July 10, 2020: Utmost Crazy

The Shanghai Composite surged 7.3% this week, increasing y-t-d gains to 10.9%. The CSI 300 rose 7.6%, with 2020 gains of 16.0%. China’s growth-oriented ChiNext Index’s 12.8% surge boosted year-to-date gains to 54.5%. Copper jumped 7.1% this week. Aluminum rose 4.6%, Nickel 4.0%, Zinc 8.3%, Silver 4.2%, Lead 4.2%, and Palladium 3.5%. China’s renminbi advanced 0.9% this week to a four-month high versus the less-than-king dollar.

July 9 – Bloomberg: “Like millions of amateur investors across China, Min Hang has become infatuated with the country’s surging stock market. ‘There’s no way I can lose,’ said the 36-year-old, who works at a technology startup… ‘Right now, I’m feeling invincible.’ Five years after China’s last big equity boom ended in tears, signs of euphoria among the nation’s investing masses are popping up everywhere. Turnover has soared, margin debt has risen at the fastest pace since 2015 and online trading platforms have struggled to keep up. Over the past eight days alone, Chinese stocks have added more than $1 trillion of value — far outpacing gains in every other market worldwide.”

China’s Total Aggregate Financing (TAF) expanded a much stronger-than-expected $490 billion in June, up from May’s $455 billion expansion and 30% above growth from June 2019. TAF surged a remarkable $2.976 TN during the first-half, 43% ahead of comparable 2019 (80% ahead of first-half 2018).

It’s not easy to place China’s ongoing historic Credit expansion in context. While not a perfect comparison, U.S. Total Non-Financial Debt (NFD) expanded a record $3.3 TN over the four quarters ended March 31st. In booming 2007, U.S. NFD expanded about $2.5 TN. Chinese Total Aggregate Financing has expanded almost $3.0 TN in six months.

In the face of economic contraction, TAF increased a blistering $4.39 TN, or 12.8%, over the past year. For perspective, y-o-y growth began 2020 at 10.7% – and is now expanding at the strongest pace since February 2018. Beijing is targeting TAF growth of $4.3 TN (30 TN yuan) for 2020, about 25% ahead of record 2019 growth (and up 45% from 2018 growth).

China’s New Bank Loans expanded $259 billion in June, up from May’s $212 billion and 9% ahead of June 2019. At $1.727 TN, year-to-date New Loans are running 25% ahead of comparable 2019. Consumer lending has bounced back, likely fueled by some pent-up demand for mortgage Credit. At $140 billion, Consumer Loan growth was up from May’s $101 billion and 29% above June 2019 growth. The $509 billion year-to-date expansion in Consumer Loans was 4% below comparable 2019. Yet Consumer Loans were up 14% y-o-y; 33% in two years; 59% in three; and 135% over five years.

China’s M2 money supply expanded $496 billion during June to $30.5 TN, an almost 20% annualized pace. Over six months, M2 surged $2.120 TN, or 14.7% annualized. At 11.1%, year-over-year M2 growth has been running at the strongest pace since January 2017. M2 expanded 20.6% over two years; 30.9% over three; and 60.1% in five years, in one of history’s spectacular monetary expansions.

For perspective, U.S. M2 rose a record $950 billion during 2019. China’s M2 expansion more than doubled this amount in only six months. And with U.S. M2 up over $3 TN, combined Chinese and U.S. first-half “money” supply growth approached an incredible $5.2 TN.

July 7 – Wall Street Journal (Jacky Wong): “Analysts fret that U.S. markets have become irrational thanks to so-called ‘Robinhood’ retail traders with plenty of time on their hands. But American markets have nothing on China. Chinese stock markets have been on a tear lately: the CSI 300 index, a gauge of the largest companies listed in Shanghai and Shenzhen, has gained 14% just in the past week… What really seems to have gotten Chinese investors excited however, is state media’s sudden switch to a bullish tone. A Monday front-page editorial in the state-owned China Securities Journal said it’s now important to foster a ‘healthy bull market’—in part because of more ‘complicated’ global trade and economic relations.”

It is a central tenet of Credit Bubble Analysis that things turn “Crazy” near the end of cycles. And with the thesis that we’re in the concluding (“Terminal”) phase of a multi-decade, super-cycle global Bubble, there’s been every reason to foresee Utmost Craziness.

In the most simplified terms, Bubbles inherently gather momentum and inflate to dangerous extremes.  Mounting fragilities ensure policymakers employ the increasingly outrageous measures demanded to hold collapse at bay. Craziness is cultivated by a confluence of late-cycle intense monetary inflation (i.e. QE and speculative leverage) and deeply ingrained speculative impulses.

The bigger the Bubble, the more intense the speculative fervor; the greater the attendant government intervention; and the more convinced market participants become that officials won’t allow a bust. Throw Trillions at systems already acutely prone to Bubble excess and you’re courting disaster (that’s you, Washington and Beijing).

The global nature of Bubble Dynamics makes this period unique. And while Europe, Japan and EM are important contributors, the global Bubble is foremost underpinned by historic U.S. and Chinese monetary inflation. That these two countries are increasingly bitter rivals adds unique challenges to Bubble analysis.

The irony of it all: China’s communist party readily promoting the stock market. Do they have much choice? The Federal Reserve over three decades shifted away from the traditional model of affecting bank lending – elevating the financial markets to the primary policy stimulus mechanism. Instead of measured interest-rate reductions, on the margin, stimulating bank lending, the Fed has resorted to Trillions of securities purchases (QE) and zero rates to directly trigger market speculation and asset inflation. This model proved an absolute boon to U.S. markets, the economic expansion, the dollar and broader U.S. global influence. To compete, Beijing knew what it had to do.

The Nasdaq100 is up 23%, lagging China’s ChiNext Index’s 54% 2020 gain. These competing superpowers are increasingly in hand-to-hand combat for technological supremacy and global dominance. It is also apparent that these two economies will be “decoupling” – in an increasingly unsettled, bi-polar world. The relationship has of late commenced an ominous free-fall.

