a thoughtful economist and, depending on the outcome of the 2024 election, could be Powell’s successor. Bullard’s comments regarding 1994 and the late-nineties deserve a rebuttal.
I’ve of late made several references to 1994 – the bookend to 2022 and pivotal year in financial history. It was the last true Fed tightening – and it did cause “some disruption.” There were big bond market and derivatives blowups that should have burst a fledgling bubble in hedge funds and leveraged speculation. Instead, the government-sponsored enterprises, or GSEs, (largely Fannie and Freddie), expanded their balance sheets by (an at the time unprecedented) $150 billion. Their massive purchases of an assortment of Credit instruments, essentially a QE operation, were pivotal in containing the crisis and bailing out the leveraged speculating community. A powerful liquidity backstop was established in 1994, and this “GSE put” would be integral to leveraged speculation in mortgage instruments and derivatives (financial markets generally) for the next decade (where GSE assets would balloon $2.25 TN through 2004).
If not for the 1994 GSE backstop and Mexican bailout, the “Asian Tiger” Bubbles would not have inflated to catastrophic extremes. There would have been no spectacular Russian and LTCM collapses in 1998, and hence no bailouts and stimulus that fueled perilous 1999 “dot.com” speculative Bubble blow-off dynamics. The “tech” bust then sparked Fed reflationary measures and the resulting mortgage finance Bubble. The subsequent “great financial crisis” saw the opening salvo of QE. The Fed’s balance sheet was at $400 billion in 1994, ended 2007 at about $900 billion, surpassed $2.0 TN in 2008, was up to $4.5 TN by 2014, and had ballooned to almost $9.0 TN earlier this week. A lot of troubling things got started in the second half of the nineties.
Mr. Bullard is wishful thinking if he actually believes a lot of good things are going to happen – like the “stellar performance in the second half of the 1990s.” There are indeed strong associations between 1994 and 2022: the former was at the dawn of a historic up-cycle, the latter the conclusion. The late-nineties saw an extraordinary confluence of financial innovation, technological advancement, leveraged speculation, globalization, and monetary policy experimentation.
The pandemic ignited late-cycle climatic excesses in financial innovation, leveraged speculation and policy experimentation. The unfolding new cycle will now impose far-reaching restraint on all three. Already well past the cycle’s peak, 2022 will be recognized as a historic inflection point for “globalization.” The new Iron Curtain is only the most tangible evidence of unfolding changed dynamics. And while not my area of expertise, I suspect recent unprecedented monetary excess likely fueled peak technological innovation. Moreover, 1994 was early days for a most protracted and historic bond bull market, which was the foundation for epic equities and asset market inflation (not to mention unparalleled market-focused monetary accommodation). This year will commence what I expect to be a new cycle of major bear markets in bonds, stocks and financial assets more generally.
Rather than the “good things” from the nineties second half, I fear more EM Bubble collapses, more LTCM and Russia-style implosions and associated acute instability. Global markets somewhat regained their composure this week. But I doubt the brush with the abyss will soon be forgotten. I’ll assume the leveraged speculating community is impaired. While I expect de-risking/deleveraging to continue, seeing the rally continue into quarter-end would not be surprising.
Unfortunately, we’re early in Global Crisis Dynamics. There’s faltering U.S. “tech,” crypto and Credit Bubbles (to name a few), periphery European bonds, Kuroda’s Bubble, and EM Bubble fragilities. With Chinese equities rallying on prospects for Beijing stimulus measures, China’s developer crisis has fallen off the radar screen. I’d put it back on; things get worse by the week.
June 24 – Bloomberg (Lorretta Chen): “China high-yield dollar bonds fell 1-2 cents Friday, according to credit traders, with developers leading the declines as this month’s downslide continues. The market is on pace to complete a third full week without a daily price gain and post a record-tying eighth-straight losing week…”
June 21 – Bloomberg (Alice Huang and Lorretta Chen): “The ongoing bond plunge for resort chain Club Med’s Chinese owner shows that financial stress among the country’s property developers is shifting to other weaker borrowers. In a sign of contagion, prices slid Tuesday for some Chinese industrial firms’ offshore debt after a Monday selloff in Macau’s casino operators. Meanwhile, last week’s slump for conglomerate Fosun International Ltd.’s dollar bonds accelerated, with some on track for record declines… The steep losses in Fosun’s bonds spreading to non-property high-yield companies are pushing China’s junk dollar debt market into a new phase.”
For the Week:
The S&P500 rallied 6.4% (down 17.9% y-t-d), and the Dow rose 5.4% (down 13.3%). The Utilities recovered 7.4% (down 4.3%). The Banks gained 4.5% (down 20.5%), and the Broker/Dealers jumped 5.4% (down 19.7%). The Transports advanced 5.3% (down 17.8%). The S&P 400 Midcaps rose 5.1% (down 17.9%), and the small cap Russell 2000 jumped 6.0% (down 21.4%). The Nasdaq100 surged 7.5% (down 25.8%). The Semiconductors gained 5.4% (down 31.1%). The Biotechs jumped 8.7% (down 14.1%). With bullion down $13, the HUI gold index declined 1.5% (down 8.1%).
