September 30, 2022: A Threatening Turn

September 30, 2022: A Threatening Turn
Doug Noland Posted on October 1, 2022

Global de-risking/deleveraging has taken A Threatening Turn. It’s no exaggeration to write that the UK pension system was this week at the brink of spectacular collapse, with confidence in policy and market function hanging in the balance.

September 28 – Reuters (David Milliken, Carolyn Cohn, Sachin Ravikumar and Dhara Ranasinghe): “The Bank of England stepped into Britain’s bond market to stem a market rout, pledging to buy around 65 billion pounds ($69bn) of long-dated gilts after the new government’s tax cut plans triggered the biggest sell-off in decades. Citing potential risks to the stability of the financial system, the BoE also delayed… the start of a programme to sell down its 838 billion pounds ($891bn) of government bond holdings, which had been due to begin next week. ‘Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,’ the BoE said. ‘This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.’”

While not mentioned specifically in the Bank of England (BOE) statement, various reports pointed to massive pension system margin calls and a resulting disorderly UK government bond (“gilts”) market. From the FT: “‘At some point this morning I was worried this was the beginning of the end,’ said a senior London-based banker, adding that at one point on Wednesday morning there were no buyers of long-dated UK gilts. ‘It was not quite a Lehman moment. But it got close.’”

From Bloomberg: “The size of the LDI (liability-driven investing) market has exploded over the past decade. The amount of liabilities held by UK pension funds that have been hedged with LDI strategies has tripled in size to £1.5 trillion ($1.7TN) in the 10 years through 2020.”

September 29 – Wall Street Journal (Jean Eaglesham, Heather Gillers, Leslie Scism and Caitlin Ostroff): “A pension-fund strategy that aims to reduce volatility without lowering returns created the first crack in the financial system after one of the fastest jumps in interest rates in decades. The Bank of England stopped the selloff exacerbated by heavy selling from U.K. pension funds forced to raise cash. The strategy is resulting in more modest selling in the U.S. as pension funds needed to increase collateral. Pension funds adopted the so-called liability-driven investment strategy, or LDI, to address regulatory changes and help to close the gap between assets and liabilities. But the strategy faltered as interest rates surged and bond prices fell, forcing more selling and driving prices still lower. ‘A vicious cycle kicks in and pension funds are selling and selling,’ said Calum Mackenzie, an investment partner at pension-fund adviser Aon PLC. ‘What you start to see is a death spiral’… Some of the more than $1.8 trillion worth of corporate pension plans in the U.S. are also facing margin calls.”

Attention was this week focused on “liability-driven investment strategies” – or LDI: “A strategy used by pension funds to manage their assets to ensure they can meet future liabilities.” And over recent years, an already challenging endeavor was made almost unworkable. Years of zero rates forced pension fund managers to reach for yield, derivatives, and leverage to generate sufficient returns to match future obligations.

Of course, an always enterprising “Wall Street” was there with a bevy of sophisticated strategies and derivative products to seemingly solve any problem. And, sure enough, everything worked splendidly – so long as rates and market yields remained ultra-low. Popularity ensured the entire strategy became one big – and now unruly – Crowded Trade.

As the BOE began to raise rates and market yields surged higher, trouble quickly materialized. Some levered pension funds sold gilts, pushing yields higher still. The pension system had become a major player in the derivatives interest-rate “swaps” marketplace over the years. And as yields surged higher, losses on swap positions required additional collateral to meet margin calls. A shortage of collateral ensued, with many fund strategies left without interest-rate hedges.

The new UK government’s tax cuts and subsidies announcement hit an acutely vulnerable marketplace, with gilt yields immediately spiking higher in a dislocated market. The highly levered pension funds were at risk of disorderly liquidations, while interest-rate derivatives markets faced catastrophic margin calls in an illiquid and collapsing marketplace.

The Bank of England aggressively intervened, in what is essentially a short-term QE program. Many in the UK are on tenterhooks, fearing a return of instability come the scheduled conclusion of this program on Wednesday, October 14th. Understandably, others are uncomfortable with additional QE in such a high inflation backdrop.

Market Structure has been an overarching CBB theme. The UK pension scheme blowup provides an early example of an untenable strategy that seemingly functioned well in the previous cycle’s backdrop (zero rates, liquidity abundance and reliable central bank market backstops).

Now, an unsettled new cycle unfolds. Leverage has become toxic, a development with far-reaching ramifications. Moreover, derivatives strategies that have assumed liquid and continuous markets now face an illiquid and discontinuous world. There are scores of festering untenable strategies out there – at home and abroad.Trillions upon Trillions. Dominos. Contagion looks like a sure bet.

The UK is only the first pension system facing the harsh reality of a steep devaluation of assets and the prospect of widespread insolvencies (liabilities greatly exceeding assets).

FT headline: “The Week That Wrecked Our Personal Finances in the UK.” It’s important to appreciate that UK “personal finances” were not wrecked this week. And you’re not going to wreck the UK pension system in a week’s time. The wrecking (ball) has been ongoing for years and even decades. For too long, misguided policy focus has been on inflating the value of bonds, stocks and other financial assets. A momentous gap developed between the perceived value of financial assets and the true economic value of real assets underpinning UK (and global) pensions and personal finances. This week was about a disorderly adjustment in grossly inflated UK bond values and associated panic. These types of adjustments are brutally destabilizing.

Many analysts were convinced the so-called “great financial crisis” would have been avoided had the Federal Reserve only moved early to bail out Lehman Brothers. But that misses the crucial analysis of Trillions of mispriced securities and derivatives (especially in the mortgage universe). The chasm between market/perceived values of financial assets and real economic wealth/wealth-creating capacity has ballooned tremendously over the past 13 years. Bubbles eventually burst, with a highly disruptive adjustment process becoming unavoidable.

We can simplistically break the unfolding Market Structure predicament down into three general issues: 1) Financial asset overvaluation not well supported by underlying economic wealth. 2) Over-leverage. 3) Risk engineering, transfer and management.

There is today gross financial asset overvaluation virtually across the board. Bond and fixed-income markets have not yet fully revalued in response to inflation dynamics, over-indebtedness, and new central bank policy regimes. Corporate debt has barely begun to price in a historic cyclical downturn and associated systemic Credit impairment. Equities are early in adjusting to an extremely high-risk world of Credit market instability, economic vulnerability, geopolitical peril, policy impotence, climate change, and likely an earnings collapse.

As for leverage, I believe the global system is only in the earliest deleveraging phase. The world is being forced to adjust to an unfolding cycle with myriad extraordinary uncertainties. Previous cycle typical leverage metrics are today (and for the foreseeable future) untenable. Pension funds are only one segment of highly levered market, financial and economic systems.

It is the “risk engineering, transfer and management” facet of the analysis that these days is somewhat the big unknown. I worry about derivatives and structured finance more generally. Recall the collapsing values of “AAA” mortgage securities during the bursting of the mortgage finance Bubble. Investors and regulators were quick to blame the ratings agencies, when it should have been obvious to anyone doing real analysis that transforming Trillions of risky late-cycle mortgage Credit into mostly top-rated securities was fanciful financial alchemy. And it is the sudden loss of confidence in perceived safe and liquid instruments that sparks panics and runs.

Throughout the protracted post-2008 boom cycle, there was a proliferation of instruments and strategies that mask underlying risks. Myriad risks (i.e. rates, Credit, currency, market, etc.) are shifted, transformed and often obfuscated. In the case of the UK pension funds, many “LDI” strategies incorporated derivatives hedges that were to protect against higher market yields. But when yields spiked higher, it became too expensive (required too much additional collateral) to maintain the hedges. This should be viewed as an early warning that many hedges will not operate as expected in the unfolding highly unstable market environment.

Importantly, too many hedges rely on dynamic/“delta” trading strategies that are forced to sell instruments into rapidly declining and liquidity-challenged markets. I’ll assume this is a major facet of the UK pension bond debacle.

UK 10-year yields traded to 4.59% in early Wednesday trading, up an astounding 146 bps in seven sessions, before reversing sharply lower (BOE intervention) to close the session at 4.01%. Ten-year Treasury yields rose to 4.01% Wednesday (up 52bps in seven sessions), only to end the day at 3.73%.