They do, however, share some commonality. The U.S. and China are both targeting securities markets to reflate their faltering Bubbles. Typically, the primary risks associated with exacerbating Bubble excess would be domestic-focused – i.e. increasingly unstable markets, economic maladjustment/fragility, and heightened social and political instability. Yet today’s backdrop adds a critical geopolitical component. Both face the momentous consequences that collapsing markets would entail for their competing global interests. Stakes are incredibly high – and policymakers respond accordingly.

Chinese equities have been booming, and sentiment has turned bullish on China’s economic recovery.  I’m unimpressed. Considering the unprecedented monetary stimulus along with pent-up demand, recovery is thus far unremarkable. Especially with surging COVID cases globally, China export sector struggles will be ongoing. And I question the wisdom of further stoking China’s historic apartment Bubble. I’ll be surprised if Chinese consumers don’t remain at least somewhat cautious for months to come. But if Beijing is hellbent on spurring a recovery, I wouldn’t bet against them in the short-term.

A combined $5.0 TN of new (U.S. and Chinese) “money” supply ensures epic distortions. For one, “money” has flooded into global securities markets. This has fomented an extraordinary reversal of short positions and hedges across global risk markets – equities, corporate Credit, commodities and currencies. Financial conditions have loosened markedly, with risk markets in the throes of a historic short squeeze.

July 8 – Financial Times (Laurence Fletcher): “Lansdowne Partners’ decision this week to shut its flagship hedge fund has dealt a big blow to a key strategy — equity long/short — that is already struggling to find losers in stimulus-soaked markets. The move by the… fund… marks a major retreat by an industry pioneer. It also highlights how tough life has become in the years since the financial crisis for managers trying to pick out overpriced stocks during a seemingly unstoppable bull run. ‘It is much harder to see opportunities in the short book, either in terms of generating specific value or as a hedging offset to the long investments,’ wrote Peter Davies and Jonathon Regis, managers of the Lansdowne Developed Markets fund… Lansdowne’s problems reflect the wider challenges facing the $830bn-in-assets equity long/short hedge fund sector.”

Tesla was up another 28% this week, boosting one-month gains to 51% and its year-to-date advance to 269%. With market capitalization of $287 billion, Tesla is the poster child for stock prices divorced from underlying fundamentals. Yet this dynamic is anything but limited to big Nasdaq stocks. At this point, panic buying and short squeeze dynamics have destabilized markets – from U.S. and Chinese equities to global stocks, corporate bonds and commodities. Did Beijing this week willfully administer a deathblow to shorts in Chinese equities and the renminbi – a squeeze that quickly broadened to the industrial commodities and global equities, more generally?

It’s not unusual for short squeezes to unfold even in the face of deteriorating fundamentals. There is often a final “blow-off” fueled by a confluence of speculative excess, panicked short covering, and derivative-related trading. It’s a key facet of late-cycle Craziness.

That sick feeling in my stomach returned this week: this is out of control. COVID is out of control. Market speculation is out of control. And it’s this combination that recalls the unease I was experiencing back in February, as a speculative marketplace was content to completely disregard mounting pandemic risk.

It’s difficult to fathom the almost 400,000 new U.S. COVID infections since last Friday’s CBB. Hopes from just a few weeks ago of a return to a semblance of normalcy have been crushed. The specter of overflowing ICUs and hospital wards has returned – but instead of NYC it will unfold in cities and towns across the entire southern U.S. And it looks like a replay of PPE and COVID test shortages.

And what the future holds appears more unsettled today than even in March and April. Back then we believed there was a curve to flatten. With shared sacrifice, we’d overcome the pandemic. It was not that many weeks ago when the estimate for COVID-related deaths was revised sharply lower to 60,000. Our nation has lost 134,000.

A harsh reality has begun to set in. At this point, no one – or any model – has a clue as to how many will perish – or even the general trajectory of this pandemic. The relatively low daily death rate was early in the week still a talking point for the dismissive. The daily death count surpassed 800 by the end of the week – on the way to 1,000, 2,000 or even higher?

Will the most populated states in the country be forced to dramatically tighten restrictions? Texas, Georgia, California and others are contemplating a return to “lockdown” conditions. Does this widely dispersed outbreak portend a major nationwide spike in infections – in cities, towns and rural communities? Are we prepared? Have we procured sufficient supplies?

Stocks are surging, so the economic recovery must not be at risk, right? Yet it’s difficult for me to see how the economy – at home and abroad – isn’t facing serious chronic problems. We’re only weeks away from the start of a new school year – and there’s little clarity. College football games are being cancelled and the entire season is slipping away. It’s simply difficult to comprehend what a mess we’ve made of things. Outrage is justified.

In Miami, apparently only 17% of new infections are generating follow-up contact tracing. Beyond the lack of sufficient tracer personnel, many newly infected are simply refusing to cooperate with local authorities. As a nation – from top leadership to us common citizens – we’ve got to quickly get our crap together and approach this crisis with more of a wartime mindset. Surging stock prices notwithstanding, there’s more than a small probability (10%, 20% – 50%?) of a quite problematic scenario.

Meanwhile, divisions, partisan infighting and a proliferation of nonsense are inflicting irreparable damage. Zerohedge uses this photo of Putin with a mischievous grin enjoying his bucket of popcorn. I imagine Xi and Putin chatting affably on a secure line in utter amazement – giggling.

For the Week:

The S&P500 gained 1.8% (down 1.4% y-t-d), and the Dow rose 1.0% (down 8.6%). The Utilities were unchanged (down 9.3%). The Banks gained 1.0% (down 35.3%), and the Broker/Dealers surged 3.7% (down 3.8%). The Transports increased 0.8% (down 14.6%). The S&P 400 Midcaps slipped 0.3% (down 14.1%), and the small cap Russell 2000 declined 0.6% (down 14.7%). The Nasdaq100 advanced 4.8% (up 24.1%). The Semiconductors surged 3.8% (up 11.9%). The Biotechs rose 1.5% (up 16.5%). With bullion rising $27, the HUI gold index jumped 6.8% (up 28.8%).