Three-month Treasury bill rates ended the week at 1.6025%. Two-year government yields fell 12 bps to 3.07% (up 233bps y-t-d). Five-year T-note yields dropped 16 bps to 3.19% (up 192bps). Ten-year Treasury yields declined nine bps to 3.14% (up 162bps). Long bond yields slipped two bps to 3.26% (up 136bps). Benchmark Fannie Mae MBS yields sank 15 bps to 4.51% (up 244bps).
Greek 10-year yields sank 25 bps to 3.77% (up 245bps y-t-d). Ten-year Portuguese yields fell 18 bps to 2.52% (up 206bps). Italian 10-year yields dropped 14 bps to 3.46% (up 229bps). Spain’s 10-year yields slumped 19 bps to 2.55% (up 199bps). German bund yields sank 22 bps to 1.44% (up 162bps). French yields dropped 23 bps to 1.97% (up 178bps). The French to German 10-year bond spread narrowed one to 53 bps. U.K. 10-year gilt yields fell 20 bps to 2.30% (up 133bps). U.K.’s FTSE equities index rallied 2.7% (down 2.4% y-t-d).
Japan’s Nikkei Equities Index gained 2.0% (down 8.0% y-t-d). Japanese 10-year “JGB” yields were little changed at 0.23% (up 16bps y-t-d). France’s CAC40 rose 3.2% (down 15.1%). The German DAX equities index was little changed (down 17.4%). Spain’s IBEX 35 equities index increased 1.2% (down 5.4%). Italy’s FTSE MIB index rose 1.5% (down 19.1%). EM equities were mixed. Brazil’s Bovespa index declined 1.2% (down 5.9%), and the Mexico’s Bolsa index slipped 0.6% (down 10.4%). South Korea’s Kospi index dropped 3.0% (down 20.5%). India’s Sensex equities index rallied 2.7% (down 9.5%). China’s Shanghai Exchange Index gained 1.0% (down 8.0%). Turkey’s Borsa Istanbul National 100 index added 0.8% (up 37.5%). Russia’s MICEX equities index rose 1.6% (down 36.9%).
Investment-grade bond funds saw hefty outflows of $7.451 billion, and junk bond funds recorded negative flows of $2.625 billion (from Lipper).
Federal Reserve Credit last week increased $7.976bn to $8.901 TN. Over the past 145 weeks, Fed Credit expanded $5.174 TN, or 139%. Fed Credit inflated $6.090 Trillion, or 217%, over the past 502 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $5.5bn to $3.403 TN. “Custody holdings” were down $137bn, or 3.9%, y-o-y.
Total money market fund assets added $1.9bn to $4.543 TN. Total money funds were down $4bn, or 0.1%, y-o-y.
Total Commercial Paper expanded $17.5bn to $1.143 TN. CP was down $20bn, or 1.7%, over the past year.
Freddie Mac 30-year fixed mortgage rates added three bps to 5.81% (up 279bps y-o-y) – the high since November 2008. Fifteen-year rates jumped 11 bps to 4.92% (up 258bps) to the high since June 2009. Five-year hybrid ARM rates rose eight bps to 4.41% (up 188bps) – the high back to October 2009. Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 5.77% (up 263bps).
For the week, the U.S. Dollar Index declined 0.5% to 104.12 (up 8.8% y-t-d). For the week on the upside, the Mexican peso increased 2.4%, the Norwegian krone 1.5%, the South African rand 1.4%, the Swiss franc 1.2%, the Canadian dollar 1.1%, the euro 0.5%, the Swedish krona 0.5%, the Singapore dollar 0.3%, the British pound 0.2%, the Australian dollar 0.2%, and the New Zealand dollar 0.1%. On the downside, the Brazilian real declined 1.7%, the South Korean won 0.8%, and the Japanese yen 0.2%. The Chinese (onshore) renminbi increased 0.40% versus the dollar (down 4.99% y-t-d).
The Bloomberg Commodities Index fell 4.3% (up 22.3% y-t-d). Spot Gold slipped 0.7% to $1,827 (unchanged). Silver declined 2.3% to $21.16 (down 9.2%). WTI crude fell $1.94 to $107.62 (up 43%). Gasoline rose 2.4% (up 74%), while Natural Gas sank 10.4% (up 67%). Copper slumped 7.1% (down 16%). Wheat sank 10.5% (up 22%), and Corn dropped 7.8% (up 14%). Bitcoin recovered $750, or 3.6%, this week to $21.277 (down 54%).
Market Instability Watch:
June 21 – Bloomberg (Lucca de Paoli): “Corporate distress in Europe’s biggest markets is near a two-year high as inflation and higher interest rates squeeze indebted firms. Companies in Germany, the UK, France, Spain and Italy are the most distressed since August 2020, according to the Weil European Distress Index. The study aggregates data from more than 3,750 listed European firms. ‘If this upward trajectory continues, we would expect to see increased pressure on liquidity and further tightening across the credit markets with some businesses struggling to access finance and ultimately facing defaults,’ said Neil Devaney…, co-head of Weil, Gotshal & Manges’s London restructuring practice.”
June 21 – Bloomberg (Chikako Mogi): “Japan’s sale of five-year government debt drew the weakest demand in more than two years in the aftermath of wild price swings in futures that have made some traders uneasy about their exposure to cash bonds. The country’s sovereign debt market has seen increasing turmoil this month as investors question the Bank of Japan’s capacity to cap yields at home with ramped up bond purchases as rates surge globally.”
