June 7, 2024: Summer of Discontent and Instability

June 7, 2024: Summer of Discontent and Instability
Doug Noland Posted on June 8, 2024

It was another important week – and I’m not referring to Nvidia’s market cap surpassing Apple’s to reach $3.0 TN (or Roaring Kitty’s podcast touting GameStop attended by 600,000). There were market-surprising/shocking election results in Mexico, India, and South Africa. Volatility was notable across international markets. The ECB and Bank of Canada cut rates this week, with markets seeing the global central bank community’s easing cycle now underway. And Friday, another stronger-than-expected Non-Farm Payrolls report rattled the bond market. Could there possibly be a common thread?

The Mexican peso sank 7.2% this week, with over half the loss on post-election Monday. Mexican stocks (S&P/BMV Index) were slammed 6.1% in Monday trading. Indian (Nifty50) equities were hit 5.9% in Tuesday’s session.

June 6 – Bloomberg (Ezra Fieser): “Early Monday morning, one of the world’s most profitable currency trades unraveled, done in by a twist in Mexican elections few saw coming. Twenty hours later, investors in India started frantically dumping stocks, triggering a one-day, $386 billion wipeout, when they realized they had badly miscalculated the scope of Narendra Modi’s election victory. Around the world, surprise results in some of the biggest developing countries are illustrating how much markets have riding on the politics of 2024… From Mumbai to Mexico City, the Year of the Election — in which 40 countries are holding national votes — is already burning investors, providing an early warning as elections in the European Union and UK near, and five months ahead of the US presidential contest.”

Highly speculative (and levered) markets don’t mix so well with voter acrimony. Importantly, speculative Bubbles and public enmity are not coincidental. They are inevitable consequences of inflationism and monetary disorder. Given enough time, policies so revered by the markets will be viewed with increasing disdain by the masses. Wealth inequalities become only more pronounced late in the cycle, creating a sprawling divergence between market euphoria and deepening public dissatisfaction. Political class market embracement/accommodation at some point shifts to the appeasement of ever more powerful populist movements. Markets this week at least acknowledge the unfolding power-shift to disgruntled electorates.

Booming markets have a way of disregarding corrosive fundamental factors. Especially in today’s backdrop, there are competing narratives: the golden era of markets and capitalism versus increasingly vulnerable historic global Bubbles. Overwhelming evidence supporting the latter ensures ample hedging and shorting – fuel for recurring squeezes and rallies. It all becomes too alluring, with short-term speculation coming to dominate. Irrespective of underlying fundamental trends, speculative markets will innately gravitate to opportunities associated with bullish narratives.

This was a fascinating week in the bond market. After trading at 4.63% the previous Thursday, 10-year Treasury yields were down to 4.29% Friday morning ahead of the May jobs report. Sure, there were some weaker data earlier in the week. The ISM Manufacturing report (48.7) disappointed, especially the four-point drop (to 45.4) in New Orders to a one-year low. Job openings (JOLTS) fell to 8.059 million (expected 8.350 million), while ADP came in at a weaker-than-expected 152,000 (175k estimate).

With a pretty good bond market squeeze in progress, sentiment shifted emphatically to the “weakening economy will soon unleash a Fed loosening cycle” narrative. The market ended Thursday pricing two cuts by the Fed’s December 18th meeting.

Wednesday was noteworthy. What I view as the week’s most meaningful data for the U.S. services-dominated economy was completely disregarded. The May ISM Services Index surprised strongly to the upside, with a 4.4-point jump in the index (2.8 points above estimates) to the highest reading since February 2023. The Business Activity component surged 10.3 points (largest gain since March ’21) to the highest level since November 2022. Prices remained elevated at 58.1 (down from 59.2), while Employment rose from 45.9 to 47.1. New Orders increased to 54.1, with Export Orders (61.8) at the strongest level in eight months.

Why would the market ignore such relevant data? The simple answer would be that the bond market was getting squeezed, and one report was not going to detract from speculative dynamics and the bullish narrative. A more complex explanation deserves a hearing: nascent trouble at the global “periphery.”

June 4 – Bloomberg (Maria Elena Vizcaino, Vinícius Andrade and Michael O’Boyle): “For the last two years, the world’s fund managers had a recipe to mint money in Mexico. Borrow anywhere interest rates were low, pile into Mexican assets — and clean up as the peso marched higher and higher. Virtually overnight, it’s no longer such a sure thing. The landslide victory by Claudia Sheinbaum in the presidential election on Sunday has rattled markets by promising to significantly strengthen the hand of the nation’s ruling leftist party in legislation.”

The global “periphery” is acutely vulnerable. EM countries have added enormous amounts of debt over recent years, and we should assume that much of it was purchased by speculators with borrowed money. It’s certainly possible that so-called “carry trades” total in the Trillions.

“Leveraged funds have been the main force behind the recent Mexican peso rally, propelling it to again become the best performing currency in the world this year.” Bloomberg, May 20th, 2024. Two weeks later: “Unwinding of hugely popular currency trade rocks markets.”

Trouble in Mexico, and to a lesser extent India and South Africa, raised the odds of general risk aversion, contagion, and destabilizing de-risking/deleveraging. Such a scenario would likely spur dollar strength, outflows, and rapid deceleration in EM Credit and economic growth. This deflating Bubble scenario supported the bond market earlier this week. I also believe this risk has helped keep a lid on U.S. and developed sovereign bond yields – countering the impact of resilient inflation and “higher for longer.”

Friday’s stronger-than-expected payrolls data provided a reality check. Ten-year Treasury yields surged 14 bps (MBS yields up 16 bps), with two-year yields jumping 16 bps to 4.89%. The market ended the week pricing 37 bps of rate reduction by the Fed’s December 18th meeting (versus 49 bps at Thursday’s close).

Count me skeptical of the view that inflation and growth are on the descent. Sure, there are ample signs of weakness to support the thesis that the Fed will soon have the all clear to begin cutting rates. The household sector has added significant debt, and rising numbers of consumers face financial stress. Of course, an inflationary economic environment will burden major cross-sections of the population.

But that’s the overarching issue: inflation remains a major force. And one of this cycle’s greatest inflationary manifestations is a gross inequitable distribution of wealth. The lower and much of the middle class suffer from higher prices, while the wealthier see their wealth continue to inflate.

June 5 – Wall Street Journal (David Uberti): “Growing investment income and household wealth have joined near-full employment and rising wages to keep millions of Americans… spending their way through price hikes. The economy’s charge through higher interest rates is putting unprecedented sums into consumers’ pockets, pushing U.S. asset values to records and helping many high earners avoid the withering effects of inflation. Americans in the first quarter earned about $3.7 trillion from interest and dividends at a seasonally adjusted annual rate…, up roughly $770 billion from four years earlier. In the last quarter of 2023, wealth held in stocks, real estate and other assets such as pensions reached the highest level ever observed by the Federal Reserve.”

June 5 – Fox Business (Kristen Altus): “So far, we’ve had disappointing retail sales. We’ve had disappointing PMI manufacturing numbers. The ISM numbers were disappointing. [Tuesday’s] job vacancies were considerably below expectations,” Mohamed El-Erian, president of Queens’ College at Cambridge University, said… ‘Citi has this ‘index of surprises,’ and we’ve had nothing but negative surprises.’ ‘And all that is saying to us is that the economy is slowing much faster than most people expected, including the Fed’… ‘That is where the policy mistake comes in. Monetary policy acts with a lag… So you are really targeting the economy of tomorrow. But if you do that based on yesterday’s data, you are likely to get it wrong.’”

There will be revisions, and there are contradicting household survey data, but I wouldn’t dismiss Friday’s report of 272,000 additional jobs. And that y-o-y Average Hourly Earnings growth remains at 4.1% suggests the labor market has entered a new paradigm (avg. 2.4% for the decade 2010-2019). I’ve already mentioned the strong ISM Services data.

June 4 – Yahoo Finance (Pras Subramanian): “Ford reported May US auto sales that jumped considerably, once again powered by hybrid vehicle and truck sales. For the month, Ford sold 190,014 vehicles, an 11.2% increase from a year ago and up 6.4% sequentially from April. Ford delivered 17,631 hybrid vehicles for the month, driven by the new F-150 hybrid and Maverick hybrid.”

Receiving no attention whatsoever, May vehicle sales were reported at a stronger-than-expected 15.9 million annual rate – near the strongest pace since 2021. From Bloomberg Economics: “With two months’ data in hand, this implies vehicle sales potentially rose as much as 10.4% in 2Q on an annualized quarterly basis.”