Why, one might ask, was the UK pension issue causing such a ruckus in U.S. and global markets? First, liquidity is fungible globally, with de-risking/deleveraging dynamics sparking a rush for liquidity throughout international markets. Moreover, Market Structure issues are a global phenomenon. The same financial engineering used by UK pensions has been adopted in the U.S. and worldwide. The hundreds of Trillions interest-rate swaps derivatives markets are global and tightly interconnected. If a strategy falters in one market, kindred strategies are then in the crosshairs globally. A problem structure in any country quickly becomes a concern for all markets. And when blowups and panics spark illiquidity and discontinuity in one market, immediately all markets are on guard for similar blowups. When it comes to Market Structure, it is one monstrous global speculative Bubble.

Global “risk off” deleveraging attained powerful momentum this week. It appeared decisive. And that the BOE intervention rally had such a short (one session) half-life was ominous. Such highly synchronized global markets are ominous. And that Treasuries can’t catch even an itty bitty safe haven bid in the face of such acute global stress is further evidence of ominous new cycle dynamics.

The rundown. Chinese “big four” bank CDS spiked further to multi-year highs. Industrial & Commercial Bank of China (ICBC) CDS jumped another 17 to 137 bps (42bps 2-wk gain). China Construction Bank CDS rose 14 to 141 bps (46bps 2-wk gain). Bank of China CDS rose 17 to 136 bps (42bps 2-wk gain), and China Development Bank CDS jumped 15 to 125 bps (39bps 2-wk gain).

China sovereign CDS gained 10 this week to 112 bps, with a notable two-week 37 bps spike – to the high since January 2017. Number one builder Country Garden bond yields surged almost nine percentage points to 46%. The yield for China’s high-yield dollar bond index jumped over 200 bps this week to 25.25%, as Asian high-yield bond yields jumped 133 bps to 17.54% (almost back to the July spike high). Asian currencies performed poorly, with the South Korean won down 1.5%, the Malaysian ringgit 1.3%, the Indonesia rupiah 1.3%, and the Japanese yen 1.0%. Heightened concerns for debt and leverage bode poorly for China and greater Asia.

Emerging Market CDS jumped 14 bps this week to a two-month high 331 bps (began the year at 187bps). The Russian ruble declined 3.8%, the Colombian peso 3.5%, the Hungarian forint 3.0%, the Brazilian real 2.8% and the Peruvian sol 1.8%. Ten-year yields spiked 73 bps in Poland, 62 bps in Croatia, 52 bps in Hungary, 43 bps in Czech Republic, 41 bps in Peru, 35 bps in Lithuania, and 33 bps in Romania. Dollar-denominated EM bond yields continue to spike higher. Yields were up 29 bps in Panama, 23 bps in Indonesia, 21 bps in Saudi Arabia and 13 bps in the Philippines. CDS spiked 32 bps in Brazil and 31 bps in Colombia.

It was another alarming week for global bank CDS. Credit Suisse CDS surged 32 bps to a record 254 bps. It’s worth noting that Credit Suisse CDS remained below 200 bps throughout the 2008 crisis, later spiking to 150 bps during the March 2020 panic. UK banks NatWest (plus 16), Lloyds (12), and Barclays (11) all posted double-digit CDS gains. Citigroup CDS jumped 10 to 134 bps – the high since March 2020. JPMorgan CDS rose five (to 111bps), Bank of America nine (116bps), Morgan Stanley eight (131bps) and Goldman Sachs five (135 bps) – all highs since the pandemic panic.

U.S. high-yield CDS surged 42 to 610 bps, trading this week to the high since May 2020. Investment-grade CDS added two to 108 bps, also the high since the pandemic crisis period. The VIX traded to 35, the high since the June spike. The bond volatility MOVE index surged to almost 160, just below the March 2020 spike high.

September 30 – Bloomberg (Olivia Raimonde and Carmen Arroyo): “Credit markets are starting to buckle under pressure from soaring yields and fund outflows, leaving strategists fearing a rupture as the economy slows. Banks this week had to pull a $4 billion leveraged buyout financing, while investors pushed back on a risky bankruptcy exit deal and buyers of repacked loans went on strike. But the pain was not confined to junk — investment-grade debt funds saw one of the biggest cash withdrawals ever and spreads flared to the widest since 2020, following the worst third quarter returns since 2008. ‘The market is dislocated and financial stability is at risk,’ said Tracy Chen, portfolio manager at Brandywine Global Investment. ‘Investors are going to test central bank resolve,’ she said…”

Some this week questioned whether the UK had become an “emerging market.” The nation’s deficits, debt level and Current Account Deficit are, after all, symptomatic of typical EM crisis fragility. But it has been how EM countries were forced to respond to crisis dynamics that set them apart from their “developed” neighbors. EM countries invariably are forced to aggressively hike interest rates to stabilize collapsing currencies and debt markets. Developed countries, on the other hand, have for years enjoyed the luxury of collapsing interest rates and even massive “money” printing operations during crisis environments to bolster asset markets and economies.

The UK is A Test Case right now. High inflation and acute currency fragility seem to preclude the normal pivot to aggressive rate cuts and yet another round of “easy money.” We’ve already witnessed the usual shift to fiscal stimulus get shot down in flames. The jury is out on the BOE’s emergency bond support operations. Indeed, the UK is now one yield spike and/or currency drop away from a debilitating crisis of confidence. The United Kingdom is not unique.

If markets block the UK’s use of monetary stimulus to thwart crisis dynamics, it’s a whole new ballgame. Unleashed Market Structure issues (certainly including illiquidity, market dislocation, and derivatives counter-party risks) would be difficult to contain, with crisis of confidence dynamics likely demonstrating powerful global contagion.

And if phenomenal global financial market risks weren’t enough, disturbing geopolitical risks are also intensifying.

September 30 – Financial Times (Max Seddon and Roman Olearchyk): “Vladimir Putin has annexed four regions in south-eastern Ukraine and vowed to use ‘all the means’ at Russia’s disposal to defend the territory in a speech that marked a further escalation in his war against Kyiv and his resentment at its western allies. In a ceremony marking the move on Friday, the Russian president called on Ukraine to negotiate an end to the war — but reserved his strongest ire for Kyiv’s ‘real masters’ in the west, which he accused of trying to ‘destroy’ Russia. The annexations are a dramatic attempt to raise the stakes in the conflict by bringing them under Russia’s nuclear umbrella… Putin said an attack on the four regions, which he said he now considered to be part of his country’s territory, would be treated as an attack on Russia and met with full force. ‘We will defend our lands with all the means at our disposal and do everything to protect our people. This is our great liberating mission,’ he said… Although Putin did not make any reference to Russia’s own nuclear arsenal, which he had threatened to use when he announced the annexations last week, he accused the US of setting a ‘precedent’ in bombing Hiroshima and Nagasaki at the end of the second world war. But the bulk of the president’s speech was spent ranting against the west. It covered topics as varied as western sanctions, European imperial history, crude jokes about sex change operations and accusations that ‘Anglo-Saxons’ had attacked two gas pipelines in the Baltic this week… ‘They are blatantly dividing the world into their vassals and everyone else,’ Putin said… ‘The west is looking for new ways to strike against our country, to weaken and destroy Russia… They just can’t put up with there being such a big country with its territory, rich natural resources, and people who won’t live by anyone else’s rules’… Putin offered hope the EU would drop its support for Ukraine as it steels itself for a difficult winter without Russian energy supplies. ‘Politicians in Europe will have to convince their citizens to wash less and heat their homes themselves. And when asked why they point their fingers at Russia… You can’t feed people with paper dollars and euros… You can’t warm people with puffed-up valuations — you need energy sources.’”

For the Week:

The S&P500 fell 2.9% (down 24.8% y-t-d), and the Dow declined 2.9% (down 20.9%). The Utilities sank 8.8% (down 9.3%). The Banks slumped 3.1% (down 27.5%), and the Broker/Dealers stumbled 2.1% (down 15.7%). The Transports slipped 0.6% (down 26.8%). The S&P 400 Midcaps declined 1.6% (down 22.5%), and the small cap Russell 2000 dipped 0.9% (down 25.9%). The Nasdaq100 fell 3.0% (down 32.8%). The Semiconductors dropped 4.2% (down 41.5%). The Biotechs gained 0.7% (down 18.3%). With bullion recovering $17, the HUI gold equities index rallied 8.1% (down 24.9%).

