A global pandemic and historic economic downturn. A rapidly escalating U.S./China cold war. Surging U.S. unemployment and economic depression. A deeply fragmented society with intensifying animosity and conflict. Heightened social instability, with mounting protests (and even a number of ugly riots). Friday Drudge headline: “A Society On Brink of Complete and Utter Chaos…”
A booming stock market. Rapidly expanding “money” supply. Exceptionally loose financial conditions, with record debt issuance. Huge inflows into corporate investment-grade and high-yield bond ETFs. Record Treasury and investment-grade corporate bond prices.
It’s easy these days to question securities market sanity. Yet it’s a fundamental tenet of Credit Bubble analysis that things turn crazy at the end of cycles. In the waning days of history’s most spectacular financial Bubble, should we be too surprised by Complete and Utter Craziness?
“Stock market investors are looking over the valley” and “V-shaped recovery” have become the popular narrative. “In the long run, and even in the medium run, you wouldn’t want to bet against the American economy,” Chairman Powell shared with CBS’s “60 Minutes” audience on Sunday, May 17, 2020. Powell’s words came in the wake of bearish comments from hedge fund heavyweights Stanley Druckenmiller and David Tepper.
Sure enough, equities gapped higher in the Monday session following Powell’s interview. A powerful short squeeze was launched. What Powell actually meant was irrelevant. The message received in the marketplace: you had best cover your short positions and unwind bearish hedges.
In the seven sessions following Powell’s comments, the S&P500 gained 6.1%. The more spectacular gains, however, were in sectors with large shorting and hedging activity. The Dow Transports surged 17.9% in seven sessions. The Philadelphia Oil Service Sector Index jumped 20.7%. The KBW Bank Index surged 22.8%, with the Nasdaq Bank Index up 24.3%. Some of the broader market indices have been popular short targets. And a reversal of bearish bets surely supported the sharp rally in the small cap Russell 2000 and S&P400 Midcaps (7-session gains 14.3% and 14.0%). Over this period, the Goldman Sachs Most Short Index jumped 11.9%.
Investment-grade CDS prices closed the Friday ahead of Powell’s interview at 96 bps. Prices ended this week at 77 bps, the low since March 5th. Over this period, high-yield CDS sank 146 bps to 540 bps, a six-week low. Curiously, in the face of “risk on” dynamics in equities and corporate Credit, 10-year Treasury yields were little changed.
Federal Reserve Assets jumped $60bn last week to a record $7.097 TN, pushing the 12-week gain to $2.856 TN. M2 “money supply” (with a week’s lag) expanded another $94bn, with a 12-week rise of $2.577 TN. Institutional Money Fund Assets (not included in M2) added $6bn, boosting its 12-week expansion to $960bn.
Q&A from Chairman Powell’s Friday online discussion, sponsored by Princeton University’s Griswold Center for Economic Policy Studies.
Question: “How sensitive is the Fed to the very difficult time that, in particular, the lower-end of the economic spectrum are experiencing these days compared to the extraordinary strength in the equity market that Wall Street has seen. And does that affect policy at all or is it just a necessary side effect – that, even if you aren’t rooting for it, it just happens?”
Powell: “We know that everyone is affected by the pandemic in a negative way to one degree or another. The burdens are falling very strongly on those who can least afford to bear them. The unemployed come very largely, so far, from parts of the service economy which involve dealing with large groups of people that are tightly together… Does that affect our policy? It does affect our policy. Part of our mandate is maximum employment. It’s maximum employment and stable prices – are our monetary policy mandates. We’re very focused on the full range of employment and doing whatever we can trying to get those people back to work or in a new job…”
Question: “Are the latest Fed policies likely to lead to more income inequality in the United States?
“Absolutely not. And I’ll tell you why. As I mentioned, the pandemic is falling on those least able to bear its burdens. It is a great increaser of inequality. If you just look at labor market reports that the BLS puts out, you will see that it is low-paid workers in the service industries who are bearing the brunt of this; it’s also women to an extraordinary degree… So, everything we do – everything we do – is focused on creating an environment in which those people will have their best chance to keep their job or get a new job… Now, how does that work? Take, for example, a company that was investment-grade on March 22nd but has now been downgraded to so-called junk, a non-investment grade company. It has tens and tens of thousands of employees. Now, why would we include that company in our programs? These are very large companies – and there are many of them that would fit this description… The reason is this: If a company doesn’t have market access and can’t roll over its debt and can’t have enough cash on hand to deal with obligations, what they’re going to do is lay people off. They’re going to cut costs… That is the choice they’ll make… By announcing our facility and including those companies, the ones who actually needed the credit in March, those companies have now been able to go out and finance themselves and now have lots of cash on their balance sheets… They’ve been able to avoid big layoffs. That is the point of all this. I think we have to keep our focus tightly on that goal of supporting the labor market and not get distracted by other goals.”
Powell didn’t want to touch the issues of a booming stock market and policies benefiting Wall Street, fixated instead on the narrative of Federal Reserve policy measures focused on supporting labor markets. I’m not convinced it’s credible, but the Fed clearly appreciates that the issue of inequality has become a major institutional risk for our central bank. “We’ve crossed a lot of red lines that had not been crossed before,” admits the Fed Chairman. Purchasing junk bonds is a line crossed. So, there’s some rationale for Powell tying the loosening of risky company Credit with labor market and inequality concerns.
Yet the Fed’s balance sheet has inflated $3.336 TN over the past 38 weeks, of which junk bond purchases have been an infinitesimal percentage. Rather conspicuously, the Federal Reserve’s primary focus has been supporting the securities markets. This has the Fed sliding into the hazardous waters of Credit and resource allocation. Its policies have directly and indirectly favored parts of the economy and segments of society. Moreover, the Fed continues to feed a speculative Bubble. Federal Reserve Assets inflated an incredible 67% in twelve weeks.