June 23 – Bloomberg (Hannah Benjamin and Ronan Martin): “The dawn of a protracted rate-hike cycle in Europe is re-setting firms’ expectations for the cost of raising new debt. A company coming to market now is typically paying higher spreads than just a few weeks ago. Germany’s BASF SE forked out 140 bps above midswaps to raise new 10-year notes on Wednesday, almost double what it paid to sell nine-year debt a little over three months ago…”
June 20 – Financial Times (Eric Lonergan): “The European Central Bank’s emergency meeting last Wednesday was a remarkable event. It could be the first time that a central bank confronted by the onset of a crisis has moved early and quickly. Concerns about the structural stability at the heart of the sovereign bond market in Europe have never been silenced. Despite the power of the ‘whatever it takes’ pledge a decade ago by then ECB president Mario Draghi, and extensive bond-buying programmes, markets have consistently priced a credit risk premium into the sovereign debt of some countries. Europe’s sovereign bond market is unique. Debt is issued by member states, but money is created by a supranational entity, the ECB. The power to print money is the basis of the creation of benchmark risk-free assets in a financial system. Without the ECB’s backing, the eurozone has no such asset. But the ECB’s support for the sovereign bond market has always been conditional on consistency with its mandate of price stability. It was the threat of deflation in 2012, and during the pandemic, which gave the ECB the all-clear to provide the limitless support required to halt a panic. Inflation in Europe is a game-changer, and markets know this.”
Bursting Bubble/Mania Watch:
June 23 – Wall Street Journal (Jon Sindreu): “Contrary to their caricature as the fickle winds of finance, individual investors are the only ones keeping the ‘buy the dip’ faith alive. But even their appetite for losses may have limits. The S&P 500 index is close to notching its worst first half in decades, yet individual investors have still purchased a net $24 billion worth of U.S. stocks over the past month, in line with the average of the past two years, according to… VandaTrack. Even purchases of single equities, which are typically more susceptible to shifts in sentiment than those of exchange-traded funds, have remained robust, unlike during the Covid-19 selloff in February 2020 and the late-2021 rout.”
June 19 – Bloomberg (Anchalee Worrachate and Liz Capo McCormick): “Wall Street pros are famously still at loggerheads over the fate of the trillion-dollar 60/40 complex – – only this time the balanced investment strategy is posting losses on a scale that’s shocking even its biggest critics. With stocks and Treasuries tumbling anew thanks to the Federal Reserve’s increasingly hawkish policy direction, the time-honored method of allocating 60% to equities and 40% to fixed income has plunged about 14% so far this quarter. That’s a worse quarterly showing than in depths of the global financial crisis and during the once-in-a-century pandemic rout…”
June 19 – Bloomberg (Suvashree Ghosh): “Celsius Network Ltd. will need more time to stabilize its liquidity and operations, the embattled crypto lending platform said in a blog post after it froze deposits last week. Celsius, one of the biggest crypto lenders, has been struggling to raise funds in a fragile digital-assets market hit by tightening interest rates, liquidity and the collapse of the Terra blockchain last month. ‘We want our community to know that our objective continues to be stabilizing our liquidity and operations,’ Celsius said… ‘This process will take time.’”
June 19 – Bloomberg (Olga Kharif): “The record-setting rout in cryptocurrencies has put a slew of decentralized-finance applications and their communities in a race to protect themselves against a cascade of liquidations — sometimes by employing unprecedented measures. On Sunday, token holders of Solend, a lending app on the Solana blockchain, voted to temporarily take over a large user’s account that faced the threat of a large liquidation, an extreme move for DeFi that appears to be a first. That decision was reversed… That all took place after MakerDAO, an app that supports stablecoin DAI and is run by a crypto community that formed one of the first decentralized autonomous organizations, suspended the token from being deposited and minted in DeFi crypto lending platform Aave.”
June 18 – Wall Street Journal (Corrie Driebusch and Paul Vigna): “On Super Bowl Sunday, a Crypto.com ad featuring billionaire NBA star LeBron James lit up millions of Americans’ TVs. ‘If you want to make history, you gotta call your own shots,’ Mr. James said in the 30-second spot for the popular cryptocurrency-trading platform. The words that splashed across the screen as the commercial ended read ‘Fortune favors the brave.’ Last week, Crypto.com laid off 5% of its workforce as its chief executive officer said on Twitter that the company was making ‘difficult and necessary decisions.’ The cryptocurrency industry was built in part on swagger, enthusiasm and optimism. Bitcoin backers’ rallying cry to rebuff skeptics was, ‘Have fun staying poor.’ Those who didn’t buy in were letting the future pass them by.”
June 21 – Reuters (Marc Jones): “Recent implosions in the cryptocurrency markets indicate that long-warned-about dangers of decentralised digital money are now materialising, the Bank for International Settlements has said. The BIS, the global umbrella body for central banks, sounded the warning in an upcoming annual report, in which it also urged more effort in developing appealing central bank digital currencies. BIS general manager Agustin Carstens pointed to recent collapses of the TerraUSD and luna ‘stablecoins’, and a 70% slump in bitcoin, the bellwether for the crypto market, as indicators that a structural problem exists.”