Three-month Treasury bill rates ended the week at 0.1225%. Two-year government yields were unchanged at 0.16% (down 141bps y-t-d). Five-year T-note yields added a basis point to 0.31% (down 139bps). Ten-year Treasury yields declined two bps to 0.65% (down 127bps). Long bond yields dropped nine bps to 1.34% (down 105bps). Benchmark Fannie Mae MBS yields sank 13 bps to 1.43% (down 128bps).

Greek 10-year yields gained five bps to 1.20% (down 23bps y-t-d). Ten-year Portuguese yields slipped a basis point to 0.42% (down 2bps). Italian 10-year yields declined three bps to 1.23% (down 19bps). Spain’s 10-year yields slipped three bps to 0.41% (down 6bps). German bund yields declined three bps to negative 0.47% (down 28bps). French yields fell three bps to negative 0.14% (down 26bps). The French to German 10-year bond spread was unchanged at 33 bps. U.K. 10-year gilt yields declined three bps to 0.16% (down 67bps). U.K.’s FTSE equities index fell 1.0% (down 19.2%).

Japan’s Nikkei Equities Index was little changed (down 5.8% y-t-d). Japanese 10-year “JGB” yields were unchanged at 0.03% (up 4bps y-t-d). France’s CAC40 declined 0.7% (down 16.9%). The German DAX equities index gained 0.8% (down 4.6%). Spain’s IBEX 35 equities index fell 1.1% (down 23.3%). Italy’s FTSE MIB index increased 0.2% (down 15.9%). EM equities were mixed. Brazil’s Bovespa index jumped 3.4% (down 13.5%), while Mexico’s Bolsa sank 3.9% (down 16.3%). South Korea’s Kospi index was little changed (down 2.2%). India’s Sensex equities index rose 1.6% (down 11.3%). China’s Shanghai Exchange surged 7.3% (up 10.9%). Turkey’s Borsa Istanbul National 100 index slipped 0.8% (up 0.3%). Russia’s MICEX equities index was unchanged (down 8.0%).

Investment-grade bond funds saw inflows of $7.180 billion, and junk bond funds posted positive flows of $2.131 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined three bps to a record low 3.03% (down 72bps y-o-y). Fifteen-year rates fell five bps to 2.51% (down 71bps). Five-year hybrid ARM rates added two bps to 3.02% (down 44bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to 3.26% (down 87bps).

Federal Reserve Credit last week contracted $60.5bn to $6.915 TN, with a 44-week gain of $3.193 TN. Over the past year, Fed Credit expanded $3.140 TN, or 83%. Fed Credit inflated $4.104 Trillion, or 146%, over the past 400 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $11.4 billion last week to $3.403 TN. “Custody holdings” were down $55.6bn, or 1.6%, y-o-y.

M2 (narrow) “money” supply declined $4.7bn last week to $18.424 TN, but with an unprecedented 18-week gain of $2.917 TN. “Narrow money” surged $3.590 TN, or 24.2%, over the past year. For the week, Currency increased $6.0bn. Total Checkable Deposits slipped $4.4bn, while Savings Deposits were little changed. Small Time Deposits fell $7.9bn. Retail Money Funds added $1.8bn.

Total money market fund assets were about unchanged at $4.656 TN. Total money funds surged $1.403 TN y-o-y, or 43.1%.

Total Commercial Paper dropped $10.7bn to $1.007 TN. CP was down $137bn, or 12.0% year-over-year.

Currency Watch:

For the week, the U.S. dollar index declined 0.5% to 96.657 (up 0.2% y-t-d). For the week on the upside, the South African rand increased 1.5%, the Swedish krona 1.3%, the British pound 1.1%, the New Zealand dollar 0.7%, the Japanese yen 0.5%, the Norwegian krone 0.5%, the Swiss franc 0.5%, the euro 0.5%, the Singapore dollar 0.3%, and the Australian dollar 0.2%. For the week on the downside, the South Korean won declined 0.5%, the Canadian dollar 0.3%, the Mexican peso 0.3% and the Brazilian real 0.2%. The Chinese renminbi increased 0.92% versus the dollar this week (down 0.55% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 1.5% (down 17.6% y-t-d). Spot Gold rose 1.5% to $1,799 (up 18.5%). Silver surged 4.2% to $19.08 (up 6.5%). WTI crude increased 30 cents to $40.62 (down 34%). Gasoline jumped 3.0% (down 24%), while Natural Gas declined 0.5% (down 17%). Copper surged 7.1% (up 4%). Wheat jumped 8.8% (down 4%). Corn fell 2.1% (down 13%).

Coronavirus Watch:

July 10 – Reuters (Lisa Shumaker): “New cases of COVID-19 rose by over 69,000 across the United States on Friday, according to a Reuters tally, setting a record for the third consecutive day… A total of nine U.S. states – Alaska, Georgia, Idaho, Iowa, Louisiana, Montana, Ohio, Utah and Wisconsin – also reached records for single-day infections. In Texas, another hot zone, Governor Greg Abbott warned on Friday he may have to impose new clampdowns if the state cannot stem its record-setting caseloads and hospitalizations through masks and social distancing… Overall, coronavirus cases are rising in 44 American states, based on a Reuters analysis of cases for the past two weeks…”

July 8 – Reuters (Gayle Issa): “Global coronavirus cases exceeded 12 million on Wednesday…, as evidence mounts of the airborne spread of the disease that has killed more than half a million people in seven months. The number of cases is triple that of severe influenza illnesses recorded annually, according to the World Health Organization.”