How did things turn so crazy? At its infancy, the Greenspan Fed years ago began offering markets some extra support. In general, Greenspan was a powerful advocate for market-based finance. The rationale must have been that after providing backing to get through a rough patch, markets would naturally return to sound mechanisms of self-adjustment and correction. Instead, financial markets became progressively distorted and dysfunctional. Credit and speculative Bubbles took hold – and there was no turning back. Greenspan’s insidious support mutated into bailouts, emergency QE, rank market manipulation, and “whatever it takes” inflationism – all to sustain Bubbles. The problem of “too big to fail” institutions morphed into “too big to fail” market structure.
Markets now expect the Fed to eventually incorporate zero rates and “yield-curve control” measures.
May 27 – Bloomberg (Steve Matthews): “Federal Reserve Bank of New York President John Williams said policy makers are ‘thinking very hard’ about targeting specific yields on Treasury securities as a way of ensuring borrowing costs stay at rock-bottom levels beyond keeping the benchmark interest rate near zero. ‘Yield-curve control, which has now been used in a few other countries, is I think a tool that can complement -– potentially complement –- forward guidance and our other policy actions,’ he said… ‘So this is something that obviously we’re thinking very hard about. We’re analyzing not only what’s happened in other countries but also how that may work in the United States.”
“Yield-curve control” is another – somewhat more palatable – name for pegging inflated price levels in Treasury securities – the most important securities in the world and the bedrock for finance more generally. That the President of the New York Fed would admit the FOMC is “thinking very hard about” such measures supports the view of unfolding market disintegration.
It’s a complete breakdown of even a pretense of monetary discipline – with resulting Monetary Disorder again the root cause of late-cycle craziness. I am reminded of Mises “crackup boom” analysis. Mises’ focus was on reckless late-cycle monetary inflation, the loss of confidence in money throughout the general economy, and resulting consumer expectations for runaway inflation.
Today, crack up boom dynamics are at work throughout the financial markets. Market participants now expect unending Federal Reserve-induced monetary expansion. The Fed is trapped in a glass cage for everyone to see. The March experience demonstrated how abruptly faltering global Bubbles can thrust the world to the brink of financial collapse. It took Trillions to pull the system back from the precipice – and it will require untold Trillions more as central bankers struggle to hold crisis at bay. “Money” is destined to continue suffering extraordinary devaluation. Meanwhile, securities prices – including stocks, Treasuries, MBS, investment-grade corporate bonds, and even high-yield corporate ETFs – are supported by Federal Reserve buying.
This sophisticated financial scheme is highly problematic. For one, it’s an unparalleled multifaceted global Bubble. At this point, the consequences of collapse are so frightening that policymakers will justify and rationalize “whatever it takes” measures. Yet Jay Powell – and central bankers more generally – are delusional if they don’t believe their policies will exacerbate inequalities. Furthermore, these inequalities will flourish both within and between nations. Festering U.S. social tensions are increasingly coming into full view, while mounting geopolitical stresses are taking an ominous turn for the worse.
The Fed has abandoned its overarching responsibility for maintaining monetary stability (sustaining Bubbles being antithesis to monetary stability). No amount of monetary expansion is too much – no degree of market intervention excessive. They’ll gladly monetize even the most egregious federal deficits. Zero rates – negative real returns for savers – are fine for as far as the eye can see. No crackpot theory is unworthy of consideration.
And why do markets expect it’s only a matter of time until negative rates – despite pushback from Fed officials? Because markets believe efforts to sustain highly inflated Bubbles will foment “kitchen sink” desperation. The Fed may not today fancy the idea of negative rates, but highly leveraged speculative Bubbles will eventually demand negative borrowing costs – along with “yield-curve control”, Fed stock purchases and about any market-supporting measure a creative mind can conceive. Nothing will be off the table.
Stocks rallied late-Friday on President Trump’s China news conference. As expected, the administration will commence the process of removing Hong Kong’s special trade status. There will be some sanctions on Chinese individuals and institutions, also as expected. But the speech was short on details – though clear on the President’s hesitancy to threaten the phase-one trade deal. Bloomberg’s headline: “Trump’s China Announcement Leaves Room to De-Escalate Tensions.” The tone supported the view that there will be more bark than bite heading into the election. But are the testy Chinese willing to play the election-cycle whipping boy?
As I’m working to wrap up this week’s CBB, protests and violence are escalating in cities across the country. We’re seeing the most inflamed racial tensions in years. From a political perspective, the country is the most bitterly divided in decades. Wealth inequalities are, as well, tearing away at our nation’s social fabric. And somehow the pandemic strikes with freakish timing and ferocity – dousing gas on myriad smoldering social, political, financial, economic and geopolitical fires.
It’s the worst-case scenario – my worry list coming to fruition. Social and political instability; a global pandemic; a runaway Fed balance sheet swiftly on its way to $10 TN; faltering Chinese and EM Bubbles; rapidly deteriorating U.S. and China relations; a disintegrating geopolitical backdrop; along with a final speculative “blow-off” throughout global finance. Markets have been corrupted, while the masses are increasingly disillusioned and insecure. A wrecking ball is chipping away at trust in our institutions.
The global Bubble has been pierced, though unprecedented monetary inflation only exacerbates the epic divergence between inflating asset prices and deflating economic prospects. As I’ve written over the years – and as demonstrated rather conspicuously in March: contemporary finance seems to operate miraculously – so long as it’s inflating. It just doesn’t work in reverse. These days it’s even more frightening to contemplate how this all ends. The Scourge of “Whatever it Takes” Monetary Mismanagement.