Three-month Treasury bill rates ended the week at 3.1775%. Two-year government yields increased seven bps to 4.28% (up 355bps y-t-d). Five-year T-note yields gained 11 bps to 4.09% (up 283bps). Ten-year Treasury yields jumped 14 bps to 3.83% (up 232bps). Long bond yields rose 17 bps to 3.78% (up 188bps). Benchmark Fannie Mae MBS yields jumped 19 bps to 5.68% (up 361bps).

Greek 10-year yields surged 26 bps to 4.84% (up 352bps). Italian yields rose 18 bps to 4.52% (up 335bps). Spain’s 10-year yields gained 11 bps to 3.29% (up 272bps). German bund yields rose eight bps to 2.11% (up 229bps). French yields jumped 12 bps to 2.72% (up 252bps). The French to German 10-year bond spread widened four to 61 bps. U.K. 10-year gilt yields surged 27 bps to 4.09% (up 312bps). U.K.’s FTSE equities index slumped 1.8% (down 6.6% y-t-d).

Japan’s Nikkei Equities Index sank 4.5% (down 9.9% y-t-d). Japanese 10-year “JGB” yields added a basis point to 0.24% (up 17bps y-t-d). France’s CAC40 slipped 0.4% (down 19.4%). The German DAX equities index declined 1.4% (down 23.7%). Spain’s IBEX 35 equities index dropped 2.9% (down 15.5%). Italy’s FTSE MIB index fell 2.0% (down 24.5%). EM equities remained under pressure. Brazil’s Bovespa index declined 1.5% (up 5.0%), and Mexico’s Bolsa index lost 1.7% (down 16.2%). South Korea’s Kospi index sank 5.9% (down 27.6%). India’s Sensex equities index declined 1.2% (down 1.4%). China’s Shanghai Exchange Index fell 2.1% (down 16.9%). Turkey’s Borsa Istanbul National 100 index dropped 3.1% (up 71.2%). Russia’s MICEX equities index sank 6.3% (down 48.3%).

Investment-grade bond funds posted outflows of $10.299 billion, and junk bond funds reported negative flows of $3.003 billion (from Lipper).

Federal Reserve Credit declined $10.8bn last week at $8.773 TN. Fed Credit is down $128bn from the June 22nd peak. Over the past 159 weeks, Fed Credit expanded $5.046 TN, or 135%. Fed Credit inflated $5.962 Trillion, or 212%, over the past 516 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week sank $18.3bn to a seven-week low $3.366 TN. “Custody holdings” were down $118bn, or 3.4%, y-o-y.

Total money market fund assets increased $6.4bn to $4.590 TN. Total money funds were up $46bn, or 1.0%, y-o-y.

Total Commercial Paper added $1.7bn to $1.230 TN. CP was up $45bn, or 3.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 41 bps to 6.70% (up 369bps y-o-y) – the high since July 2008. Fifteen-year rates spiked 52 bps to a 15-year high 5.96% (up 368bps). Five-year hybrid ARM rates jumped 33 bps to 5.30% (up 282bps) – the high since January 2009. Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 27 bps to 6.82% (up 362bps) – the high since March 2009.

Currency Watch:

September 28 – Financial Times (Hudson Lockett and Thomas Hale): “China’s renminbi fell to the lowest level since 2008 as the country’s central bank holds back from intervening to prop up the currency in response to the rallying dollar. The renminbi is the latest major currency to succumb to a wave of dollar strength that has sent exchange rates from the pound to the yen spiralling lower this year. As the People’s Bank of China pursues monetary easing to shore up economic growth, continued policy divergence with the hawkish US Federal Reserve is expected to push the Chinese currency down further.”

September 28 – Bloomberg: “China’s central bank stepped up its defense of the falling yuan with a strongly-worded statement to warn against speculation, after the currency dropped to its lowest versus the dollar since 2008. ‘Do not bet on one-way appreciation or depreciation of the yuan, as losses will definitely be incurred in the long term,’ the People’s Bank of China said… Key market participants need to ‘voluntarily safeguard the stability of the market, and be firm when they need to iron out big rallies or declines in the exchange rate.’ The central bank added that it has ‘plenty of experience’ to fend off external shocks and effectively guide market expectations.”

September 29 – Reuters (Julie Zhu): “China’s central bank has asked major state-owned banks to be prepared to sell dollars for the local unit in offshore markets as it steps up efforts to stem the yuan’s descent, four sources with knowledge of the matter said. State banks were told to ask their offshore branches, including those based in Hong Kong, New York and London, to review their holdings of the offshore yuan and ensure U.S. dollar reserves are ready to be deployed, three of the sources…”

September 26 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japanese Finance Minister Shunichi Suzuki said authorities stood ready to respond to speculative currency moves, a fresh warning that comes days after Tokyo intervened in the foreign exchange market to stem yen falls for the first time in more than two decades. Suzuki also told a news conference… the government and the Bank of Japan (BOJ) were on the same page in sharing concerns about the currency’s sharp declines. ‘We are deeply concerned about recent rapid and one-sided market moves driven in part by speculative trading… There’s no change to our stance of being ready to respond as needed’ to such moves, he added.”

September 30 – Bloomberg (Toru Fujioka): “The Ministry of Finance disclosed Friday that it spent 2.84 trillion yen ($19.7bn) in September to slow the yen’s slide in its first intervention to support the currency since 1998. Some private analysts had estimated the intervention at up to 3.6 trillion yen.”

September 28 – Bloomberg (Sofia Horta e Costa and Hooyeon Kim): “After some of the most dramatic declines in global financial markets since the Federal Reserve began lifting borrowing costs six months ago, authorities in Asia are intensifying efforts to prevent a downward spiral. South Korea joined a growing list of interventions on Wednesday, with the central bank saying it will buy as much as $2.1 billion worth of sovereign debt. In Taiwan, officials have floated currency controls and signaled a readiness to ban stock short sales. China has instructed some funds to refrain from large share sales and told banks to ensure the yuan’s daily fixing is being ‘respected’ by market players.”

September 26 – Bloomberg (Matthew Burgess, Ruth Carson and Tania Chen): “Asian markets risk a reprise of crisis-level stress as two of the region’s most important currencies crumble under the onslaught of relentless dollar strength… ‘The renminbi and yen are big anchors and their weakness risks destabilizing currencies to trade and investments in Asia,’ said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd… ‘We’re already heading toward global financial crisis levels of stress in some aspects, then the next step would be the Asian financial crisis if losses deepen.’”

For the week, the U.S. Dollar Index declined 0.9% to 112.17 (up 17.2% y-t-d). For the week on the upside, the British pound increased 2.9%, the Swedish krona 1.9%, the euro 1.2%, and the Mexican peso 0.4%. On the downside, the Brazilian real declined 2.8%, the New Zealand dollar 2.5%, the Norwegian krone 2.5%, the Australian dollar 2.0%, the Canadian dollar 1.7%, the South Korean won 1.5%, the Japanese yen 1.0%, the South African rand 0.8%, the Swiss franc 0.5% and the Singapore dollar 0.3%. The Chinese (onshore) renminbi gained 0.17% versus the dollar (down 10.68% y-t-d).

Commodities Watch:

September 26 – Reuters (Tom Polansek): “The world is heading toward the tightest grain inventories in years despite the resumption of exports from Ukraine, as the shipments are too few and harvests from other major crop producers are smaller than initially expected, according to grain supply and crop forecast data. Poor weather in key agricultural regions from the United States to France and China is shrinking grain harvests and cutting inventories, heightening the risk of famine in some of the world’s poorest nations.”

The Bloomberg Commodities Index declined 0.8% (up 12.4% y-t-d). Spot Gold rallied 1.0% to $1,661 (down 9.2%). Silver recovered 0.8% to $19.028 (down 18.4%). WTI crude increased 75 cents to $79.49 (up 6%). Gasoline surged 3.8% (up 11%), while Natural Gas declined 0.9% to $6.766 (up 81%). Copper rallied 2.1% (down 24%). Wheat surged 4.7% (up 20%), while Corn was little changed (up 14%). Bitcoin recovered $270, or 1.4%, this week to $19,400 (down 58%).