Mr. El-Erian (and others) believes that “remaining too tight, it will inflict unnecessary damage to a US economy that will already be facing more growth headwinds.” This misses the most crucial analysis: The U.S. (and much of the world) is a Bubble Economy. There will undoubtedly be much more than future “growth headwinds.” Acute financial and economic fragilities are fundamental to aged Bubbles.

The issue I have is that “remaining too tight will inflict unnecessary damage.” There will be no escaping the consequences from damage already done. The policy priority when confronting Bubbles should always be to limit the type of deep structural damage that ensures destabilizing financial crises and severe economic downturns. Systemic risk rises parabolically during “Terminal Phase Excess.” Time is of the essence. Analysts and central bankers who are content to disregard Bubble Dynamics while focusing on avoiding recession are missing the grave financial, economic, social, and geopolitical risks associated with runaway Bubbles.

Mr. El-Erian doesn’t utter the “B” word. Very few on Wall Street will admit we’re in a Bubble. Is there anyone in the Federal Reserve system even contemplating Bubble analysis? Yet it is the most consequential dynamic in the markets, finance, and economy today. A lot of effort is wasted on debating the appropriate “neutral rate.” But a policy rate that is highly accommodative during the late stage of Bubble excess will turn restrictive when the Bubble begins to deflate.

Today’s policy rate continues to accommodate Bubble excess. One can look at booms in federal borrowings, “private Credit,” corporate debt, securitizations, muni issuance, “buy now, pay later,” etc. And so long as Credit remains abundantly available, it will be spent. Count on in.

June 5 – Bloomberg (Abhinav Ramnarayan and Eleanor Duncan): “Some $175 billion worth of debt backed by assets such as cars, credit cards and consumer loans have been sold in the US and Europe so far in 2024…, in what is shaping up to be the busiest half of issuance for the sector in at least six years. Asset-backed securitization deals, where loans are packaged up and sold in bond-like instruments, have grown in popularity as banks seek ways to offload risk and refinance loans taken out during the easy-money era. If sales continue at the current pace, the first six months of 2024 will be the best half since at least 2018…”

June 7 – Bloomberg (Abhinav Ramnarayan): “Companies offering buy now, pay later services like PayPal Holdings Inc. and Klarna Bank AB are selling debt backed by consumer loans, as they find new ways to fund their business in a higher-rate environment. By offering pools of assets repackaged as securities, these firms are able to access relatively inexpensive funding via private markets… That’s helping drive a resurgence in the sector. PayPal signed an agreement with private equity firm KKR & Co. to sell it European loan packages, while Klarna has secured similar debt in private deals… ‘There’s a lot of buy now, pay later deals going through privately at the moment,’ said Salim Nathoo, a partner at A&O Shearman… ‘It’s a product that fintechs are pushing out in different jurisdictions and we are certainly seeing some pan-European portfolios hit the market.’”

June 5 – Bloomberg (Skylar Woodhouse and Shruti Date Singh): “US airports are set to storm the municipal-bond market in the weeks and months ahead to raise billions of dollars for upgrades and fixes they can no longer put off as travel surges to new highs. At the urging of airlines, facilities across the US are increasing not only runway capacity but also amenities at new or renovated terminals… Already this year, operators of airports in cities from San Francisco to St. Louis have come to market with $3.5 billion of debt… Heavy volume through September and another wave in December will push the total for the year to $21 billion, close to the pre-pandemic peak…”

Treasuries demonstrate powerful Bubble Dynamics. With the Fed communicating a bias to begin cutting rates, the Treasury market quickly responds to weaker data with lower yields. And lower yields then work to underpin Credit growth and economic momentum. The Atlanta Fed GDPNow Forecast is back above 3%. Moreover, there’s now nascent instability at the “periphery” that places some downward pressure on “core” yields.

How does it all end? How long will the bond market accommodate excess that elevates the risk of ongoing massive issuance and upside growth and inflation surprises? And now we have arguably premature rate cuts from the ECB and Bank of Canada. From my vantage point, recent data suggest improved prospects for both the Eurozone and our neighbor to the north. In what increasingly appears a global phenomenon, wage pressures risk upside inflation surprises.

June 7 – Bloomberg (Alexander Weber): “The European Central Bank’s preferred measure of euro-zone pay showed acceleration at the start of 2024, in the latest sign that price pressures in the region are proving stubborn. Compensation per employee rose by 5.1% from a year ago in the first quarter, up from a revised 4.9% in the previous three months… That exceeded a Bloomberg Economics forecast of 4.6%.”

June 7 – Bloomberg (Randy Thanthong-Knight): “Canada’s unemployment rate rose for the third time in four months, but rising wages and a strong US labor report prompted some economists to express caution on the pace of Bank of Canada rate cuts. The country added 26,700 positions in May and the jobless rate rose 0.1 percentage points to 6.2%… Still, several economists flagged rising wage growth… Hourly wages for permanent employees accelerated by 5.2%, faster than expectations of 4.7% and up from 4.8% a month earlier. That’s the strongest pace since January…”

EM stress dissipated as the week progressed. But it sure appears there’s some pain in various trades that is forcing de-risking. I think it’s likely the tide has turned against the “periphery.” Contagion watch. The week’s developments point to a Summer of Discontent and Instability.

For the Week:

The S&P500 gained 1.3% (up 12.1% y-t-d), and the Dow added 0.3% (up 2.9%). The Utilities sank 3.8% (up 10.8%). The Banks fell 1.9% (up 7.2%), and the Broker/Dealers declined 1.9% (up 7.2%). The Transports retreated 1.4% (down 5.5%). The S&P 400 Midcaps fell 2.1% (up 5.0%), and the small cap Russell 2000 dropped 2.1% (unchanged). The Nasdaq100 jumped 2.5% (up 12.9%). The Semiconductors surged 3.2% (up 26.6%). The Biotechs rallied 2.2% (down 3.2%). With bullion down $34, the HUI gold index sank 5.8% (up 8.1%).

Three-month Treasury bill rates ended the week at 5.23%. Two-year government yields added a basis point this week to 4.89% (up 64bps y-t-d). Five-year T-note yields declined four bps to 4.46% (up 62bps). Ten-year Treasury yields fell six bps to 4.43% (up 55bps). Long bond yields dropped nine bps to 4.56% (up 53bps). Benchmark Fannie Mae MBS yields declined seven bps to 5.88% (up 61bps).

Italian yields slipped two bps to 3.96% (up 26bps y-t-d). Greek 10-year yields dipped a basis point to 3.66% (up 61bps). Spain’s 10-year yields declined four bps to 3.35% (up 36bps). German bund yields fell four bps to 2.62% (up 60bps). French yields declined four bps to 3.10% (up 54bps). The French to German 10-year bond spread was unchanged at 48 bps. U.K. 10-year gilt yields fell six bps to 4.26% (up 73bps). U.K.’s FTSE equities index declined 0.4% (up 6.6% y-t-d).

Japan’s Nikkei Equities Index added 0.5% (up 15.6% y-t-d). Japanese 10-year “JGB” yields sank nine bps to 0.98% (up 36bps y-t-d). France’s CAC40 was little changed (up 6.1%). The German DAX equities index increased 0.3% (up 10.8%). Spain’s IBEX 35 equities index gained 0.7% (up 12.9%). Italy’s FTSE MIB index added 0.5% (up 14.2%). EM equities were mixed. Brazil’s Bovespa index declined 1.1% (down 10.0%), and Mexico’s Bolsa index sank 4.0% (down 7.7%). South Korea’s Kospi index rallied 3.3% (up 2.5%). India’s Sensex equities index recovered 3.7% (up 6.2%). China’s Shanghai Exchange Index fell 1.2% (up 2.6%). Turkey’s Borsa Istanbul National 100 index dropped 2.5% (up 35.7%). Russia’s MICEX equities index increased 0.5% (up 4.3%).

Federal Reserve Credit declined $37.7bn last week to $7.223 TN. Fed Credit was down $1.667 TN from the June 22, 2022, peak. Over the past 247 weeks, Fed Credit expanded $3.496 TN, or 94%. Fed Credit inflated $4.412 TN, or 157%, over the past 604 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $2.0bn last week to $3.324 TN. “Custody holdings” were down $83.4 billion y-o-y, or 2.4%.

Total money market fund assets rose $23.2bn to $6.093 TN. Money funds were up $673bn, or 12.4%, y-o-y.

Total Commercial Paper declined $12.3bn to $1.268 TN. CP was up $157bn, or 14.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined four bps to 6.99% (up 21bps y-o-y). Fifteen-year rates fell seven bps to 6.29% (up 13bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps 7.30% (up 25bps).