For the Week:
The S&P500 gained 3.0% (down 5.8% y-t-d), and the Dow jumped 3.8% (down 11.1%). The Utilities rose 6.0% (down 6.9%). The Banks surged 9.4% (down 34.4%), and the Broker/Dealers jumped 7.7% (down 10.2%). The Transports gained 5.9% (down 17.7%). The S&P 400 Midcaps rose 4.0% (down 14.5%), and the small cap Russell 2000 gained 2.8% (down 16.4%). The Nasdaq100 added 1.5% (up 9.4%). The Semiconductors advanced 2.8% (up 0.2%). The Biotechs increased 0.3% (up 11.2%). With bullion down $4, the HUI gold index dropped 4.1% (up 13.0%).
Three-month Treasury bill rates ended the week at 0.1225%. Two-year government yields slipped a basis point to 0.16% (down 141bps y-t-d). Five-year T-note yields declined three bps to 0.30% (down 139bps). Ten-year Treasury yields slipped a basis point to 0.65% (down 126bps). Long bond yields rose three bps to 1.41% (down 98bps). Benchmark Fannie Mae MBS yields jumped seven bps to 1.65% (down 121bps).
Greek 10-year yields sank 19 bps to 1.50% (up 7bps y-t-d). Ten-year Portuguese yields dropped 23 bps to 0.50% (up 6bps). Italian 10-year yields fell 12 bps to 1.48% (up 6bps). Spain’s 10-year yields declined six bps to 0.56% (up 9bps). German bund yields rose four bps to negative 0.45% (down 26bps). French yields fell five bps to negative 0.08% (down 20bps). The French to German 10-year bond spread narrowed nine to 37 bps. U.K. 10-year gilt yields added a basis point to 0.18% (down 64bps). U.K.’s FTSE equities index gained 1.4% (down 19.4%).
Japan’s Nikkei Equities Index surged 7.3% (down 7.5% y-t-d). Japanese 10-year “JGB” yields increased one basis point to 0.01% (up 2bps y-t-d). France’s CAC40 rose 5.6% (down 21.5%). The German DAX equities index gained 4.6% (down 12.5%). Spain’s IBEX 35 equities index jumped 6.0% (down 25.7%). Italy’s FTSE MIB index rose 5.1% (down 22.6%). EM equities were higher. Brazil’s Bovespa index rallied 6.4% (down 24.4%), and Mexico’s Bolsa increased 0.9% (down 17.1%). South Korea’s Kospi index rose 3.0% (down 7.6%). India’s Sensex equities index recovered 5.7% (down 21.4%). China’s Shanghai Exchange increased 1.4% (down 6.5%). Turkey’s Borsa Istanbul National 100 index gained 2.4% (down 7.8%). Russia’s MICEX equities index increased 0.9% (down 10.2%).
Investment-grade bond funds saw inflows of $7.502 billion, and junk bond funds posted inflows of $6.318 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.15% (down 84bps y-o-y). Fifteen-year rates fell eight bps to 2.62% (down 84bps). Five-year hybrid ARM rates declined four bps to 3.13% (down 47bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up six bps to 3.70% (down 49bps).
Federal Reserve Credit last week expanded $137.5bn to a record $7.060 TN, with a 38-week gain of $3.338 TN. Over the past year, Fed Credit expanded $3.240 TN, or 85%. Fed Credit inflated $4.249 Trillion, or 151%, over the past 394 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.8 billion last week to $3.391 TN. “Custody holdings” were down $72bn, or 2.1%, y-o-y.
M2 (narrow) “money” supply jumped $93.8bn last week to a record $18.084 TN, with an unprecedented 12-week gain of $2.577 TN. “Narrow money” surged $3.453 TN, or 23.6%, over the past year. For the week, Currency increased $9.3bn. Total Checkable Deposits dropped $22.6bn, while Savings Deposits surged $107.5bn. Small Time Deposits fell $8.4bn. Retail Money Funds gained $8.0bn.
Total money market fund assets slipped $1.2bn to $4.788 TN. Total money funds surged $1.640 TN y-o-y, or 52%.
Total Commercial Paper declined $6.7bn to $1.051 TN. CP was down $34bn, or 3.1% year-over-year.
Currency Watch:
May 25 – Wall Street Journal (Joanne Chiu): “China set a reference rate for the yuan at its weakest point in 12 years, a signal that Beijing sees the benefits of a weaker currency as it grapples with an economic slowdown and rising tensions with Washington. On Tuesday, the People’s Bank of China set a daily midpoint for the yuan at 7.1293 per dollar, the lowest level since February 2008. The central bank lets the onshore yuan trade in a band around this fix… The currency also trades in less tightly controlled offshore markets, in Hong Kong and elsewhere.”
For the week, the U.S. dollar index declined 1.5% to 98.344 (up 1.9% y-t-d). For the week on the upside, the Brazilian real increased 3.7%, the Norwegian krone 2.9%, the Swedish krona 2.6%, the Mexican peso 2.5%, the Australian dollar 2.0%, the euro 1.8%, the New Zealand dollar 1.8%, the Canadian dollar 1.6%, the British pound 1.4%, the Swiss franc 1.0%, the Singapore dollar 0.8%, and the South African rand 0.4%. For the week on the downside, the Japanese yen declined 0.2% and South Korean won 0.1%. The Chinese renminbi was little changed versus the dollar this week (down 2.44% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index gained 1.3% (down 21.5% y-t-d). Spot Gold slipped 0.3% to $1,730 (up 14.0%). Silver surged 4.6% to $18.499 (up 3.2%). WTI crude jumped $2.24 to $35.49 (down 42%). Gasoline gained 3.9% (down 36%), and Natural Gas surged 6.8% (down 16%). Copper advanced 1.6% (down 13%). Wheat rallied 2.4% (down 7%). Corn gained 2.4% (down 16%).
Coronavirus Watch:
May 26 – Los Angeles Times (Michael Hiltzik): “The money-losing biotech firm Moderna thrilled the investment world last week by announcing encouraging results from a COVID-19 vaccine trial. But few investors may have been more thrilled than four top executives of the firm. With exquisite timing, in the two days following the announcement they reaped more than $29 million in gains from selling shares in the company. In most cases, they sold at prices near the peak of Moderna’s surge in value after the vaccine announcement.”
