May 24, 2019: The Ignore Them, Then Panic Dynamic

May 24, 2019: The Ignore Them, Then Panic Dynamic
Doug Noland Posted on May 25, 2019

After years of increasingly close cooperation and collaboration, the relationship has turned strained. Both sides are digging in their heels. Credibility is on the line. If one side doesn’t back down, things could really turn problematic. The Fed is asserting that it’s not about to lower the targeted Fed funds rate. Markets are strident: You will cut, and you will cut soon. Bonds are instructing the world to prepare for the Long March.

Market probability for a rate cut by the December 11th FOMC meeting jumped to 80% this week, up from last week’s 75% and the previous week’s 59%.

May 22 – Reuters (Howard Schneider and Jason Lange): “U.S. Federal Reserve officials at their last meeting agreed that their current patient approach to setting monetary policy could remain in place ‘for some time,’ a further sign policymakers see little need to change rates in either direction. ‘Members observed that a patient approach…would likely remain appropriate for some time,’ with no need to raise or lower the target interest rate from its current level of between 2.25 and 2.5%, the Fed… reported in the minutes of the central bank’s April 30-May 1 meeting. Recent weak inflation was viewed by ‘many participants…as likely to be transitory,’ while risks to financial markets and the global economy had appeared to ease – a judgment rendered before the Trump administration imposed higher tariffs on Chinese goods and took other steps that intensified trade tensions.”

Analysts have been quick to point out that additional tariffs along with the breakdown in trade negotiations unfolded post the latest FOMC meeting. True, yet several Fed officials have recently reiterated the message of no urgency to lower rates. This week Atlanta Federal Reserve President Raphael Bostic said he doesn’t see the Fed reducing rates. In a Thursday Bloomberg interview, Federal Reserve Bank of Cleveland President Lorretta Mester went so far as to state that reducing rates (to boost inflation) would be “bad policy.” This followed New York Fed President John Williams’ Wednesday comment: “I don’t see any strong argument today, based on what we have seen in the data or other information, to move interest rates one way or the other.” On Thursday, Dallas Fed President Robert Kaplan stated he was “agnostic at this point about whether the next move is up or down.”

Agnostic the markets are not. Ten-year Treasury yields dropped another seven bps this week to the lows (2.32%) since December 15th, 2017. Two-year yields declined four bps to 2.17%, the low going back to February 2018. Yet sinking market yields are anything but a U.S. phenomenon. German 10-year bund yields declined another basis point to negative 0.11%, trading this week at low yields going all the way back to the summer of 2016. Swiss yields fell four bps this week to negative 0.45% (low since October 2016). Japanese JGB yields declined two bps to negative 0.07%.

Curiously, yields dropped 15 bps in Italy (2.55%), nine bps in Portugal (0.97%) and six bps in Spain (0.82%). Yields this week were down to 0.04% in Denmark, 0.07% in the Netherlands, 0.11% in Finland, 0.17% in Sweden, 0.19% in Austria, 0.37% in Belgium, 0.38% in Slovakia, 0.45% in Latvia and 0.54% in Slovenia. We have become numb to an incredible market spectacle.

Global “risk off” gathered some momentum this week. The Shanghai Composite declined 1.0%, trading back to around February lows. China’s growth/tech ChiNext index sank 2.4% to the lowest level since February 22nd. Hong Kong’s Hang Seng China Financials index dropped 1.5% to the low going back to January 21st. China’s renminbi mustered a 0.26% gain versus the dollar, a notably unimpressive recovery considering its recent walloping.

“Risk off” was pervasive throughout European equities. Germany’s DAX index fell 1.9%, with France’s CAC40 down 2.2%. Led by a 6.6% drubbing in Italian bank shares, Italy’s MIB index sank 3.5%. Europe’s STOXX 600 Bank index fell 3.0%.

The S&P500 declined 1.2%, with the tech-heavy Nasdaq100 down 2.7%. The Semiconductors were hammered 6.4%. The Dow Transports fell 3.4%.

The unfolding “risk off” backdrop became too much for some key commodities markets. WTI crude was hammered 6.6% this week (biggest decline of the year), trading to a two-month low. Copper declined 1.7%, approaching January lows. Aluminum fell 2.0%, Zinc 1.5%, and Tin 1.0%. The Bloomberg Commodities Index traded Thursday at the lows since “U-turn” January 4th.

May 22 – Reuters (Michael Martina and David Lawder): “China must prepare for difficult times as the international situation is increasingly complex, President Xi Jinping said in comments carried by state media…, as the U.S.-China trade war took a mounting toll on tech giant Huawei… During a three-day trip this week to the southern province of Jiangxi, a cradle of China’s Communist revolution, Xi urged people to learn the lessons of the hardships of the past. ‘Today, on the new Long March, we must overcome various major risks and challenges from home and abroad,’ state news agency Xinhua paraphrased Xi as saying, referring to the 1934-36 trek of Communist Party members fleeing a civil war to a remote rural base, from where they re-grouped and eventually took power in 1949.”

May 19 – Bloomberg (Karen Leigh): “President Donald Trump said he was ‘very happy’ with the trade war and that China wouldn’t become the world’s top superpower under his watch. ‘We’re taking in billions of dollars,’ Trump told Fox News Channel’s Steve Hilton when asked about the end game on the trade war. ‘China is obviously not doing well like us.’ Trump’s comments signal he’s in no rush to get back to negotiating with Beijing… The president also told Hilton he believed China wants to replace America as the world’s leading superpower, and it’s ‘not going to happen with me.’ ‘I think that’s their intention… Why wouldn’t it be? I mean they’re very ambitious people, they’re very smart.’”

If it is negotiation posturing, it’s a rather convincing effort from both sides. Hopes for de-escalation from rapidly deteriorating Chinese/U.S. relations were tempered to start the week. “China is in ‘no rush’ to restart trade talks,” read the headline. President Trump’s comments regarding China not attaining superpower status under his watch played right into Beijing’s narrative.

May 20 – Bloomberg (Ian King, Mark Bergen, and Ben Brody): “The impact of the Trump administration’s threats to choke Huawei Technologies Co. reverberated across the global supply chain on Monday, hitting some of the biggest component-makers. Chipmakers including Intel Corp., Qualcomm Inc., Xilinx Inc. and Broadcom Inc. have told their employees they will not supply Huawei until further notice, according to people familiar with their actions. Alphabet Inc.’s Google cut off the supply of hardware and some software services to the Chinese mobile phone equipment giant, another person familiar said, asking not to be identified discussing private matters. The Trump administration on Friday blacklisted Huawei — which it accuses of aiding Beijing in espionage — and threatened to cut it off from the U.S. software and semiconductors it needs to make its products.”

With technology stocks in the crosshairs, equities were under heavy selling pressure in Monday trading (S&P500 down 2.4%; Dow sinking 617 points). In an effort to contain market and supply chain fallout, the administration after Monday’s close moved to grant tech firms a three-month license (with stipulations) to do business with Huawei. Tuesday’s rally suffered a short half-life.

By Tuesday evening, concerns were mounting after reports the Trump administration was considering adding Chinese surveillance firms to the blacklisted companies to be cut off from U.S. technology suppliers. It was the opposite of de-escalation.

Ten-year Treasury yields fell four bps Wednesday and another six on Thursday (to 2.32%). The Shanghai Composite dropped 1.4% in Thursday trading. In U.S. markets, the VIX popped to 18, as a whiff of vulnerability emerged in U.S. corporate credit. Junk bond spreads increased to near the widest – and investment-grade CDS prices near the highest – level since late-March. U.S. bank stocks dropped 1.8% in Thursday trading, as bank CDS prices widened moderately. For the week, investment-grade corporate bond funds suffered their first outflow ($756 million) in 17 weeks.