Currency Watch:

June 5 – Reuters (Harry Robertson): “A sharp drop in Mexico’s currency after a landslide election result has shaken foreign exchange markets as far as Hungary and Turkey this week, leaving investors asking whether the unwinding of hugely popular ‘carry trades’ will continue. A carry trade involves investors borrowing in currencies that have low interest rates, such as the Japanese yen or Swiss franc, and buying higher yielding ones such as the Mexican peso or, recently, the U.S. dollar. It has boomed in popularity as interest rates have diverged around the world and market volatility has stayed low. Yet the peso’s dramatic fall against the yen this week – it dropped 4.4% on Monday in its biggest daily decline since the COVID-19 crisis – is a sign that investors have been rapidly backing out of some of their favourite, and most lucrative, trades.”

June 6 – Reuters (Makiko Yamazaki, Tetsushi Kajimoto and Takaya Yamaguchi): “Japan’s Finance Minister Shunichi Suzuki said… that foreign exchange intervention should be done in a restrained manner, after data suggested Tokyo tapped a vast pool of foreign reserves for its recent yen-buying operations. ‘Foreign exchange intervention should be done with its necessity and effectiveness taken into account,’ Suzuki said… While intervention could be used to contain excessive moves in the currency market, such action ‘should be conducted in a restrained manner,’ Suzuki said.”

June 5 – Bloomberg (Matthew Burgess and Grace Sihombing): “The Indonesian rupiah declined to a fresh four-year low as investors unwound the emerging-market carry trade, prompting support for the currency from the nation’s central bank. The rupiah fell as much as 0.5% to 16,293 per dollar on Wednesday, its weakest since April 2020. That brings one of Asia’s highest yielding currencies below the level which triggered an unexpected interest-rate hike by Bank Indonesia in April to stem the rout.”

June 3 – Reuters (Alun John): “More global reserve managers plan to increase exposure to the now high-yielding U.S. dollar as their interest in China’s yuan has soured due to low returns and geopolitical tensions, the Official Monetary and Financial Institutions Forum said. The data, from a survey carried out by the think tank…, challenges – at least in the short term – the trend towards de-dollarisation, the idea that countries will diversify away from dollars.”

For the week, the U.S. Dollar Index increased 0.2% 104.885 (up 3.5% y-t-d). For the week on the upside, the South Korean won increased 1.4%, the Swiss franc 0.6%, and the Japanese yen 0.4%. On the downside, the Mexican peso declined 7.5%, the Norwegian krone 2.0%, the Brazilian real 1.9%, the Australian dollar 1.1%, the Canadian dollar 1.0%, the New Zealand dollar 0.6%, the South African rand 0.6%, the euro 0.4%, the Swedish krona 0.2%, the British pound 0.2%, and the Singapore dollar 0.1%. The Chinese (onshore) renminbi declined 0.08% versus the dollar (down 2.04% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.1% (up 3.2% y-t-d). Spot Gold retreated 1.4% to $2,294 (up 11.2%). Silver fell 4.1% to $29.153 (up 22.5%). WTI crude declined $1.46, or 1.9%, to $75.53 (up 5.4%). Gasoline retreated 1.8% (up 13%), while Natural Gas jumped 12.8% to $2.918 (up 16%). Copper slumped 2.6% (up 15%). Wheat sank 7.5% (unchanged), while Corn increased 0.6% (down 5%). Bitcoin rallied $1,950, or 2.9%, to $69,385 (up 63%).

Middle East War Watch:

June 5 – Wall Street Journal (Dov Lieber, Adam Chamseddine and Carrie Keller-Lynn): “Israel and Hezbollah are moving closer to a full-scale war after months of escalating hostilities with the Lebanese militant group, adding pressure on Israel’s government to secure its northern border. Hezbollah… opened a battle front with Israel on Oct. 8, a day after the deadly Hamas-led raid inside Israel sparked the current war in Gaza. Hezbollah says that its attacks are in support of the Palestinians and that it won’t stop until Israel ceases its war in Gaza. Reluctant to open a second front, Israel initially responded to Hezbollah with tit-for-tat attacks, trying to calibrate its actions to avoid sparking a full-scale war. But in recent weeks, both sides say there has been a sharp rise in hostilities.”

June 5 – Financial Times (Neri Zilber and Malaika Kanaaneh Tapper): “Israeli leaders have threatened to take more ‘intense action’ against Hizbollah after an escalation in cross-border fire, increasing tensions and the prospect of all-out war with the Lebanese militant group. In a visit to the largely evacuated northern Israeli city of Kiryat Shmona…, Prime Minister Benjamin Netanyahu referred to the fires that raged across much of the region over the past two days, mostly a result of Hizbollah rockets and drone attacks. ‘Yesterday the earth was on fire here… but it was also on fire in Lebanon. Whoever thinks that they can hurt us and that we will sit idly by is making a big mistake… We are prepared for very intense action in the north. One way or another, we will restore security to the north,’ he added.”

June 6 – Bloomberg: “Israel is escalating warnings against Hezbollah in Lebanon by threatening it could be forced into a war with the Iran-backed group, following increasingly deadly attacks. Hezbollah’s rockets and drones have caused significant damage in the past few days, prompting Israeli officials to reiterate warnings to the militants and Lebanon that war is an option. A drone strike on a facility on Wednesday wounded 10 Israelis and killed one soldier… ‘Whoever thinks he can hurt us while we respond by sitting on our hands is making a big mistake,’ said Netanyahu. ‘One way or another, we will restore security to the north.’”

June 4 – Reuters (Dan Williams, Henriette Chacar and Maya Gebeily): “Israel is ready for an offensive along the northern border with Lebanon and is nearing a decision, the chief of staff said on Tuesday, as the Hezbollah movement said it was not seeking to widen the conflict but was ready to fight any war imposed on it.”

Ukraine War Watch:

June 5 – Financial Times (Christopher Miller, Isobel Koshiw and Alice Hancock): “Russia has knocked out or captured more than half of Ukraine’s power generation, causing the worst rolling blackouts since the start of its full-scale invasion in 2022. Moscow’s missile and drone attacks in recent months have homed in on Ukrainian power plants… Before Russia’s full-scale invasion in 2022, Ukraine’s domestic energy production was about 55 gigawatts of electricity, among the largest in Europe. That power generation capacity has currently dropped below 20GW…”

Taiwan Watch:

June 1 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “China’s defence minister has delivered a scathing attack on Taiwan’s new president Lai Ching-te, warning that Taiwan’s ‘aggressive’ behaviour and foreign moves to abet it were eroding prospects for peaceful unification. Dong Jun said Lai and his new government were ‘now using military means to reject unification and making a lot of noise about arming themselves’. ‘Facing the strong military of the big motherland, such armed conspiracies will be futile [and] will only lead to their own destruction more rapidly,’ Dong told the IISS Shangri-La Dialogue…”

June 2 – Reuters (Xinghui Kok and Fanny Potkin): “The prospect of peaceful ‘reunification’ with Taiwan is being increasingly ‘eroded’ by Taiwanese separatists and external forces, Chinese Defence Minister Dong Jun said…, drawing an angry response from the government in Taipei… Dong said Taiwan was the ‘core of core issues’ for China, but Taiwan’s ruling Democratic Progressive Party is incrementally pursuing separatism and bent on erasing Chinese identity. ‘Those separatists recently made fanatical statements that show their betrayal of the Chinese nation and their ancestors. They will be nailed to the pillar of shame in history,’ he said.”

Market Instability Watch:

June 4 – Financial Times (Marc Jones): “A clobbering for South Africa’s, Mexico’s and even India’s heavyweight markets in recent days has proved without doubt that politics can still deliver an unexpected uppercut in big emerging economies. Mexico’s peso and South Africa’s rand were both still sliding on Tuesday following their respective election surprises… The peso fell 1.5% to just shy of 18 to the U.S. dollar at one point as traders continued to fret about the ramifications of the resounding win for the Claudia Sheinbaum-led MORENA party and its allies in Sunday’s Mexican election. That took its drop in recent days to nearly 5% and means that June is currently on track to be the peso’s worst month since a 17% plunge at the start of the COVID-19 pandemic… South Africa’s rand, which has also been hit by the prospect of a potentially fraught coalition government after a poor election showing from the ruling ANC party, fell another 1.3% too, to take its fall over the last week to around 3.5%.”

June 3 – Bloomberg (Davison Santana): “Mexican traders rushed to seek protection in currency options after the overwhelming victory of the ruling party Morena on Sunday. Implied peso volatility soared to the highest level since October. Demand for options pushed the one-month gauge to over 16%, up from 9.2% less than a week ago. The Mexican peso now has the highest implied volatility among 16 main currencies and the second highest among all 31 major currencies tracked by Bloomberg, trailing only the Russian ruble.”