Market Instability Watch:

September 28 – Bloomberg (Greg Ritchie): “The UK bond market blowup which forced an unusual Bank of England intervention has shone a light on the fragilities of markets as they transition away from easy money. While the gilt capitulation was triggered by UK government tax giveaways and exacerbated by quirks in the UK pension industry, the underriding factors were years in the making and global in nature. Major central banks around the world have kept borrowing costs and government finances in check through super-low rates and asset-purchase programs since the global financial crisis. Now, as inflation forces them to turn off the cash spigots, markets are looking ever more vulnerable. The situation speaks to the conflict of official mandates, with central banks often tasked to protect against financial instability as well as price pressures.”

September 28 – Bloomberg (David Goodman and Philip Aldrick): “The Bank of England staged a dramatic intervention to stave off an imminent crash in the gilt market by pledging unlimited purchases of long-dated bonds. With the fallout from Prime Minister Liz Truss’s tax cuts still ripping through UK asset prices, the central bank had been warned that collateral calls on Wednesday afternoon could force investors to dump government bonds, according to a person familiar with its decision making. The plan to buy securities maturing in 20 years or more in daily tranches of up to £5 billion ($5.3bn) had an immediate impact on the gilt market, putting yields on 30-year debt on track for the biggest drop on record. They earlier climbed to the highest since 1998.”

September 29 – Wall Street Journal (Jean Eaglesham, Heather Gillers, Leslie Scism and Caitlin Ostroff): “A pension-fund strategy that aims to reduce volatility without lowering returns created the first crack in the financial system after one of the fastest jumps in interest rates in decades. The Bank of England stopped the selloff exacerbated by heavy selling from U.K. pension funds forced to raise cash. The strategy is resulting in more modest selling in the U.S. as pension funds needed to increase collateral. Pension funds adopted the so-called liability-driven investment strategy, or LDI, to address regulatory changes and help to close the gap between assets and liabilities. But the strategy faltered as interest rates surged and bond prices fell, forcing more selling and driving prices still lower. ‘A vicious cycle kicks in and pension funds are selling and selling,’ said Calum Mackenzie, an investment partner at pension-fund adviser Aon PLC. ‘What you start to see is a death spiral’… Some of the more than $1.8 trillion worth of corporate pension plans in the U.S. are also facing margin calls.”

September 27 – Financial Times (Kate Duguid, Adam Samson and Colby Smith): “The $24tn US Treasury market has been hit with its most severe bout of turbulence since the coronavirus crisis, underscoring how big swings in international bonds and currencies and jitters over US rate rises have spooked investors. The Ice BofA Move index, which tracks fixed income market volatility, has reached its highest level since March 2020, a time when deep uncertainty about how the pandemic would affect the world economy set off massive fluctuations in US government bonds. ‘Right now it is all about market volatility,’ said Gennadiy Goldberg, a strategist at TD Securities. ‘You have investors staying away because of the volatility — and investors staying away increases volatility. It is a volatility vortex.’”

September 28 – Bloomberg (Philip Aldrick): “The Bank of England’s decision to announce unlimited and immediate purchases of long-dated bonds was prompted by fears that collateral calls as soon as Wednesday afternoon could trigger a further crash in gilts, according to a person familiar with policy makers’ decision making. The Bank had been warned by investment banks and fund managers in recent days that the collateral requirements could create a situation in which forced selling drove up the yield on UK debt, the person said, asking not to be named discussing the central bank’s deliberations.”

September 29 – Financial Times (Martin Arnold): “Europe’s top financial regulators have issued an unprecedented warning about ‘severe risks to financial stability’ after concluding Russia’s invasion of Ukraine could create a toxic combination of an economic downturn, falling asset prices and financial market stress. The European Systemic Risk Board, which is responsible for monitoring and preventing dangers to the region’s financial system, issued the alert after meeting last week and deciding the energy crisis triggered by the war in Ukraine had put the financial system in a precarious position. This is the first ‘general warning’ about risk the ESRB has issued since its creation in 2010 on the eve of the eurozone sovereign debt crisis.”

September 24 – Reuters (Michael MacKenzie and Liz Capo McCormick): “Week by week, the bond-market crash just keeps getting worse and there’s no clear end in sight. With central banks worldwide aggressively ratcheting up interest rates in the face of stubbornly high inflation, prices are tumbling as traders race to catch up. And with that has come a grim parade of superlatives on how bad it has become. On Friday, the UK’s five-year bonds tumbled by the most since at least 1992 after the government rolled out a massive tax-cut plan that may only strengthen the Bank of England’s hand. Two-year US Treasuries are in the middle of the the longest losing streak since at least 1976, dropping for 12 straight days. Worldwide, Bank of America Corp. strategists said government bond markets are on course for the worst year since 1949, when Europe was rebuilding from the ruins of World War Two.”

September 25 – Bloomberg (Ambereen Choudhury, Natasha White, and Denise Wee): “Global financial firms, still smarting from multi-billion dollar losses in Russia, are now reassessing the risks of doing business in Greater China after an escalation of tensions over Taiwan. Lenders including Societe Generale SA, JPMorgan…, UBS Group AG have asked their staff to review contingency plans in the past few months to manage exposures… Global insurers, meanwhile, are backing away from writing new policies to cover firms investing in China and Taiwan, and costs for political risk coverage have soared more than 60% since Russia’s invasion of Ukraine. ‘Political risk around potential US sanctions and the likelihood that China would respond by restricting capital flow has kept risk managers busy,’ said Mark Williams, a professor at Boston University. ‘A sanctions war would significantly increase the cost of doing business and push US banks to rethink their China strategy.’”

September 24 – Financial Times (Federica Cocco): “Executives at publicly traded US companies are becoming increasingly worried about the spectre of a further escalation of tensions over Taiwan, a major supplier of crucial components like semiconductors. The number of annual regulatory filings citing Taiwan as a risk factor has risen significantly over the past 12 months… In March, a popular time for releasing so-called ‘10-k’ reports, 116 companies mentioned Taiwan as a risk to their business, and the rolling 12-month average this month reached its highest level in at least 16 years. Technology companies represent the sector most concerned, with those in the semiconductor industry raising the loudest alarm.”

Bursting Bubble and Mania Watch:

September 25 – Wall Street Journal (Gunjan Banerji): “It is the worst year for buying the stock-market dip since the 1930s. Instead of rebounding after a tumble, stocks have continued to fall, burning investors who stepped in to buy shares on sale. The S&P 500 has dropped 1.2% on average this year in the week after a one-day loss of at least 1%… That is the biggest such decline since 1931. The extended downturn is putting a dent in the popular buy-the-dip trade, a strategy in which many investors found great success after the last financial crisis and particularly during the lightning-fast pandemic recovery. Major stock indexes hit dozens of continuous records, convincing many investors that any downturn would be short-lived—and an attractive opportunity to buy. Retail, or nonprofessional, investors have been enthusiastic dip buyers, piling in even when institutional investors are coming out.”

September 24 – Wall Street Journal (Heather Gillers and Dion Rabouin): “Public pension funds are already reporting big losses in 2022. Things are likely to get uglier. That is because the funds, which manage around $5 trillion in retirement savings for the nation’s teachers, firefighters and other public workers, haven’t yet factored in second-quarter returns on private equity and other illiquid investments. ‘You should expect sometime over the next three to four quarters to see write-downs in the illiquid part of the portfolio,’ Allan Emkin, a consultant to large pension funds with Meketa Investment Group, told the board of the $300 billion California State Teachers’ Retirement System last month. The losses are yet another example of how the current market tumult offers almost no place to hide, and that even the investments usually considered havens are slumping.”

September 27 – Bloomberg (Chikako Mogi and Masaki Kondo): “Japan’s 20-year bond yields rose to the highest level since 2015 as global debt markets come under increasing pressure due to expectations of further monetary-policy tightening. Yields on the securities extended gains even after the Bank of Japan announced unscheduled bond-purchase operation, climbing four bps to 1.03%. The benchmark 10-year yield rose 0.5 bps to 0.25%, the upper limit of the trading range the BOJ tolerates under its yield-curve-control policy.”