Market Instability Watch:
May 26 – Bloomberg (Tian Chen and Kari Lindberg): “Fears that capital will flee Hong Kong are visible just about everywhere in the city’s financial markets, yet the currency remains resistant for now. Speculators are betting on significant depreciation with derivatives, sending a measure of bearishness to near its highest level of the year. Volume on Hong Kong dollar options soared to $3.7 billion on Friday, with a third of the trades betting the pegged currency would hit or break the weak end of its trading band. Conviction that turbulence will get worse is also evident in the swaps market, where the spread between local and U.S. rates reached levels last seen in the 1990s.”
Global Bubble Watch:
May 28 – Bloomberg (Molly Smith and Priscila Azevedo Rocha): “Companies are selling more bonds than ever with the backing of central banks, putting supply in the U.S. and Europe on track to reach records. Any one of eight U.S. investment-grade companies expected to issue debt Thursday could tip year-to-date supply past $1 trillion at the fastest rate ever, while European borrowers passed 900 billion euros ($991 billion) on Wednesday, two months earlier than in 2019.”
May 27 – Reuters (Marc Jones): “The number of companies or countries at risk of having their credit ratings cut has been pushed to an all-time high by the coronavirus pandemic, S&P Global analysis shows. A total of 1,287 of S&P’s ratings are now on a downgrade warning — either with ‘negative outlooks’ where a move might take two years, or on ‘CreditWatch with negative implications’ where the risk is almost immediate. It tops 1,028 in the wake of the financial crisis in 2009 and comes despite nearly 700 downgrades already being impacted by COVID-19 in recent months. ‘Almost two-thirds of issuers face downgrade potential due to the unprecedented challenges posed by COVID-related containment measures,’ S&P said…”
Trump Administration Watch:
May 26 – CNBC (Jacob Pramuk): “Congress will ‘probably’ have to pass more legislation to mitigate the damage from the coronavirus pandemic, Senate Majority Leader Mitch McConnell said… The Kentucky Republican said a measure to lift the U.S. economy would have a more narrow scope than the $3 trillion package House Democrats approved earlier this month. He said states’ progress in restarting their economies in the coming weeks will help to inform what Congress does. McConnell noted that ‘we need to make sure we have unemployment insurance properly funded for as long as we need,’ as tens of millions of people lose paychecks. ‘So, in the next few weeks, we’ll determine whether there is yet another bill,’ he told reporters…”
May 27 – CNBC (Tucker Higgins): “Secretary of State Mike Pompeo reported to Congress… that Hong Kong was no longer autonomous from China, a move that could jeopardize the special administrative region’s favorable trade relationship with the U.S. and open up Chinese officials to sanctions… ‘No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground,’ Pompeo said… ‘Hong Kong and its dynamic, enterprising, and free people have flourished for decades as a bastion of liberty, and this decision gives me no pleasure. But sound policy making requires a recognition of reality… While the United States once hoped that free and prosperous Hong Kong would provide a model for authoritarian China, it is now clear that China is modeling Hong Kong after itself.’”
May 25 – Bloomberg: “China condemned the U.S. adding 33 Chinese entities to a trade blacklist, a move that risks potential retaliation from Beijing as tensions between the world’s two-biggest economies deteriorate further. The U.S. Department of Commerce… expanded its so-called entities list, which restricts access to American technology and other items, to include 24 Chinese companies and universities it said had ties to the military and another 9 entities it accused of human rights violations in Xinjiang. China’s foreign ministry… expressed ‘strong dissatisfaction’ and ‘firm opposition’ to the move as it defended the government’s crackdown in Xinjiang, saying that ‘counter-terrorism measures’ were taken ‘to prevent the breeding of terrorism and extremism at the source.’”
Federal Reserve Watch:
May 23 – Financial Times (James Politi and Colby Smith): “The US Federal Reserve feels no urgency to offer big new monetary measures or guidance until it has a clearer grasp of the economic trauma inflicted by the coronavirus pandemic and the shape of a possible recovery, senior central bank officials have signalled in recent days. Fed officials, including Jay Powell, …are still ready to take more aggressive action if needed, after rebooting stricken corners of the financial markets through a massive rescue operation involving interest rate cuts, asset purchases and special lending schemes. But they are not preparing to make a new move at their next monetary policy meeting in June.”
U.S. Bubble Watch:
May 28 – Associated Press (Christopher Rugaber): “Roughly 2.1 million people applied for U.S. unemployment benefits last week, a sign that companies are still slashing jobs in the face of a deep recession even as more businesses reopen and rehire some laid-off employees. About 41 million people have now applied for aid since the virus outbreak intensified in March, though not all of them are still unemployed. The… report… includes a count of all the people now receiving unemployment aid: 21 million. That is a rough measure of the number of unemployed Americans. The national jobless rate was 14.7% in April, the highest since the Great Depression, and many economists expect it will near 20% in May.”
May 28 – Associated Press: “The U.S. economy shrank at an even faster pace than initially estimated in the first three months of this year with economists continuing to expect a far worse outcome in the current April-June quarter. …Gross domestic product… fell at an annual rate of 5% in the first quarter, a bigger decline than the 4.8% drop first estimated a month ago.”
May 25 – Wall Street Journal (Andrew Ackerman and Nick Timiraos): “With interest rates falling to the lowest level on record, this should be a banner time for households in search of a new mortgage. It isn’t. Mortgage availability has tightened sharply as lenders impose tougher income, credit-score and down-payment conditions and drop some loan types altogether, such as home-equity lines of credit. The economic shock from the coronavirus pandemic explains some of this credit crunch. But the economic factors have been exacerbated by policy decisions in Washington, industry officials say. As part of its March relief bill, Congress let homeowners suspend mortgage payments for up to a year but provided no way to pay for this, potentially saddling lenders with the burden.”