June 4 – Wall Street Journal (P.R. Venkat): “India’s key stock-market indexes were severely battered as investors dumped shares after the country’s national election trends showed that the ruling Narendra Modi-led coalition isn’t likely to score a decisive victory, as predicted by exit polls. The country’s benchmark Sensex closed 5.7% lower at 72079.05 on Tuesday, registering its worst performance in more than four years. The Nifty 50, representing the weighted average of 50 of the country’s largest companies listed on the National Stock Exchange, slumped 5.9%.”

June 6 – Bloomberg (Daisuke Sakai): “Political upheavals, tumbling stock markets, spiking volatility and a flash crash from nowhere: None of it is enough to dissuade Japan’s large cohort of individual investors from betting on emerging-market currencies. While election-related volatility has hit South Africa’s rand, the Mexican peso and the Indian rupee, retail investors in Japan are sticking tight to carry trades that enable them to capture both shifts in exchange rates and the higher yields available in foreign currencies. Little wonder, when the strategy returned 58% since the start of 2023 via bets on the peso… Even as those emerging markets swung sharply, the ratio of trader positions that are long on Mexican peso against the yen stood at 96% as of June 4, down only 1 percentage point from the previous week…”

June 3 – Bloomberg (Carter Johnson): “Rising uncertainty around the US election could endanger some of this year’s most popular macro trades as investors rush to cut exposures, according to Morgan Stanley. A number of crowded trading strategies — from going long the greenback versus lower-yielding peers to holding an underweight position in longer-term Treasuries — could get squeezed with investors heading to the exits ahead of November, strategists Matthew Hornbach and James Lord wrote… ‘Most investors will choose to pare back risk exposures in their portfolios’ heading into the general election, the Morgan Stanley team wrote… ‘As first-mover investors reduce popular risk exposures, macro markets could move in ways that encourage a broader swath of investors to join suit.’”

Global Credit Bubble Watch:

June 6 – Bloomberg (Kat Hidalgo): “In hallways and wooden huts dotted around the SuperReturn International conference in Berlin, dealmakers are meeting to drum up new business. They’re also rehearsing answers to a question they’re hearing a lot these days: are the boom times for the $1.7 trillion private credit market over? A year since Blackstone Inc. President Jon Gray hailed a ‘golden moment’ for private credit, the shine is coming off Wall Street’s new money spinner. The pace of buyouts is slowing and some private credit funds are struggling to return cash to their investors. Banks are back, contesting deals and undercutting direct lenders on margins. ‘There has been an erosion of the private credit illiquidity premium,’ said Matthew Bonanno, managing director at General Atlantic’s credit unit. ‘I think there is some frustration from LPs on this,’ he said, referring to the limited partners such as pension plans and insurance companies that allocate capital to private credit funds.”

June 3 – Bloomberg (Jill R. Shah): “Companies sold a record volume of leveraged loans last month, taking advantage of the cash chasing credit. A glance at recovery rates for defaults, however, highlights a growing risk in this debt. For newly issued first-lien debt in the US and Canada in the first quarter, investors could expect to get back less than 35% of their investment when loans sour, compared with 72% from 2018 through 2022, according to a May presentation by S&P Global Ratings.”

June 3 – Bloomberg (Amanda Albright and Lauren Coleman-Lochner): “The relentless surge in municipal bond sales this year is showing no signs of slowing down as investors brace for the biggest jump in new issuance in two years. The amount of US state and city debt scheduled to sell in the next 30 days has climbed to almost $19 billion, the most since May 2022… The measure typically represents a fraction of what actually comes to market as deals are announced with less than a month’s notice.”

June 7 – Bloomberg (Peter Laca and Andras Gergely): “East European governments are ramping up debt issuance to record levels to finance widening budget deficits just as the turbulence in emerging markets is making demand less reliable. The supply of domestic and foreign bonds has risen this year, with sales on international markets reaching a record $36 billion for the most active issuers in the region, led by Poland and Romania. The latest country to tap foreign funding was Serbia with a debut $1.5 billion sustainable note this week.”

June 4 – Bloomberg (Jeanny Yu): “There’s no let up in the rush by Chinese technology companies to issue convertible bonds, with online travel agency now following industry giants such as Alibaba Group Holding Ltd. into the action. announced Tuesday an offering of $1.3 billion convertible senior notes… The issuance follows hot on the heels of several announcements late last month, the biggest being Alibaba’s record-breaking $5 billion issue. Inc. set the ball rolling in May with a $2 billion convertible bond offering, and computer-maker Lenovo Group Ltd. also sold $2 billion zero-coupon convertible bonds…”

June 5 – Bloomberg (Megawati Wijaya and Kari Lindberg): “Private credit may potentially reap an additional $20 trillion of assets currently sitting on banks’ balance sheet, Raja Mukherji, managing director for credit at Apollo Global Management, says… Upcoming Basel III regulation will impose additional capital standards for banks, especially in securitized products and asset-backed securities… ‘While private credit on paper, people say, is within $1.5 trillion to $2 trillion, you are talking about another $20 trillion of possible assets that have sat in banks’ balance sheet that are going to come.’”

Bubble and Mania Watch:

June 4 – AFP: “The world has never had so many rich people and their investments in soaring stock markets have made them wealthier than ever recorded, according to a study… The number of ‘high net worth individuals’ — defined as people with liquid assets of at least $1 million — rose by 5.1% last year to 22.8 million, according to… Capgemini. Their total wealth reached $86.8 trillion in 2023, a 4.7% increase from the previous year, according to the annual World Wealth Report.”

June 4 – Wall Street Journal (Asa Fitch): “Two years into a nearly $53 billion government effort to shore up the U.S. chip industry, the program’s impact is becoming clearer: Big companies making advanced chips are getting a boost, but there are limits to what the money can do. The Chips Act, passed in 2022 to jump-start domestic semiconductor production, is supposed to supercharge chip making in the U.S. But even in its early stages, it is being challenged by fast-growing chip industries in competing countries, political complexity regarding the allotments at home and the sheer expense of manufacturing chips. The lion’s share of the allotments have been slated for Intel and other large chip makers that plan to make advanced chips in the U.S… Meanwhile, other countries have amped up spending to keep competitive.”

June 6 – Bloomberg (Isabelle Lee): “After a fresh torrent of inflows, actively run exchange-traded funds look poised for a record-breaking $260 billion haul this year as investors go beyond traditional benchmarks to ride alternative strategies, from selling options to riding cheap quant trades. Portfolio managers have poured money into the active sector for 50 consecutive months after a $22 billion allocation in May… With that momentum, State Street Corp., the fifth-largest ETF manager, predicts flows into actively run ETFs may be almost double last year’s record $140 billion tally.”

June 5 – Bloomberg (Jan-Henrik Foerster and Kat Hidalgo): “The private equity industry must face up to the reality of lower valuations, according to Apollo Global Management Inc.’s Scott Kleinman. ‘I’m here to tell you everything is not going to be ok,’ the Apollo co-president said… ‘The types of PE returns it enjoyed for many years, you know, up to 2022, you’re not going to see that until the pig moves through the python. And that is just the reality of where we are.’ Private equity firms didn’t take significant markdowns during the recent period of rapid rate hikes which means that ‘investors of all sorts are going to have swallow the lump moving through the system,’ he said, referring to assets that private equity firms bought up until 2022. Funds are now holding on to these companies and will eventually have to refinance at higher rates.”

June 1 – Financial Times (Jennifer Hughes): “A scrap metal merchant and an electric vehicle maker that has sold just four cars top the list of so-called ‘penny’ stocks that are out-trading the likes of Tesla and Apple, prompting some analysts to warn that markets are becoming overheated. Seven of the top 10 most traded US equities in May… are penny stocks worth less than $1, according to Cboe Global Markets data… None of the companies are profitable. The huge volumes in so many little-known stocks suggest a renewed appetite among retail investors for cheap names in which they believe they can quickly make a lot of money. ‘When markets get frothy, the speculative froth often hits penny stocks as well — this is a classic sign of market peaks,’ said James Angel, a finance professor at Georgetown University. ‘Penny stocks tend to be extremely volatile, so you can make or lose a ton of money very quickly,’ he added. ‘That appeals to the speculative urge.’”