September 25 – Bloomberg (Masaki Kondo): “The Bank of Japan bought a larger-than-planned amount of bonds at its regular operation on Monday, as the benchmark yield climbed toward the upper end of the central bank’s tolerated trading range. The BOJ purchased 550 billion yen ($3.8bn) of five-to-10-year notes. This was a third time its purchases exceeded the original plan of 500 billion yen, and followed unscheduled buying of 150 billion of the same tenors last Wednesday.”

September 30 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global bond and equity funds witnessed massive outflows in the week ended Sept. 28… Investors offloaded a net $22.07 billion worth of global bond funds, in their biggest such weekly net sales since June. 22, data from Refinitiv Lipper showed.”

September 25 – Bloomberg (Natalie Wong, John Gittelsohn and Noah Buhayar): “In the heart of midtown Manhattan lies a multibillion-dollar problem for building owners, the city and thousands of workers. Blocks of decades-old office towers sit partially empty, in an awkward position: too outdated to attract tenants seeking the latest amenities, too new to be demolished or converted for another purpose. It’s a situation playing out around the globe as employers adapt to flexible work after the Covid-19 pandemic and rethink how much space they need. Even as people are increasingly called back to offices for at least some of the week, vacancy rates have soared in cities from Hong Kong to London and Toronto. ‘There’s no part of the world that is untouched by the growth of hybrid working,’ said Richard Barkham, global chief economist for commercial real estate firm CBRE Group Inc.”

September 28 – Bloomberg (Sidhartha Shukla): “Trading volumes in nonfungible tokens — digital art and collectibles recorded on blockchains — have tumbled 97% from a record high in January this year. They slid to just $466 million in September from $17 billion at the start of 2022, according to… Dune Analytics. The fading NFT mania is part of a wider, $2 trillion wipeout in the crypto sector as rapidly tightening monetary policy starves speculative assets of investment flows.”

Ukraine War Watch:

September 26 – Financial Times (Gideon Rachman): “We have now reached the point in the Ukraine war that western policymakers have both hoped for and worried about for many months. Even as they made the decision to supply Ukraine with the missiles that changed the course of the war, US officials were aware of the double-edged nature of their choice. As one of them put it back in May: ‘The better the Ukrainians do, the more dangerous the situation will become.’ That moment of heightened opportunity, and heightened danger, has arrived. After a series of Russian defeats, Vladimir Putin has called up more troops and once again threatened to use nuclear weapons. Many western pundits think Putin is bluffing. But policymakers are more cautious. This weekend Jake Sullivan, US President Joe Biden’s national security adviser, reiterated that the Kremlin’s nuclear warnings are ‘a matter that we have to take deadly seriously’. The possibility of nuclear war has always loomed large in the White House’s calculations. And that is a good thing, given that miscalculation could lead to Armageddon.”

September 28 – Reuters (Sabine Siebold and Bart H. Meijer): “NATO and the European Union… stressed the need to protect critical infrastructure after what they called acts of ‘sabotage’ on the Nord Stream pipelines, and Brussels warned of a ‘robust and united response’ should there be more attacks. As gas continued to spew into the Baltic Sea, it remained far from clear who might be behind the leaks or any foul play, if proven, on the Nord Stream pipelines that Russia and European partners spent billions of dollars building.”

U.S./Russia/China Watch:

September 28 – Bloomberg (Nancy Cook): “Vice President Kamala Harris said the Biden administration intends to deepen America’s unofficial ties with Taiwan, a fresh US warning to China that she delivered in a speech from the deck of a US warship in Japan. ‘Taiwan is a vibrant democracy that contributes to the global good — from technology to health, and beyond, and the United States will continue to deepen our unofficial ties,’ Harris said… She criticized China, saying Beijing ‘has challenged freedom of the seas’ and “has flexed its military and economic might to coerce and intimidate its neighbors.’ Harris added that many have witnessed ‘disturbing behavior in the East China Sea and in the South China Sea, and most recently, provocations across the Taiwan Strait.’”

Economic War/Iron Curtain Watch:

September 28 – Reuters (Gabriela Baczynska, Sabine Siebold and Marine Strauss): “The European Union executive proposed… an eighth round of sanctions against Russia over its invasion of Ukraine, including tighter trade restrictions, more individual blacklistings and an oil price cap for third countries. The proposal will now go to the bloc’s 27 member countries, which will need to overcome their differences to implement the new sanctions on top of seven sets of punitive measures imposed on Russia since its forces swept into Ukraine on Feb. 24.”

September 27 – Bloomberg (Craig Stirling and Elena Mazneva): “The economic damage from the shutdown of Russian gas flows is piling up fast in Europe and risks eventually eclipsing the impact of the global financial crisis. With a continent-wide recession now seemingly inevitable, a harsh winter is coming for chemical producers, steel plants and car manufacturers starved of essential raw materials who’ve joined households in sounding the alarm over rocketing energy bills. The suspected sabotage of Germany’s main pipeline for gas from Russia underlined that Europe will have to survive without any significant Russian flows.”

September 27 – Reuters: “Kremlin-controlled gas giant Gazprom said… it rejected all claims from Ukraine’s energy firm Naftogaz in arbitration proceedings over Russian gas transit, and had notified the arbitration court. It also said that Russia may introduce sanctions against Naftogaz in case it further pursues the arbitration case, meaning Gazprom would be prohibited by the sanctions from paying Ukraine the transit fees.”

Inflation Watch:

September 29 – Bloomberg (Kim Chipman, Dominic Carey and Michael Hirtzer): “American farmers face yet another supply-chain headache just as harvest season moves into high gear: Not enough barges on a shrinking Mississippi River. Drought is drying up the crucial US water artery. That means less room for vessels shipping out corn and soybeans, the biggest US crops. Barge rates reached $49.88 per ton on Tuesday, the highest on record and up nearly 50% from a year ago…”

September 30 – Reuters (Balazs Koranyi): “Euro zone inflation zoomed past forecasts to hit 10.0% in September, a new record high that will reinforce expectations for another jumbo interest rate hike next month from the European Central Bank. Price growth in the 19 countries sharing the euro accelerated from August’s 9.1%…, beating expectations for a reading of 9.7%, with some euro zone members experiencing the fastest price growth since the time of the Korean War 70 years ago.”

September 29 – Financial Times (Guy Chazan and Martin Arnold): “German inflation soared to double-digit levels for the first time in more than 70 years, underlining the precarious state of Europe’s largest economy, which leading economists warned could shrink by up to 7.9% next year in a worst-case scenario. Chancellor Olaf Scholz responded to soaring energy costs on Thursday by announcing plans for a €200bn cap on gas prices, which he described as a ‘defensive shield’ to be financed by extending an off-balance sheet fund set up to provide aid during the coronavirus pandemic. Consumer prices in Germany rose 10.9% in the year to September, accelerating from 8.8% in August…”

Biden Administration Watch:

September 26 – Reuters (Trevor Hunnicutt and Doina Chiacu): “U.S. Vice President Kamala Harris reaffirmed Washington’s commitment to Japan’s defense during a meeting on Monday with Prime Minister Fumio Kishida in Tokyo in which they condemned China’s actions in the Taiwan Strait. ‘They discussed the People’s Republic of China’s recent aggressive and irresponsible provocations in the Taiwan Strait, and reaffirmed the importance of preserving peace and stability across the Taiwan Strait,’ the White House said…”

Federal Reserve Watch:

September 27 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve officials said they needed to keep raising interest rates to restore price stability, with St. Louis Fed chief James Bullard warning that their credibility was on the line. ‘This is a serious problem and we need to be sure we respond to it appropriately,’ Bullard told an economic conference in London… ‘We have increased the policy rate substantially this year and more increases are indicated,’ in the Fed’s latest forecasts.”

September 28 – Reuters (Dhara Ranasinghe, Jorgelina Do Rosario and Ann Saphir): “Federal Reserve Bank of Chicago President Charles Evans said… that volatility in markets can create additional restrictiveness in financial conditions. Global markets have been whipsawed this week by turmoil in UK markets, already on edge over aggressive rate hikes from the U.S. Federal Reserve and other major central banks. ‘The U.S. economy and inflation are going to be largely dictated by the stance of monetary policy and everything else that is going on supply shocks, the labour issues we’re dealing with… It is a case that financial market volatility can add to additional financial restrictiveness. So anything around the world in terms of policy or developments like Russia’s invasion of Ukraine can add to additional restrictiveness.’”