June 22 – Financial Times (Joe Rennison): “Wall Street banks are taking steep losses on corporate bond deals signed before the latest downturn in financial markets, as investors demand bigger discounts and higher yields to lend to companies. When banks agree bond sales on behalf of companies, they typically set a maximum interest rate that investors can expect to receive in exchange for buying the debt… But markets have dropped much further than envisaged in 2022… An index of high-yield bonds run by Ice Data Services has dropped nearly 13% so far in 2022. In turn, investment banks have cut the prices of companies’ bonds in an effort to attract buyers — eating into their underwriting fees. ‘Almost every single deal that was underwritten will have to come at a discount and underwriters are having to pay for it,’ said a banker at a large US bank.”
June 23 – Bloomberg (Davide Scigliuzzo and Claire Ruckin): “Investment bankers in the US and Europe are bracing for potentially billions of dollars in total losses on big-ticket leveraged buyouts as they struggle to offload risky corporate debt that’s plunging in value amid a sweeping market selloff. The biggest hit, which could amount to about $1 billion, may come from the take-private of Citrix Systems Inc., which a group of lenders led by Bank of America Corp., Credit Suisse… and Goldman Sachs… signed in January…”
June 18 – Bloomberg (Benjamin Robertson and Jan-Henrik Förster): “Private equity bosses are finding history to be a lousy guide as they hunt for clues on how to work through the turmoil in global markets. Industry executives were in a sober mood as they met at the SuperReturn International conference in Berlin this week to discuss a multitude of challenges, from rampant inflation and rising rates to Russia’s ongoing war in Ukraine and the looming threat of recessions. ‘I don’t think there is a playbook we can turn to from the global financial crisis or the dotcom bust or anything else,’ Matt Cwiertnia, co-head of private equity at Ares Management Corp., told attendees. ‘You need to be paranoid now and get in early with your companies to help them navigate through this.’”
June 18 – Bloomberg (Thyagaraju Adinarayan and Sagarika Jaisinghani): “So far 2022 has been a year where just about everyone on Wall Street got it wrong. As did the Fed and a cadre of global central banks. Back in December, strategists at the world’s top investment firms like JPMorgan… predicted the S&P 500 would gain 5% in 2022. Economists saw the U.S. 10-year Treasury yield hitting 2% on average by the year’s end. And even Goldman Sachs… lent credibility to the claims Bitcoin was on track to hit $100,000. Yet six months later, an unprecedented confluence of shocks has ended one the most powerful equity bull markets and sent safe-haven government bonds and other assets spiraling. The S&P 500 is down 23%, 10-year rates stand at 3.23% and Bitcoin has shed more than half its value.”
Russia/Ukraine War Watch:
June 22 – Bloomberg (Archie Hunter, Tarso Veloso and Megan Durisin): “Infrastructure owned by two major agriculture traders was damaged in Russian attacks at one of the biggest crop-handling ports in Ukraine, adding to the mounting losses suffered by its farm sector. Rocket strikes on the Ukrainian port city of Mykolayiv on Wednesday damaged a terminal owned by agricultural trader Viterra, and the site is on fire, a company spokesperson said. Bunge Ltd. also said one of its facilities was hit and a city rescue brigade was at the site.”
Economic War/Iron Curtain Watch:
June 23 – Bloomberg: “Russia said international sanctions have created a ‘force-majeure’ situation that’s forced it to switch to servicing its eurobonds in rubles in a bid to avoid a default. Finance Minister Anton Siluanov likened the government’s predicament to a ‘farce,’ in which it has the money and the intention of paying, but its hard currency can’t pass through the international settlement system due to sanctions over the invasion of Ukraine. ‘Overseas counter-agents have refused to make payments in foreign currencies, which for us is a force-majeure situation,’ Siluanov said… ‘And it’s purely for this reason that we are switching to payments in rubles.’”
June 23 – Bloomberg (Arne Delfs and Vanessa Dezem): “Germany warned that Russia’s moves to slash Europe’s natural gas supplies risked sparking a collapse in energy markets, drawing a parallel to the role of Lehman Brothers in triggering the financial crisis. With energy suppliers piling up losses by being forced to cover volumes at high prices, there’s a danger of a spillover effect for local utilities and their customers, including consumers and businesses, Economy Minister Robert Habeck said… after raising the country’s gas risk level to the second-highest ‘alarm’ phase. ‘If this minus gets so big that they can’t carry it anymore, the whole market is in danger of collapsing at some point,’ Habeck said… ‘So a Lehman effect in the energy system.’”
June 18 – Fox News (Caitlin McFall): “Russian President Vladimir Putin blasted the U.S. in speech from St. Petersburg Friday, accusing Washington of believing it is ‘God’s messenger’ and warning that the world order is changing. ‘After declaring victory in the Cold War, the United States proclaimed itself to be God’s messenger on Earth,’ Putin claimed. ‘They seem to ignore the fact that in the past decades, new powerful and increasingly assertive centers have been formed.’ Putin’s speech, which was delayed for over an hour due to an alleged cyber-attack, focused almost solely on attacking the U.S. and its Western allies.”