May 27 – Reuters (Lucia Mutikani): “U.S. applications for home mortgages jumped last week, in a sixth straight weekly increase… The Mortgage Bankers Association (MBA) said… its seasonally adjusted Purchase Index increased 8.6% from a week earlier… The index rose 7.4% from the prior week and was 9% higher compared to the same week a year ago.”
May 26 – CNBC (Diana Olick): “Home prices were still gaining steam in March, as the country began shutting down in the face of the coronavirus pandemic. On a national level, prices in March rose 4.4% annually, up from 4.2% in February, according to the S&P CoreLogic Case-Shiller index. The 10-City Composite rose 3.4% annually, up from 3% in the previous month. The 20-City composite increased 3.9%, up from 3.5% in February.”
May 25 – Financial Times (Myles McCormick): “The biggest independent shale oil groups in the US reported a record combined loss of $26bn in the first quarter as the sector braces itself for a wave of bankruptcies over the next two years. The collapse in crude demand brought about by the coronavirus pandemic forced more than $38bn in write-offs among top producers, according to… Rystad Energy, sending net losses tumbling well below an average of $2.9bn in the past six years.”
May 27 – Wall Street Journal (David Hodari): “Investment in the U.S. shale sector will drop by half this year, the International Energy Agency said…, predicting a period of pain for producers, even as oil prices rally. The forecast body blow to the availability of capital for U.S. producers comes as part of an expected world-wide decline in broader energy investment during 2020. The… organization expects global investment in oil and gas to decrease by one-third and the financing of all energy projects to decline by 20%. ‘We see a historic fall in global energy investment, but the biggest hit is to the shale industry,’ said the agency’s executive director, Fatih Birol. ‘It has always been under pressure, but now access to capital and investment confidence is drying up.’”
May 24 – Wall Street Journal (Patrick Thomas): “Young Americans are having little luck finding summer jobs. Coronavirus outbreaks throughout the country have dried up many of the traditional opportunities that high school and college-age students rely on each summer. Junior workers seeking seasonal employment are striking out so much that the April unemployment rate for teens aged 16 to 19 hit 32%, marking a high not seen since at least 1948… As more teens hit the job market in June and July, when school is generally out, that rate typically climbs higher.”
May 24 – Reuters (Mike Spector): “The more than a century old car rental firm Hertz Global Holdings Inc filed for bankruptcy protection… after its business was decimated during the coronavirus pandemic and talks with creditors failed to result in much needed relief. Hertz’s board earlier in the day approved the company seeking Chapter 11 protection in a U.S. bankruptcy court in Delaware…”
Fixed-Income Bubble Watch:
May 28 – Bloomberg (Jeremy Hill and James Crombie): “In the first few weeks of the pandemic, it was just a trickle: companies like Alaskan airline Ravn Air pushed into bankruptcy as travel came to a halt and markets collapsed. But the financial distress wrought by the shutdowns only deepened, producing what is now a wave of insolvencies washing through America’s corporations. In May alone, some 27 companies reporting at least $50 million in liabilities sought court protection from creditors — the highest number since the Great Recession… In May 2009, 29 major companies filed for bankruptcy… And year-to-date, there have been 98 bankruptcies filed by companies with at least $50 million in liabilities — also the highest since 2009, when 142 companies filed in the first four months.”
May 26 – Financial Times (Anna Gross and Joe Rennison): “Highly rated companies… have borrowed $1tn in five months as they seek to fortify their balance sheets against the coronavirus-induced economic downturn. US corporate bond issuance from investment-grade companies… has crossed $1tn this year, according to… Refinitiv. That total… outpaces the $540bn issued over the same period in 2019, and is closing in on the $1.3tn full-year average over the past five years… Total issuance topped $200bn for three consecutive months to May — the first time that has happened in data running back to 1990..”
May 27 – Wall Street Journal (Megumi Fujikawa and Cezary Podkul): “The Japanese bank that was the biggest buyer of debt used to fund private-equity buyouts suffered a ¥400 billion ($3.7bn) hit and said it would stop investing in that market. Norinchukin Bank owns about 10% of the $700 billion market for corporate debt that was packaged into securities called collateralized loan obligations. Other big buyers include Wells Fargo… and JPMorgan…, which each owned about $30 billion worth of CLOs at the end of the first quarter. Losses on these investments could hamper the banks at a time when bad loans are rising. They could also sour investors on CLOs, which bought roughly 60% of the debt that private-equity companies used for deals in recent years… ‘We will limit making new investments’ in CLOs, Chief Executive Kazuto Oku said.”
China Watch:
May 25 – Reuters (Colin Qian, Se Young Lee and Kevin Yao): “China will strengthen its economic policy and continue efforts to lower interest rates on loans, central bank Governor Yi Gang said, reinforcing expectations of further support measures to revive an economy ravaged by the coronavirus pandemic… The People’s Bank of China will use various monetary policy tools to maintain sufficient liquidity, and keep the annual growth rate of M2 money supply and social financing significantly higher than last year, Yi said.”
May 25 – Wall Street Journal (John Lyons): “With his plan to impose sweeping antisedition legislation on Hong Kong, Chinese leader Xi Jinping has revealed a willingness to alter the onetime British colony’s special status as a self-governing city with a speed and scope that has surprised many, from pro-democracy activists to diplomats to businesspeople. At a meeting of mainland China’s National People’s Congress last week, authorities said they would go around Hong Kong’s own legislature and draft measures against secession, foreign influence and terrorism as Beijing seeks to curb protests by Hong Kong citizens seeking more freedom and autonomy. The move suggests Mr. Xi is shifting gears in his approach to Hong Kong and many now anticipate an accelerating effort to control other areas fundamental to Hong Kong’s free-market identity, from its educational system and free press to its courts and immigration policies.”