July 8 – AFP (Patrick Galey): “Potentially fatal COVID-19 complications in the brain including delirium, nerve damage and stroke may be more common than initially thought, a team of British-based doctors warned… Severe COVID-19 infections are known to put patients at risk of neurological complications, but research led by University College London suggests serious problems can occur even in individuals with mild cases of the virus. The team looked at the neurological symptoms of 43 patients hospitalised with either confirmed or suspected COVID-19. They found 10 cases of temporary brain dysfunction, 12 cases of brain inflammation, eight strokes and eight cases of nerve damage. Most of those patients with inflammation were diagnosed with acute disseminated encephalomyelitis (ADEM) — a rare condition typically seen in children after viral infections.”

July 7 – CNN (Christina Maxouris and Amir Vera): “In the span of a week and a half, the number of coronavirus cases in the United States has doubled, yet officials are saying this is still the first wave of the pandemic. ‘We are still knee-deep in the first wave of this,’ Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said… ‘I would say, this would not be considered a wave. It was a surge, or a resurgence of infections superimposed upon a baseline … that really never got down to where we wanted to go.’ … ‘We are in free fall,’ said Dr. Rochelle Walensky, chief of infectious diseases at Massachusetts General Hospital.”

July 7 – CNBC (Noah Higgins-Dunn): “Texas reported more than 10,000 new Covid-19 cases Tuesday, a record-breaking daily surge as the state responds to a growing outbreak and rising hospitalizations. The Texas Health and Human Services Commission reported 10,028 new cases, which surpasses the state’s previous record of nearly 8,260 cases set on July 4.”

July 6 – CNBC (Noah Higgins-Dunn): “Texas had more than 8,000 hospitalized Covid-19 patients on Sunday, a record number of hospitalizations and one of the highest in the country… The number of people hospitalized with Covid-19 grew by 5% or more Sunday in 23 states, based on a seven-day moving average…”

July 6 – Reuters (Sharon Bernstein, Dan Whitcomb and Lisa Shumaker): “New coronavirus cases soared in California over the July Fourth weekend, stressing some hospital systems and leading to the temporary closure of the state capitol building in Sacramento for deep cleaning… The number of people hospitalized with COVID-19 has increased by 50% over the past two weeks to about 5,800…”

July 6 – CNBC (Chloe Taylor): “It is not a ‘safe bet’ to rely on immunity to Covid-19 as a strategy for coping with the pandemic, one expert has warned, adding that herd immunity strategies were ‘probably never going to work.’ Speaking… on CNBC…, Danny Altmann, professor of immunology at Imperial College London, said that in towns and cities where there had been coronavirus infections, only 10% to 15% of the population was likely to be immune. ‘And immunity to this thing looks rather fragile — it looks like some people might have antibodies for a few months and then it might wane, so it’s not looking like a safe bet… It’s a very deceitful virus and immunity to it is very confusing and rather short-lived.’”

July 5 – The Hill (Kristin Tate): “A combination of the coronavirus pandemic, economic uncertainty, and social unrest is prompting waves of Americans to move from large cities and permanently relocate to more sparsely populated areas. The trend has been accelerated by technology and shifting attitudes that make it easier than ever to work remotely. Residents of all ages and incomes are moving in record numbers to suburban areas and small towns.”

Market Instability Watch:

July 9 – Bloomberg (Joanna Ossinger): “Markets are still struggling to restore liquidity after the Covid-19 meltdown and that may leave them exposed to new shocks, according to JPMorgan… ‘Liquidity conditions have improved considerably, though not fully, and overall functioning has mostly been restored, but markets remain in an unstable equilibrium and vulnerable to shocks,’ strategists including Joyce Chang, Nikolaos Panigirtzoglou and Marko Kolanovic wrote… Strategists have been cautioning on tight liquidity and fragility for some time, citing everything from the growth of passive investing to high-frequency trading as factors that could exacerbate market stress, particularly when volatility spikes.”

July 7 – Reuters (Howard Schneider and Jonnelle Marte): “A surge in coronavirus cases that threatens to pinch consumer spending and job gains just as some stimulus programs are due to expire has Federal Reserve policymakers worried, with at least one pledging more support ahead from the U.S. central bank. ‘We have a lot of accommodation in place; there’s more that we can do, there’s more that we will do,’ Fed Vice Chair Richard Clarida told CNN… There is ‘no limit’ to the amount of bond buying the Fed can do, he said…”

July 7 – Financial Times (Colby Smith and Eric Platt): “Investors are betting on big swings in US stock prices, even as benchmark equity indices push steadily higher and darlings like Tesla and Amazon surge to new records. The Cboe’s Vix index of equity market volatility, often referred to as Wall Street’s fear gauge, remains 41% above its historic average at nearly 28. Another longer-term measure of US stock volatility is 50% above its long-term average, according to the Cboe.”

July 7 – Bloomberg (Annie Massa and Katherine Greifeld): “Vanguard Group’s U.S. exchange-traded funds attracted inflows of about $89 billion in the first half, surging ahead of industry leader BlackRock Inc. in a volatile period. BlackRock took in an estimated $38 billion… Vanguard’s dominance contrasts with the first half of 2019, when BlackRock led its main rival by about $1.9 billion.”

Global Bubble Watch:

July 6 – Financial Times (James Politi): “When things cannot go on forever, they stop. And so it is with China’s support of the US dollar. Foreigners sold more than $500bn of US government bonds during the second quarter, and perhaps one-third of that was unloaded by Chinese entities. The trend is worth watching. Ever since 2001, when China was allowed unfettered entry into the World Trade Organization, the country has played a huge behind-the-scenes role in pushing up the value of the US currency and suppressing US bond yields. In barely two decades, China’s share of the $140tn pool of global liquidity — defined as total savings plus credit — leapt from about 6% to well over 25%. China invoices goods in US dollars, invests in US dollars and provides timely countercyclical boosts of fiscal and monetary policy for its dollar-hungry economy.”