June 22 – Bloomberg: “Chinese President Xi Jinping criticized sanctions for stoking global economic pain in a speech kicking off this year’s BRICS summit, as he seeks to bolster relations with emerging markets in the wake of strained Western ties. Without explicitly naming the US, Xi said that the international community is worried that the global economy will split into mutually exclusive zones, and called for the world to fight against the hegemony of any one country. ‘Politicizing, instrumentalizing and weaponizing the world economy using a dominant position in the global financial system to wantonly impose sanctions would only hurt others as well as hurting oneself, leaving people around the world suffering,’ Xi told the BRICS Business Forum…”
June 19 – Reuters (Chen Aizhu): “China’s crude oil imports from Russia soared 55% from a year earlier to a record level in May, displacing Saudi Arabia as the top supplier… Imports of Russian oil… totalled nearly 8.42 million tonnes, according to data from the Chinese General Administration of Customs.”
June 22 – Bloomberg (Jamie Tarabay and Sarah Zheng): “A recent paper shows that China is paying attention to Elon Musk’s Starlink system… In a paper published this spring by the Beijing Institute of Tracking and Telecommunications Technology, a researcher urges the Chinese military to track and monitor every satellite in the sprawling Starlink network. The ubiquity of the satellites, their ability to provide internet service, and the potential for the US government to leverage the satellites in the event of a conflict with China is enough reason for Beijing to develop a means of targeting Starlink…”
June 21 – Financial Times (Max Seddon and Richard Milne): “Russia has threatened Lithuania with serious consequences if the Baltic country prevents it from exporting EU-sanctioned goods to the exclave of Kaliningrad by rail. Nikolai Patrushev, Russia’s security council secretary and one of President Vladimir Putin’s closest confidants, said during a trip to Kaliningrad… that Russia would ‘react to such hostile actions’ after Lithuania began enforcing the sanctions. Patrushev warned that ‘appropriate measures’ would be ‘taken in the near future’, adding that ‘their consequences will have serious negative influence on the population of Lithuania’… Russia accused the EU of starting a ‘blockade’ of Kaliningrad after Lithuania, which controls the only overland rail route linking the exclave to mainland Russia via Belarus, began restricting the transit of goods under EU sanctions over Russia’s war in Ukraine.”
June 21 – Wall Street Journal (Nicole Friedman): “The relentless climb in U.S. home values continued in May, when median prices shot above $400,000 for the first time while sales activity slowed under pressure from higher mortgage costs. Rapidly rising interest rates are rippling through U.S. markets… But home-buying demand continues to exceed unusually low levels of supply and propel prices higher. The median existing-home price rose 14.8% in May from a year earlier to $407,600, a record high in data going back to 1999…”
June 18 – Bloomberg (Sing Yee Ong): “A shortage of popular food items from popcorn to sriracha is hitting restaurants and grocery shelves this summer, a sign that the world’s immense supply chains are still under pressure. Over the past few months, many seemingly random foods have become wildly expensive or unusually hard to find. These include lettuce in Australia, onions and salami in Japan and even bottled beer in Germany, sending businesses scrambling to find alternatives to feed their customers.”
Biden Administration Watch:
June 22 – Associated Press (Josh Boak): “President Joe Biden… called on Congress to suspend federal gasoline and diesel taxes for three months — an election-year move meant to ease financial pressures that was greeted with doubts by many lawmakers. The Democratic president also called on states to suspend their own gas taxes or provide similar relief, and he delivered a public critique of the energy industry for prioritizing profits over production… ‘It doesn’t reduce all the pain but it will be a big help,’ Biden said… ‘I’m doing my part. I want Congress, states and industry to do their part as well.’”
June 18 – Bloomberg (Peter Martin and Jennifer Jacobs): “Biden administration officials have decided to reject a vague new assertion by China that the Taiwan Strait is not ‘international waters’ and are increasingly concerned the stance could result in more frequent challenges at sea for the democratically governed island, according to people familiar… Chinese officials have made such remarks repeatedly in meetings with US counterparts in recent months… That raises the prospect that China could be preparing a new challenge to US regional influence and military power in a key area of discord between the two countries.”
Federal Reserve Watch:
June 22 – Reuters (Ann Saphir and Lindsay Dunsmuir): “The Federal Reserve is not trying to engineer a recession to stop inflation but is fully committed to bringing prices under control even if doing so risks an economic downturn, U.S. central bank chief Jerome Powell said… ‘We are not trying to provoke, and I don’t think we will need to provoke, a recession,’ Powell said at a hearing before the U.S. Senate Banking Committee, although he acknowledged that a recession was ‘certainly a possibility’ and events in the last few months around the world had made it more difficult to reduce inflation without causing one… ‘Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,’ he said, repeating that policymakers would need to be nimble in response to the incoming data.”
June 20 – Reuters (Lindsay Dunsmuir): “The U.S. Federal Reserve could raise interest rates swiftly this year and forge a ‘stellar’ economy ahead if it can pull off a repeat of the success of the central bank’s 1994 tightening cycle, St. Louis Fed President James Bullard said… ‘That tightening episode caused some disruption that year,’ Bullard said… ‘However, I have always felt that set up the U.S. economy for a stellar performance in the second half of the 1990s … I hope we can get something like that this time.’”