May 24 – Bloomberg (Brian Smith): “Like a punch-drunk boxer saved by the bell, the Memorial Day weekend couldn’t have come at a better time for the high-grade credit market. Credit spreads have blown out to the widest levels since March, the new issue market screeched to a halt mid-week… Total high-grade new issue volume (including EM) totaled just shy of $17 billion, well below projections of $20b-$25b, as at least three potential borrowers were said to have punted until next week… Three of this week’s new issue tranches failed to price at the tight end of the guidance range, a rare occurrence and clear signal of investor pushback… Nearly 75% of this week’s deals are trading wide to their new issue pricing levels.”

A Wall Street Journal article (James Mackintosh) headline resonated: “Investors Slowly Wake Up to Fears of a New Cold War: The U.S.-China Trade Conflict Might be a Repeat of a Pattern All-Too Common in Markets When it Comes to Geopolitical Risks: Ignore Them, Then Panic.”

It’s worth generally examining The “Ignore Them, Then Panic” Dynamic. At this point, perpetual monetary stimulus has become deeply imbedded within inflated securities prices across asset classes around the globe. One can disagree on potential catalysts and circumstances, but the most extreme global bond pricing dynamics clearly incorporate prospective rate cuts and additional QE. Meanwhile, risk markets are bolstered by collapsing market yields along with the perception of multiple market backstops (Fed/global central banks, Chinese stimulus, Trump/2020 elections, corporate buybacks, etc.).

Early on in the global government finance Bubble period, I advanced the concept of the “Moneyness of Risk Assets.” This was an evolution from the mortgage finance Bubble period’s “Moneyness of Credit” market distortion. The aggressive use of rate policy and central bank balance sheets/Credit to promote stock and bond price inflation nurtured the (central bank backstop-induced) perception of risk assets as safe and liquid stores of value (i.e. “money-like”). Over time, this had momentous effects throughout the markets, certainly including the booming ETF and derivatives complexes.

When it comes to various risks, over years it became increasingly easy to simply “Ignore Them.” Central banks have repeatedly stepped up to backstop vulnerable risk markets. At the same time, the central bank “put” has ensured readily available inexpensive market insurance (i.e. put options). Why not write/sell flood insurance when the authorities control the weather? And with market protection so cheap, is it not rational to partake in rewarding risk-taking activities? Moreover, with QE having become the principal instrument in the central banking toolkit, prices for Treasury, Bund, JGB and other “safe haven” bonds are essentially guaranteed to rise in the event of heightened systemic risk. Superior to even cheap derivative protection, can’t lose holdings of safe haven bonds offer protection while also inflating in value.

As I’m fond of discussing, crises typically erupt in the money markets. It is when the perception of safety and liquidity is suddenly questioned that all hell breaks loose. And never before have risk markets so harbored the misperception of money-like attributes. This explains the “Then Panic” Dynamic.

I have argued that contemporary finance functions poorly in reverse. The market-based global financial apparatus seemingly performs wondrously so long as securities prices rise, the cost of market protection remains cheap and risk embracement holds sway. And it is as if the system has evolved to operate quite splendidly under moderate degrees of apprehension. Such a backdrop provides the Buy the Dip Crowd fruitful opportunities, while lavishing effortless profits upon the writers/sellers of market protection. To be sure, a hospitable marketplace of mild pullbacks and robust rallies further emboldens the prevailing view that markets always go up (so ignore risk!).

As we witnessed in December, things can start to unwind rather quickly when markets begin questioning the timeliness and scope of the central bank backstop. When the faithful dip buyers reverse course and turn urgent sellers, there’s an immediate market liquidity issue. Worse yet, when the protection sellers (i.e. put writers) suddenly fear they might end up on the hook for substantial market losses, it’s “Then Panic.” They must either rapidly buy protection for themselves or start shorting securities to offset their exposure to escalating losses. Any time writers of derivative protection are forced into aggressive selling, markets quickly face a major liquidity problem.

I have argued that the bursting of China’s historic Bubble presents a catalyst for the piercing of the global Bubble. And I posited as recently as last week that the breakdown in trade negotiations risks pushing China over the edge. I also suggested that acute Chinese fragility likely explains the extraordinary drop in global safe haven bond yields. While this is reasonable analysis, it is surely too simplistic.

Crisis unfolding in China has become a high probability catalyst for bursting the global Bubble. Yet it is structurally-impaired global financial and economic systems that explain virtual panic buying of safe haven bonds in the face of resilient risk markets. For decades now, risk markets have climbed the proverbial “wall of worry” – seemingly scaling new heights after overcoming one potential crisis after another (i.e. deep U.S. recession, European crisis, geopolitical flashpoints, Brexit, multiple China scares, “flash crashes,” the winding down of QE, etc.). It became rational for risk markets to welcome risk as an opportunity to capitalize on additional central bank and Beijing stimulus measures.

Safe haven bond markets view the backdrop altogether differently. Current market structure is unsustainable. Treasuries, bunds, JGBs, etc. are zeroed in on the risk markets’ proclivity for Ignore Them, Then Panic. The safe havens are now preparing for the Panic Phase, with the presumption that dysfunctional speculative dynamics and deep structural maladjustment ensure the next bout of “risk off” (de-risking/deleveraging) deteriorates into illiquidity and market dislocation.

The assumption is that central bankers will have no alternative than to cut rates and aggressively resort to even greater marketplace liquidity injections (QE). Considering the scope of speculative leverage permeating global markets, along with structural dependency to unending liquidity abundance, I don’t disagree with the safe haven perspective.

Highly speculative risk markets, heartened by extremely low yields and prospects for monetary stimulus, confront a major timing issue. They envisage the Fed and global central banks moving quickly and forcefully to reverse “risk off” before it gains momentum – emboldened by the January U-turn and the belief that the Fed learned from its December blunder.

The Fed, however, is signaling it doesn’t see justification for an itchy trigger finger. There is a contingent within the FOMC surely not overjoyed by the speculative melee incited by their January “pivot”. Believing the markets and economy are fundamentally sound, the Fed back in December was caught unprepared for the intensity of market instability. Many on the FOMC likely view the markets’ rapid recovery as confirming their confidence in underlying system soundness and resiliency. I’ll also assume that Chairman Powell and some committee members are uncomfortable with the view of a “Fed put” not far below current market prices.

The huge 2019 risk market rally has only exacerbated underlying market and economic fragilities. Safe haven bonds concur with this view, while the ongoing collapse in global market yields works to support the speculative Bubble raging in the risk markets. Corporate Credit, in particular, has been underpinned by sinking sovereign bond yields. The backdrop has made it especially easy to Ignore Them – myriad risks including collapsed trade talks, rising U.S./China tensions, a fragile Chinese Bubble, waning global growth, vulnerable EM, susceptible European finance and economies, and the rapidly deteriorating geopolitical backdrop.

Healthy markets would adjust and correct to reflect heightened uncertainties and deteriorating prospects. Speculative markets instead promote excess and the ongoing accumulation of imbalances, maladjustment and impairment. There’s no operable release valve. Pressure builds and builds – risks accumulate in all the wrong places – Then Panic.

The flaw in contemporary finance – especially within market psychology over recent years – is to believe central bankers have nullified market, economic and Credit cycles. They have certainly averted a number of market crises over recent years, in the process dangerously extending cycles. Along the way risk market participants grew greatly overconfident in the capacity of central bankers to permanently forestall crisis. Moreover, they have turned completely blind to the historic crisis festering just below the surface of their delusional view of a “Permanently High Plateau” of global peace and prosperity.