July 9 – Bloomberg (Theophilos Argitis, Esteban Duarte and Kait Bolongaro): “Justin Trudeau’s government made every effort… to convince Canadians the country can afford a deficit that will soar to 16% of economic output this year. Its actions suggest there’s some worry. In the same budget update that forecast a C$343 billion ($254bn) deficit, Finance Minister Bill Morneau announced a significant shift in strategy toward issuing longer-dated bonds… The idea is to lock in as debt at current borrowing costs for as long as possible, to ensure public debt charges don’t surge in the future. With federal debt surpassing C$1 trillion for the first time ever, the risk is real.”

July 6 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “The valuation of Asian shares surged to a 10-1/2-year high in June, tracking a rally in global stocks, as upbeat U.S. and China data renewed hopes of a swift economic recovery, offsetting concerns over rising coronavirus cases.”

Trump Administration Watch:

July 9 – CBS (Patrick Goodenough): “Secretary of State Mike Pompeo… characterized China as a malign world actor, blaming the ‘repressive regime’ for the spread of the coronavirus, aggressive behavior towards neighboring countries, and human rights abuses at home… And towards the end of the press briefing, Pompeo again mentioned the Chinese president by name as he voiced confidence that many across the world were becoming aware of the CCP’s ‘true colors,’ and would respond accordingly. ‘I am convinced more than ever that the free peoples of the world will come to understand the threat that’s presented, not only internally inside of China, but importantly, that the impact that General Secretary Xi has on the world is not good for free peoples and democracy-loving peoples,’ he said.”

July 10 – CNBC (Kevin Breuninger): “President Donald Trump said Friday that he isn’t thinking about a possible next stage of the U.S. trade deal with China, adding that the relationship between the two nations has been ‘severely damaged’ by the coronavirus pandemic. ‘They could have stopped the plague. They could have stopped it. They didn’t stop it,’ Trump said on Air Force One en route to Florida…”

July 7 – Bloomberg (Nick Wadhams, Jenny Leonard, Jennifer Jacobs and Saleha Mohsin): “Some top advisers to President Donald Trump want the U.S. to undermine the Hong Kong dollar’s peg to the U.S. dollar as the administration considers options to punish China for recent moves to chip away at the former British colony’s political freedoms… The idea of striking against the Hong Kong dollar peg — perhaps by limiting the ability of Hong Kong banks to buy U.S. dollars — has been raised as part of broader discussions among advisers to Secretary of State Michael Pompeo and hasn’t been elevated to the senior levels of the White House, suggesting that it hasn’t gained serious traction yet…”

July 6 – Reuters (Doina Chiacu and Susan Heavey): “U.S. President Donald Trump is considering several executive orders targeting China, manufacturing and immigration, his chief of staff Mark Meadows told reporters… ‘It’s dealing with a number of executive orders that may go all the way from dealing with some of the immigration issues that we have before us, to some of the manufacturing and jobs issues that are before us, and ultimately dealing with China, in what we need to do there in terms of resetting that balance,’ Meadows said.”

July 6 – Reuters (Kanishka Singh and Shubham Kalia): “Secretary of State Mike Pompeo said… that the United States is ‘certainly looking at’ banning Chinese social media apps, including TikTok, suggesting it shared information with the Chinese government, a charge it denied. ‘I don’t want to get out in front of the President (Donald Trump), but it’s something we’re looking at,’ Pompeo said in an interview with Fox News.”

July 8 – Reuters (Humeyra Pamuk): “The Trump administration will take steps to ensure the Chinese government does not gain any access to the private information of American citizens through telecommunications and social media, U.S. Secretary of State Mike Pompeo said…, when asked if the U.S. was planning to ban Chinese-owned app Tiktok.”

July 7 – Wall Street Journal (Michelle Hackman and Melissa Korn): “The Trump administration’s latest rules on international students are leaving colleges in a bind: hold in-person classes—a proposition many have deemed too dangerous—or risk losing enrollees from abroad. Under the policy…, international students won’t be allowed to enter or remain in the country if their universities opt to teach classes entirely online this fall. And should institutions that start with in-person classes this fall revert to all remote teaching if the coronavirus pandemic worsens, international students would need to leave… The news caught colleges and universities off guard, particularly after the generous posture the administration had taken as schools began closing down in the spring.”

July 6 – Reuters (Michelle Price, David Lawder and Lawrence Delevingne): “A high-profile pandemic aid program protected about 51.1 million American jobs, the Trump administration said…, as it revealed how $521.4 billion in taxpayer cash was injected into small businesses but also into the pockets of the rich and famous… Those include several firms that lobby on public policy, such as Wiley Rein LLP and APCO Worldwide, as well as prominent law firms like Kasowitz Benson Torres LLP, which has represented President Donald Trump, and Boies Schiller Flexner LLP.”

July 6 – Associated Press: “The Latest on the Treasury decision to identify hundreds of thousands of businesses that received funding through the Paycheck Protection Program, created to preserve jobs at smaller businesses during the coronavirus pandemic: The financial services industry received roughly $27 billion from the Paycheck Protection Program, the coronavirus-relief fund aimed at helping small businesses… The list of borrowers includes a handful of banks, but the money mostly when to securities brokerages, financial advisers and hedge funds. Real estate investment companies, which are grouped in with other financial services as part of the data, were also a big recipient of funds.”

Federal Reserve Watch:

July 7 – Wall Street Journal (Andrew Ackerman): “Global policy makers responded decisively to the coronavirus outbreak earlier this year but the financial system isn’t out of the woods yet, a top Federal Reserve official said… ‘The COVID event is not behind us yet,’ Randal Quarles, the Fed’s vice chairman for financial regulation, said… ‘We know that the financial system will face more challenges.’… Many households face ‘bleak’ employment prospects, Mr. Quarles said, and the next phase of the pandemic will ‘inevitably involve an increase in nonperforming loans and provisions as demand falls and some borrowers fail.’”