June 18 – Bloomberg (Catarina Saraiva): “Federal Reserve Governor Christopher Waller said he would support another 75-basis-point rate increase at the central bank’s July meeting should economic data come in as he expects. ‘The Fed is ‘all in’ on re-establishing price stability,’ Waller said Saturday in prepared remarks…”
June 23 – Bloomberg (Jonnelle Marte): “Federal Reserve Governor Michelle Bowman said she supports raising interest rates by 75 bps again in July and following that with a few more half-point hikes… ‘Based on current inflation readings, I expect that an additional rate increase of 75 bps will be appropriate at our next meeting as well as increases of at least 50 bps in the next few subsequent meetings, as long as the incoming data support them,’ Bowman said… ‘Depending on how the economy evolves, further increases in the target range for the federal funds rate may be needed after that.’”
June 22 – Reuters (Ann Saphir): “Chicago Federal Reserve Bank President Charles Evans… signaled he would likely back another big interest rate hike in July unless inflation data improves, saying the Fed’s top priority is to ‘take the steam’ out of price pressures. ‘Seventy-five (basis points) is a very reasonable place to have a discussion,’ Evans told reporters… ‘I think 75 would be in line with continued strong concerns that the inflation data isn’t coming down as quickly as we thought.’”
June 22 – Yahoo Finance (Brian Cheung): “Policymakers at the Federal Reserve are beginning to entertain the possibility of recession, as high inflation pushes the central bank to raise interest rates at the fastest pace in decades. ‘It’s certainly a possibility,’ Fed Chairman Jerome Powell told the Senate Banking Committee… The change in tone underscores seeming concern within the Fed that the cost of lowering inflation may be a drop-off in economic growth and potential job losses. ‘We could have a couple of negative quarters’ of economic growth, Philadelphia Fed President Patrick Harker told Yahoo Finance…”
U.S. Bubble Watch:
June 23 – Reuters: “The number of Americans filing new claims for unemployment benefits edged down last week as labor market conditions remained tight, though some slowing is emerging. Initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 229,000 for the week ended June 18… Economists polled by Reuters had forecast 227,000 applications for the latest week. Claims have been treading water since tumbling to more than a 53-year low of 166,000 in March amid signs of some cooling in the labor market.”
June 23 – Bloomberg (Vince Golle): “US business activity took a decisive step back in June as rapid inflation reduced demand for services and led to outright contractions in factory orders and production. The S&P Global flash June composite purchasing managers index slid 2.4 points to 51.2… While still above 50, and therefore indicating growth, the reading was the second weakest since July 2020… Businesses also downgraded their expectations about the economy’s prospects in the coming year against a backdrop of high inflation, rising interest rates, slower demand and lingering supply-chain concerns.”
June 23 – Bloomberg (Prashant Gopal): “Mortgage rates in the US climbed again, hovering near a 14-year high. The average for a 30-year loan was 5.81%, up from 5.78% last week, Freddie Mac said…”
June 21 – CNBC (Diana Olick): “Sales of existing homes in May dropped 3.4% to a seasonally adjusted annualized rate of 5.41 million units… Sales were 8.6% lower than in May 2021. April’s sales were revised slightly lower as well. This is the weakest reading since June 2020…There were 1.16 million homes for sale at the end of May, an increase of 12.6% month to month but still down 4.1% from May 2021. At the current sales pace, that represents a 2.6-month supply. Low supply continued to push home prices higher. The median price of a house sold in May was $407,600, an increase of 14.8% from May 2021. That is the highest price on record since the Realtors began tracking it in the late 1980s.”
June 21 – Reuters (Nathan Gomes): “U.S. homebuilder Lennar Corp… warned of a downturn in home demand as red-hot prices and surging interest rates push buyers to the sidelines, threatening the industry’s breakneck pace of profit growth. In the sector’s strongest warning so far, Lennar said any forecast at this point would amount to ‘guessing’… ‘The Fed’s stated determination to curtail inflation through interest rate increases and quantitative tightening have begun to have the desired effect of slowing sales in some markets and stalling price increases across the country,’ Lennar Executive Chairman Stuart Miller said…”
June 20 – Bloomberg (Philip Aldrick): “Former Treasury Secretary Lawrence Summers said the US jobless rate would need to rise above 5% for a sustained period in order to curb inflation that’s running at the hottest pace in four decades. ‘We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,’ said Summers said… ‘There are numbers that are remarkably discouraging relative to the Fed Reserve view.’”
Fixed-Income Bubble Watch:
June 21 – Bloomberg (Fola Akinnibi): “The latest slump in US municipal bonds has sent investors fleeing a part of the $4 trillion market where they typically park cash to maintain short-term exposure and wait out periods of uncertainty. Muni exchange-traded funds have seen roughly $1.7 billion in outflows this month, on pace for the largest exodus since March 2020…”
June 22 – Bloomberg: “Chinese President Xi Jinping pledged to meet economic targets for the year even as the government’s zero tolerance approach to combating Covid outbreaks and a weak housing market put the growth goal further out of reach. In a keynote speech to a virtual BRICS Business Forum…, Xi said China will ‘strengthen macro-policy adjustment and adopt more effective measures to strive to meet the social and economic development targets for 2022 and minimize the impacts of Covid-19,’ according to a Xinhua report.”