May 27 – Wall Street Journal (Mike Bird): “The U.S. determination that Hong Kong is no longer autonomous from mainland China has significant implications for the city’s exporters and businesses. But that could pale in comparison to further action by the U.S. to use its dominant position in the global banking system against Beijing. The most immediate threat is the possible end of the city’s special status as separate from mainland China for import and export purposes under the Hong Kong Policy Act of 1992. Sensitive U.S. technologies could no longer be imported into Hong Kong, and the city’s exports might be hit with the same tariffs levied on Chinese trade. But the act doesn’t cover the far more extensive role Hong Kong plays as China’s main point of access to global finance. That’s the context in which the Senate’s tentative discussion of penalties against banks that do significant transactions with ‘persons or entities that materially contribute to the contravention of China’s obligations’ should be viewed. As of 2019, mainland Chinese banks held 8,816 trillion Hong Kong dollars ($1.137 trillion) in assets in the semiautonomous city, an amount that has risen 373% in the last decade.”
May 25 – Reuters (Gabriel Crossley): “China warned… that it will take countermeasures if the United States insists on undermining its interests regarding Hong Kong, following the latest comments from Washington about possible sanctions over new national security legislation for the city.”
May 26 – Fox News (Louis Casiano): “China is dismissing threats of sanctions from the Trump administration over Beijing’s proposed national security law in Hong Kong, calling it a ‘nothingburger.’ ‘The White House claimed it would impose sanctions on China, but the tools and resources at its disposal are fewer than those it could mobilize before the [coronavirus] outbreak,’ China’s state-run Global Times published Monday. ‘It is only bluffing.’”
May 23 – Reuters (James Pomfret, Jessie Pang, Donny Kwok, Twinnie Siu, Pak Yiu): “Hong Kong police fired tear gas and water cannons to disperse thousands of people who rallied on Sunday to protest against Beijing’s plan to impose national security laws on the city. In a return of the unrest that roiled Hong Kong last year, crowds thronged the Causeway Bay shopping area in defiance of curbs imposed to contain the coronavirus. Chants of ‘Hong Kong independence, the only way out,’ echoed through the streets.”
May 23 – Reuters (Patricia Zengerle): “Nearly 200 political figures from around the world on Saturday decried Beijing’s proposed national security laws for Hong Kong, including 17 members of the U.S. Congress, as international tensions grow over the proposal to set up Chinese government intelligence bases in the territory. In a joint statement organized by former Hong Kong Governor Christopher Patten and former British Foreign Secretary Malcolm Rifkind, 186 law and policy leaders said the proposed laws are a ‘comprehensive assault on the city’s autonomy, rule of law and fundamental freedoms’ and ‘flagrant breach’ of the Sino-British Joint Declaration that returned Hong Kong to China in 1997.”
May 24 – Financial Times (Sun Yu): “China’s chief economic planner says Beijing has room to leverage up to rescue the coronavirus-stricken economy, pointing to official figures that show the country’s debt load remains low by international standards. Cong Liang, secretary-general of the National Development and Reform Commission (NDRC), said… it was ‘viable, safe and necessary’ for the Chinese government to increase borrowing to address the economic downturn. The remarks follow the announcement… by Li Keqiang, China’s premier, that Beijing would issue bonds and raise the fiscal deficit by a combined Rmb5.8tn ($813bn) to revive the ailing economy… Mr Cong said China’s planned fiscal deficit ratio of at least 3.6% this year remained ‘very low’ compared with the international average of just under 10%. Mr Cong added that China’s debt pressure was ‘far below the levels in major advanced and emerging economies’. Official data shows China’s government debt-to-GDP ratio stood below 40% in 2019, compared with more than 106% in the US and almost 70% in India.”
May 26 – Reuters (Anne Marie Roantree): “Beijing has expanded the scope of draft national security legislation to include organisations as well as individuals, media reported…, a move that is likely to exacerbate concerns over freedoms in the financial hub. The news comes after Beijing last week proposed national security laws that drew a swift rebuke from international rights groups and western governments, with the United States branding it a ‘death knell’ for the city’s autonomy.”
May 26 – Financial Times (Sue-Lin Wong and Nicolle Liu): “Beijing’s decision last week to impose national security legislation on Hong Kong reignited street protests, sparked international condemnation and raised questions about the rule of law in the territory. More demonstrations were expected…, with lawmakers in the city set to debate a separate bill that would make it a criminal offence to insult the Chinese national anthem. If enacted, the mainland national security legislation will mark the first time that a Chinese law carrying criminal penalties has been introduced into Hong Kong’s legal code, bypassing the territory’s legislature and public consultation processes.”
May 27 – Wall Street Journal (Joanne Chiu): “Two of China’s most valuable U.S.-listed companies are pushing ahead with multibillion-dollar share sales in Hong Kong, amid growing pressure from U.S. lawmakers for greater financial scrutiny of Chinese companies. The listing plans of NetEase… and JD.com… will be reviewed on Thursday by the listing committee of Hong Kong’s stock exchange…”
Central Bank Watch:
May 26 – Reuters (Francesco Canepa and Balazs Koranyi): “The European Central Bank (ECB) is drafting contingency plans to carry out its multi-trillion bond-buying programme without the Bundesbank in case Germany’s top court forces the main participant in the scheme to quit, four sources told Reuters. In this worst-case scenario, the ECB would launch an unprecedented legal action against the German central bank, its biggest shareholder, to bring it back into the programme… The moves would likely mark a moment of truth for the euro, testing Germany’s commitment to a currency it played the biggest role in creating and forcing it to tackle some deep-seated reservations within the country about ECB policies. Germany’s constitutional court has given the ECB until early August to justify its massive buying of government bonds or continue the scheme without the Bundesbank, which is supposed to carry out more than a quarter of the bond purchases.”
May 27 – Bloomberg (Sam Kim and Hooyeon Kim): “The Bank of Korea cut rates to a record low and forecast the first economic contraction since the Asian financial crisis… Following the BOK’s unanimous decision on Thursday to cut the seven-day repurchase rate to 0.5%, BOK Governor Lee Ju-yeol said the central bank is considering using unconventional policy tools to support growth, but shied away from the specifics sought by investors.”