June 3 – Wall Street Journal (AnnaMaria Andriotis): “E*Trade is considering telling meme-stock leader Keith Gill he can no longer use its platform after growing concerned about potential stock manipulation around his recent purchases of GameStop options, according to people familiar… Shortly before Gill reignited a meme stock craze in May, he bought a large volume of GameStop options on E*Trade… This past weekend, Gill posted a screenshot of an E*Trade account showing he owns stock worth $115.7 million and a new set of options that expire later this month. His total gains on the position were at $6.86 million.”

AI Bubble Watch:

June 4 – Wall Street Journal (Jiyoung Sohn and Yang Jie): “In early April, South Korean President Yoon Suk Yeol didn’t mince his words when describing why chips are paramount to the country’s economic survival. ‘The competition over semiconductors unfolding now is an industrial war,’ Yoon told government and industry officials. ‘An all-out war between countries.’ South Korea has a massive war chest prepared for future semiconductor manufacturing: roughly $450 billion in private investment alone. That is roughly the same amount earmarked currently for chip production in the U.S….”

June 6 – Bloomberg (Vlad Savov, Jane Lanhee Lee and Takashi Mochizuki): “Jensen Huang wasn’t on the official Computex 2024 program, but he didn’t need to be. The Nvidia Corp. billionaire led an unprecedented cast of tech glitterati to the world’s biggest computing conference this week in Taiwan, where he effortlessly upstaged the likes of Intel Corp.’s Pat Gelsinger — without a single official keynote or session. From packing a 4,000-seat sports stadium to paparazzi-fueled night-market jaunts, the leather jacket-clad CEO and his $3 trillion company drew the largest audiences and biggest entourages. As icing on the cake, the 61-year-old this week joined the likes of Elon Musk in a select group of business chieftains worth at least $100 billion, riding a $315 billion Nvidia market rally over three frantic days.”

June 6 – Reuters (Noel Randewich): “Nvidia rose to record highs on Wednesday, with the artificial intelligence chipmaker’s valuation breaching the $3 trillion mark and overtaking Apple to become the world’s second most valuable company. Nvidia is preparing to split its stock ten-for-one, effective on June 7… Nvidia’s stock rose 5.2% to end the day at $1,224.40, valuing the company at $3.012 trillion.”

May 31 – Wall Street Journal (Christopher Mims): “Nvidia reported eye-popping revenue last week. Elon Musk just said human-level artificial intelligence is coming next year. Big tech can’t seem to buy enough AI-powering chips. It sure seems like the AI hype train is just leaving the station, and we should all hop aboard. But significant disappointment may be on the horizon, both in terms of what AI can do, and the returns it will generate for investors. The rate of improvement for AIs is slowing, and there appear to be fewer applications than originally imagined for even the most capable of them. It is wildly expensive to build and run AI. New, competing AI models are popping up constantly, but it takes a long time for them to have a meaningful impact on how most people actually work. These factors raise questions about whether AI could become commoditized, about its potential to produce revenue and especially profits, and whether a new economy is actually being born.”

June 4 – New York Times (Kevin Roose): “A group of OpenAI insiders is blowing the whistle on what they say is a culture of recklessness and secrecy at the San Francisco artificial intelligence company, which is racing to build the most powerful A.I. systems ever created. The group, which includes nine current and former OpenAI employees, has rallied in recent days around shared concerns that the company has not done enough to prevent its A.I. systems from becoming dangerous. The members say OpenAI, which started as a nonprofit research lab and burst into public view with the 2022 release of ChatGPT, is putting a priority on profits and growth as it tries to build artificial general intelligence…”

June 2 – Wall Street Journal (Peter Huntsman): “The campaign to phase out fossil fuels is on a collision course with the artificial-intelligence revolution. Energy-intensive AI technologies are becoming more dependent on the electrical grid, which is largely powered by coal and natural gas. Oil, gas and pipeline companies hold the keys to Silicon Valley’s future. Yet access to cheap, reliable and abundant electricity powered by fossil fuels will soon pose a major risk to such businesses as Apple, Google and Microsoft… According to Goldman Sachs, AI is likely to drive a 160% increase in data-center power demand by 2030.”

June 3 – Bloomberg (Kari Lindberg): “A British artificial intelligence startup plans to launch a private credit fund to buy servers outfitted with high-powered Nvidia Corp. chips to be used by companies in Asia. In its first foray into private credit, Venture Hub, a UK-based AI company operated by ANC Research & Development Ltd., seeks to raise up to $50 million to buy servers using Nvidia H200 graphic processing units…”

Global Banking Watch:

June 6 – Bloomberg (Hari Govind): “Moody’s… said at least six US regional banks with a substantial exposure to commercial real estate loans are at risk of having their debt ratings downgraded. The long-term ratings of First Merchants Corp., F.N.B. Corp., Fulton Financial Corp., Old National Bancorp, Peapack-Gladstone Financial Corp. and WaFd were placed on review for downgrade by the ratings provider. Regional banks with a substantial concentration in commercial real estate loans face ongoing asset quality and profitability pressures…”

June 6 – Bloomberg (Scott Carpenter): “Banks are ramping up investments in a complex part of the mortgage bond market that offers shorter-term securities, as they cope with the growing risk of their losing deposits amid high rates. Demand from banks is fueling sales of floating-rate, collateralized mortgage obligations, which are constructed from simpler mortgage securities. Overall, there were $25 billion of new CMO sales in April, the highest monthly figure in nearly three years.”

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

June 6 – Associated Press (James Jordan and Harriet Morris): “President Vladimir Putin warned… that Russia could provide long-range weapons to others to strike Western targets in response to NATO allies allowing Ukraine to use their arms to attack Russian territory. Putin also reaffirmed Moscow’s readiness to use nuclear weapons if it sees a threat to its sovereignty. The recent actions by the West will further undermine international security and could lead to ‘very serious problems,’ he said… ‘That would mark their direct involvement in the war against the Russian Federation, and we reserve the right to act the same way,’ Putin added.”

June 6 – Reuters (Dmitry Antonov and Andrew Osborn): “The Kremlin said… that Western nations supplying Ukraine with weapons to strike Russian territory will have to reckon with Russia, after President Vladimir Putin said he was considering arming the West’s enemies in retaliation… ‘We are thinking that if someone thinks it is possible to supply such weapons to a war zone in order to strike at our territory and create problems for us, then why do we not have the right to supply our weapons of the same class to those regions of the world where there will be strikes on sensitive facilities of those countries that are doing this to Russia?’ said Putin.”

June 3 – Financial Times (Gideon Rachman): “Russia is once again waving around its nuclear weapons. Last week, Vladimir Putin warned Nato countries against allowing Ukraine to use western munitions to strike Russia. The Russian leader warned of ‘serious consequences’ and said that Ukraine’s allies should be aware of the ‘small territory’ and ‘dense population’ of many European countries. In case this was too vague, Dmitry Medvedev followed up with a more blood-curdling threat. Russia’s former president cited Putin’s words and added: ‘The use of tactical nuclear weapons can also be miscalculated. This would be a fatal mistake.’”

June 5 – Associated Press (James Jordan and Harriet Morris): “Russian President Vladimir Putin warned Germany… that the use of its weapons by Ukraine to strike targets in Russia would mark a ‘dangerous step’ and ruin relations between Berlin and Moscow. Germany joined the United States recently in authorizing Ukraine to hit some targets on Russian soil with the long-range weapons they are supplying to Kyiv. The deliveries of German tanks to Ukraine came as a shock to many in Russia, he said. ‘Now if they use missiles to strike facilities on the Russian territory it will completely ruin Russian-German relations,’ he said.”

June 2 – Reuters: “Russian Deputy Foreign Minister Sergei Ryabkov said… the United States could face ‘fatal consequences’ if it ignored Moscow’s warnings not to let Ukraine use weapons provided by Washington to strike targets inside Russia. Ryabkov was commenting on President Joe Biden’s decision last week to approve the use of U.S.-supplied weapons to hit targets inside Russia that were involved in attacks on Ukraine’s Kharkiv region. ‘I would like to warn American leaders against miscalculations that could have fatal consequences. For unknown reasons, they underestimate the seriousness of the rebuff they may receive,’ state news agency RIA quoted Ryabkov as saying.”

June 1 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “A top Chinese general has accused the US of trying to build an ‘Asia-Pacific version of Nato’, underlining tensions between Washington and Beijing one day after the two countries’ defence chiefs met for the first time since 2022… Lieutenant General Jing Jianfeng denounced the US as the ‘source of chaos and tension’ in the Indo-Pacific and said its regional strategy aimed to ‘create division, provoke confrontation and undermine stability’. Speaking at the Shangri-La Dialogue security forum after US defence secretary Lloyd Austin had outlined the ways the Biden administration was working with allies to boost deterrence in the region, Jing said Washington would end up ‘tying the region’s countries to the US war chariot’.”