June 19 – Bloomberg: “China is planning ‘extraordinary’ new policies to help downstream industrial firms that have seen their profits hit by the high cost of raw materials, according to Shanghai Securities News. The Ministry of Industry and Information Technology is studying measures to enhance the structure of supply-side policies, boost consumer demand and incentivize investments in technology, the newspaper said…”
June 22 – Bloomberg: “While global attention is focused on the economic impact of coronavirus lockdowns in Shanghai and Beijing, the slump in China’s housing market is likely to have even more profound implications. An official index that tracks apartment and house sales has posted year-on-year declines for 11 months straight—a record since China created a private property market in the 1990s. With demand for services and commodities generated by housing construction and sales accounting for about 20% of gross domestic product, that represents a big drag on growth… ‘This is the worst property downturn on record,’ says Lu Ting, chief China economist at Nomura… The length of the drop exceeds those in 2008 and 2014 that reverberated through global commodity markets by curbing Chinese demand for imported steel and copper.”
June 23 – Bloomberg (Lorretta Chen): “Moody’s… lowered Country Garden Holdings Co. from investment-grade territory, the latest sign of how sentiment has soured for private-sector Chinese developers during the industry’s cash crunch and sales slump. The country’s largest builder by sales was downgraded one notch to Ba1, and Moody’s ratings outlook is negative. The firm… cited Country Garden’s ‘declining property sales and deteriorating financial metrics,’ as well as weakened access to long-term funding.”
June 23 – Bloomberg (Dorothy Ma): “Chinese high-yield dollar bonds fell 0.5-2 cents on the dollar Thursday morning, according to credit traders, extending declines earlier this week. Country Garden’s 6.5% dollar bond due 2024 dropped 2 cents to 61.5 cents… China’s junk notes haven’t gained since June 3, according to a Bloomberg index.”
June 23 – Reuters (Albee Zhang, Ella Cao, Ryan Woo, Wang Jing, Josh Horwitz and Liz Lee): “Heatwaves in northern and central China drove up electricity demand to record levels as millions switched on air conditioners to escape the sweltering conditions, while floodwaters in the south submerged villages and trapped city residents. On Wednesday, China’s meteorological administration issued orange alert warnings for high temperatures in regions across the provinces of Shandong, Henan and Hebei. Several cities in Shandong, China’s second-most populous province, have issued ‘red alert’ high temperature warnings… Temperatures in the regions were expected to hit above 40 Celsius (104 Fahrenheit) this week, according to the state weather forecaster.”
Central Banker Watch:
June 23 – Financial Times (Martin Arnold): “The heads of the French and German central banks have said companies and households increasingly believe prices will continue to soar, raising the chances that inflation in the eurozone’s two largest economies will remain uncomfortably high in the coming years. Businesses and consumers in Germany and France expect inflation to be higher for longer than they did six months ago, according to new research from the Bundesbank and Banque de France, which chiefs Joachim Nagel and François Villeroy de Galhau… described as ‘worrying’ and ‘bad news’.”
June 18 – Reuters (Balazs Koranyi): “The European Central Bank should limit the rise in borrowing costs of more indebted euro zone members but will not solve their debt issues or let budget concerns dictate monetary policy, ECB policymaker Olli Rehn said… But ECB action will only go as far as preventing ‘unwarranted’ market moves and will not help countries in case of profound debt issues, Rehn, Finland’s central bank chief, said… ‘We are fully committed to preventing fiscal dominance – and/or financial dominance, for that matter,’ Rehn said, referring to a situation when fiscal, not monetary, considerations dictate central bank policy.”
June 20 – Bloomberg (Aaron Eglitis and Alexander Weber): “The European Central Bank is ready to combat unwarranted financial-market moves but must also be prepared to look through turbulence as it exits negative interest rates, Governing Council member Martins Kazaks said. ‘If action is going to be necessary, we will be on top of it,’ Kazaks, the Latvian central bank governor, said… ‘It is natural to see some increased uncertainty and volatility. We need to live through this situation with a cool head and steady hand showing to the market, what’s our direction.’”
June 20 – Reuters (Balazs Koranyi): “The risk of an abrupt correction on Europe’s financial and housing markets is high, European Central Bank President Christine Lagarde said… ‘Risks to financial stability have perceptibly increased since the beginning of this year,’ she said… ‘While the correction in asset prices has so far been orderly, the risk of a further and possibly abrupt fall in asset prices remains severe,’ she said.”
June 23 – Reuters (Victoria Klesty): “Norway’s central bank raised its benchmark interest rate by 50 bps…, its largest single hike since 2002 and did not rule out making further increases of this size as the country seeks to control inflation… ‘Based on the committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further to 1.5% in August,’ Governor Ida Wolden Bache said…”
June 20 – Reuters (Cynthia Kim and Jihoon Lee): “South Korea’s central bank… said it expects inflation will be higher than earlier projected and that it would closely assess debt repayment burdens to determine whether a half-percentage point interest rate hike in July was appropriate. The Bank of Korea, which raised its 2022 forecast for annual average inflation sharply to 4.5% less than a month ago, said it does not rule out the possibility of inflation exceeding the 4.7% reached in 2008.”
Global Bubble and Instability Watch:
June 22 – Reuters (Julie Gordon): “Canadian consumer prices increased in May at rates not seen since January 1983…, upping pressure on the central bank to follow the U.S. Federal Reserve with a supersized rate hike. Canada’s annual inflation rate accelerated to 7.7% in May, galloping past April’s 6.8% and analyst forecasts of 7.4%… Inflation is far above Bank of Canada’s April forecast that it would average 5.8% this quarter.”