For the Week:

The S&P500 fell 1.2% (up 12.7% y-t-d), and the Dow declined 0.7% (up 9.7%). The Utilities advanced 1.6% (up 13.3%). The Banks slipped 0.5% (up 11.7%), and the Broker/Dealers dipped 0.2% (up 10.7%). The Transports dropped 3.4% (up 10.5%). The S&P 400 Midcaps fell 1.4% (up 12.0%), and the small cap Russell 2000 lost 1.4% (up 12.3%). The Nasdaq100 dropped 2.7% (up 15.3%). The Semiconductors sank 6.4% (up 13.6%). The Biotechs increased 0.4% (up 6.8%). Though bullion rallied $7, the HUI gold index declined 0.9% (down 7.2%).

Three-month Treasury bill rates ended the week at 2.29%. Two-year government yields declined four bps to 2.17% (down 33bps y-t-d). Five-year T-note yields fell five bps to 2.12% (down 39bps). Ten-year Treasury yields dropped seven bps to 2.32% (down 36bps). Long bond yields fell seven bps to 2.75% (down 26bps). Benchmark Fannie Mae MBS yields dropped six bps to 3.10% (down 40bps).

Greek 10-year yields fell seven bps to 3.35% (down 105bps y-t-d). Ten-year Portuguese yields declined seven bps to 0.98% (down 75bps). Italian 10-year yields dropped 11 bps to 2.55% (down 19bps). Spain’s 10-year yields declined five bps to 0.83% (down 59bps). German bund yields slipped a basis point to negative 0.12 (down 36bps). French yields were unchanged at 0.28% (down 43bps). The French to German 10-year bond spread widened one to 40 bps. U.K. 10-year gilt yields fell eight bps to 0.96% (down 32bps). U.K.’s FTSE equities index slumped 1.0% (up 8.2% y-t-d).

Japan’s Nikkei Equities Index dipped 0.6% (up 5.5% y-t-d). Japanese 10-year “JGB” yields declined two bps to negative 0.07% (down 7bps y-t-d). France’s CAC40 fell 2.2% (up 12.4%). The German DAX equities index lost 1.9% (up 13.8%). Spain’s IBEX 35 equities index declined 1.1% (up 7.4%). Italy’s FTSE MIB index sank 3.5% (up 11.2%). EM equities were mixed. Brazil’s Bovespa index rallied 4.0% (up 2.9%), while Mexico’s Bolsa dropped 1.9% (up 2.3%). South Korea’s Kospi index declined 0.5% (up 0.2%). India’s Sensex equities index surged 4.0% (up 9.3%). China’s Shanghai Exchange fell 1.0% (up 14.4%). Turkey’s Borsa Istanbul National 100 index declined 0.8% (down 5.7%). Russia’s MICEX equities index gained 1.6% (up 10.5%).

Investment-grade bond funds saw outflows of $756 million, while junk bond funds posted inflows of $4.0 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 4.06% (down 60bps y-o-y). Fifteen-year rates declined two bps to 3.51% (down 64bps). Five-year hybrid ARM rates gained two bps to 3.68% (down 19bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.21% (down 42bps).

Federal Reserve Credit last week declined $26.0bn to $3.824 TN. Over the past year, Fed Credit contracted $474bn, or 11.0%. Fed Credit inflated $1.014 TN, or 36%, over the past 342 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $0.5bn last week to $3.469 TN. “Custody holdings” rose $86bn y-o-y, or 2.6%.

M2 (narrow) “money” supply increased $3.0bn last week to a record $14.557 TN. “Narrow money” rose $554bn, or 4.0%, over the past year. For the week, Currency increased $1.0bn. Total Checkable Deposits gained $4.8bn, and Savings Deposits rose $9.8bn. Small Time Deposits added $1.2bn. Retail Money Funds increased $0.8bn.

Total money market fund assets jumped $30bn to $3.131 TN. Money Funds gained $331bn y-o-y, or 11.8%.

Total Commercial Paper declined $8.2bn to $1.083 TN. CP gained $9.0bn y-o-y, or 0.8%.

Currency Watch:

May 20 – Reuters (Andrey Ostroukh): “Russia’s central bank has lowered the share of dollars in its reserves because of the external risks the country could face, First Deputy Governor Ksenia Yudayeva said… ‘We have tried to bring this (reserves) structure into accordance with the risks we believe we may face,” Yudayeva told members of lower house of parliament…”

The U.S. dollar index slipped 0.4% to 97.603 (up 1.5% y-t-d). For the week on the upside, the Brazilian real increased 1.9%, the Norwegian krone 1.2%, the Swiss franc 0.9%, the Australian dollar 0.7%, the Japanese yen 0.7%, the Mexican peso 0.6%, the South Korean won 0.6%, the Swedish krona 0.6%, the New Zealand dollar 0.5%, the euro 0.4% the Canadian dollar 0.2%, the Singapore dollar 0.2% and the South African rand 0.1%. For the week on the downside, the British pound declined 0.1%. The Chinese renminbi increased 0.26% versus the dollar this week (down 0.31% y-t-d).

Commodities Watch:

May 19 – Wall Street Journal (Heather Haddon and Jacob Bunge): “A disease sweeping China’s hog farms is set to hit U.S. meat eaters’ pocketbooks. The companies that sell Big Mac and Whopper burgers, Jimmy Dean sausages and Dunkin’ bacon sandwiches all expect meat prices to rise this year, as China imports more pork, beef and poultry to fill a shortfall in its huge hog market. African swine fever… has decimated Chinese hog counts, constraining supplies in the world’s top market for pork. Up to 200 million Chinese hogs will be lost as the disease spreads and herds are culled to prevent it from spreading further…”

The Bloomberg Commodities Index declined 1.3% this week (up 2.2% y-t-d). Spot Gold recovered 0.6% to $1,285 (up 0.2%). Silver gained 1.1% to $14.545 (down 6.4%). WTI crude sank $4.13 to $58.63 (up 29%). Gasoline dropped 5.0% (up 47%), and Natural Gas fell 1.3% (down 12%). Copper lost 1.4% (up 3%). Wheat surged 5.3% (down 3%). Corn jumped 5.5% (up 8%).

Market Instability Watch:

May 19 – Reuters (Zheng Li and Kevin Yao): “China’s central bank will use foreign exchange intervention and monetary policy tools to stop the yuan weakening past the key 7-per-dollar level in the near-term, three people familiar with the central bank’s thinking said. ‘At present, rest assured they will certainly not let it break 7,’ a source told Reuters. ‘Breaking 7 is beneficial to China because it can reduce some of the effects of tariff increases, but the impact on our renminbi confidence is negative and funds will flow out,’ the source said.”

May 22 – Bloomberg (Jeanny Yu and Mengchen Lu): “The record pace of foreign selling in China’s equities matters now more than ever. While overseas traders are quickly souring on yuan assets, they’ve also never wielded this much influence over the onshore stock market. Index inclusions and expanded quotas mean they drive a record 10% of daily turnover… That proportion is even greater for favorites like Kweichow Moutai Co., at 34% on a monthly basis… Integrating China’s capital markets into the global financial system has been a priority for the country’s policy makers since late 2017. In the year since MSCI Inc. first added mainland shares to its benchmarks, China has been expediting measures that make it easier for overseas investors to manage risk. Their growing influence means that mainland stocks, which have historically been somewhat immune to shifts in global sentiment, are losing that resilience.”