De-globalization and Iron Curtain Watch:

June 4 – Wall Street Journal (Nathaniel Taplin): “Cheap Chinese high-tech goods have flooded the global economy this year, raising alarms in Washington and Brussels as Western businesses complain about what they see as a new round of unfair competition. Chinese leader Xi Jinping has dismissed the charges, saying ‘there is no so-called problem of Chinese overcapacity’… But a look at China’s industrial sector shows clear signs of overcapacity, especially in industries such as solar panels, automobiles and steel. In some sectors, the situation looks poised to get worse, as China keeps expanding capacity even as domestic demand stays weak.”

June 5 – Bloomberg: “China’s main national chip fund should wind up raising more than the $47.5 billion originally disclosed, a senior adviser to Beijing said, reflecting the government’s resolve to close a technology gap with the US. More state-backed firms are likely to join investors such as Industrial and Commercial Bank of China Ltd. in contributing capital, Li Ke, a member of the committee that advises the fund, told Bloomberg…”

Inflation Watch:

June 4 – Financial Times (Richard Milne and Oliver Telling): “A sudden rush to order shipments for the festive period risks deepening delays and congestion across the global supply chain, the chief executive of the world’s second-largest container shipping group has warned. Vincent Clerc, head of AP Møller-Maersk, told the Financial Times that, after ‘an almost vertical’ increase in shipping costs in the past month amid worsening congestion at ports in Asia and the Middle East, more customers could try to ship goods much earlier than normal. ‘At this stage the thing that can really make things worse for the global supply chain is this rush for the door where everybody starts to order more than they need. You get this bullwhip effect,’ he added.”

June 4 – Bloomberg (Mark Schroers): “The uptick in euro-zone inflation is increasingly drawing comparisons to the US — fueling concern that the European Central Bank could face similar impediments to lowering interest rates as the Federal Reserve. While there have been clear differences in the drivers of price growth either side of the Atlantic – a point ECB officials repeatedly stress — some economists see important parallels and warn against underestimating the risk of more persistent pressures.”

Federal Reserve Watch:

June 2 – Financial Times (Claire Jones): “A top Federal Reserve official has called for interest rates to stay on hold for an ‘extended’ time, saying lowering borrowing costs before inflation was under control would put the foundations of US prosperity at risk. Neel Kashkari, Minneapolis Fed president, also told the FT… that Americans’ ‘visceral’ hatred of inflation meant that some people would prefer a recession to a jump in prices. ‘The economy is, in the US, quite strong, the labour market is strong, inflation is coming down and many, many people are deeply unhappy about the status of the economy,’ he said. ‘I think it’s because of the high inflation that they’ve experienced.’”

Biden Administration Watch:

June 7 – ABC News (Alexander Hutzler): “President Joe Biden, in France to commemorate the 80th anniversary of D-Day, offered a forceful defense of democracy at a site of American heroism during World War II… Biden… spoke from Pointe du Hoc, where Army Rangers scaled 100-foot cliffs to seize the German ammunition that could have been used against troops at Omaha and Utah beaches. ‘As we gather here today, it’s not just to honor those who showed such remarkable bravery that day June 6, 1944… It’s to listen to the echo of their voices. To hear them. Because they are summoning us and they’re summoning us now. They’re asking us what will we do? They’re not asking us to scale these cliffs. They’re asking us to stay true to what America stands for.’”

U.S. Economic Bubble Watch:

June 7 – CNBC (Jeff Cox): “The U.S. economy added far more jobs than expected in May… Nonfarm payrolls expanded by 272,000 for the month, up from 165,000 in April and well ahead of the… estimate for 190,000… At the same time, the unemployment rate rose to 4%, the first time it has breached that level since January 2022… Job gains were concentrated in health care, government, and leisure and hospitality… The three sectors respectively added 68,000, 43,000 and 42,000 positions… Regarding wages, average hourly earnings were higher than expected as well, rising 0.4% on the month and 4.1% from a year ago.”

June 6 – Reuters (Mark Niquette): “The US trade deficit widened in April to the largest since October 2022 on a surge in imports of goods including motor vehicles, computers and industrial supplies. The gap in goods and services trade grew 8.7% from the prior month to $74.6 billion… The value of imports rose 2.4% to the highest since mid-2022, while exports edged up 0.8%.”

June 5 – CNBC (Jeff Cox): “Private job creation slowed more than expected in May, according to a report… from ADP that signals further sluggishness in the labor market… Companies added 152,000 jobs on the month, fewer than the downwardly revised 188,000 in April and below the… estimate for 175,000. This was the lowest monthly level since January… Annual pay growth gains held at a 5% rate… Trade, transportation and utilities led with 55,000 new jobs, while education and health services added 46,000, and construction contributed 32,000. The other services category added 21,000, but leisure and hospitality, a leading contributor over the past several years, saw a gain of just 12,000.”

June 4 – Reuters (Ann Saphir): “U.S. job openings fell more than expected in April, pushing the number of available jobs per job-seeker to its lowest in nearly three years as labor market conditions soften in a manner that could help the Federal Reserve’s fight against inflation. Job openings… were down 296,000 to 8.059 million on the last day of April, the lowest level since February 2021, the… Bureau of Labor Statistics said… in its Job Openings and Labor Turnover Survey, or JOLTS report… That left 1.24 openings in April for every unemployed person, down from 1.3 in March and the lowest since June 2021.”

June 3 – Bloomberg (Vince Golle and Mark Niquette): “The Institute for Supply Management’s manufacturing gauge fell 0.5 point to 48.7, the weakest in three months… Readings less than 50 indicate contraction… The purchasing managers group’s measure of new orders slid 3.7 points, the biggest drop since June 2022, to 45.4 in May. The bookings index now stands at the lowest level in a year, suggesting demand across the economy is weakening. As a result, ISM’s production index slipped to 50.2.”

June 7 – CNBC (Robert Frank): “The U.S. far outpaced the rest of the world in minting millionaires last year, adding 600,000 new millionaires and powering record fortunes at the top… America’s millionaire population grew 7.3% in 2023 to 7.5 million people, according to… Capgemini. Their combined fortunes grew to $26.1 trillion, up 7% from 2022. Capgemini defines millionaires as those with investible assets of $1 million or more not including primary residence, collectibles or consumer durables.”

June 3 – Associated Press (Mae Anderson, Paul Harloff and Barbara Ortutay): “The typical compensation package for chief executives who run companies in the S&P 500 jumped nearly 13% last year… The median pay package for CEOs rose to $16.3 million, up 12.6%, according to… Equilar. Meanwhile, wages and benefits netted by private-sector workers rose 4.1% through 2023. At half the companies in this year’s pay survey, it would take the worker at the middle of the company’s pay scale almost 200 years to make what their CEO did.”

Fixed Income Watch:

June 3 – Bloomberg (Amanda Albright and Lauren Coleman-Lochner): “The relentless surge in municipal bond sales this year is showing no signs of slowing down as investors brace for the biggest jump in new issuance in two years. The amount of US state and city debt scheduled to sell in the next 30 days has climbed to almost $19 billion, the most since May 2022…”

China Watch:

June 2 – Reuters (Ellen Zhang and Ryan Woo): “China’s factory activity grew the fastest in about two years in May due to production gains and new orders, particularly at smaller firms…, lifting the outlook for the second quarter. The Caixin/S&P Global manufacturing PMI rose to 51.7 in May from 51.4 the previous month, the highest since June 2022, and beating analysts’ forecasts of 51.5.”

June 7 – Bloomberg: “China’s exports climbed more than expected in May, boosting hopes that the world’s second-biggest economy can maintain its momentum by relying on foreign markets even in the face of new tariff threats. Exports rose 7.6% in dollar terms from a year earlier, while imports increased 1.8%… That left a trade surplus of almost $83 billion for the month.”

June 6 – Bloomberg: “China’s property stocks entered a technical bear market over concerns that Beijing’s efforts to bolster the sector are too small to end the rout. A Bloomberg Intelligence gauge of Chinese developer shares fell 3.3% on Thursday, extending losses from a mid-May high to almost 21%. Sunac China Holdings Ltd. was the biggest laggard with a slump of 12%, while CIFI Holdings Group Co. sank 8.4%. Real estate stocks have retreated amid skepticism over a broad support package unveiled by the central government on May 17.”

June 7 – Bloomberg (Li Liu): “China’s financial regulator and the housing ministry require banks and local governments to work towards accelerating pace of lending to property developers, according to ministry-backed China Construction News. China seeks to better support financing needs of property developers and promote stable development of the market.”