September 27 – Reuters (Marc Jones and Lindsay Dunsmuir): “The U.S. Federal Reserve will need to raise interest rates to a range between 4.50% and 4.75%, Chicago Fed President Charles Evans said…, a more aggressive stance than he has previously embraced that underscores the central bank’s hardening resolve to quash excessively high inflation. Evans also said that he does not see ‘recession-like’ unemployment rate numbers ahead, even as the Fed’s actions result in below-trend economic growth and a softening in the labor market to bring inflation back down to the central bank’s 2% goal.”

September 27 – Reuters (Ann Saphir): “San Francisco Federal Reserve Bank President Mary Daly said… the U.S. central bank is ‘resolute’ about bringing down high inflation but also wants to do so ‘as gently as possible’ so as not to drive the economy into a downturn. It is important, Daly said at a symposium held jointly with the Monetary Authority of Singapore, ‘to navigate through this high inflation environment as carefully as we can, so that we don’t leave longer term damage to our labor market.’”

U.S. Bubble Watch:

September 29 – Associated Press (Christopher Rugaber): “The number of Americans filing for jobless benefits dropped last week, a sign that few companies are cutting jobs despite high inflation and a weak economy. Applications for unemployment benefits for the week ending Sept. 24 fell by 16,000 to 193,000… That is the lowest level of unemployment claims since April. Last week’s number was revised down by 4,000 to 209,000.”

September 30 – Reuters (Lucia Mutikani): “U.S. consumer spending increased more than expected in August, but aggressive interest rate hikes from the Federal Reserve as it battles stubbornly high inflation are slowing demand… Spending was driven by services as a drop in gasoline prices freed up cash to spend on travel and dining out. Outlays on services increased 0.8% after edging up 0.1% in July. Spending on goods fell 0.5%, held down by a drop in receipts at gasoline service stations amid lower gasoline prices. Goods spending fell 0.7% in July… The personal consumption expenditures (PCE) price index rose 0.3% last month after dipping 0.1% in July. In the 12 months through August, the PCE price index increased 6.2% after advancing 6.4% in July. Excluding the volatile food and energy components, the PCE price index jumped 0.6%…”

September 27 – Bloomberg (Augusta Saraiva): “US consumer confidence rose for a second month in September to the highest since April… The Conference Board’s index increased to 108 from a 103.6 reading in August… The median forecast… called for a reading of 104.6. A measure of expectations — which reflects consumers’ six-month outlook — climbed to 80.3, the highest since February, while the group’s gauge of current conditions advanced to a five-month high of 149.6.”

September 27 – CNBC (Diana Olick): “U.S. home prices cooled in July at the fastest rate in the history of the S&P CoreLogic Case-Shiller Index… Home prices in July were still higher than they were a year ago, but cooled significantly from June gains. Prices nationally rose 15.8% over July 2021, well below the 18.1% increase in the previous month… The 10-City composite… climbed 14.9% year over year, down from 17.4% in June. The 20-City composite, which adds regions such as the Seattle metro area and greater Detroit, gained 16.1%, down from 18.7% in the previous month.”

September 28 – CNBC (Diana Olick): “Mortgage rates drove even higher last week after the Federal Reserve signaled it would continue its aggressive action to cool inflation. That, and rising uncertainty in the overall housing market, caused mortgage application volume to drop 3.7% last week compared with the previous week… After a strange rebound the week before, applications to refinance a home loan declined 11% for the week and were 84% lower than the same week one year ago. They are now at a 22-year low because there are very few borrowers who can benefit from a refinance at today’s higher rates.”

September 28 – Reuters (Lindsay Dunsmuir): “The average interest rate on the most popular U.S. home loan climbed to its highest level since August 2008, data from the Mortgage Bankers Association (MBA) showed… Rising mortgage rates are increasingly weighing on the interest-rate-sensitive housing sector as the Federal Reserve pushes on with aggressively lifting borrowing costs to curb high inflation. The average contract rate on a 30-year fixed-rate mortgage rose by 27 bps to 6.52% for the week ended Sept. 23, a level not seen since the financial crisis and the Great Recession.”

September 27 – Bloomberg (Vince Golle): “US sales of new homes unexpectedly rose in August, representing a break in an otherwise rapid descent this year for a housing market still at risk of further deterioration as mortgage rates climb. Purchases of new single-family homes increased nearly 29% to a 685,000 annualized pace… New-home sales rose in all regions, including a 29.4% jump in the South, where the pace was the firmest this year… There were 461,000 new homes for sale at the end of the month, the most since March 2008.”

September 25 – New York Times (Ivan Penn): “California finds itself on edge more than ever with a lingering fear: the threat of rolling blackouts for years to come. Despite adding new power plants, building huge battery storage systems and restarting some shuttered fossil fuel generators over the last couple of years, California relies heavily on energy from other states — the cavalry rushing over a distant hill. Sometimes the support does not show up when expected, or at all. That was the case this month, when millions of residents got cellphone alerts urging them to cut their energy use as the state teetered close to blackouts in blazing heat. As climate change makes extreme weather events more frequent, the peril has only increased.”

Fixed Income Watch:

September 29 – Bloomberg (Davide Scigliuzzo and Paula Seligson): “For the second time in two weeks, Wall Street bankers suffered a painful reminder of how quickly risk appetite is evaporating from credit markets as a $3.9 billion debt sale for a leveraged buyout collapsed. A group of underwriters led by Bank of America Corp. and Barclays Plc pulled the loan and bond offering for telecom provider Brightspeed… after struggling to attract demand from investors. The transaction, which was meant to help fund Apollo Global Management Inc.’s purchase of the company, is the latest large acquisition financing to stumble. Banks face significant losses on tens of billions of dollars in buyout debt that they committed to months ago and are trying to offload…”

September 29 – Bloomberg (Amanda Albright and Marvis Gutierrez): “Municipal-bond investors aren’t the only ones getting hurt by the bear market. Cities and Wall Street bankers alike are also feeling the pinch as the volume of deals in the $4 trillion market tumbles. State and local debt sales are poised for a monthly decline of roughly 40% to about $24 billion in September… It would be the lowest monthly volume of debt sales since November 2020, the data show, even though September is typically a busy month for debt sales.”

China Watch:

September 26 – Bloomberg: “China’s shaky recovery continued in September, with a pickup in car and homes sales in the biggest cities compensating for weaker global demand and falling business confidence. That’s the outlook based on Bloomberg’s aggregate index of eight early indicators for this month. The overall gauge was at 5, unchanged from August, signaling that the economic rebound maintained momentum. Overall, China’s economy picked up in the third quarter from the near contraction in the April-June period, but that rebound was undermined by Covid lockdowns and outbreaks in cities across the country, the continued housing slump, and weakening export demand.”

September 29 – Bloomberg (Kevin Kingsbury): “Wednesday’s rout in China’s high-yield dollar bonds, and their inability today to maintain early gains, highlight the struggles still ahead for the country’s developers. The market saw its biggest loss in nearly a year amid worries about debt payments at CIFI, the nation’s 13th-largest builder by sales. Its dollar bonds lost 42% Wednesday…, and shares sank a record 32%. CIFI’s notes briefly climbed Thursday morning, but that didn’t last as its stock plunged as much as a further 27%.”

September 26 – Bloomberg: “Chinese regulators have asked several big mutual fund houses and brokers to refrain from large sales of stocks before the party congress in October, according to people familiar with the matter… The authorities are looking to restore a semblance of calm to financial markets ahead of the Communist Party’s congress on Oct. 16.”

September 26 – Financial Times (Edward White and Mercedes Ruehl): “China’s economic output will lag behind the rest of Asia for the first time since 1990, according to new World Bank forecasts that highlight the damage wrought by President Xi Jinping’s zero-Covid policies and the meltdown of the world’s biggest property market. The World Bank has revised down its forecast for gross domestic product growth in the world’s second-largest economy to 2.8%, compared with 8.1% last year, and from its prediction in April of between 4 and 5% for this year.”