July 6 – Financial Times (James Politi): “A senior Federal Reserve official has warned that the rebound in the world’s largest economy is in danger of stalling as a result of the recent spike in coronavirus infections… Raphael Bostic, the president of the Federal Reserve Bank of Atlanta… said high-frequency data had shown a ‘levelling off’ of economic activity both in terms of business openings and mobility. ‘There are a couple of things that we are seeing and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise… And so we’re watching this very closely, trying to understand exactly what’s happening.’”

July 7 – Reuters (Howard Schneider): “The surge in U.S. coronavirus cases has made business owners ‘nervous again,’ Atlanta Federal Reserve Bank President Raphael Bostic said…, and prompted him to focus on company decisions over the next three to six weeks. ‘We are hearing it more and more as we get more data. People are getting nervous again. Business leaders are getting worried. Consumers are getting worried. And there is a real sense this might go on longer than we have planned for,’ Bostic said…”

U.S. Bubble Watch:

July 5 – Bloomberg (Simon Kennedy): “Goldman Sachs… economists revised down their estimates for the U.S. economy this quarter, but predicted it will be back on track in September after some states imposed fresh restrictions to combat the coronavirus… The economists said they now expect the economy to grow 25% in the third quarter having previously predicted 33%. That would result in the economy slumping 4.6% this year, worse than the 4.2% previously seen.”

July 9 – Reuters (Lucia Mutikani): “New applications for U.S. jobless benefits fell last week, but a record 32.9 million Americans were collecting unemployment checks in the third week of June, suggesting the labor market was struggling to claw out of the COVID-19 pandemic slump… Initial claims for state unemployment benefits dropped 99,000 to a seasonally adjusted 1.314 million for the week ended July 4. That was the 14th straight weekly decline. Economists polled by Reuters had forecast 1.375 million applications in the latest week.”

July 8 – Associated Press (Sarah Skidmore Sell): “Renters are nearing the end of their financial rope. People who rent have largely been able to survive the initial months of the pandemic helped by unemployment and federal relief checks. But the extra $600 in unemployment benefits ceases at the end of July and local eviction moratoriums are expiring. There is no agreement between the White House and Congress on a second federal relief package. More broadly, there are fewer supports in place for renters than for homeowners. And as a jump in virus cases in numerous states nationwide adds more uncertainty to the economy and job market, many who rent are facing a precarious future.”

July 10 – New York Times (Conor Dougherty): “When California shut down its economy in March, it became a model for painful but aggressive action to counter the new coronavirus. The implicit trade-off was that a lot of upfront pain would help slow the spread, allowing the state to reopen sooner and more triumphantly than places that failed to act as decisively. But the virus had other plans, and now the state’s economy is in retrenchment mode again. For the nation, this means that an important center of its output — a magnet of summer tourism and home to the technology and entertainment industries along with the world’s busiest port operation — is unlikely to regain momentum soon when growth is needed most. For the state, it means a progressive agenda predicated on the continuation of good times will be hampered as governments move from expansion to cuts. Voters had mostly been open to paying for expanding services and priorities like affordable housing, but they seem to be turning wary of new taxes.”

July 8 – Wall Street Journal (Karen Langley): “U.S. companies scrambling to withstand the coronavirus pandemic unveiled in the second quarter their steepest dividend cuts since 2009, though the pace of cuts appears to have slowed. Shareholders were notified of a net $42.5 billion reduction in dividends on common stock in the second quarter, according to S&P Dow Jones Indices… The analysis excluded companies with market values of less than $25 million. The net reduction is the largest since the first quarter of 2009, when the total was $43.8 billion.”

July 9 – Wall Street Journal (Corrie Driebusch): “Since the coronavirus pandemic began, companies looking to bolster their balance sheets have rushed to sell stock in record amounts. The result has been a resurgence in fees to Wall Street banks in a high-margin area that had languished for years… Thanks to a flood of new-stock issuance and a resilient IPO market, companies raised nearly $190 billion from the end of March through the end of June, the most ever in a single quarter for the U.S. equity-capital markets, according to Dealogic…”

July 6 – Reuters (Lucia Mutikani): “U.S. services industry activity rebounded sharply in June, almost returning to its pre-COVID-19 pandemic levels, but a resurgence in coronavirus cases that has forced some restaurants and bars to close again threatens the emerging recovery. The Institute for Supply Management (ISM) said… its non-manufacturing activity index jumped to a reading of 57.1 last month…”

July 8 – CNBC (Diana Olick): “After a brief pullback at the end of June, homebuyers rushed back into the mortgage market last week, taking advantage of record-low mortgage rates. Mortgage applications to purchase a home rose 5% for the week and were a remarkable 33% higher than a year ago…, which was seasonally adjusted, including for the Fourth of July holiday.”

July 8 – Wall Street Journal (David Harrison): “State and local governments from Georgia to California are cutting money for schools, universities and other services as the coronavirus-induced recession wreaks havoc on their finances. Widespread job losses and closed businesses have reduced revenue from sales and income taxes, forcing officials to make agonizing choices in budgets for the new fiscal year, which started July 1 in much of the country. Governments have cut 1.5 million jobs since March, mostly in education, and more reductions are likely barring a quick economic recovery. In Washington state, some state workers will take unpaid furloughs. In Idaho, Boise State University cut its baseball and swim teams in an effort to save $3 million.”

July 7 – CNBC (Scott Cohn): “Economic activity at the state level plunged in the first three months of 2020…, as the Covid-19 pandemic brought the national economy to a standstill. In New York and Nevada, where the coronavirus was raging by March, state Gross Domestic Product plunged 8.2% for the quarter, compared to the national drop of 5%. Other big drops included Michigan at 6.8% and Louisiana at 6.2%… The smallest drop was Nebraska at 1.3%… State revenue shortfalls could reach a staggering $200 billion in fiscal year 2020 which just ended, and fiscal year 2021, which began on July 1, according to the Tax Policy Center.”