June 23 – Bloomberg (Alexander Weber): “Euro-area economic expansion slowed sharply as surging prices curbed the rebound from pandemic restrictions and factories continued to suffer from supply snarls. An indicator for economic activity by S&P Global fell to a 16-month low in June… While the overall gauge still signals modest expansion, manufacturing output declined for the first time in two years. ‘Economic growth is showing signs of faltering as the tailwind of pent-up demand from the pandemic is already fading, having been offset by the cost-of-living shock and slumping business and consumer confidence,’ S&P Global economist Chris Williamson said…”
June 20 – New York Times (Norimitsu Onishi, Constant Méheut and Aurelien Breeden): “President Emmanuel Macron governed like Jupiter in his first term, using the full powers of France’s executive branch and largely ignoring Parliament. But big gains by opposition groups in Sunday’s legislative elections are likely to force Mr. Macron to regularly seek compromise in his second term… Having lost an absolute majority in the National Assembly, the lower and more powerful house of Parliament, Mr. Macron — who adopted a top-down governing style in his first term and who was often referred to as a ‘Republican monarch’ — must now cajole his coalition partners and win over opposition lawmakers, particularly in the center-right.”
June 23 – Reuters (Holger Hansen and Vera Eckert): “Germany triggered the ‘alarm stage’ of its emergency gas plan… in response to falling Russian supplies but stopped short of allowing utilities to pass on soaring energy costs to customers in Europe’s largest economy… We must not fool ourselves: ‘The cut in gas supplies is an economic attack on us by… Putin,’ Economy Minister Robert Habeck said… Gas rationing would hopefully be avoided but cannot be ruled out, Habeck said and warned: ‘From now on, gas is a scarce commodity in Germany … We are therefore now obliged to reduce gas consumption, now already in summer.’”
EM Bubble Watch:
June 18 – Wall Street Journal (Jason Douglas, Yuka Hayashi and Chelsey Dulaney): “Slowing growth, scorching inflation and rising U.S. interest rates are intensifying a squeeze on emerging-market finances and stoking concern over a fully fledged debt crisis in low- and middle-income countries. The anxiety is evident in sky-high bond yields and month after month of capital outflows, as investors ditch the assets of vulnerable countries in favor of safer returns elsewhere. Strains that have been building since Russia invaded Ukraine are gradually getting worse, as the outlook for global growth sours and hopes for a quick reprieve from rising inflation evaporate.”
June 22 – Reuters (Marc Jones): “A growing group of countries are likely to see their credit ratings come under pressure as rising global interest rates hit already-stretched finances, one of the world’s biggest rating agencies, S&P Global, has warned. A report… said that heavily indebted Italy would face its highest debt bill as a percentage of its GDP since 2012 without European Central Bank help, while Ukraine, Brazil, Egypt, Ghana and Hungary were the most vulnerable emerging market countries. ‘Rising rates look to be fiscally challenging for a minority of developed market sovereigns and at least six out of 19 emerging market sovereigns,’ said S&P’s report, which assumed borrowing costs would rise by up to 300 bps in the next three years.”
June 19 – Bloomberg (Masumi Suga and Sumio Ito): “Prime Minister Fumio Kishida said the Bank of Japan’s policy of monetary easing should remain on track for now, considering the negative impact a change would have on smaller companies. Monetary policy ‘should be judged comprehensively by taking into account the trends of the economy as a whole,’ Kishida said…”
Social, Political, Environmental, Cybersecurity Instability Watch:
June 18 – CNN (Claire Colbert and Raja Razek): “The devastating flooding that occurred along the Yellowstone River this week constitutes a 1 in 500-year event, according to a US Geological Survey (USGS) news release. Unprecedented rain and rapid snowmelt in recent days have caused rivers in parts of Montana, Wyoming, and Idaho to burst their banks, swallowing bridges and sweeping away entire sections of roadway. More than 10,000 visitors to Yellowstone National Park have been forced to evacuate. All entrances to the park are expected to remain closed until at least Monday.”
June 22 – Reuters (Amruta Khandekar): “Nearly 1 in 5 American adults who reported having COVID-19 in the past are still having symptoms of long COVID, according to survey data collected in the first two weeks of June, U.S. health officials said… Overall, 1 in 13 adults in the United States have long COVID symptoms lasting for three months or more after first contracting the disease, and which they did not have before the infection…”
June 20 – Reuters (Francois Murphy): “Iran is escalating its uranium enrichment further by preparing to use advanced IR-6 centrifuges at its underground Fordow site that can more easily switch between enrichment levels, a United Nations nuclear watchdog report… showed. The move is the latest of several steps Iran had long threatened to take but held off carrying out until 30 of the 35 countries on the International Atomic Energy Agency’s Board of Governors backed a resolution this month criticizing it for failing to explain uranium traces found at undeclared sites.”
June 18 – Newsweek (Thomas Kika): “Japan went on high alert earlier this week after numerous warships spotted south of Tokyo indicated an increased presence of Russian and Chinese forces near the country’s territory. Seven Russian warships were spotted moving southward off the coast of Japan’s northmost island, Hokkaido, on Thursday and Friday… Japan’s Joint Staff confirmed that the foreign vessels were monitored by ships and aircraft from the Maritime Self-Defense Force.”