Europe Watch:
May 27 – Bloomberg (Nikos Chrysoloras and Viktoria Dendrinou): “The European Commission unveiled an unprecedented stimulus plan to tackle the worst recession in living memory and underwrite struggling Italy’s membership of the 27-nation bloc. The government in Rome stands to receive 82 billion euros ($90bn) in emergency grants and up to 91 billion euros in low-interest loans from the package that could be worth as much as 750 billion euros in total… The program, which still needs to win the backing of member states, would be funded by joint debt issuance in a significant step toward closer financial integration… ‘This is Europe’s moment,’ Commission President Ursula von der Leyen said. ‘Our willingness to act must live up to the challenges we are all facing.’”
May 27 – CNBC (Silvia Amaro): “The European Commission has unveiled plans for a 750 billion euro ($826.5bn) recovery fund as the region faces the worst economic crisis since the 1930s. It will borrow these funds and then disburse them via the European budget — the EU’s common basket of cash that supports programs such as Erasmus. They will be repaid between 2028 and 2058. The 750 billion euros includes 500 billion euros in grants and 250 billion euros in loans to member states. Out of the 500 billion euros in loans, 310 billion will be invested in the green and digital transitions. Germany and France opened the door to issuing mutual EU debt last week, suggesting that the Commission, the EU’s executive arm, should raise 500 billion euros on the public markets to be distributed as grants.”
May 27 – Wall Street Journal (Laurence Norman): “The European Union set out a $2 trillion coronavirus response plan, including a massive pooling of national financial resources that, if approved, would deepen the bloc’s economic union in a way that even the eurozone debt crisis failed to achieve. Wednesday’s proposal, composed of a €750 billion ($824bn) recovery plan and €1.1 trillion budget over the next seven years, aims to lift the region from its economic slump, but must overcome infighting dividing the bloc. If backed by all 27 member states, the plan would represent a historic step in knitting together national finances across the bloc. The proposal from the European Commission, the EU’s executive arm, follows a similar Franco-German plan set out last week and would establish significant new transfers of wealth among members, funded by commonly issued debt.”
May 24 – Financial Times (Jim Brunsden and Sam Fleming): “Brussels faces an entrenched split over ways to finance Europe’s economic recovery after a group of four northern member states rejected a Franco-German plan to issue EU debt to provide grants for Covid-19-stricken countries. The rift complicates the task of European Commission president Ursula von der Leyen… But on Saturday, the Netherlands, Austria, Denmark and Sweden pre-emptively rejected the notion of grants in a counterproposal — instead recommending the creation of an ‘emergency fund’ financed by loans only.”
May 23 – Bloomberg (Boris Groendahl, Morten Buttler and Viktoria Dendrinou): “The European Union’s budget hard-liners outlined elements of a deal for collectively financing the bloc’s response to the coronavirus recession, signaling they may be open to concessions. In a joint paper, the leaders of Austria, Denmark, Sweden and the Netherlands — net donors to the EU budget and traditionally skeptical of its expansion — reiterated their opposition to debt mutualization and emphasized that any aid program must have a time limit. Along with pro-austerity language, the document includes signs that the four governments are exploring areas of compromise…”
May 27 – Bloomberg (Carolynn Look): “The euro-area economy is faring worse than hoped, facing a recession as bad as the European Central Bank’s more pessimistic forecasts. Output is set to shrink between 8% and 12%, ECB President Christine Lagarde and Vice President Luis De Guindos both said…, calling a milder scenario out of date. The remarks highlight the severity of the repercussions for Europe after businesses were forced to close because of the coronavirus pandemic, costing hundreds of thousands of jobs and furloughing millions more.”
Brazil Watch:
May 25 – Bloomberg (Julia Leite and Martha Viotti Beck): “As Brazil’s accelerating caseload propels it into the second worst coronavirus hotspot, one of the most alarming aspects is the epidemic’s path — spreading into areas so poor they lack not only intensive care units but often clean water. Restricted at first to Brazil’s rich neighborhoods and capitals in close contact with international travelers, the virus has migrated inland, and also to states like Maranhao, where 20% of the population live in extreme poverty and most workers have unregulated jobs.”
EM Watch:
May 28 – Bloomberg (Constantine Courcoulas): “The Turkish central bank brought its short-term borrowing of hard currency from local lenders to a record as it looked to boost international reserves after an effort to defend the lira. The monetary authority’s outstanding foreign-currency swap stock coming due within the next year rose by $5.9 billion in the month to $35.5 billion in April… It’s equivalent to about 40% of its gross currency reserves including gold, which stood at $86.3 billion as of the end of April. The central bank has borrowed more than $17 billion of hard currency from local lenders through its swap facility this year, topping up its coffers as local lenders defend the lira by selling foreign exchange in the market. The central bank’s gross reserves have dropped by $20 billion in the period.”
May 24 – Reuters (Irem Koca and Jonathan Spicer): “Turkey has hiked a tax on the buying of foreign currency to 1% from 0.2% in a move meant to curb fallout for the lira from the coronavirus pandemic, the country’s Official Gazette said.”
May 26 – Bloomberg (Kartik Goyal): “Foreign funds have slashed their holdings of India’s government bonds to the lowest in three years amid dwindling returns, just as the nation embarks on a mammoth borrowing plan. The amount of sovereign securities held by global funds has slumped 767 billion rupees ($10bn) from this year’s peak in February as steep hedging costs diminished pay-offs in one of Asia’s highest-yielding markets. The rupee’s plunge by about 6% in 2020 further reduced the appeal of Indian debt.”