June 3 – Bloomberg (Wei Zhou): “Spreads for Chinese corporate bonds narrowed the most since April 2022, as non-bank financial institutions flush with cash snapped up more corporate bonds. The yield premium for 3-year AAA rated corporate yuan bonds versus comparable central government debt narrowed by 11 bps in May, the biggest drop in more than two years… The tight spreads show that China’s onshore credit environment remains attractive to issuers, and investors are expecting more policy stimulus, said Ting Meng, senior credit strategist at Australia & New Zealand Banking Group Ltd.”

June 4 – Reuters (Ellen Zhang and Ryan Woo): “China’s services activity in May accelerated at the quickest pace in 10 months while staffing levels expanded for the first time since January… The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 54.0 from 52.5 in April, expanding for the 17th straight month and growing at the fastest pace since July 2023… Together with the Caixin manufacturing PMI, which hit a near two-year high, the readings suggest business activity expanded robustly last month… The Caixin/S&P’s composite PMI, which tracks both the services and manufacturing sectors, rose to 54.1 last month from 52.8 in April, the highest in a year.”

June 5 – Bloomberg: “China’s export boom goes far beyond the high-tech industries that are in Western crosshairs, leaving Beijing at risk of a backlash from countries that have so far preferred to sit on the trade-war sidelines… China’s surplus in manufacturing trade, which is close to record levels, points to a much broader surge in exports. It encompasses not just green-energy goods but all kinds of products — from steel to animal feed — that are getting harder to sell at home, where a real estate slump is slowing the economy. In many cases rising exports have been accompanied by falling prices.”

June 2 – Bloomberg: “China should issue much more central government debt to make up for the inability of cash-strapped local authorities to spend money and drive growth, according to one of the country’s leading economists. The ratio of central government debt to China’s gross domestic product — currently around 20% — should be more than doubled, Li Daokui, a regular policy adviser to the government, told Bloomberg… Beijing recently began issuing 1 trillion yuan ($138bn) of special bonds to finance public investment, but ‘they should have 10 trillion, or even 20 trillion of extra-long bonds,’ said Li, currently a professor at Tsinghua University in Beijing.”

June 3 – Bloomberg: “Two of China’s biggest cities saw improvements in homebuyer sentiment last weekend after relaxing property restrictions, the first positive signs in months for the embattled real estate sector. In Shanghai, about 90% of the more than 300 units offered at a new project over the weekend were sold… In Shenzhen, some developers saw buyer interest surge so much they rescinded discount offers. Existing-home sales recovered in both cities.”

June 5 – Bloomberg: “A local government financing vehicle from one of China’s most indebted cities issued a yuan bond with low borrowing costs, taking advantage of China’s booming corporate bond market. Tianjin Infrastructure Construction & Investment Group Co. priced a 1.5 billion yuan ($211 million) note at 2.57% late Tuesday… The coupon was the lowest among its bonds with the same tenor. The bond fetched bids of 1.8 times its offering size…”

June 4 – Bloomberg (Denise Wee): “HSBC Holdings Plc attracted more than 130,000 new bank customers in Hong Kong in the first quarter. Bank of China (Hong Kong) gained 200,000 new cross-border clients in 2023, while at Hang Seng Bank, new account openings for non-residents jumped 342% last year. The surge is in large part being driven by mainland Chinese flocking to Hong Kong and offers a welcome bright spot for the city that’s struggling to recover after the pandemic and years of political upheaval.”

June 3 – Reuters (Jessie Pang and Fabian Hamacher): “Hong Kong police detained several people and Chinese authorities restricted access to Beijing’s Tiananmen Square… on the 35th anniversary of the crackdown on pro-democracy protesters, as cities in Taiwan and elsewhere marked the date. Chinese tanks rolled into the square before dawn on June 4, 1989 to end weeks of pro-democracy demonstrations by students and workers. Television news images of a lone Chinese man in a white shirt standing in front of a column of tanks spread around the world and became the iconic image of the demonstrations.”

Central Bank Watch:

June 6 – Bloomberg (Alice Gledhill, Alexander Weber and Aline Oyamada): “The European Central Bank delivered on its promise to cut interest rates but left investors querying where policy is headed next by also saying it will take longer for inflation to reach 2%. While Thursday’s quarter-point reduction in the deposit rate from its nine-month peak at 4% was widely expected, the upward revision to next year’s forecast for consumer-price growth — to 2.2% from 2% — came as more of a surprise. President Christine Lagarde noted that the inflation outlook has improved ‘markedly’ and said there’s a ‘strong likelihood’ that the ECB is shifting into a ‘dialing-back phase.’ But she declined to confirm that such a change of gear has now happened.”

June 6 – Bloomberg (Marton Eder): “Austria’s hawkish central bank chief Robert Holzmann was the sole dissenter against the move on Thursday to cut euro-zone interest rates. Holzmann based his view on the latest economic data, despite saying as late as last week that he was inclined to support a rate reduction. ‘Data-driven decisions should be data-driven decisions,’ Holzmann said…”

June 4 – Bloomberg (Swati Pandey): “Australia’s central bank is conscious of the high economic cost of above-target inflation and won’t hesitate to raise interest rates again if needed — though its assessment remains that this may not be required. ‘Even though the risks are balanced, the cost of higher inflation is something that we’ve got in mind,’ Reserve Bank Governor Michele Bullock told a senate panel… ‘So if it did seem that there’s a shift to the upside then we’re very conscious that costs of that are much higher.’”

Global Bubble Watch:

June 3 – Reuters (Indradip Ghosh and Leika Kihara): “Global factory activity offered signs of recovery last month as contraction slowed in the euro zone and manufacturing activity in most of Asia’s largest economies picked up… In Asia, manufacturing activity expanded in Japan for the first time in a year and South Korea’s manufacturing grew at the fastest pace in two years, due in part to signs of a pick-up in the automobile and semiconductor sectors”

June 7 – Bloomberg (Randy Thanthong-Knight): “Canada’s unemployment rate rose for the third time in four months, but rising wages and a strong US labor report prompted some economists to express caution on the pace of Bank of Canada rate cuts. The country added 26,700 positions in May and the jobless rate rose 0.1 percentage points to 6.2%… Still, several economists flagged rising wage growth in Canada as a concern. Hourly wages for permanent employees accelerated by 5.2%, faster than expectations of 4.7% and up from 4.8% a month earlier. That’s the strongest pace since January…”

Europe Watch:

June 5 – Reuters (Indradip Ghosh): “Euro zone business activity expanded at its quickest rate in a year in May as growth in the bloc’s dominant services industry outpaced contraction in manufacturing… HCOB’s composite Purchasing Managers’ Index (PMI) for the currency union, compiled by S&P Global and seen as a good gauge of overall economic health, rose to 52.2 in May from April’s 51.7, its highest since May 2023… ‘The spectre of recession is off the table. This is thanks to the service sector, where the upswing has recently broadened,’ said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. ‘Overall, the service sector is likely to ensure that the euro zone will show positive growth again in the second quarter.’”

June 2 – Bloomberg (William Horobin): “S&P Global Ratings downgraded France, tarnishing President Emmanuel Macron’s record for debt management and plunging him deeper into political difficulties a week before European elections… The credit assessor highlighted the French government’s missed goals in plans to restrain the budget deficit after huge spending during the Covid pandemic and energy crisis. S&P said that although reforms and a recovery in economic growth will improve the situation, the hole will remain above 3% of gross domestic product in 2027.”

Japan Watch:

June 3 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan is likely to discuss the reduction of bond purchases as early as its policy meeting next week, according to people familiar… BOJ officials will probably consider if the timing is appropriate to slow the pace of bond buying from the current roughly ¥6 trillion ($38.4bn) per month and whether they need to provide more details on the outlook to improve predictability… The bank concludes its two-day policy meeting on June 14.”

June 6 – Bloomberg (Toru Fujioka): “A leading dove on the Bank of Japan’s policy board held open the door to the possibility of cutting bond purchases when authorities gather next week to discuss policy. ‘I think it’s appropriate to proceed with a reduction over time in preparation for the exit depending on the state of economic recovery,’ BOJ Board Member Toyoaki Nakamura said…”

Emerging Market Watch:

June 4 – Financial Times (Christine Murray and Michael Stott): “Mexico’s finance minister tried to reassure investors in a hastily scheduled call on Tuesday that the leftwing government remained committed to fiscal discipline after its landslide election win. But traders continued to sell the peso on fears of radical constitutional change after voters handed a huge mandate to president-elect Claudia Sheinbaum in Sunday’s vote and gave the ruling Morena party a big majority in congress.”