September 29 – Bloomberg (Dorothy Ma): “Chinese high-yield dollar bonds are capping a seventh-straight quarterly loss despite government efforts to stabilize the property sector, as fresh declines the past two weeks have re-emphasized the industry’s struggles. The developer-dominated market for such debt has lost 9.5% since the start of July, according to a Bloomberg index, threatening to post a fifth-consecutive quarter of double-digit declines. The junk notes have dropped 8% in September and are poised to erase the largest monthly return in a decade posted in August.”

September 30 – Bloomberg: “China’s financial regulators told the nation’s biggest state-owned banks to extend at least 600 billion yuan ($85bn) of net financing to the embattled property sector in the final four months of this year, according to people familiar with the matter, in their latest attempt to address a deepening liquidity crisis.”

September 26 – Reuters (Eduardo Baptista and Xiaoyu Yin): “For six months, home for Ms. Xu has been a room in a high-rise apartment in the southern Chinese city of Guilin that she bought three years ago, attracted by brochures touting its riverfront views and the city’s clean air. Her living conditions, however, are far from those promised: unpainted walls, holes where electric sockets should be and no gas or running water. Every day she climbs up and down several flights of stairs carrying heavy water bottles filled with a hose outside. ‘All the family’s savings were invested in this house,’ Xu, 55, told Reuters… Xu and about 20 other buyers living in Xiulan County Mansion share a makeshift outdoor toilet and gather during the day at a table and benches in the central courtyard area. They are part of a movement of home buyers around China who have moved into what they call ‘rotting’ apartments, either to pressure developers and authorities to complete them or out of financial necessity…”

September 26 – Wall Street Journal (Lingling Wei): “China has spent a trillion dollars to expand its influence across Asia, Africa and Latin America through its Belt and Road infrastructure program. Now, Beijing is working on an overhaul of the troubled initiative, according to people involved in policy-making. A slowing global economy, combined with rising interest rates and higher inflation, have left countries struggling to repay their debts to China. Tens of billions of dollars of loans have gone sour, and numerous development projects have stalled. Western leaders have criticized China’s lending practices, which some have labeled ‘debt-trap diplomacy,’ embarrassing Beijing. Many economists and investors have said the country’s lending practices have contributed to debt crises in places like Sri Lanka and Zambia. After nearly a decade of pressing Chinese banks to be generous with loans, Chinese policy makers are discussing a more conservative program…”

September 25 – Financial Times (Cheng Leng): “Maike Metals International is selling assets and studying a broader restructuring as it battles to survive a liquidity crisis, said chair He Jinbi… The final plan could involve ‘shareholding restructuring, asset restructuring and debt restructuring’, said He, illustrating the extent of the difficulties at one of China’s biggest commodity trading houses. Maike, which handles a quarter of the country’s refined copper imports, is an important intermediary between Chinese metal consumers and global merchants such as Glencore and Trafigura.”

Central Banker Watch:

September 27 – Bloomberg (David Goodman and Philip Aldrick): “Bank of England Chief Economist Huw Pill said the UK’s government’s fiscal announcement and the market reaction that followed it requires a significant monetary policy response, but the best time to assess and react to their impact is at the institution’s next meeting in November… Pill said Chancellor of the Exchequer Kwasi Kwarteng’s program of tax cuts had caused a significant repricing of market assets, which proved a challenge to the bank’s inflation goal. The fiscal policies themselves will act as stimulus for demand, he said. ‘It’s hard not to draw the conclusion that all this will require a significant monetary policy response,’ Pill said.”

September 26 – Bloomberg (Philip Aldrick and David Goodman): “The fire sale of UK assets sparked by Chancellor of the Exchequer Kwasi Kwarteng’s mini-budget last week has pushed the market losses on the Bank of England’s government bond portfolio to more than £200 billion ($216bn). The shortfall reflects the difference between what the BOE paid for gilts during the 2008 financial crisis, after the Brexit vote, and when the pandemic hit, versus the current market price. The collapse comes just a week before the BOE plans to begin unwinding its quantitative easing program by selling gilts, meaning the losses will start to be crystallized.”

September 28 – Financial Times (Martin Arnold): “The European Central Bank is likely to raise interest rates by 0.75 percentage points next month ahead of a further move in December to a level that no longer stimulates economic growth, several of its policymakers said… ‘We will do what we have to do, which is to continue hiking interest rates in the next several meetings,’ ECB president Christine Lagarde told an Atlantic Council…, adding that the bank’s ‘first destination’ was to lift rates to the ‘neutral rate’ that neither boosted nor restricted growth.”

UK Crisis Watch:

September 28 – Bloomberg (Edward Harrison): “Is the Bank of England’s unlimited buying of long-dated gilts QE? It’s certainly curious policy for a central bank ostensibly in the midst of a tightening cycle. In the end, the BOE’s actions demonstrate how market ructions force an about-face from central banks bent on raising rates and tightening policy. Don’t look at the UK situation as an outlier because of an extreme fiscal policy. Instead see it as a harbinger of things to come elsewhere if central banks continue the pace of rate hikes. To be sure, the moves in the gilt market are extreme by any developed market yardstick… But we have been seeing an unusual level of volatility in government bond markets throughout developed markets. The MOVE index that measures Treasury volatility is spiking too.”

September 24 – Reuters (Andy Bruce): “Britain’s deputy finance minister… played down a historic collapse in the pound and government bonds in response to the country’s new economic growth plan, which sent international investors heading for the exit. The pound slumped 3.6% on Friday below $1.09, a new 37-year low against the dollar, while gilts suffered their worst day in decades… ‘Let’s be clear, the interest rates payable on government gilts is about the same in the United Kingdom now today as it is in the United States,’ Chris Philp, Britain’s deputy finance minister, told Sky News… ‘You mention the dollar, that’s been strong against a number of currencies, including the yen and the euro.’”

September 28 – Bloomberg (Abhinav Ramnarayan): “British blue-chip companies are facing their highest bond refinancing costs on record as new Prime Minister Liz Truss’s fiscal package aimed at turbo-charging growth wreaks havoc on UK markets. The difference in the rate investment-grade companies need to pay if they issue sterling bonds now compared with coupons on existing debt climbed to 325 bps… This is the highest level since the sterling index of investment-grade corporate bonds began more than two decades ago, exceeding the previous high hit in the aftermath of the 2008 financial crisis.”

September 25 – Reuters (Alistair Smout and David Milliken): “British finance minister Kwasi Kwarteng said… he was focused on boosting longer-term growth, not on short-term market moves, when challenged over the sharp fall in sterling and bond prices following his first fiscal statement. Kwarteng scrapped the country’s top rate of income tax and cancelled a planned rise in corporate taxes – all on top of a hugely expensive plan to subsidise energy bills for households and businesses… On Sunday Kwarteng defended the measures as supporting the economy in response to the once-in-a-generation shocks of the COVID-19 pandemic and the rise in energy prices following Russia’s invasion of Ukraine. ‘As chancellor of the exchequer, I don’t comment on market movements. What I am focused on is growing the economy and making sure that Britain is an attractive place to invest,’ he told the BBC…”

September 27 – Bloomberg (William Shaw, Jack Sidders and Charlie Wells): “Deals for house purchases are collapsing after lenders pulled mortgage offers in response to soaring interest rates. Smaller lenders such as Kensington, Accord Mortgages and Hodge were among those to say they were withdrawing products Tuesday. That follows the decision by Lloyds Banking Group Plc — the UK’s biggest mortgage provider — on Monday to halt some offers, while Virgin Money UK Plc temporarily stopped offering home loans to new customers… HSBC Holdings Plc told brokers it was removing new mortgage products for the rest of the day while Nationwide Building Society announced that it was increasing rates across product ranges starting Wednesday.”

September 27 – Financial Times (George Hammond): “More than 2mn households in the UK face sharp rises in their mortgage costs over the next two years, dramatically increasing the chances of a property price crash as many are forced to sell, according to analysts. The warning comes as average mortgage rates are forecast to exceed 6% in the first half of next year as the Bank of England raises interest rates more aggressively to try to address the market turmoil in the wake of chancellor Kwasi Kwarteng’s tax-slashing mini-Budget last week.”