July 8 – Reuters (Tracy Rucinski): “United Airlines said… it was preparing to send notices of potential furloughs to 36,000 U.S.-based frontline employees, or about 45% of staff, as travel demand hit by the coronavirus pandemic struggles to recover… The… airline continues to burn through about $40 million of cash every day, with a number of efforts to cut costs and raise liquidity failing to compensate for the drastic drop-off in travel…”

July 6 – Bloomberg (Martin Z. Braun): “U.S. public pensions may have finished the fiscal year with small gains, a dramatic turnaround after losing about $1 trillion during the first quarter, U.S. public pensions were on pace for an average investment loss of about 21% for the year ending June 30, according to Moody’s… Thanks to massive monetary and fiscal stimulus, state and local retirement funds, which invest about half of their assets in U.S. and foreign stocks, may have returned 1.9%, according to an analysis by Bank of New York Mellon Corp. Moody’s estimates one-year returns at about 1%.”

July 6 – Yahoo Finance (Ben Werschkul): “The Social Security and Medicare trustees released a report in April looking at the state of the nation’s most prominent trust funds. It showed Social Security running low on money in 2035 and Medicare being depleted even earlier. And that was before factoring in the effects of the coronavirus pandemic. Now, economists are beginning to get a clearer picture of just how much the coronavirus recession may impact some of the government’s biggest programs. Without intervention, ‘all major trust funds will be out of money in just about a decade,’ Marc Goldwein, a budget expert and a senior vice president at the Committee for a Responsible Federal Budget, said…”

July 7 – Reuters (Tracy Rucinski and Susan Heavey): “The largest U.S. air carriers have all signed letters of intent on federal loans to help them weather the novel coronavirus, with United Airlines warning employees… that a surge in outbreaks was hitting bookings, threatening a travel rebound and jobs.”

July 8 – Bloomberg (Oshrat Carmiel): “Manhattan’s rental market is starting to show the damage from a pandemic-fueled exodus. The borough’s apartment-vacancy rate in June rose to the highest on record. Available listings surged 85% from a year earlier to 10,789 — an all-time high for a single month, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate said… The median rent slid 6.6% to $3,242, the first decline in 18 months and the biggest in data going back to October 2011…”

July 6 – Wall Street Journal (Amrith Ramkumar): “U.S. crude supply is falling at its quickest pace ever, easing a global oil glut and spurring a swift recovery in fuel prices… Weekly U.S. output recently fell to 10.5 million barrels a day, down from a near-record of 13 million barrels a day from late March…”

July 8 – CNBC (Lauren Hirsch): “The coronavirus pandemic has now claimed one of the country’s oldest and most prestigious retailers. Brooks Brothers… filed for Chapter 11 bankruptcy court protection from creditors on Wednesday, as it continues to search for a buyer. The retailer, founded in 1818, boasts of having dressed 40 U.S. presidents and countless investment bankers.”

Fixed-Income Bubble Watch:

July 8 – CNBC (Alicia Adamczyk): “As the economic fallout from the coronavirus pandemic continues, almost one-third of U.S. households, 32%, have not made their full housing payments for July yet, according to a survey by Apartment List… About 19% of Americans made no housing payment at all during the first week of the month, and 13% paid only a portion of their rent or mortgage. That’s the fourth month in a row that a ‘historically high’ number of households were unable to pay their housing bill on time and in full, up from 30% in June and 31% in May.”

July 6 – Bloomberg (Madeleine Ngo): “The amount of U.S. bonds and loans trading at distressed levels has increased for a second straight week as corporate borrowers potentially face another round of lockdowns amid a resurgence of the coronavirus. The amount of distressed debt rose 5.9% to $369 billion from June 26 to July 2… The biggest increases were in the airlines, media and entertainment sectors, which were hit hard after a slump in demand caused by the pandemic. After peaking in March at more than $930 billion, the amount of distressed debt has dropped significantly.”

China Watch:

July 8 – Financial Times (Christian Shepherd): “China has acknowledged that ties with the US are at their lowest point since the normalisation of relations in 1979, in comments that suggest Beijing wants to ease tensions, analysts said. ‘What is alarming is that the China-US relationship is one of the most important in the world and it is facing its most serious challenge since diplomatic relations were established,’ Wang Yi, China’s foreign minister, said… ‘China has never had the intention of challenging or replacing the US and has no intention of entering into total confrontation with the US,’ he said, adding that Beijing’s policy had not changed despite deteriorating relations in recent months.”

July 9 – Reuters (Cheng Leng, Julie Zhu and Engen Tham): “Chinese state lenders are revamping contingency plans in anticipation of U.S. legislation that could penalise banks for serving officials who implement the new national security law for Hong Kong, sources at five state financial institutions said. In worst-case scenarios under consideration by the Bank of China and Industrial and Commercial Bank of China (ICBC), the lenders are looking at the possibility of being cut off from U.S. dollars or losing access to U.S. dollar settlements, two sources said. The dollar is the dominant global currency for international payments and central bank reserves. ‘We are hoping for the best, but preparing for the worst. You never know how things will turn out,’ one of the sources said.”

July 6 – Financial Times (James Kynge): “Beware a sudden sentiment-fuelled Chinese stock market rally. While China’s state-backed media celebrates the country’s biggest stock market rally in more than a year, investors with longer memories may recall a painful lesson from 2015: stock price surges that are not accompanied by climbing industrial profits can end in tears. Back then, a chorus of official cheerleading and easy money bid up the main Shanghai stock index by about 150% between June 2014 and June 2015. But then it collapsed and within less than a month it had slumped by 32%.”