June 2 – Bloomberg (Srinivasan Sivabalan and Selcuk Gokoluk): “Just as enthusiasm over artificial intelligence and China’s stimulus fades, a familiar weakness has come back to haunt equity investors in emerging markets: sinking corporate profits. With 96% of companies in the MSCI Emerging Markets Index done with their quarterly results, the earnings season is almost over. And the picture isn’t pretty — Almost half of the companies have missed analyst estimates, average profits have slumped 10% compared with the prior-year period and for every dollar of predicted earnings, companies are bringing home only 86 cents. Two years ago an 18% rise in profits helped EM companies smash projections. That suggests EM stocks could struggle to sustain a $2.1 trillion rally that’s been driven by trends such as the rush into AI-related stocks and optimism about a quick, stimulus-driven economic recovery in China.”

June 5 – Bloomberg (Sudhi Ranjan Sen, Dan Strumpf and Swati Gupta): “At the start of the year, Narendra Modi hailed the opening of a huge new Hindu temple as a once-in-a-millennium turning point in India’s history. The lavish event, broadcast across the nation, was timed to generate a wave of religious fervor that would carry him in a landslide to a third term as prime minister. But less than five months later, voters in that northern Indian district soundly rejected Modi’s party in national elections, part of a broader wave of discontent with his decade-long rule in relatively poorer parts of the country… The collapse of Modi’s support in Uttar Pradesh, India’s most-populous state and a one-time BJP stronghold, amounted to a collective rebellion from millions of people left behind in one of the world’s fastest-growing economies.”

Leveraged Speculation Watch:

June 3 – Bloomberg (Denitsa Tsekova and Carmen Reinicke): “Jim Chanos quit after failing to raise capital. Carson Block’s firm launched its first long-only fund. Andrew Left dubbed his kind ‘a dying breed.’ These are bad times to be a bear on Wall Street. After taking hits on multiple fronts, short sellers — who borrow and then sell stocks in a bid to profit from price declines — are in retreat. Thank the gravity-defying bull market, lingering regulatory threats, a day-trading horde randomly squeezing shares like GameStop Corp. ever higher, and more. Short interest in a typical member of the S&P 500 is hovering around the lowest levels in more than two decades, according to Goldman Sachs…”

June 5 – Bloomberg (Bei Hu): “Ray Dalio said internal conflicts will be the ‘highlight of this year,’ particularly on the issue of whether the US election result will be accepted by both parties. The policies from an administration run by Donald Trump would be very different from a Democratic one, Dalio said… However, on anti-China policies, there’s broad agreement between the two parties. ‘There’s a great risk of economic sanctions that would be really terrible for the world,’ said the billionaire investor and founder of Bridgewater Associates. Dalio was building the case that the world is entering a period of greater risks, on the back of enormous debt creation, internal conflicts unprecedented in developed countries and great power clashes. Adding to those are natural disasters…”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 5 – Financial Times (Kenza Bryan and Jana Tauschinski): “The UN secretary-general said the world needed ‘an exit ramp off the highway to climate hell’, as the latest data showed the streak of record global temperatures stretched into a 12th consecutive month in May. The battle to limit the world’s temperature rise ‘will be won or lost’ this decade, António Guterres said, under the watch of current political leaders. ‘We are playing Russian roulette with our planet,’ he said…, in an effort to spur hundreds of negotiators from almost 200 countries gathered for the third day of 10 days of UN climate talks in Bonn, ahead of the G7 and G20 summits.”

June 5 – Reuters (Kate Abnett and Gabrielle Tétrault-Farber): “Each of the past 12 months ranked as the warmest on record in year-on-year comparisons, the EU’s climate change monitoring service said…, as U.N. Secretary-General António Guterres called for urgent action to avert ‘climate hell’. The average global temperature for the 12-month period to the end of May was 1.63 degrees Celsius (2.9 degrees Fahrenheit) above the pre-industrial average – making it the warmest such period since record-keeping began in 1940, the Copernicus Climate Change Service said.”

June 3 – Financial Times (Kenza Bryan and Steven Bernard): “The El Niño Pacific Ocean warming effect that has contributed to a spike in global temperatures is expected to swing to its opposite La Niña cooling phase from late summer, say weather experts… A rapid transition from one extreme to the other in the tropical Pacific would see more parts of the world battered by weather events, not long after the strong El Niño warming event has wreaked havoc on rainfall patterns and commodity prices. The World Meteorological Organization of the UN said there was now a 70% chance of La Niña occurring between August and November.”

June 3 – New York Times (Ivan Penn): “In February, the United States did something that it had not done in many years — the country sent more electricity to Canada than it received from its northern neighbor. Then, in March, U.S. electricity exports to Canada climbed even more, reaching their highest level since at least 2010. The increasing flow of power north is part of a worrying trend for North America: Demand for energy is growing robustly everywhere, but the supply of power — in Canada’s case from giant hydroelectric dams — and the ability to get the energy to where it’s needed are increasingly under strain.”

June 5 – Bloomberg (Riley Griffin and Jessica Nix): “A man in Mexico died after contracting a strain of bird flu that hasn’t been confirmed in humans before, the World Health Organization said… The virus was detected in a 59-year-old patient who had been hospitalized in Mexico City. The man died one week after developing a fever, shortness of breath and diarrhea. It’s the first lab-confirmed case of a person contracting a form of bird flu known as H5N2…”

June 5 – Bloomberg (Kelsey Butler): “Numerous companies in the Mexican state of Tamaulipas along the Texas border have shuttered factories or curbed operations due to a severe drought in the region. The natural disaster is having an impact on the manufacturing industry, which is one of the state’s main economic engines. Local authorities in Altamira, a port city on the Gulf of Mexico known as a hub for chemical companies, recently limited water to some 70 companies to prioritize access for residents…”

Geopolitical Watch:

June 5 – Bloomberg (Krystal Chia and Xinyi Luo): “In the wake of India’s surprise election result, political risks were a big theme at the Bloomberg Wealth summit held in Hong Kong… Participants from UBS Group AG to Hang Lung Group Ltd. highlighted how geopolitics are on the minds of the richest investors, as they try to navigate wars in Europe and the Middle East, escalating tensions between superpowers, and a year of key elections around the world from Mexico to South Africa and the US. ‘Geopolitical risk and the possibility of a tail risk event has gone up dramatically,’ said Sonja Laud, chief investment officer at Legal & General Investment Management Ltd. ‘As investors, we should not ignore this.’”

June 4 – Wall Street Journal (Niharika Mandhana and Gordon Fairclough): “As the U.S. military’s new cyber chief and the head of the nation’s main electronic spy agency, it is Gen. Timothy Haugh’s job to be concerned about China’s clandestine efforts to steal sensitive American data and weapons know-how. But he is also contending with an unusual Chinese threat, one that is designed not to extract military secrets or data of any kind but to lurk in the infrastructure that undergirds civilian life, as if lying in wait for the right moment to unleash chaos. ‘We see it as very unique and different—and also concerning,’ Haugh said… ‘And the concern is both in what is being targeted and then how it is being targeted.’”

June 4 – Financial Times (John Paul Rathbone, Henry Foy, and Raphael Minder): “Western governments are struggling to respond to what they say is a growing Russian campaign of sabotage attempts including arson at military bases and civilian infrastructure across Europe. The goal of these ‘grey zone’ attacks, which security officials said were often led by Russian GRU military intelligence, is to promote disunity among Ukraine’s allies, disrupt military supplies to Kyiv and test western resolve. ‘Russia is trying to send a message that it is omnipotent and can disturb our societies… to instigate fear and to find ways to make our lives more miserable,’ Latvia’s President Edgars Rinkēvičs told the Financial Times. ‘It is also testing our response, because if we don’t respond these attacks are going to increase.’”

June 3 – Wall Street Journal (James T. Areddy): “China’s 1989 crackdown on pro-democracy activists sparked a seminal crisis in Beijing’s relationship with the West. On the massacre’s 35th anniversary, China’s leaders face familiar international blowback over their conduct. Instead of gunfire, today’s sources of discomfort about China are a mix of its aggressive industrial policy and militarization toward neighbors, plus a national-security agenda from Chinese leader Xi Jinping that has curtailed personal freedoms at home and shaped affairs abroad. A poor and relatively backward nation in 1989, China is now an economic powerhouse backed by a formidable military and diplomatic corps vying to reset the global order and impose its will internationally. Beijing’s image is undergoing ‘a systematic, progressive, long-term falloff, not a one-time shock’ like the one triggered in 1989, said David Shambaugh, a distinguished visiting fellow at California’s Hoover Institution…”

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June 14, 2024: Potential Catalyst and Q1 2024 Z.1
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