September 27 – Reuters (Wayne Cole): “Global ratings agency Moody’s has warned the British government that plans for unfunded tax cuts could lead to larger budget deficits and higher interest rates, threatening the country’s credibility with investors. In a blunt release the agency said large unfunded tax cuts were ‘credit negative’, leading to structurally higher deficits amid rising borrowing costs, a weaker growth outlook and acute public spending pressure.”

Europe Watch:

September 26 – Associated Press (David McHugh, Justin Spike, Karel Janicek and Veselin Toshkov): “As Europe heads into winter in the throes of an energy crisis, offices are getting chillier. Statues and historic buildings are going dark. Bakers who can’t afford to heat their ovens are talking about giving up, while fruit and vegetable growers face letting greenhouses stand idle. In poorer eastern Europe, people are stocking up on firewood, while in wealthier Germany, the wait for an energy-saving heat pump can take half a year. And businesses don’t know how much more they can cut back.”

September 29 – Bloomberg (Jana Randow): “German inflation reached double digits for the first time since the euro was introduced more than 20 years ago, surging more than anticipated after temporary government-relief measures ended and Europe’s energy crisis worsened. Consumer prices jumped 10.9% from a year ago in September, topping August’s 8.8% advance… That’s more than the 10.2% economists… had estimated.”

September 26 – Bloomberg (Alexander Weber): “German business confidence deteriorated further on mounting concerns over energy supplies and record-breaking inflation that’s yet to peak. A gauge of expectations by the Ifo institute released Monday slid to 75.2 in September from 80.3 in August. That’s the lowest since April 2020. Analysts had predicted a drop to 79. An index of current conditions also fell.”

September 26 – Financial Times (Amy Kazmin and Giuliana Ricozzi): “A coalition led by Giorgia Meloni’s arch-conservative Brothers of Italy has won a decisive victory in Italy’s snap election, putting it in position to form the country’s first government led by the far-right since the second world war. Claiming victory, Meloni, who is poised to become Italy’s first female prime minister since Italian unification in 1861, acknowledged the serious challenges ahead. ‘We haven’t arrived — this is a starting point,” she told supporters… ‘From tomorrow, we have to demonstrate what we are worth. It’s time for responsibility — we won’t betray Italy… We will govern this nation on behalf of everyone.’”

September 27 – Reuters (Charlotte Van Campenhout, Marine Strauss and Keith Weir): “The European Commission urged the new Italian government to stick to reform plans as it cleared the way on Tuesday for the payment of an additional 21 billion euros ($20.2bn) in post-COVID recovery funds. The Commission said Italy had met a series of 45 landmarks and targets in reform of areas such as public employment, procurement, tax administration, teaching and healthcare to qualify for another part of a 192 billion euro programme.”

September 30 – Reuters (Bart Meijer): “Inflation in the Netherlands jumped in September to its highest in decades, driven by skyrocketing energy prices… Consumer prices, harmonised to be comparable with inflation data from other European Union countries (HICP), rose to 17.1% this month after August’s jump to 13.7%. Energy prices in the euro zone’s fifth largest economy were 114% higher than in September 2021, while food prices jumped 10.5%.”

EM Crisis Watch:

September 25 – Financial Times (Jonathan Wheatley): “The IMF’s lending to economically troubled countries has hit a record high as the world’s lender of last resort battles simultaneous crises that have pushed at least five countries into default, with more expected to follow. The pandemic, Russia’s attack on Ukraine and a sharp rise in global interest rates have forced dozens of countries to seek IMF assistance. A Financial Times analysis of IMF data shows that at the end of August the volume of loans disbursed by the fund amounted to $140bn in 44 separate programmes.”

September 29 – Reuters (Carolina Pulice and Alexandre Caverni): “Brazil’s Luiz Inacio Lula da Silva leads President Jair Bolsonaro by 14 points…, with the far-right incumbent having lost momentum against his leftist rival as the Oct. 2 presidential election looms. The survey by Datafolha showed Lula with 48% of voter support versus 34% for Bolsonaro in the election’s first round, compared with 47% and 33%, respectively, in the previous poll.”

September 29 – Reuters (Swati Bhat): “India’s current account deficit widened in the April-June quarter, driven by soaring global commodity prices that pushed up the trade deficit, while large capital outflows also hurt… In absolute terms, the current account deficit (CAD) stood at $23.90 billion in the first quarter of fiscal year 2022/23, its highest since the December quarter of 2012. However, as a percentage of GDP, the CAD was at 2.8%, its highest in nearly four years.”

Japan Watch:

September 29 – Bloomberg (Yoshiaki Nohara and Toru Fujioka): “Japanese Prime Minister Fumio Kishida instructed the government Friday to come up with an economic stimulus package by the end of October to help mitigate the impact of inflation, as economists warned against over-sized spending. The order from Kishida came during the morning’s cabinet meeting, chief spokesperson Hirokazu Matsuno told reporters… The measures will tackle price rises, encourage pay increases, and speed up Kishida’s drive to transform capitalism in Japan, Matsuno said.”

September 26 – Bloomberg (Toru Fujioka, Sumio Ito and Yoshiaki Nohara): “Bank of Japan Governor Haruhiko Kuroda said he supports last week’s government intervention in the currency markets, and said it creates an appropriate policy mix together with the central bank’s ongoing monetary easing. ‘The intervention was conducted by the finance minister’s decision as a necessary means to deal with excessive moves and I think it was appropriate,’ Kuroda said… ‘The intervention and monetary easing are complementary.’”

September 25 – Reuters (Daniel Leussink): “Japan’s factory activity growth hit a 20-month low in September, as firms struggled with a global slowdown and pressure from high energy and raw material prices that was exacerbated by a weak yen. The au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) slipped to a seasonally adjusted 51.0 in September from the prior month’s final of 51.5. The headline figure marked the slowest expansion since January 2021…”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 27 – Reuters (Denis Balibouse, Cecile Mantovani and Emma Farge): “Swiss glaciers have recorded their worst melt rate since records began more than a century ago, losing 6% of their remaining volume this year or nearly double the previous record of 2003, monitoring body GLAMOS said… The melt was so extreme this year that bare rock that had remained buried for millenia re-emerged at one site while bodies and even a plane lost elsewhere in the Alps decades ago were recovered. Other small glaciers all but vanished.”

Leveraged Speculation Watch:

September 26 – Bloomberg (Ruth Carson and David Finnerty): “Hedge funds ramped up bullish bets on the pound just days before the UK government’s unexpectedly large tax cuts sent the currency tumbling. Leveraged investors added a net 13,488 long contracts during the week to Sept. 20, the most since March, data from the Commodity Futures Trading Commission show.”

September 28 – Bloomberg (Vildana Hajric): “Anyone paying even slight attention to markets these days knows there’s no place to hide as everything from stocks to bonds to commodities is getting hit. That’s bad news for risk-parity strategies that look to maximize diversification across asset classes. The $1.1 billion RPAR Risk Parity ETF is down more than 32% from its November 2021 high, a record drawdown… Before Wednesday, the fund had dropped for six straight sessions — the longest streak of declines since October 2020… ‘It’s supposed to be a diversified fund — holding major asset classes: stocks/bonds/gold/TIPS, to basically ‘weather’ when volatility hits one of the asset classes,’ said Todd Sohn, ETF strategist at Strategas Securities. ‘But we are in this environment with inflation still high and bond yields now making multi-decade highs that no one has experienced in 40 years.’ It’s been a ‘perfect storm’ for risk-parity strategies, he added.”

Geopolitical Watch:

September 28 – Reuters (Yew Lun Tian): “China signaled… no let-up in its combative approach to foreign policy in a third term for Xi Jinping as leader despite criticism from many Western diplomats that the so-called Wolf Warrior stance has been counterproductive. As relations with the West have soured over issues from trade and human rights to COVID-19, Chinese diplomats have often been confrontational on the public stage, including on social media, a stridency that some critics see as intended for a domestic audience that nonetheless hurts its foreign ties.”

September 28 – Reuters (Kantaro Komiya): “Naval forces of Japan, the United States and South Korea will conduct joint military drills on Friday, Japan’s Maritime Self-Defense Force (MSDF) announced… MSDF said the exercises, including anti-submarine drills, will be held in the Sea of Japan, which South Korea calls the East Sea.”

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