May 22 – Financial Times (Joe Rennison and Colby Smith): “It was an unnerving piece of data for investors last week, buried halfway down an esoteric spreadsheet released by the US government that tracks how many Treasuries foreign investors buy and sell. China, the largest foreign creditor to the US government with total Treasury holdings in excess of $1.2tn, sold $20bn of securities with a maturity exceeding one year in March… The sales amounted to China’s largest retreat from the market in more than two years.”

May 21 – Bloomberg (Livia Yap and Yuling Yang): “Expectations that $200 billion of foreign money would flow into China’s capital markets this year are looking nothing short of optimistic. For overseas investors, a weaker currency is the latest factor making yuan-denominated assets less attractive. They’ve been selling mainland-listed stocks at a record pace and their demand for Chinese bonds has been relatively tepid: monthly inflows have averaged at just 6.8 billion yuan ($984 million) this year, versus the 44.4 billion yuan seen in 2018, ChinaBond data show. What had started as a promising year in China’s markets is quickly turning sour as the country’s trade stand-off with the U.S. takes a toll on sentiment.”

May 21 – Bloomberg (Annie Lee): “Dollar bonds from some Chinese technology firms continue to drop on Tuesday after U.S. put restrictions on Huawei… China computer maker Lenovo’s $1b 5.375% perpetual bond tumbled 1.6 cents to 94 cents on the dollar on Tuesday, the biggest slump in three months.”

May 23 – Associated Press (David McHugh): “The CEO of Deutsche Bank says he is ready to make ‘tough cuts’ to improve the struggling bank’s profitability and raise a ‘disappointing’ share price as negative headlines continue to plague Germany’s biggest bank. Christian Sewing made the remarks… in front of restive shareholders at the bank’s annual meeting… He touted the bank’s full-year profit from 2018 — the first since 2014 — and achievement of its cost-cutting goals. The bank has cut staff to 91,700 employees, from 99,700 in 2016. But the meeting takes place amid a heavy flow of bad news for the bank. Shares traded at record lows Thursday…”

May 20 – Financial Times (Karen Ward): “The last time Washington and Beijing locked horns, global equities sold off by about one-fifth. This time, markets have shrugged off the blustery tweets from President Donald Trump, responding to threats of escalation with a somewhat bizarre aplomb. The 10% tariff currently being charged on $200bn of goods entering the US has been increased to 25%. The remaining $300bn or so of goods that China imports to the US may also face tariffs. These are numbers that will start to have a notable impact on activity in both China and the US. So why are markets so sanguine? In part it may be seen as rhetorical sabre-rattling, consistent with the narrative Mr Trump set out in his book The Art of the Deal. More likely the market is taking solace in the fact that the Federal Reserve is showing willingness this time round to pick up the pieces.”

May 23 – CNBC (Stephanie Landsman): “One of Wall Street’s leading experts on China suggests the window is closing on trade deal. Yale University senior fellow Stephen Roach warns that the United States is playing too much hardball. He cites the decision to put restrictions on China telecom giant Huawei as a potentially costly move in the ongoing negotiations. ‘The odds of a deal are rapidly receding,’ he told CNBC… ‘We have to be less hopeful now.’”

May 22 – Bloomberg (Enda Curran and Chris Anstey): “After months of predicting a trade deal between the world’s two largest economies, economists at some of the biggest financial institutions are growing increasingly pessimistic. Goldman Sachs…, Nomura… and JPMorgan… are among those that have rewritten their forecasts as U.S. President Donald Trump threatens to impose a 25% tariffs on around $300 billion of additional Chinese imports. Analysts at Nomura have made that hike in duties — which would mean practically all of China’s exports to the U.S. are hit by tariff hikes — their baseline forecast. They see it as a 65% probability before year-end, and most likely to come in the third quarter. ‘The U.S.-China relationship has moved further off track over the past two weeks after a period of what appeared, on the surface, to be steady progress towards reaching an admittedly narrow agreement,’ Nomura economists wrote… ‘We do not think the two sides will be able to get back to where they seemed to be in late April.’”

May 22 – CNBC (John Harwood): “Veteran economist Diane Swonk well remembers the difficulty of economic forecasting amid the 2008 financial crisis. The tumult of bankruptcies, bailouts and recession kept blurring her vision. That makes today’s hazy outlook all the more frustrating. At a moment of solid economic fundamentals, what confounds forecasting now are the mercurial whims of a single man – President Donald Trump. ‘You’re one tweet away from a U-turn on policy,’ Swonk complains. That’s the Trump tax on America’s economic stability. Among the many ways Trump has shattered White House norms, his impulsive public communications rank among the most consequential. By inspiring investors or spooking them, his tweets and impromptu utterances can send stock values spiking or plummeting – and then back again hours later.”

Trump Administration Watch:

May 19 – Reuters (David Lawder and Nandita Bose): “U.S. President Donald Trump said his tariffs on Chinese goods are causing companies to move production out of China to Vietnam and other countries in Asia, and added that any agreement with China cannot be a ‘50-50’ deal. In an interview with Fox News…, Trump said that the United States and China ‘had a very strong deal, we had a good deal, and they changed it. And I said that’s OK, we’re going to tariff their products.’”

May 22 – CNBC (Yun Li): “Treasury Secretary Steven Mnuchin said a resumption of trade talks with China is not on the calendar yet… ‘I’m still hopeful that we can get back to the table. The two presidents will most likely see each other at the end of June,’ Mnuchin said… The two leaders are set to meet at the G-20 summit in Japan next month.”

May 22 – Reuters (Jason Lange and Michael Martina): “The United States is at least a month from enacting its proposed tariffs on $300 billion in Chinese imports as it studies the impact on American consumers, U.S. Treasury Secretary Steven Mnuchin said… Washington this month hiked existing tariffs on $200 billion in Chinese goods to 25% from 10%, prompting Beijing to retaliate with its own levies on U.S. imports, as talks to end a 10-month trade war between the world’s two largest economies stalled.”

May 20 – NPR (Bobby Allyn and Matthew S. Schwartz): “Days after blacklisting Chinese technology company Huawei from buying American-made products, the Trump administration is now easing up. On Monday, the U.S. Commerce Department restored the… tech giant’s ability to maintain its network, which means the company can buy equipment and complete software updates to support those who use Huawei smartphones, according to a 90-day temporary general license issued by federal officials.”

May 23 – Axios (Steve LeVine): “Short of a highly improbable climbdown by China, President Trump, confronting a strong re-election challenge from Democrats, is likely to maintain an aggressive public posture toward Beijing at least through the 2020 campaign cycle, experts tell Axios. The big picture: Standing tall against China is one of the very few issues with strong bipartisan popularity across the country, which will make Trump hesitant to let it go, especially given the strong economy. For China’s Xi Jinping, too, there is much greater political safety in not caving to Trump. ‘Whether or not we get a deal on trade, the U.S.-China relationship is heading towards greater confrontation,’ says Ian Bremmer, president of the Eurasia Group.”

May 21 – Bloomberg (Jenny Leonard and Nick Wadhams): “The U.S. is considering cutting off the flow of vital American technology to five Chinese companies including Megvii, widening a dragnet beyond Huawei to include world leaders in video surveillance as it seeks to challenge China’s treatment of minority Uighurs in the country’s west. The U.S. is deliberating whether to add Megvii, Zhejiang Dahua Technology Co., Hangzhou Hikvision Digital Technology Co. and two others to a blacklist that bars them from U.S. components or software…”

May 22 – Wall Street Journal (Rebecca Ballhaus and Michael C. Bender): “President Trump said he wouldn’t work with Democrats while investigations of him continue and abruptly ended a meeting with the party’s leaders…, casting fresh doubt on a divided Washington’s ability to complete big-ticket legislation in the next 18 months. The morning began with House Speaker Nancy Pelosi (D., Calif.) accusing the Republican president of engaging in a ‘coverup’ as she fended off a rising chorus of Democrats calling for Mr. Trump’s impeachment. Soon after, Mr. Trump stormed out of a planned meeting on infrastructure at the White House with Mrs. Pelosi and Sen. Chuck Schumer (D., N.Y.) after telling them that the talks were off. At a hastily called news conference moments later in the Rose Garden, Mr. Trump said he wouldn’t work with Congress ‘under these circumstances.’”

May 23 – The Hill (Juliegrace Brufke and Niv Elis): “The odds of congressional negotiators reaching a deal to lift budget caps and raise the debt ceiling ahead of their Memorial Day recess appear to be growing increasingly grim despite top lawmakers’ earlier optimism. ‘The first meeting went pretty well the second meeting not as well,’ House Minority Leader Kevin McCarthy (R-Calif.) said… ‘I think it will take a little more time.’ Disagreements over nondefense discretionary spending remain a key sticking point between parties, with Republicans arguing Democrats are requesting ‘obscene’ levels of spending.”

May 19 – Financial Times (Kiran Stacey and Demetri Sevastopulo): “US intelligence chiefs have held a series of classified briefings with American companies and other groups to warn them of the dangers of doing business in China, a further sign of Washington’s increasingly hawkish stance towards trade between the two countries. Dan Coats, the director of national intelligence, has given several briefings alongside colleagues from the FBI and the National Counterintelligence and Security Center to large technology companies, venture capitalists and educational institutions.”

May 20 – New York Times (Li Yuan): “China has spent nearly two decades building a digital wall between itself and the rest of the world, a one-way barrier designed to keep out foreign companies like Facebook and Google while allowing Chinese rivals to leave home and expand across the world. Now President Trump is sealing up that wall from the other side. Google said on Monday that it would limit the software services it provides to Huawei, the telecommunications giant, after a White House order last week restricted the Chinese company’s access to American technology. Google’s software powers Huawei’s smartphones, and its apps come preloaded on the devices Huawei sells around the world. Depending on how the White House’s order is carried out, that could come to a stop.”

May 22 – Wall Street Journal (Gregg Ip): “After two years of treating adversaries and allies alike as trade villains, President Trump pivoted last week. With China edging away from commitments to change its ways, Mr. Trump sharply ratcheted up tariffs and banned U.S. companies from doing business with Huawei Technologies Co. Separately, he lifted tariffs on metal imports from Canada and Mexico while delaying for six months tariffs on autos from the European Union and Japan. Meanwhile, U.S., European and Japanese trade officials are to meet this week on joint efforts to curb Chinese subsidies. But before heralding a united front, let’s remember how Mr. Trump got here: not by working with allies, but by stiff-arming them. His confrontation with China today remains a largely unilateral affair, using American laws and leverage to address American grievances and priorities.”

May 21 – CNBC (Evelyn Cheng): “U.S. President Donald Trump’s latest tariff increase — and Beijing’s plans to counter them — are hitting U.S. companies in China. Nearly three-fourths, or 74.9%, of almost 250 respondents to a survey held from May 16 to May 20 said the increases in American and Chinese tariffs are having a negative impact on their business, according to… the American Chamber of Commerce in Shanghai and the Beijing-based American Chamber of Commerce in China.”

May 20 – Bloomberg (Editorial Board): “In its struggle with China over trade and national security, the U.S. has many legitimate grievances, and a variety of weapons for seeking redress. That doesn’t mean it should use all of them. The nuclear missile the U.S. just launched at Huawei Technologies Co. Ltd. is a case in point. Last week, the Commerce Department placed Huawei and nearly 70 of its affiliates on an ‘Entity List,’ which means that U.S. suppliers may now need a license to do business with them. Both Huawei’s mobile phones and its network equipment rely on American components, including advanced semiconductors. If the ban is applied stringently, it could drive one of China’s most high-profile companies — employing more than 180,000 people — out of business. That would be a serious mistake.”

Federal Reserve Watch:

May 23 – Bloomberg (Christopher Condon): “For Loretta Mester, returning inflation to the U.S. central bank’s 2% target requires restraint more than drastic action. In an interview with Bloomberg News, the president of the Federal Reserve Bank of Cleveland dismissed the notion that policy makers should cut interest rates to raise inflation. Instead, officials should simply be careful not to react too quickly when prices move back up again, as she expects them to later this year. ‘If you really wanted to get inflation expectations moving up you’d have to take really aggressive action — if that was your only goal… But that would be bad policy because we have another goal and the risk you’d be running on the other goal would be excessive,’ she added…”

May 20 – CNBC (Jeff Cox): “Atlanta Federal Reserve President Raphael Bostic said he does not see the central bank cutting interest rates, contrary to market expectations. Bostic expressed confidence in the economy, and in the Fed’s position on monetary policy…”

May 21 – Reuters (Howard Schneider and Trevor Hunnicutt): “The Federal Reserve is discussing whether a better way to get the U.S. economy to hit the central bank’s inflation target is to tolerate much higher price increases in some years to counter the weaker ones. One problem: The fact that the Fed has failed for a decade to even reach that 2% level could leave people skeptical it is serious about even more aggressive strategies. That is just one of many hurdles policymakers noted… that face any overhaul of the central bank’s policy framework. ‘I don’t know if they are really going to believe that we are going to follow through,’ Chicago Fed president Charles Evans said… ‘We have been undershooting 2% for so long… I take it as necessary to go above 2 to be presumed to have credibility,’ to deliver under any new approach.”

May 20 – Associated Press (Martin Crutsinger): “Federal Reserve Chairman Jerome Powell said… the central bank is closely monitoring a sharp rise in corporate debt but currently does not see the types of threats that triggered the 2008 financial crisis. …Powell said views about riskier corporate debt — known as leveraged lending — range from ‘this is a rerun of the subprime mortgage crisis’ to ‘nothing to worry about here.’ He said his view lies somewhere in the middle. The risks currently are ‘moderate,’ Powell said.”

May 22 – Bloomberg (Christopher DeReza): “Credit conditions are Federal Reserve Chairman Jerome Powell’s ‘pain point,’ and credit spreads should be watched to gauge the central bank’s appetite for interest-rate cuts, Morgan Stanley Chief U.S. Economist Ellen Zentner said… ‘A blowout of 50bps or more would get the central bank’s Attention.’”

U.S. Bubble Watch:

May 21 – Reuters (Lucia Mutikani): “U.S. home sales fell for a second straight month in April, weighed down by a chronic shortage of more affordable houses, the latest sign the economy was slowing after a temporary boost from exports and an inventory overhang in the first quarter… ‘A mismatch between strengthening entry level demand and scarce entry level supply is likely playing a role in the underwhelming sales pace,’ said Charlie Dougherty, an economist at Wells Fargo…”

May 22 – CNBC (Diana Olick): “Homeowners are taking advantage of lower interest rates, rushing to refinance their mortgages before rates potentially turn higher again. Total mortgage application volume increased 2.4% last week from the previous week and was up 15% from a year earlier, according to the Mortgage Bankers Association… Mortgage applications to purchase a home did not react as positively. They were down 2% for the week, although they were 7% higher than a year ago.”

May 19 – Wall Street Journal (Amrith Ramkumar and Theo Francis): “Spending on factories, equipment and other capital goods slowed in the first quarter among a broad cross-section of large, U.S.-listed firms, bolstering investor concerns that a key driver of economic growth is fading. Capital spending rose 3% from a year earlier in the first quarter at 356 S&P 500 companies…, according to an analysis by The Wall Street Journal of data supplied by Calcbench… That is down from a 20% rise in the year-ago period for the same companies… Executives at several companies said lingering trade tensions with China were making them and their customers cautious…”

May 20 – Financial Times (Robert Armstrong): “The quality of big US banks’ commercial lending portfolios is deteriorating for the first time in nearly three years, leaving investors to wonder whether there is worse to come should the ebullient economy slow. Non-performing loans at the 10 largest commercial lenders rose 20%, or $1.6bn, in the first quarter… That reversed a steady improvement in credit quality dating back to 2016, when a wave of borrowers fell into default after oil prices crashed. The level of sour loans remains historically low relative to banks’ balance sheets.”

May 21 – Reuters (Karen Pierog): “April, typically a big revenue month for U.S. states that levy personal income taxes, was especially robust this year, making up for subpar collections in prior months, but analysts cautioned the tax surge underscores how state budgets face greater volatility from federal tax law changes and the stock market. In California, where personal income taxes account for about 70% of the state’s general fund revenue, a year-over-year increase of 35.2% last month made up for lagging revenue from the tax in December and January…”

May 23 – CNBC (Eric Rosenbaum): “Many Americans describe their situation as financially stable, but economic fragility is persistent across the U.S., especially related to income level, educational attainment, and ethnicity and race. An unexpected expense of $400 can force more than one-third of American adults into a difficult financial situation. That’s according to the just-released ‘Report on the Economic Well-being of U.S. Households for 2018,’ a study that Fed has been conducting since 2013. The Fed survey finds that many families have experienced substantial gains since 2013, but the decade-long economic expansion and the low unemployment has done ‘little to narrow the persistent economic disparities by race, education, and geography.’”

May 18 – CNBC (Ari Levy): “Nobody in Silicon Valley should be surprised by Uber’s disappointing IPO. Or Lyft’s. Experts have been predicting this type of performance for years. Marc Andreessen called ‘the effective death of the IPO’ in 2014 and said that with high-flying tech companies staying private longer, ‘gains from the growth accrue to the private investor, not the public investor.’ Fred Wilson of Union Square Ventures told CNBC the following year that these late-stage IPOs mean ‘all of the gains are captured among a very small cohort of people.’ …These are the very people that benefit from companies who stay private longer while their valuations skyrocket, because they’re the early investors. They get to ride the valuation up from the millions to $10 billion, $20 billion or $50 billion and then sell their shares to the masses of public market investors who are thirsting for the next Amazon or Google.”

May 20 – Gallup (Mohamed Younis): “Americans today are more closely divided than they were earlier in the last century when asked whether some form of socialism would be a good or bad thing for the country. While 51% of U.S. adults say socialism would be a bad thing for the country, 43% believe it would be a good thing. Those results contrast with a 1942 Roper/Fortune survey that found 40% describing socialism as a bad thing, 25% a good thing and 34% not having an opinion.”

May 20 – Reuters (Lucia Mutikani): “The tight U.S. labor market is not drawing new people into the labor force, but merely reducing the number dropping out, according to research… by the San Francisco Federal Reserve.”

China Watch:

May 23 – CNBC (Evelyn Cheng): “The latest U.S. actions on trade are preventing negotiations with Beijing from proceeding, China’s Commerce Ministry said…. ‘If the U.S. would like to keep on negotiating it should, with sincerity, adjust its wrong actions. Only then can talks continue,’ Ministry of Commerce spokesperson Gao Feng said Thursday…”

May 23 – CNBC (Stella Qiu and Tony Munroe): “China said the United States needs to correct its ‘wrong actions’ in order for trade talks to continue after it blacklisted Huawei… ‘If the United States wants to continue trade talks, they should show sincerity and correct their wrong actions. Negotiations can only continue on the basis of equality and mutual respect,’ Chinese Commerce Ministry spokesman Gao Feng told a weekly briefing.”

May 22 – Bloomberg: “When Donald Trump first took office in 2017, officials in Beijing saw a pragmatic businessman: All that tough campaign talk, they argued, was merely Art-of-the-Deal negotiating tactics rather than deeply held beliefs. Yet more than two years later, President Xi Jinping finds himself on the verge of a new Cold War his government sees fanned by Washington’s most ideological China hawks. What’s worse, the view that China is a strategic competitor that must be thwarted at all costs is picking up supporters across the U.S. political spectrum by the day. As Trump continues to raise the stakes with threats to kneecap Huawei Technologies Co. and other companies over what the U.S. says are rising national security risks, officials in Beijing are weighing their options to respond. They are stoking up anti-U.S. sentiment and drawing up contingency plans to bail out Huawei, while also still calling for dialogue to resolve the dispute.”

May 20 – Reuters (Natalia Drozdiak, Jonathan Stearns, and Nikos Chrysoloras): “China could retaliate against the U.S. after President Donald Trump blacklisted Huawei Technologies Co., the Chinese ambassador to the European Union said. Trump upped the ante in his trade dispute with China last week, announcing moves to curb Huawei’s business that are starting to have ramifications for other companies around the world. ‘This is wrong behavior, so there will be a necessary response,’ Zhang Ming, China’s envoy to the EU, said… ‘Chinese companies’ legitimate rights and interests are being undermined, so the Chinese government will not sit idly by.’”

May 22 – Bloomberg: “China’s grip on the world’s rare earths market is in focus once again amid speculation the dominant producer could choke off supplies as the trade war escalates. But they’re not the only strategic minerals to watch if China’s relations with the U.S. deteriorate. President Donald Trump’s blitz on China’s flagship maker of telecoms hardware, and the possibility that more tech companies could be targeted, has raised fears that Beijing’s retaliation may embroil multiple industries using critical commodities. Rare earths have drawn most attention after President Xi Jinping made a point of visiting a plant this week. China has used them before as a political weapon, notably after a maritime dispute with Japan in 2010. The potential for a trade-based cold war also highlights the emerging industries where China is ahead in securing supply chains. That includes batteries for electric vehicles and mass storage, which rely on cobalt, lithium and a cluster of other materials that were niche but are now only growing in significance.”

May 19 – Financial Times (Tom Mitchell): “As the trade dispute escalates between China and the US, classic Chinese movies about the ‘War to Resist America and Aid Korea’, as the Korean war of the 1950s is known in China, have made a reappearance on Chinese primetime state television. This is one of the many signs in China hinting at what analysts believe will now be a protracted trade conflict with Washington. Reluctant to accept humbling terms demanded by Donald Trump to end the two countries’ year-long trade spat, Xi Jinping, the Chinese Communist president, is preparing to lead his country into an all-out trade conflict with the world’s leading economic and technological power, just as Mao Zedong sent Chinese ‘volunteers’ to take on US forces during the Korean war for four long, bloody years in the 1950s. ‘If the bulk of this agreement is about China doing this and China doing that, that’s totally unpalatable to a domestic audience,’ said one person briefed on the talks in Beijing.”

May 22 – Reuters (Tom Miles): “China told the world’s main disarmament forum… that U.S. foreign policy was destabilizing, baffling and redolent of Don Quixote, the Spanish fictional hero whose misplaced determination leads him on a series of doomed endeavors. ‘The Cold War mentality has come back to drive the security strategy and policy of a major power,’ China’s disarmament ambassador Li Song told the Conference on Disarmament… ‘In particular the U.S. keeps saying other countries make it feel unsafe – this is truly baffling,’ he said.”

May 20 – Financial Times (Editorial Board): “Huawei is under siege. Google is restricting parts of its Android operating system to the Chinese telecoms tech giant. US chipmakers are poised to suspend supplies too. The US move to put the Chinese telecoms flagship on its so-called Entity List — requiring American companies to obtain a government licence to sell to it — is a pivotal moment for the global technology industry. It represents an opening salvo in an emerging new US-China cold war. It is also a serious miscalculation.”

May 21 – Wall Street Journal (Emre Peker and Dan Strumpf): “Huawei Technologies Co. denounced U.S. actions against the company as ‘bullying’ and implored European governments to resist American pressure to follow suit in a bid to safeguard one of its most lucrative markets. The telecom equipment giant also took its counteroffensive directly to European consumers…, launching a marquee phone, the Honor 20—the latest device in a lower-priced Huawei-owned line aimed at younger users. The slick, Silicon Valley-like debut in London was planned well before the U.S. decision to restrict exports to Huawei. Still, the venue highlighted how Europe has become a central battlefield in the fight between the U.S. and the company. Europe is one of Huawei’s most important international markets.”

May 20 – Financial Times (Nic Fildes and Louise Lucas): “Seven years ago, the Chinese smartphone maker Huawei opened a small research centre in Finland, tapping the home country of its rival Nokia for engineers who knew how to build a mobile phone operating system. Starting with just 20 engineers, Huawei has gradually built up headcount in Finland, opening bases in Helsinki, Oulu and Tampere in preparation for the day when it might need an alternative to Android, the system that runs three quarters of the world’s mobile phones. On Monday, it appeared as if Huawei’s worst fears had been confirmed. Google, which bought Android in 2005, said it would stop supplying Huawei with Android software in order to comply with a US government ban.”

May 19 – Reuters (Josh Horwitz): “Chinese state media… criticized the United States for its complaints about intellectual property theft, calling them a ‘political tool’ intended to suppress China’s economic development… An op-ed article in the People’s Daily targeted the Section 301 report Washington issued in March 2018, saying the authors fabricated the claim that China stole hundreds of billions of dollars worth of intellectual property from the U.S.”

May 20 – Bloomberg (John Authers): “Round numbers tend to matter in markets. So it is that the foreign-exchange community is dominated by one question, which is whether China’s yuan will breach the seven-per-U.S.-dollar level. The question is freighted with history. The currency steadily appreciated after July 2005, when the Chinese authorities ended the currency’s peg of 8.3 to the dollar that had endured since 1995. It finally strengthened below seven per dollar in 2008 and has stayed there ever since, meaning the yuan has remained relatively strong. It now looks as though that could be about to change: The yuan has an anomalous status. It is no longer a pure expression of the wishes of Chinese authorities, but it is still not a pure expression of the will of the market either.”

May 19 – Bloomberg (Tian Chen and Ran Li): “China’s yuan, already battered by the U.S. trade dispute, will soon have a catalyst for further depreciation. Offshore-listed Chinese companies will sell the yuan to buy foreign currencies and fund their $18.8 billion dividend bill due from June to August… While that’s less than last year’s $19.6 billion, the payments come at a sensitive time: the yuan is near its weakest this year and speculation is mounting it will fall to 7 per dollar, regarded as a key psychological level. The offshore yuan has already dropped about 2.9% in May, making it one of the world’s worst-performing currencies.”

May 20 – Bloomberg: “In China’s financial system, the bigger the role of the state, the cheaper the funding costs. As a rule. But in one corner of the country’s $13 trillion bond market, something different has happened. The highest yields in the 7.5 trillion yuan ($1.1 trillion) worth of debt sold by local government financing vehicles are found on the securities sold in regions where the public sector dominates the economy. That analysis… showcases both the productivity gap between state-owned and private industries, and the increasing differentiation between weaker and stronger borrowers in Chinese bonds. As China’s economic growth slows, the pressure is set to grow for policy makers in Beijing to ensure against mass defaults.”

May 22 – Bloomberg (Jason Gale): “China’s attempts to control African swine fever have been insufficient to stem further spread of the disease, with the deadly pig contagion now endemic in two regions, a United Nations group said. The virus that causes the disease is entrenched among pig populations in the autonomous regions of Tibet and Xinjiang Uygur… Diseases that are endemic, or generally present, are more difficult to stamp out by quarantining and culling diseased and vulnerable livestock. About 20% of China’s pig inventories may have been culled in the first few months of 2019 amid fears of African swine fever spreading more rapidly… China’s pig production will drop by 134 million head, or 20%, in 2019, the U.S. Department of Agriculture said…”

May 22 – CNBC (Arjun Kharpal): “Huawei could have its own operating system for smartphones and laptops ready for use in China by fall this year, the head of the company’s consumer division told CNBC. Still, he stressed that would only happen if the company were completely stopped from using Google’s and Microsoft’s software.”

Brexit Watch:

May 24 – Bloomberg (Tim Ross and Fergal O’Brien): “As Prime Minister Theresa May finally succumbed to the pressure to step down as leader of the Conservative Party, she had a message to whoever succeeds her: you will have to compromise. It’s a lesson she learned the hard way… Her entire three-year time in office was consumed by the seemingly impossible task of executing a 2016 referendum decision to leave the European Union. ‘To succeed, he or she will have to find consensus in Parliament where I have not,’ she told television cameras… ‘Such a consensus can only be reached if those on all sides of the debate are willing to compromise.’ Compromise, she said, is ‘not a dirty word.’ Hours after May said she was resigning, a top contender for her job was already making his Brexit pitch and was choosing to keep the no-deal option that markets fear on the table. ‘The way to get a good deal is to prepare for a no-deal situation,’ former Foreign Secretary Boris Johnson told a conference… ‘To get things done you need to be prepared to walk away.’”

Central Banking Watch:

May 21 – Financial Times (Guy Chazan, Alex Barker and Claire Jones): “German monetary hawks are making a concerted push for Jens Weidmann to succeed Mario Draghi as president of the European Central Bank, amid fears that Germany could miss out on all the top EU jobs up for grabs this year. Berlin’s priority is to ensure a German becomes president of the European Commission, and Germany’s chancellor Angela Merkel has thrown her weight behind Manfred Weber’s bid for the job. But officials in Berlin know that Mr Weber — a Bavarian MEP with no government experience, who is the lead candidate of the European People’s party in this weekend’s European elections — faces a struggle to secure the post.”

May 20 – Wall Street Journal (Brian Blackstone): “For five years, European nations have been trying to jump-start their ailing economies with what was supposed to be a radical, short-term remedy—negative interest rates. Instead, central banks haven’t been able to wean their economies off them. Increasingly, they appear to be a permanent feature of the landscape. No major bank that introduced negative rates during Europe’s debt crisis has turned main policy rates positive again. ‘Overall, we are on a painkiller,’ said Tamaz Georgadze, chief executive of Raisin GmbH in Berlin…, ‘and it’s very hard to get off it.’”

Europe Watch:

May 23 – Bloomberg (Fergal O’Brien and Carolynn Look): “German business confidence fell to the weakest in more than four years as the escalation of global trade tensions weighed heavily on the outlook. Along with a survey showing manufacturing still contracting and new orders falling, it’s a reminder of the shaky situation Europe’s largest economy is in. Its car industry is in upheaval and industrial giants such as Thyssenkrupp AG are seeing earnings plunge. The drop in the Ifo index was bigger than forecast and took the closely watched gauge to its lowest since November 2014.”

May 22 – Wall Street Journal (Valentina Pop in Brussels and Giovanni Legorano): “As the U.K. stumbles on its way out of the European Union, a potentially greater disruption for the bloc is crystallizing: Other EU-skeptic movements want to stay in the EU and fight it from within. This week’s elections to the European Parliament are expected to confirm such parties’ rising strength inside EU institutions, heralding an age in which Europe’s political establishment must find ways to cohabit with unruly rebels. ‘The extremists are in Brussels and have governed Europe for 20 years,’ Matteo Salvini, head of Italy’s far-right League party, told a large crowd…, pledging a different EU: ‘We want to construct a future without the bureaucrats who only look to the past,’ he said.”

Japan Watch:

May 19 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan’s economy grew at an annualised rate of 2.1%…, accelerating slightly from the previous quarter’s growth backed by net export gains.”

May 23 – Reuters (Stanley White): “Japanese manufacturing activity swung back into contraction in May as export orders fell at the fastest pace in four months, highlighting why policy makers and investors remain anxious about the growing economic impact of a bruising Sino-U.S. trade war. The Markit/Nikkei Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 49.6 in May from a final 50.2 in the previous month.”

May 21 – Reuters (Leika Kihara): “A sales tax hike scheduled for October could derail Japan’s economic recovery, a central bank board member said…, noting more monetary stimulus would be needed if a slowdown hampered the bank’s efforts to boost prices. Yutaka Harada, a pro-stimulus member of the Bank of Japan’s board, warned the country’s economy was already hurt by sluggish exports and output, and that the tax increase would compound the slowdown.”

EM Watch:

May 21 – Bloomberg (Cagan Koc and Constantine Courcoulas): “Turkey is paying the price for its pre-election efforts to tinker with the markets. As a controversial vote rerun looms, a barrage of interventionist policies by President Recep Tayyip Erdogan’s government has backfired, starving the economy of investment, fueling demand for foreign currency among households and businesses and further undermining the lira. Despite repeated assurances that capital controls aren’t an option, Turkey has sought to stabilize its currency by reintroducing a tax on foreign-currency sellers and imposing a settlement delay for purchases by individuals of more than $100,000.”

May 18 – Reuters (Ece Toksabay): “Turkish President Tayyip Erdogan said the West was putting pressure on the Turkish lira, inflation and interest rates, but that these ‘games’ would be thwarted after a re-run of Istanbul’s mayoral election in June. ‘Ahead of the last election, the West tried to corner us by applying pressure on the currency, interest rates and inflation,’ Erdogan said… ‘All these games will be thwarted once we get over the election,’ he said, after Turkey’s election board ruled on a re-run of March’s election, which was won by the main opposition candidate in a shock loss for Erdogan’s party.”

May 22 – Reuters (Alasdair Pal and Mayank Bhardwaj): “Indian Prime Minister Narendra Modi scored a dramatic election victory…, putting his Hindu nationalist party on course to increase its majority on a mandate of business-friendly policies and a tough stand on national security. His re-election reinforces a global trend of right-wing populists sweeping to victory, from the United States to Brazil and Italy, often after adopting harsh positions on protectionism, immigration and defense.”

Global Bubble Watch:

May 20 – Bloomberg (Enda Curran): “U.S. restrictions on China’s telecom giant Huawei threatens to snuff out a nascent recovery in semiconductor demand, a key driver of economic growth in technology powerhouses including South Korea and Taiwan. China dominates purchases from Asian semiconductor exporters and bought 51% of their exports in 2017, according to… Citigroup Inc. economists Jin-Wook Kim and Johanna Chua.”

May 21 – Reuters (Guy Faulconbridge and Maytaal Angel): “British Steel, the country’s second largest steel producer, is on the brink of collapse unless the government agrees to provide an emergency 30 million pound ($38 million) loan… British Steel said negotiations had not concluded and it continues to work with all parties to secure the future of the business.”

Fixed-Income Bubble Watch:

May 21 – Bloomberg (Adam Tempkin): “Debt graders are giving high ratings to riskier and riskier bonds from online lenders, Fitch… warned in a report that swipes at rival firms like Kroll Bond Rating Agency. Bonds backed by loans from startups like Avant, Prosper Marketplace and LendingClub Corp. have weaker safeguards for investors than they did two years ago, but are still earning ratings in the A tier or higher, Fitch said. If the economy sours and borrowers default in greater numbers, the notes could be subject to downgrades.”

Geopolitical Watch:

May 21 – Reuters (Tom Miles): “The risk of nuclear weapons being used is at its highest since World War Two, a senior U.N. security expert said…, calling it an ‘urgent’ issue that the world should take more seriously. Renata Dwan, director of the U.N. Institute for Disarmament Research (UNIDIR), said all states with nuclear weapons have nuclear modernization programs underway and the arms control landscape is changing, partly due to strategic competition between China and the United States.”

May 20 – South China Morning Post: “China’s Foreign Ministry said… that it ‘strongly urges the US to stop such provocative actions’ after Washington said one of its warships sailed near the disputed Scarborough Shoal, claimed by China, in the South China Sea. Navigation of the waterway is one of the flashpoints in US-China relations as the world’s two biggest economic powers continued their trade tariff war.”

May 22 – Reuters (Idrees Ali): “Taiwan is one of a growing number of flashpoints in the U.S.-China relationship, which also include a bitter trade war, U.S. sanctions and China’s increasingly muscular military posture in the South China Sea, where the United States also conducts freedom-of-navigation patrols. The voyage will be viewed by self-ruled Taiwan as a sign of support from the Trump administration amid growing friction between Taipei and Beijing, which views the island as a breakaway province.”

May 18 – Reuters (Marwa Rashad and Stephen Kalin): “U.S. President Donald Trump issued a new threat to Tehran…, tweeting that a conflict would be the ‘official end’ of Iran, as Saudi Arabia warned it stood ready to respond with ‘all strength’ and said it was up to Iran to avoid war… ‘If Iran wants to fight, that will be the official end of Iran. Never threaten the United States again!’ Trump said in a tweet without elaborating.”

May 20 – CNBC (Tom DiChristopher and Patti Domm): “Iran is ramping up its uranium output, a provocative step that threatens to further inflame simmering tensions with the United States and deepen regional conflict following a series of dangerous escalations in the Middle East. Iranian production of low-enriched uranium has recently increased fourfold, putting the nation on a path to exceed limits on nuclear materials set out in a 2015 agreement with world powers…”

May 22 – Reuters (Babak Dehghanpisheh): “Iran’s youth will witness the demise of Israel and American civilization, Iran’s Supreme Leader Ayatollah Ali Khamenei said… ‘You young people should be assured that you will witness the demise of the enemies of humanity, meaning the degenerate American civilization, and the demise of Israel,’ Khamenei said in a meeting with students.”

May 22 – Reuters (Mohamed El-Sherif): “Yemen’s Iran-aligned Houthi movement launched a drone attack on Saudi Arabia’s Najran airport, the group’s Al Masirah TV said… It said it targeted hangars containing war planes.”

May 21 – Reuters (Michelle Nichols): “North Korea stepped up its campaign… for the United States to return a seized cargo ship belonging to Pyongyang, warning Washington that it had violated its sovereignty in a move that could affect ‘future developments’ between the countries.”

May 19 – Reuters (Vladimir Soldatkin): “Venezuelan Oil Minister Manuel Quevedo said… his country’s economy and oil industry was under economic and financial siege by the U.S. government. ‘This therefore generates disturbances in the flow of oil supply to the world market as well as serious economic damage and suffering to the Venezuelan people,’ he said…”

May 22 – Reuters (Susan Heavey): “U.S. fighter jets intercepted several Russian bombers in international airspace off the coast of Alaska…, in the fourth and fifth such incursions this year, U.S. military officials said…”

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