May 26 – Bloomberg (Scott Squires and Ignacio Olivera Doll): “As Argentina negotiates with creditors to restructure its debt following a ninth default, the government is struggling with another crisis: preventing precious dollars from flowing out of its embattled economy. Strict currency controls, stalled debt payments, a nationwide lockdown — and still the greenbacks drain away. Foreign currency reserves dropped to a four-year low last week, totaling less than they did when the International Monetary Fund started a $56 billion loan program in 2018.”
Japan Watch:
May 27 – Bloomberg (Yuko Takeo, Emi Urabe and Chikako Mogi): “Japan’s government increased the amount of debt it plans to issue this fiscal year for the third time in under two months, seeking to fund its unprecedented economic stimulus. Issuance will surge to 212.3 trillion yen ($2 trillion) in fiscal 2020… That’s versus 152.8 trillion yen estimated on April 20.”
May 26 – Reuters (Takaya Yamaguchi and Tetsushi Kajimoto): “Japanese Prime Minister Shinzo Abe’s cabinet approved… a new $1.1 trillion stimulus package that includes significant direct spending… The record stimulus of 117 trillion yen… followed another 117 trillion yen package rolled out last month. The new package takes Japan’s total spending to combat the virus fallout to 234 trillion yen ($2.18 trillion), or about 40% of gross domestic product.”
Geopolitical Watch:
May 27 – Financial Times (Jamil Anderlini): “By imposing a draconian national security law on Hong Kong, China’s leaders have clearly decided that stamping out dissent in the territory is more important than preserving its status as Asia’s premier financial centre. That title is now under direct threat after the Trump administration said… it no longer considered the former British colony to be autonomous from mainland China. This ruling opens the door for more sanctions that could punish individuals and companies and remove a range of special trade and investment privileges. Hong Kong could be left with very little to differentiate it from any other big Chinese city. Hong Kong is now the main battleground in an escalating cold war between China and what is left of the US-led liberal world order.”
May 24 – New York Times (Steven Lee Myers): “China’s move to strip away another layer of Hong Kong’s autonomy was not a rash impulse. It was a deliberate act, months in the making. It took into account the risks of international umbrage and reached the reasonable assumption that there would not be a significant geopolitical price to pay. As a provocative move, it is just the latest. With the world distracted by the pandemic’s devastating toll, China has taken a series of aggressive actions in recent weeks to flex its economic, diplomatic and military muscle across the region. China’s Coast Guard rammed and sank a fishing boat in disputed waters off Vietnam, and its ships swarmed an offshore oil rig operated by Malaysia. Beijing denounced the second inauguration of Taiwan’s president… and pointedly dropped the word peaceful from its annual call for unification… Chinese troops squared off again last week with India’s along their contentious border in the Himalayas.”
May 24 – Bloomberg: “The U.S. should give up its ‘wishful thinking’ of changing China, Foreign Minister Wang Yi said, warning that some in America were pushing relations to a ‘new Cold War.’ ‘China has no intention to change the U.S., nor to replace the U.S. It is also wishful thinking for the U.S. to change China,’ Wang said… He also criticized the U.S. for slowing its nuclear negotiations with North Korea and warned it not to cross Beijing’s ‘red line’ on Taiwan.”
May 26 – Reuters (Yew Lun Tian): “President Xi Jinping said… China would step up its preparedness for armed combat and improve its ability to carry out military tasks as the coronavirus pandemic is having a profound impact on national security, state television reported.”
May 28 – Reuters (Yew Lun Tian and Yimou Lee): “China will attack Taiwan if there is no other way of stopping it from becoming independent, one of the country’s most senior generals said on Friday, in a rhetorical escalation from China aimed at the democratic island Beijing claims as its own. Speaking at Beijing’s Great Hall of the People on the 15th anniversary of the Anti-Secession Law, Li Zuocheng, chief of the Joint Staff Department and member of the Central Military Commission, left the door open to using force… ‘If the possibility for peaceful reunification is lost, the people’s armed forces will, with the whole nation, including the people of Taiwan, take all necessary steps to resolutely smash any separatist plots or actions,’ Li said.”
May 28 – Bloomberg: “With Donald Trump and Xi Jinping both focused on ramping up domestic support in the wake of the pandemic, the bottom is rapidly falling out of U.S.-China relations. And few in either Washington or Beijing seem in the mood to stop it… ‘There is no off ramp for the moment for the U.S. and China, for the pretty obvious reason that neither is looking for one,’ said Richard McGregor, a senior fellow at the Lowy Institute in Sydney and author of ‘The Party: The Secret World of China’s Communist Rulers.’ ‘The U.S. feels it is playing catch up in muscling up to Beijing, a debate that will only be sharpened in a presidential election year. And China under Xi is programmed not to take a backward step.’”
May 27 – Bloomberg: “A body advising the U.S. Congress warned of growing risks for domestic investors from strains in China’s banking system and questioned Wall Street’s push into the Communist Party-ruled nation as it opens its capital markets. The report comes at a time of growing tension between the U.S. and China… The U.S. administration is examining whether to keep government pension funds from investing in Chinese equities and mulling a range of sanctions to punish it over a crackdown on Hong Kong. The Senate last week passed a bill that would limit the ability of Chinese companies to raise capital from U.S. investors, while Nasdaq Inc. also moved to limit Chinese listings. At the same time, the biggest U.S. financial firms from JPMorgan… to BlackRock Inc. and Goldman Sachs… have mapped out expansion plans in China as it opens its $45 trillion market.”
May 27 – Bloomberg (Nikos Chrysoloras): “China’s efforts to tighten its grip on Hong Kong pose a threat to the rules-based international order, the European Union’s top diplomat said, calling on member states to respond with a ‘robust’ message. China’s increasing control over the city ‘affects not only our direct interests in Hong Kong but also the maintenance of the rules-based international order where legal and political commitments are to be respected,’ EU foreign policy chief Josep Borrell said in a letter to the bloc’s 27 foreign ministers. The EU must continue “to ensure unified and robust messaging,” Borrell said…”
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