July 6 – CNBC (Patti Domm): “Strategists say two factors are helping give legs to the global stock market’s Monday morning surge – bullishness about China and the view that central banks will backstop markets. A front-page editorial in the state-owned China Securities Journal is getting credit for fueling a strong rally in Chinese markets overnight that spread to global equities. Shanghai stocks jumped 5.7%, after the publication said investors should look forward to the ‘wealth effect of the capital markets’ and the prospect for a ‘healthy bull market.’ ‘We have the Fed to juice bull markets, China has its state media,’ wrote Peter Boockvar, chief investment strategist at Bleakley Advisory Group.”

July 7 – Wall Street Journal (Jacky Wong): “Analysts fret that U.S. markets have become irrational thanks to so-called ‘Robinhood’ retail traders with plenty of time on their hands. But American markets have nothing on China. Chinese stock markets have been on a tear lately: the CSI 300 index, a gauge of the largest companies listed in Shanghai and Shenzhen, has gained 14% just in the past week… What really seems to have gotten Chinese investors excited however, is state media’s sudden switch to a bullish tone. A Monday front-page editorial in the state-owned China Securities Journal said it’s now important to foster a ‘healthy bull market’—in part because of more ‘complicated’ global trade and economic relations.”

July 7 – Bloomberg: “Several trading apps of key Chinese brokers are struggling to keep up as millions of the country’s mom and pop traders race to seek a quick buck in a surging market. Users reported intermittent service connections and slowness at trading app of Huatai Securities Co. on Tuesday, while another leading broker Guotai Junan Securities Co. also had delays in real-time pricing and money transfer… Complaints also surfaced about other apps. The glitches came as trading volume in the mainland stocks boomed, hitting a five-year high and totaling 3.2 trillion yuan ($455bn) in the first two days of the week…”

July 7 – Bloomberg: “China’s equity market is firmly in the spotlight after an almost unprecedented rally that helped lift global stocks to a one-month high. The speed of the past week’s gains in China is in many ways unseen since the stock bubble that burst five years ago. Monday’s surge alone added more than $460 billion to Chinese stock values, behind just one day in July 2015…”

July 9 – Reuters (Stella Qiu and Ryan Woo): “China’s factory gate prices fell for a fifth straight month in June as the coronavirus pandemic weighed heavily on industrial demand… The producer price index (PPI) in June fell 3.0% from a year earlier…, slower than a 3.2% fall tipped by a Reuters poll of analysts and a 3.7% decline in May. However, in a sign of potential improvement in the manufacturing sector, PPI rose 0.4% from the previous month, turning around from a 0.4% decline in May.”

July 8 – Wall Street Journal (Mike Bird): “Holders of yuan bonds issued by China’s Tahoe Group Co. were left empty-handed this week, when the company failed to pay around $214 million due. But they’re not the only creditors to Chinese real-estate developers worth watching. Like many developers, Tahoe in recent years has rapidly increased its presale income—money from sales of homes not yet built. The company’s unearned revenue, denoting income received for work not yet completed, stood at $7.134 billion at the end of 2019, having more than doubled over two years. Buyers of properties at one Tahoe development in Beijing wrote to the company’s chairman last month after suspensions in construction, fearing they would be left without their homes…”

July 5 – Bloomberg: “China imposed a program to keep large transactions in check amid heightened concerns over the state of its financial system as bad debt balloons in the wake of the coronavirus outbreak. The People’s Bank of China this month kicked off a pilot plan in Hebei province that would require retail and business clients to pre-report any large withdrawals or deposits… The two-year program will be expanded to Zhejiang and Shenzhen in October, encompassing more than 70 million people.”

July 8 – Bloomberg: “Refinancing pressure is mounting at China’s industrial firms following unprecedented pandemic-induced shocks to the sector and a dearth of bond issuance in the past three months. Offshore bond sales from high-yield energy and other industrial companies hit a two-year low in the first half of 2020, with no sales from April to June… It couldn’t have come at a worse time for them as $3.1 billion of bonds, or more than a quarter of their debt, need to be repaid or refinanced over the next 12 months…”

Central Bank Watch:

July 5 – Bloomberg (William Horobin): “The coronavirus pandemic has permanently changed European economic policy, locking in a more extensive set of monetary tools and forcing the creation of a powerful joint fiscal plan, according to European Central Bank policy maker Francois Villeroy de Galhau. Villeroy said that exceptional ECB measures introduced in the wake of the global financial meltdown and the euro-area sovereign debt crisis — such as negative interest rates, quantitative easing and long-term bank loans — are here to stay. ‘The first lesson is that what we presented as exceptional, provisional weapons will be long-lasting… The non-conventional becomes the quasi-conventional, and that helps us in the current crisis.’”

July 5 – Financial Times (Martin Arnold and Guy Chazan): “Germany’s central bank is set to keep buying sovereign bonds from next month, defusing an explosive ruling by the country’s constitutional court that had threatened to destabilise the European Central Bank’s flagship asset-purchase scheme… Two officials briefed on the matter told the Financial Times that the Bundesbank will later this month formally decide to take its lead from the finance minister and parliament in Berlin, which both declared last week that the ECB had satisfied the court’s requirements.”

Europe Watch:

July 7 – Reuters (Philip Blenkinsop and Francesco Guarascio): “The euro zone economy will drop deeper into recession this year and rebound less steeply in 2021 than previously thought, the European Commission forecast…, with France, Italy and Spain struggling the most due to the COVID-19 pandemic… The EU executive said the 19-nation single currency area would contract by a record 8.7% this year before growing by 6.1% in 2021. In early May, the Commission had forecast a 2020 downturn of 7.7% and a 2021 rebound of 6.3%.”

July 6 – Reuters (Philip Blenkinsop): “The European Union will take decisive action against the United States if it is unwilling to settle a long-running row over aircraft subsidies and presses ahead with a series of new trade investigations, Europe’s trade commissioner said… ‘I want to reassure people that we are ready to act decisively and strongly on the European Union side if we don’t get the type of outcome that we expect from the United States in relationship to finalising this 15-year-old dispute,’ he said.”

Brazil Watch: