Saturday, May 26, 2018

Weekly Commentary: Unfolding Instability Thesis

Interestingly, financial crises over the ages have often unfolded during autumn. Early economic thinkers pondered and debated the sources of instability and the root cause of recurring economic cycles. Even in relatively primitive economic systems, money and Credit played a leading role. I admit to finding "trade cycle" analysis intriguing. Even in a simple agrarian economic structure, farmers would borrow for the spring planting season and repay loans later in the fall. This Credit Cycle played prominently, with monetary abundance and associated economic boom in the spring and summer followed by tightening and vulnerability as bank lending books contracted after harvest.

Trade cycle and monetary analysis from the British economist Ralph Hawtrey (1879-1975) has over the years resonated:

"The general rise of prices will involve a proportional increase of borrowing to finance a given output of goods, over and above the increase necessitated by the increase in output. This increase of borrowing, meaning an increase in the volume of credit, will further stimulate trade. Where will the process end? In the case of the curtailment of credit the self-interest of the bankers and the distress of the merchants combined to restore the creation of credits…but in the case of the expansion of credits there is no such corrective influence at work. An indefinite expansion of credit seems to be in the immediate interest of merchants and bankers alike. The continuous and progressive rise of prices makes it profitable to hold goods in stock…thus the merchant and the banker share between them a larger rate of profit on a larger turnover... The greater the amount of credit created, the greater will be the amount of purchasing power and the better the market for the sales of all kinds of goods. The better the market the greater the demand for credit. Thus an increase in the supply of credit itself stimulates the demand for credit…" (Hawtrey, "Currency and Credit").

"Mr. Hawtrey's theory explains why there were not merely small oscillations around the equilibrium, but big swings of the pendulum in the one or the other direction. The reason is the cumulative, self-sustaining nature of the process of expansion and contraction. The equilibrium line is like a razor's edge. The slightest deviation involves the risk of further movement away from equilibrium…the expansion could go on indefinitely, if there were no limits to the increase in the quantity of money" (Gottfried Haberler, "Prosperity and Depression").

In Hawtrey's analysis, "dealers" borrowed to finance inventories of goods and commodities. This borrowing activity created the marginal monetary flow and purchasing power within the economic system. Credit flows were fundamental to the monetary forces sustaining the economic cycle. Hawtrey appreciated that Credit and the "flow of money" was inherently self-reinforcing, hence unstable. During upcycles, Credit begets additional Credit; monetary excess begets further destabilizing excess. Eventually, the monetary expansion comes to an end and a painful downside to the cycle becomes unavoidable. At least that's the way it used to work.

Hawtrey would find today's financial architecture unrecognizable: unfettered finance on a global basis; near zero and even negative interest rates; open-ended QE and ballooning central bank balance sheets; central bank manipulation of bond yields and asset prices; highly leveraged securities holdings and a derivatives marketplace to the tune of hundreds of Trillions.

While Hawtrey's "dealers" were financing goods inventories, contemporary "dealers" - the central banks, hedge funds and leveraged speculators, derivatives operators, GSEs, etc. - finance inventories of securities. Instead of banks (restrained by reserve and capital requirements) lending against goods inventories, boundless global "money" markets finance unfathomable speculative securities holdings. Going back now at least 25 years, the financing of securities holdings has been the marginal source of liquidity fueling recurring asset Bubbles and economic cycles. This monetary structure has been acutely unstable. Over time, worsening instability fostered increasingly intrusive central bank command over the cost of finance, marketplace liquidity and securities market pricing more generally.

Audience question from a Friday panel discussion at a Swedish Riksbank event: "Imaging you're traveling into the future - 25 years. What would you expect to receive when you are evaluated 25 years into the future regarding the present period of unconventional policy methods?"

Bank of England governor Mark Carney: "Great question to ask. Terrible question to answer… Those who are marking our exam papers will start with our objectives. And we'll see how well we achieved our objectives. So, starting with whether we've achieved our inflation target and, subject to that, reduced unwarranted volatility in output and employment. And the steps we have taken on the financial side - the effectiveness of those will be revealed by 25 years down the road. They will have been properly tested in a way that, obviously, everyone in this room cannot truly mark that exam paper right now."

I doubt future analysts and historians looking back in 25 years will have much interest in whether inflation targets were achieved or policy effects on unemployment rates and GDP. Contemporary central bankers will instead be judged by the impact a decade plus of extreme monetary measures had on Financial Stability. Sure, unprecedented monetary stimulus reflated securities markets, asset prices, perceived wealth and economic activity. But did it nurture sustainable financial stability - or instead only create more systemic and perilous global financial and economic Bubbles? I believe the answer lies foremost in the global dimensions of speculative leverage.

My view holds that prolonged experimental policy stimulus has been a boon for global securities leveraged speculation. The scope of today's Bubble is unprecedented; the monetary role of securities finance upon the maladjusted and unbalanced global economy unparalleled. The Bubble in EM has gone miles beyond 1997. The Bubble in China is truly epic. I suspect a staggering amount of "carry trade" leverage has accumulated globally over this protracted speculative cycle. ECB policies have clearly spurred leveraged speculation throughout euro zone bond markets, especially the unsound periphery. Eastern Europe as well? There is surely massive leverage in U.S. Credit, most likely having played a prevailing role in the booming investment-grade corporate marketplace.

We're in the stage of the cycle where things look good. In the U.S., in particular, the New Era and New Paradigm mentality has taken deep root. The economy appears robust, bolstered by fantastic technological advancement and scientific development. The underlying instability of finance goes unrecognized; the global nature of Bubble Dynamics unappreciated. Meanwhile, markets again this week provided confirmation of the Unfolding Instability Thesis.

Italian 10-year yields surged 23 bps this week to 2.46%, the high since October 2014. In only three weeks, Italian two-year yields have jumped 79 bps to 0.46%. Portuguese 10-year yields rose eight bps this week to 1.95%, a three-month high. Spanish yields traded above 1.5% in Monday trading, the high going back to early March.

This month's almost 70 bps spike in Italian 10-year yields is alarming. I would argue this week's 17 bps drop in German 10-year yields (to 41bps) is more problematic for markets more generally. The Italian to German 10-year yields spread widened 40 bps in just one week. The Portuguese to German spread widened 25 bps this week, with the Spanish to German 10-year spread 19 bps wider. The Italian to German two-year yield spread has widened 78 bps in two weeks.

It was a rough week for those short German bunds (or even French bonds) to finance leveraged holdings in European periphery debt. Pain in this popular (Crowded?) trade follows on the heels of painful losses in various EM "carry trades." The Turkish lira dropped another 4.7% this week. And while Latin American currencies for the most part rallied this week, Eastern European currencies were notably weak. The Hungarian forint dropped 1.5%, the Polish zloty 1.4%, the Czech koruna 1.4%, the Bulgarian lev 1.1% and the Romanian leu 1.0%. How much leveraged has accumulated in higher-yielding European EM debt?

After trading at 3.08% in Tuesday trading, 10-year Treasury yields reversed course and closed the week down 12 bps to 2.93%. Minutes from the early-May FOMC meeting were released Wednesday afternoon. The minutes were generally viewed as dovish, with the Fed tolerant of inflation rising above target and "uncertainty surrounding trade issues could damp business sentiment and spending."

Bond markets have been anxiously anticipating some hint from the Federal Reserve that unstable global markets could slow the path of rate increases. They seemed to discern them embedded in the minutes. The Treasury rally alleviated some off the selling pressure on EM bonds. At the same time, the upheaval in Italian and European debt markets appeared a significant escalation in global de-risking/de-leveraging dynamics. Sentiment with respect to global economic prospects has begun to deteriorate.

Japan's Nikkei stock index dropped 2.1% this week, and the Shanghai Composite fell 1.6%. A paralyzing truckers' strike in Brazil further eroded sentiment. Brazilian stocks sank 5.0% this week. European equities were under pressure as well. Italian stocks sank 4.5%, and Spanish stocks fell 2.8%. European banks were slammed 4.1%, led by an 8.1% drop in the Italian bank index. Japan's Topix Bank index fell 4.1%, and Hong Kong's Hang Seng Financials were down 1.7%. U.S. stocks outperformed, not unhelpful to the rising dollar (up 0.7% this week). Curiously, crude was slammed 5.3%, most of the losses coming late in the week.

The euro dropped 1.0% this week to the lowest level since last November, adding fuel to the destabilizing dollar rally.

May 23 - New York Times (Jason Horowitz): "The populist parties that won Italy's elections two months ago by demonizing the political establishment, the European Union and illegal migrants in often vulgar terms were granted the go-ahead… to form a government, crystallizing some of the biggest fears of Europe's leaders, who were already bracing for turbulence. The rapid ascent of populists in Italy - the birthplace of Fascism, a founding member of the European Union, and the bloc's fourth-largest economy - shattered the nation's decades-old party system. It also gave fresh energy to the nationalist impulses tugging at the Continent and moved the greatest threat to the European Union's cohesion from newer member states on the periphery, such as Hungary and Poland, to its very core. After 80 days of arduous talks, President Sergio Mattarella gave a mandate to form a government to the parties' consensus pick for prime minister, Giuseppe Conte, a little-known lawyer with no government experience."

If uncertainties associated with the new Italian government weren't enough, Spain continues to fester.

May 25 - Financial Times (Michael Stothard): "The risk of early elections in Spain rose dramatically on Friday after two opposition parties threatened motions of no-confidence against the government in response to a damning court ruling in a graft case involving members of the ruling People's Party. Spanish stocks fell and bond yields rose after Socialist leader Pedro Sanchez said that he had tabled a vote of no confidence to topple the government. The liberal Ciudadanos party said it would table its own motion if new elections are not called. This comes as dozens of people related to the ruling centre-right PP, including a former treasurer, were convicted on Thursday of a range of crimes related to the use of an illegal slush fund that helped finance party election campaigns between 1999 and 2005… The judge said that the testimony of prime minister Mariano Rajoy and other party officials that they knew nothing was 'not credible'."

On a global basis, risk aversion is taking hold. De-risking/de-leveraging dynamics have gained momentum. Liquidity abundance has begun to wane; financial conditions globally are beginning to tighten. This ensures markets will now assume a different tact with risk. So long as risk embracement and resulting liquidity abundance were commanding global markets, EM and Italian fragilities were inconsequential. The same could be said for vulnerabilities in regions, countries, governmental entities, sectors, corporations and businesses around the globe. Rather suddenly, however, prospects for risk aversion, Credit tightening and illiquidity will have newly mindful markets keen to sidestep the weakened, fragile and sickly. It may at this point be subtle, but it's also quite a sea change.

The past decade of stimulus-induced bull markets has been occasionally interrupted by bouts of "Risk Off." Granted, these spells proved short-lived. Central bankers - through talk and/or more aggressive stimulus measures - quickly extinguished nascent Fear. Most of all, zero rates and massive and unrelenting QE reinforced Greed. And this went on for way too long. Faith in central banking was further emboldened, ensuring an upsurge in speculative leveraging the world over.

My long-held view is that central bank measures to guarantee buoyant and liquid markets in the end ensure a liquidity crisis. The perception that central banks will always backstop liquidity has incentivized a degree of speculative leverage - and resulting monetary flows - that virtually guarantees financial and economic dislocation.

The world is now on contagion watch. More and more, De-risking/Deleveraging Dynamics are encroaching on Greed. The Fed is raising rates, and global central banks are winding down QE. A shrinking pool of new QE liquidity confronts a rapidly expanding pool of speculative holding liquidations.

I don't expect the Powell Fed to turn hawkish. Indeed, if things unfold as I expect the Fed will surely turn more cautious with rate hikes. But I also believe the new Chairman would rather not come quickly to the market's defense. Markets are long overdue for removing the training wheels. Interestingly, John Authers' Friday evening FT article was titled "Lack of 'Powell put' tightens financial conditions." Similar to Italy's debt load, the true status of the Fed (and global central banker) put will be a greater concern now that financial conditions have begun to tighten and asset markets have turned more vulnerable.

For the Week:

The S&P500 added 0.3% (up 1.8% y-t-d), and the Dow increased 0.2% (up 0.1%). The Utilities jumped 3.2% (down 4.9%). The Banks declined 0.5% (down 0.5%), and the Broker/Dealers slipped 0.3% (up 10.9%). The Transports jumped 1.6% (up 2.7%). The S&P 400 Midcaps added 0.2% (up 2.4%), while the small cap Russell 2000 was unchanged (up 6.0%). The Nasdaq100 rallied 1.4% (up 8.8%). The Semiconductors surged 3.4% (up 11.0%). The Biotechs declined 0.5% (up 10.8%). With bullion up $9, the HUI gold index recovered 1.4% (down 6.3%).

Three-month Treasury bill rates ended the week at 1.86%. Two-year government yields fell seven bps to 2.48% (up 59bps y-t-d). Five-year T-note yields dropped 12 bps to 2.77% (up 56bps). Ten-year Treasury yields sank 12 bps to 2.93% (up 53bps). Long bond yields fell 11 bps to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields dropped 12 bps to 3.64% (up 64bps).

Greek 10-year yields fell 13 bps to 4.37% (up 30bps y-t-d). Ten-year Portuguese yields rose eight bps to 1.95% (up 1bp). Italian 10-year yields surged another 23 bps to 2.46% (up 45bps). Spain's 10-year yields added two bps to 1.47 % (down 10bps). German bund yields sank 17 bps to 0.41% (down 2bps). French yields fell 12 bps to 0.71% (down 7bps). The French to German 10-year bond spread widened five to 30 bps. U.K. 10-year gilt yields dropped 18 bps to 1.32% (up 13bps). U.K.'s FTSE equities index slipped 0.6% (up 0.6%).

Japan's Nikkei 225 equities dropped 2.1% (down 1.4% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.04% (down 1bp). France's CAC40 lost 1.3% (up 4.3%). The German DAX equities index fell 1.1% (up 0.2%). Spain's IBEX 35 equities index sank 2.8% (down 2.2%). Italy's FTSE MIB index was pounded 4.5% (up 2.5%). EM equities were mostly lower. Brazil's Bovespa index sank 5.0% (up 3.3%), and Mexico's Bolsa declined 1.3% (down 8.6%). South Korea's Kospi index was little changed (down 0.3%). India’s Sensex equities index added 0.2% (up 2.5%). China’s Shanghai Exchange dropped 1.6% (down 5.0%). Turkey's Borsa Istanbul National 100 index gained 0.8% (down 10.5%). Russia's MICEX equities declined 0.9% (up 9.3%).

Investment-grade bond funds saw inflows of $2.529 billion, and junk bond funds had inflows of $261 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps to 4.66% (up 71bps y-o-y). Fifteen-year rates jumped seven bps to 4.15% (up 96bps). Five-year hybrid ARM rates gained five bps to 3.87% (up 80bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.70% (up 64bps).

Federal Reserve Credit last week declined $15.4bn to $4.299 TN. Over the past year, Fed Credit contracted $135.7bn, or 3.1%. Fed Credit inflated $1.488 TN, or 53%, over the past 290 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.8bn last week to a five-month low $3.382 TN. "Custody holdings" were up $138bn y-o-y, or 4.3%.

M2 (narrow) "money" supply jumped $27.1bn last week to a record $13.999 TN. "Narrow money" gained $513bn, or 3.8%, over the past year. For the week, Currency increased $3.7bn. Total Checkable Deposits rose $33.6bn, while savings Deposits declined $16.0bn. Small Time Deposits gained $3.5bn. Retail Money Funds added $2.3bn.

Total money market fund assets added $1.3bn to $2.826 TN. Money Funds gained $177bn y-o-y, or 6.7%.

Total Commercial Paper surged $22.8bn to $1.092 TN. CP gained $104bn y-o-y, or 10.6%.

Currency Watch:

The U.S. dollar index gained 0.7% to 94.258 (up 2.3% y-t-d). For the week on the upside, the Brazilian real increased 2.3%, the South African rand 2.1%, the Mexican peso 2.1%, the Japanese yen 1.3%, the Swiss franc 0.7%, the Australian dollar 0.5%, the New Zealand dollar 0.1% and the Singapore dollar 0.1%. For the week on the downside, the British pound declined 1.2%, the euro 1.0%, the Canadian dollar 0.7%, the Norwegian krone 0.7% and the Swedish krona 0.2%. The Chinese renminbi declined 0.18% versus the dollar this week (up 1.80% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index added 0.5% (up 11.1% y-t-d). Spot Gold increased 0.7% to $1,302 (down 0.1%). Silver recovered 0.4% to $16.52 (down 3.6%). Crude was slammed $3.78 to $67.50 (up 12%). Gasoline dropped 2.8% (up 21%), while Natural Gas gained 2.9% (down 1%). Copper increased 0.4% (down 7%). Wheat surged 4.8% (up 27%). Corn gained 0.9% (up 16%).

Market Dislocation Watch:

May 23 - Financial Times (Roger Blitz): "Turkey's currency collapse is adding fuel to a widespread retreat in emerging market forex. Much of the weakness is in Central and Eastern Europe. Poland's zloty has fallen 1%, while the Hungarian forint and the Czech koruna are also sharply lower. But Asian EM currencies, which have largely resisted dollar strength in recent weeks, started succumbing to the pressure, including the Korean won, down 0.5%, the Singapore dollar and the Taiwanese dollar."

May 21 - Bloomberg (Luke Kawa): "The Italian government's borrowing costs have surged to inauspicious territory. The nation is getting punished in the bond market as the incoming populist government coalition seems ready to boost spending without much regard for European Union budget strictures and mulls the potential creation of assets tantamount to a parallel currency. The result: An Italian note maturing in February 2028 now yields 10 bps more than a euro-denominated sovereign from Indonesia due four months later."

May 24 - Reuters (Sujata Rao and Saikat Chatterjee): "Goldman Sachs said… that any systemic spillovers from Italian political risks into peripheral Europe could push the euro down against the dollar by 'around five big figures.' The prospect of a coalition government between the anti-establishment 5-Star Movement and far-right League, bent on big spending plans that would put Italy on a collision course with the European Union, have rattled markets in the past week. 'Should this become a more systemic event...we estimate that EUR/USD could fall by around 5 big figures,' the U.S. bank said in a note…"

Trump Administration Watch:

May 23 - New York Times (Ana Swanson): "President Trump has asked for a sweeping trade investigation into whether autos imported into the United States pose a threat to national security, a move that could ultimately result in tariffs on foreign-made cars and further strain relations with global allies. …The Commerce Department said it had begun an investigation 'following a conversation' with Mr. Trump. The announcement followed a statement from the president, in which he said he had instructed the commerce secretary, Wilbur Ross, to investigate imports of cars, trucks and auto parts 'to determine their effects on America's national security.' 'Core industries such as automobiles and automotive parts are critical to our strength as a nation,' Mr. Trump said."

May 24 - Wall Street Journal (Sean McLain in Tokyo, William Boston and Trefor Moss): "President Donald Trump's push to impose painful tariffs on auto imports has put close U.S. allies in the crosshairs of a global trade row that is creating uncertainty among auto makers, investors and governments. Shares of some of the biggest international auto makers… which have big exposure to the U.S., fell Thursday, a day after the U.S. Commerce Department launched a probe into whether it could raise tariffs to up to 25% on auto imports on the basis of national security. The probe adds to a battle over steel tariffs and, again, pitches the U.S. against three of its closest military allies-Japan, South Korea and Germany. All are major car exporters."

May 24 - Bloomberg (Chris Reiter): "U.S. President Donald Trump's threat to levy tariffs on imported vehicles aims at the heart of Germany's export-led economy, further straining relations between the two long-standing allies. While Trump didn't specifically point to Germany when calling for an investigation into protections for the U.S. auto industry on national security grounds, he didn't have to. Past statements have made clear that he resents the country's trade surplus, which amounted to 14.2 billion euros ($16.7bn) last year for Germany's auto industry."

May 23 - Reuters (James Oliphant and Lisa Lambert): "U.S. President Donald Trump… railed against Mexico and Canada's efforts in renegotiating the North American Free Trade Agreement (NAFTA), saying both of the United States' neighbors had been very difficult. 'NAFTA is very difficult. Mexico has been very difficult to deal with. Canada has been very difficult to deal with ... but I will tell you that in the end we win,' Trump told reporters…"

May 24 - Reuters (Susan Heavey): "U.S. President Donald Trump has signaled a new direction in U.S.-China trade talks and said any deal would need 'a different structure,' fueling uncertainty over current negotiations. In an early Wednesday morning post on Twitter, Trump said the current track appeared 'too hard to get done' and cited difficulties such as verification, but he gave no other details about what he or his administration was looking for amid ongoing negotiations."

May 24 - Bloomberg (Jenny Leonard and Saleha Mohsin): "President Donald Trump is backing away from the trade agreement the U.S. just announced with Beijing, under pressure from China hawks among his supporters and in Congress who have assailed the accord as a capitulation. 'Our Trade Deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion,' Trump said… After boasting of the deal's benefits for farmers in tweets on Monday, Trump first indicated on Tuesday he was having second thoughts as some of his loyalists publicly criticized the agreement. Asked if he was pleased with the direction of his administration's negotiations with China, Trump told reporters 'no, not really.' He later added, 'they're a start.'"

May 19 - Wall Street Journal (Bob Davis and Lingling Wei): "A last-ditch effort by the Trump administration failed to get China to accept its demand for a $200 billion cut in the U.S. bilateral trade deficit, as Chinese officials resisted committing to any specific targets after two days of contentious negotiations. The two days of deliberations in Washington ended with both sides arguing all night on Friday over what to say in a joint statement… The Chinese had come willing to step up purchases of U.S. merchandise as a measure to narrow China's $375 billion trade advantage. But U.S. negotiators pushed the Chinese delegates to approve a specific target of $200 billion in additional Chinese purchases. The Chinese refused any such target in specific dollar amounts, and the matter is now in the hands of President Donald Trump and President Xi Jinping, the people said."

May 22 - Wall Street Journal (Kate O'Keeffe and Bob Davis): "Lawmakers are moving to thwart Trump administration efforts to ease restrictions on Chinese telecommunications giant ZTE Corp. and other sensitive technology, citing fears the positions would compromise national security in the latest twist in trade negotiations between the world's largest economies. The Senate Banking Committee unanimously approved legislation… that would tighten national-security reviews of Chinese technology deals by the interagency Committee on Foreign Investment in the U.S., strengthen export controls and prohibit the Trump administration from lifting stiff penalties imposed on ZTE."

May 24 - CNBC (Stephanie Landsman): "One of Wall Street's top Asia experts isn't ruling out a U.S.-China trade war. According to Yale University senior fellow Stephen Roach, the threat is still real, and it could take a big bite out of stocks. 'The bottom line is China has been one of President Trump's core economic issues, and I'd be surprised if he just capitulates on this,' Roach told CNBC's 'Trading Nation'… 'We have to look at the risk of some type of trade tensions very seriously.' Roach, who was Morgan Stanley Asia chairman for five years, said it's hard to have confidence in White House trade policy when Trump administration officials are constantly changing their minds."

May 22 - CNBC (Tom DiChristopher): "Secretary of State Mike Pompeo has announced a list of a dozen demands that Iran must meet before the United States lifts punishing sanctions against the country. However, the list is a non-starter and raises the specter of a prolonged standoff in the world's busiest oil exporting region. Pompeo articulated the list at the conservative Heritage Foundation… The address clarified the U.S. playbook for containing Iran following President Donald Trump's announcement that he will abandon a 2015 nuclear deal with Iran and restore sanctions on the Iranian economy, including its lifeblood oil industry."

May 23 - Wall Street Journal (Ryan Tracy and Andrew Ackerman): "Ten days after his inauguration, President Donald Trump promised to 'do a big number' on the Dodd-Frank law that tightened rules on financial firms after the 2008 crisis. Behind the scenes, his then top economic adviser and a powerful senator settled on a less ambitious plan. And in recent weeks, Mr. Trump called a senior House lawmaker, urging him to move forward despite objections from Republicans who wanted broader changes. The strategy to seek modest Dodd-Frank changes… paid dividends on Tuesday: The House of Representatives by 258-159 approved the resulting bipartisan legislation…"

May 22 - Reuters (Jeff Mason and Eric Beech): "U.S. President Donald Trump said… he will propose new tax cuts sometime prior to November, when Republicans look to retain their control of the U.S. Congress in midterm elections. Trump said he would meet with Republican Representative Kevin Brady, chairman of the tax-writing House Ways and Means Committee, about the proposal."

EM Bubble Watch:

May 22 - Bloomberg (Enda Curran and Lianting Tu): "Emerging-market companies and governments straining to deal with the rising cost of borrowing in dollars face increasing pressure as a record slew of bonds come due. Some $249 billion needs to be repaid or refinanced through next year… That's a legacy of a decade-long debt binge during which emerging markets more than doubled their borrowing in dollars, ignoring the many lessons of history from the 1980s Latin American debt crisis, the 1990s Asian financial crisis and the 2000s Argentine default. Even since the 2013 taper tantrum, the group's dollar debt has climbed in excess of $1 trillion -- more than the combined size of the Mexican and Thai economies…"

May 23 - Financial Times (Laura Pitel): "The few remaining market-friendly members of Recep Tayyip Erdogan's economic team were notably silent as the Turkish lira plummeted to record lows this week. As warnings of a full-blown currency crisis have increased in the run-up to crucial presidential and parliamentary elections, it was the president's son-in-law who was left to speak out. Berat Albayrak said… that the beleaguered lira was the victim of an 'operation' of 'overseas origins' aimed at bringing down the government. That Mr Albayrak has become one of the president's closest confidants in recent years is a symbol of the growing siege mentality at the presidential palace. Analysts and officials say that over the 15 years that Mr Erdogan has dominated Turkish politics, threats both real and imagined have forced him to retreat into an inner circle of people who tell him only what he wants to hear. 'His advisers are a bunch of idiots and sycophants,' says one Turkish official. 'He no longer listens to sensible advice.'"

May 24 - Bloomberg (Ugur Yilmaz): "Every market analyst in Turkey knows who Mert Ulker is: He's the expert who was fired as research chief at one of the country's biggest brokerages for publishing speculation that President Recep Tayyip Erdogan might have staged the failed 2016 coup to tighten his grip on power. He's now a cautionary tale. With Erdogan just weeks away from elections likely to cement his near-absolute authority, barely a word of criticism creeps into research published by strategists and economists based in Turkey - not even after Erdogan's threat to force the central bank to cut interest rates sent the lira into freefall. 'Each time I am about to write a bearish comment, my managers and colleagues remind me of what happened to Mert Ulker,' said one analyst who works at a state-run financial institution in Istanbul…"

May 24 - Bloomberg (Sabrina Valle): "Eight anxious hours. That's how long it took the chief executive officer of Petrobras to decide that he must break a promise to investors to help contain the growing chaos from a Brazilian trucker strike. For the first time in three years, Petrobras agreed to sell fuel below market prices in a move based purely on politics. The reaction? Truckers rejected the move and shares in the state-controlled oil producer tumbled the most in a year. Pedro Parente's actions Wednesday came after what started as a routine labor dispute became a logistical crisis spanning Latin America's largest economy. Flights were canceled at some airports amid fuel shortages. Buses were idled in Rio de Janeiro, where the company is based. Supermarkets were beginning to limit purchases in fear of coming shortages."

May 21 - Bloomberg (Rieka Rahadiana and Tassia Sipahutar): "Indonesia's central bank pledged to continue its intervention in the currency and bonds market to ease volatility, and said it will boost forex liquidity as the rupiah slumped to a fresh 31-month low. Bank Indonesia will hold three forex swap auctions to ensure sufficient liquidity in the interbank market… The bank, which usually holds two auctions a week, has been holding additional sales to ensure the market is well supplied, he said."

Federal Reserve Watch:

May 23 - CNBC (Jeff Cox): "Federal Reserve officials would be content to let inflation briefly run above their 2% target as the economy continues to recover, according to minutes from the central bank's most recent meeting. Following the May 1-2 session, the policymaking Federal Open Market Committee said it wasn't raising rates yet but added the word 'symmetric' to describe its inflation goal. Market participants since have puzzled over what the change in language might imply. The summary… indicates a substantial level of debate over how the Fed should approach inflation. The minutes also pointed to an interest rate hike at the June meeting amid debate over how close the Fed might be getting to the end of this rate-hiking cycle."

U.S. Bubble Watch:

May 24 - Bloomberg (Alex Tanzi): "National home values have increased 8.7% since last April to a median value of $215,600, according to Zillow. Newly released data from the Federal Housing Finance Agency confirm the widespread gains seen by Zillow… The FHFA report shows first-quarter home prices rose 6.9% from a year earlier. Annual appreciation surpassed 10% in Nevada (13.7%), Washington (13.1%), Idaho (11.1%), Colorado (10.6%). The rise in home prices has allowed more people to take cash-out of the homes when they refinance. Refinancing, where the home owner took additional cash out, rose to 61% in the first quarter -- the highest rate seen since the third quarter of 2008…"

May 22 - CNBC (Jeff Cox): "Investors and policymakers have gone looking for inflation over the past decade and largely have come up empty. It could, however, come barreling at them soon like an 18-wheeler. Multiple signs of inflation in freight-related industries are at or near historical highs, in what could be an early sign that price pressures are building and ready to reverberate around the economy. Freight marketplace DAT keeps track of supply and demand in the freight industry through a bulletin board that matches companies with loads to be delivered to the vehicles that will take the goods to the marketplace… Recent readings show demand for vehicles skyrocketing, a sign that generally points to inflationary pressures building up in the supply chain."

May 22 - Reuters (Pete Schroeder): "U.S. banks reported $56 billion in profits in the first quarter, up 27.5% from a year earlier, as institutions began to take advantage of a lower effective tax rate… Over 70% of U.S. banks reported growth in year-over-year earnings, as the industry enjoyed higher net operating revenue amid a significantly lower corporate tax rate, according to the regulator. Net interest income was up 8.5% to $131.3 billion."

May 21 - Bloomberg (Saleha Mohsin and David McLaughlin): "Treasury Secretary Steven Mnuchin urged the Justice Department to review the power that large technology firms such as Google have over the American economy, the latest U.S. official to back antitrust scrutiny of the industry. A '60 Minutes' segment on Sunday devoted to assertions that Alphabet Inc.'s Google wields a destructive monopoly in online search hammered home the notion of the company's dominance during a time of heightened public concern with technology giants… 'These issues deserve to be reviewed carefully,' Mnuchin said… 'These are issues the Justice Department needs to look at seriously, not for any one company, but as these technology companies have a greater and greater impact on the economy.'"

May 24 - Wall Street Journal (Nour Malas): "The Silicon Valley cities that are home to Google and Apple Inc. are considering the kind of per-employee tax that Seattle recently drew criticism for imposing. Mountain View, Calif., and nearby Cupertino are both weighing possible ballot measures this fall. Officials said the taxes could raise money to help manage local problems tied to rapid growth, including traffic and a need for affordable housing. 'We are pursuing a more aggressive agenda to respond to our housing and transportation crises, which have both gotten significantly worse in the last year,' said Rod Sinks, the vice mayor of Cupertino, where Apple is based."

May 20 - Financial Times (Rana Foroohar): "Financial crises always start the same way. Loose monetary policy leads to an increase in debt and a rise in risk-taking. Over-confident financiers, lax regulators and politicians desperate to please voters operate in this toxic environment until a bubble eventually bursts, taking the financial system down with it. I am not saying we are heading for this fate in the very near future. But it is worth noting that this coming week the US Congress may very well pass a bill to rollback the post-financial crisis-era Dodd-Frank reforms. This is happening at a time when interest rates have been at historic lows for nearly 10 years, public and private debt is at record levels, consumer debt loads and subprime defaults are rising, and politicians are looking to throw a bit more kerosene on the economy to seduce voters in the run-up to November's midterm elections."

May 23 - Bloomberg (Joe Light): "Two U.S. senators who have played key roles in trying to advance housing-finance reform are acknowledging the legislative efforts to end government control of Fannie Mae and Freddie Mac are dead, at least for now. Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia commented on the status of the two companies… Corker and Warner tried to develop a bill that would have largely preserved the operations of Fannie and Freddie while opening the market to new competition. That effort foundered after failing to win support from progressives, who wanted to preserve the companies' affordable-housing mandates… 'My sense is that these institutions may well stay in conservatorship for some time,' Corker said…"

May 22 - Bloomberg (Shelly Hagan): "U.S. consumers are more devoted to their mobile phones than their automobiles. The sea change has taken place over the last few years as mobile devices become an integral tool not just for communication with loved ones or employers, but also everything from banking to dating to watching TV and listening to music. As cars grow relatively less important, borrowers struggling to pay back their loans on time are increasingly prioritizing payments on the latest iPhone instead of making sure they hold on to their pickup or coupe."

May 23 - Reuters (Richard Leong): "U.S. applications on mortgages to refinance an existing home fell to their lowest level in 17-1/2 years as some 30-year borrowing costs climbed to their highest levels in over seven years, the Mortgage Bankers Association said…"

China Watch:

May 20 - Reuters (Li Zheng, Ma Rong and Kevin Yao): "China will 'actively and steadily' deleverage and tackle financial risks, sources said…, citing the country's five-year plan (2016-2020) for the financial sector. China will boost the role of price-based monetary policy targets with interest rates as core, according to two sources with knowledge of the matter and a document seen by Reuters."

May 23 - Reuters (Andreas Rinke and Ben Blanchard): "China said… it would 'open its door wider' to German businesses, giving a warm reception to visiting Chancellor Angela Merkel, who has wooed Beijing to counterbalance trade threats from U.S. President Donald Trump. Germany and China, two exporting nations that run large trade surpluses with the United States, have found themselves in Trump's firing line and are scrambling to preserve the multi-lateral order on which their prosperity rests. Merkel faces a delicate balancing act on the trip to show Chinese-German solidarity over trade and the Iran nuclear deal without harming ties with long-term ally Washington."

Central Bank Watch:

May 24 - Bloomberg (Alessandro Speciale): "European Central Bank officials with memories of Greece's brinkmanship aren't about to blink as they face another populist government from a country many times its size. In the same month that the… institution potentially closed the book on its involvement with the Greek debt crisis, its guardians have been keeping a nervous eye on Italy. Populists there are trying to form a coalition government with euro-skeptic tendencies and spending promises of as much as 126 billion euros ($147bn) a year. With the biggest debt burden in the euro zone, such pledges in Italy have unsettled bond markets scarred by the European sovereign crisis of recent years. For the ECB, which spearheaded efforts to contain that turmoil, the prospect of a wayward government at the helm of the region's third-biggest economy is a political nightmare for officials who will insist on euro-zone members sticking to the rules of monetary union."

May 24 - Financial Times (Claire Jones): "The eurozone's central bankers want to maintain 'a steady hand' as they continue to plan for the removal of their crisis-era stimulus in the face of concern that the slowdown in growth may prove more than a blip. The bank also warned that it needed to strengthen its message on government spending in the face of events in Italy. After a bumper 2017, growth in the opening months of this year has been slower in the eurozone. Most economists view the setback as temporary..."

May 24 - Financial Times (Claire Jones): "The European Central Bank has warned the eurozone's more heavily indebted member states that loosening their fiscal policy could cause investors to offload their bonds. The warning comes just hours after Italy's president blessed a coalition composed of two anti-establishment parties that have made higher fiscal spending a cornerstone of their mandate the right to form a government. The ECB said… to mark the release of its latest edition of its Financial Stablity Review: 'A deteriorating growth environment or a loosening of the fiscal stance in high-debt countries could impact the fiscal outlook and, by extension, market sentiment towards some euro area sovereign issuers.'"

Global Bubble Watch:

May 22 - Financial Times (Robin Wigglesworth): "Every morning, Wayne Wicker goes to the gym and watches CNBC to catch up on the financial news. Lately, one particular theme dominates the broadcasting agenda. 'There seems to be a new merger on CNBC every day,' noted Mr Wicker, the chief investment officer at ICMA-RC… 'It's a pretty spectacular trend.' Indeed, the overall volume of mergers and acquisitions globally has reached nearly $2tn already this year, according to Dealogic, on track to beat the post-crisis high of 2015. However, M&A splurges tend to be a classic late-cycle harbinger. The acquisitions boom has already left US companies with record amounts of debt on their balance sheets, and the quality of that debt… has deteriorated."

May 24 - Bloomberg (Lianting Tu and Narae Kim): "Debt issuers in the Asian dollar-bond market are learning the wisdom behind the old adage 'if at first you don't succeed, try, try again.' In a twist hardly thinkable during the record sales of last year, investors balked at two investment-grade Chinese companies' offerings last week. Increasing strains thanks to the appreciating dollar and steady increase in benchmark Treasury yields are shaking up this near-$1 trillion market…"

May 21 - Financial Times (Attracta Mooney): "Chinese investors have been big buyers of international property for years, helping to boost real estate markets globally as they ploughed money into so-called trophy assets. However, last year the country tightened capital controls on foreign property purchases. As a result, Chinese cross-border real estate investment in the first quarter of 2018 was the lowest in three years, as outflows fell 27% year-on-year to $5.6bn for the period. Now institutional investors are grappling with what this tightening of policy means for commercial property markets around the world and whether the retreat of Chinese buyers will push down prices."

Europe Watch:

May 23 - CNN (Andrea Mammone and Federico Finchelstein): "Italy is set to create its most anti-establishment government since the end of fascism in 1945. The Five Star Movement's leader, Luigi Di Maio, and Matteo Salvini's Northern League met with Italy's President, Sergio Mattarella, and put forward Giuseppe Conte -- a law professor with no political experience -- as their proposed candidate for prime minister The formation of a new cabinet under Conte's leadership could take a while yet, but one thing is sure: Italy -- and the rest of Europe -- is a long way from stemming the anti-establishment surge that's been plaguing the continent in recent years Some pundits believe that the 'modern barbarians' are literally at the gate of Rome."

May 25 - Financial Times (Jessica Dye): "Italy's political uncertainty has prompted Moody's to put the country's rating on review for a possible downgrade. Moody's said that Italy's Baa2 rating - two notches above non-investment grade, or junk, status - was at risk due to two key factors: the potential for its fiscal strength to crumble under the new coalition government's plans, and the chance that current efforts at structural reform will falter, or that past reforms could be undone."

May 25 - Bloomberg (Maria Tadeo and Esteban Duarte): "Spanish Prime Minister Mariano Rajoy said he aims to see out the rest of his four-year term after the opposition called a vote of no-confidence in his scandal-plagued administration. 'As far as it's in my power, it is evident that I want the legislature to last four years,' Rajoy said Friday… 'That is good. It gives certainty, it gives security, it allows you to govern with a degree of calmness.' The Socialists, the biggest opposition group, called a vote to oust Rajoy's minority administration after the National Court convicted former officials from the governing party of running a multi million-euro racket on his watch. The anti-establishment group Podemos backed the motion, while Ciudadanos said the prime minister's position has become 'unsustainable' and demanded a snap election."

Fixed Income Bubble Watch:

May 21 - Bloomberg (Cecile Gutscher): "You need to rifle through 18 years of history to find selloffs that compare to the one corporate bond investors are now enduring. Debt of American companies just posted their third-worst 100-day returns since 2000, according to a JPMorgan Chase & Co. index, as tighter monetary conditions leave their mark on high-quality bonds with longer maturities. With negative returns likely to scare off retail investors, the outlook for the asset class looks grim, JPMorgan strategists said in a Friday note. But they find a silver lining: the highest yields in almost five years are likely to discourage new bond supply, which would at least help the technical picture. The selloff in corporate credit is now on par with the routing emerging markets. A Bloomberg Barclays index of U.S. investment-grade credit is down 3.9 percent so far this year, while dollar bonds of developing nations have declined at about the same clip."

May 25 - Bloomberg (Tracy Alloway and Cecile Gutscher): "The C-C-Craze for some of the riskiest corporate credits has gone too far, according to Goldman Sachs… While U.S. investment-grade bonds that are most sensitive to moves in borrowing costs have been hit hard this year, investors continue to pile into debt sold by some of the weakest junk-rated companies. Bonds in the CCC category -- just two notches above default -- have returned a whopping 330 bps in total this year… That outperformance has helped push spreads on the Bank of America Merrill Lynch gauge of CCC rated debt to below 700 bps earlier this week -- the smallest premium since July 2014. Meanwhile, Goldman's preferred valuation measure of corporate credit, which subtracts their projected expected-loss rates from current spreads, shows U.S. high-yield obligations are now mispriced for even the most benign scenarios."

May 25 - Bloomberg (Sally Bakewell): "Wall Street's hottest debt market is approaching hyperdrive. Investors haven't been able to get enough of the repackaged corporate loans known as collateralized loan obligations. That intense demand is allowing the money managers that put these securities together to sell off pieces of CLOs that by law they previously had to hang on to. These sales are the crest of what could be a $7 billion wave of such deals. The frenzied buying isn't limited to older securities -- Wells Fargo & Co. is forecasting that there will be a record $150 billion of new U.S. CLOs issued this year. Moody's… can't keep up with the demand for its services, and is taking around a month more to rate the securities than it needed before. That strong demand is allowing managers to sell CLOs with weaker protections, and it's making the leveraged loans that get bundled into the securities riskier too. Investors are buying CLOs because they are seen as safe: they offer protection against rising interest rates and against losses if loans default."

Japan Watch:

May 21 - Reuters (Stanley White and Leika Kihara): "The Bank of Japan… won approval from influential members of the government's leading advisory panel for its decision to abandon the timeframe it had set for meeting its inflation target… In its quarterly outlook report, the BOJ ditched its forecast for when inflation will reach 2%, saying this will dispel the notion that the central bank is obliged to ease policy if it pushes back this forecast."

May 24 - Bloomberg (Christopher Anstey): "When Tadashi Kikugawa arrived on the Japanese bond desk at Fuji Bank in 1988 after finishing a college degree in physics, he had to get to grips with a market with 'huge' fluctuations. Trades worth $1 billion in one shot weren't unusual, he says, and they would often send yields seesawing. Fast forward three decades and the market for Japanese government bonds -- JGBs -- is very different. Gone are the days of wild swings, and sometimes the market doesn't move at all. On one Tuesday in March there wasn't a single trade in the benchmark 10-year Japanese government bond. 'That was very sad," Kikugawa said... "We used to say that volatility was your friend. There's no friend anymore.'"

Geopolitical Watch:

May 18 - Reuters (David Stanway and Winni Zhou): "China's air force has landed bombers on islands and reefs in the South China Sea as part of a training exercise in the disputed region, it said… It said the pilot of the H-6K bomber conducted assault training on a designated sea target and then carried out take-offs and landings at an airport in the area, describing the exercise as preparation for 'the West Pacific and the battle for the South China Sea'."

May 23 - CNBC (Holly Ellyatt): "Diplomatic tensions and the 'aggressive policy' of the U.S. toward Moscow are of more concern than economic sanctions, the president and chairman of one of Russia's largest lenders said… 'What concerns me more than any economic sanctions, that for the first time since the Cuban (missile) crisis - people, at least in Russia and probably in America also, have started to feel that there is more danger of World War III,' Andrei Kostin, the president and chairman of Russia's VTB Bank told CNBC's Geoff Cutmore… 'There is a recent public opinion poll (in) Russia (that) showed that 55% of Russians now believe or think that World War III is possible because of the aggressive policy of the United States,' he added."

Friday, May 25, 2018

Friday Evening Links

[BloombergQ] Stocks Mixed as Crude Plunges the Most in a Year: Markets Wrap

[CNBC] Moody's warns of 'particularly large' wave of junk bond defaults ahead

[BloombergQ] Fed's Powell Leads Global Call for Central Bank Independence

[Reuters] Brazil truckers maintain blockades, near standoff with military

[BloombergQ] Central Bankers Give Their Crisis Policies an Incomplete Grade

[BloombergQ] Trump Casts Long Shadow at Buoyant Putin's Geopolitical Show

[FT] Moody’s puts Italy on review for downgrade

[FT] Lack of ‘Powell put’ tightens financial conditions

Friday's News Links

[Reuters] Wall Street lower as oil prices slump

[MarketWatch] Treasurys extend weeklong rally on Italy fears

[CNBC] Oil prices are tanking as Russia and Saudi Arabia rethink output caps

[BloombergQ] Sentiment in U.S. Eases on Less-Favorable Buying Conditions

[CNBC] White House official: Trump could take a harder line on trade with China now that the Kim Jong Un summit is off

[Reuters] Fed's Powell: central banks must strive to enhance transparency on supervision

[BloombergQ] Italian Banks a Worry Again as Populist Parties Rethink Fixes

[Reuters] ECB resolve to end bond buys this year remains firm: sources

[Reuters] Collapse of Trump-Kim summit threatens to deepen U.S.-China rift

[Reuters] 'Trump formula'? North Korea says still open to talks after summit canceled

[Bloomberg] As Europe's Risks Flare, Everyone Piles Back Into German Bunds

[BloombergQ] Fed Hiking Cycles Always Create a `Meaningful Crisis Somewhere'

[Reuters] Spain's Rajoy says will not call snap election

[Reuters] Taiwan air force scrambles as Chinese bombers fly round island

[Weekly Standard] Italy’s deplorables unite against Europe’s elites

[WSJ] In Auto Tariffs, a High-Stakes Game of Chicken

[WSJ] Mike Meru Has $1 Million in Student Loans. How Did That Happen?

[WSJ] Bull Market in Tech-Company Convertible Debt Rages On

[FT] New York property jitters herald declines elsewhere

[FT] Spanish and Italian bond yields rise sharply

[FT] Spanish opposition demands Rajoy confidence vote

Thursday, May 24, 2018

Thursday Afternoon Links

[Reuters] Wall Street dips after Trump cancels North Korea summit, targets car imports

[Reuters] European autos tumble as U.S. tariff threat rattles Germans

[BloombergQ] Trump Threatens Allies With New Tariffs, Sowing Global Confusion

[BloombergQ] U.S. Sales of Existing Homes Fall as Inventory Woes Continue

[CNBC] Fed could end tightening cycle in 2019: Harker on CNBC

[BloombergQ] Trucker Strike Strangles Brazil for Fourth Day on Fuel Cost

[BloombergQ] Spain's Rajoy Under Pressure After Ex-Party Treasurer Convicted

Thursday's News Links

[BloombergQ] Stocks Slide as Geopolitics Swamps Risk-On Mood: Markets Wrap

[Reuters] Tariff fears hit car shares, lira back on the rack

[Reuters] Trump calls off meeting with North Korea's Kim

[Reuters] Nikkei drops to over 2-week lows as U.S probe hits automakers

[Reuters] Trump urges a new 'structure' for U.S.-China trade deal

[BloombergQ] Trump's Auto Tariffs Threat Targets Heart of German Economy

[BloombergQ] U.S. Home Values Are Rising at Their Fastest Pace in 12 Years

[Reuters] Merkel woos China as Trump poses new trade challenge

[Reuters] Any systemic risk from Italy could push euro down '5 big figures' - Goldman

[BloombergQ] A Big Chill Silences Turkey's Market Analysts Amid Lira's Plunge

[CNBC] Take ‘trade tensions very seriously,' Stephen Roach warns a painful US-China trade war could still hit stocks

[DailyBeast] Trump Adviser Peter Navarro Slams Steve Mnuchin as ‘Neville Chamberlain’

[NYT] Trump Initiates Trade Inquiry That Could Lead to Tariffs on Foreign Cars

[WSJ] Trump Tariff Threat Vexes Allies and Global Auto Makers

[WSJ] From Housing to Stocks, Rising U.S. Bond Yields Are Being Felt

[WSJ] Swamped by Growth, Silicon Valley Weighs Taxing Big Employers

[WSJ] Turkey’s Currency Meltdown

[WSJ] Taxpayers Are on the Hook in Banks’ Financial Engineering

[FT] Trump car tariff threat prompts global condemnation

[FT] ECB to maintain ‘steady hand’ in face of eurozone growth slowdown

[FT] ECB warns indebted countries on risk of flight from bonds

Wednesday, May 23, 2018

Wednesday Evening Links

[Reuters] Wall St. ends up as Fed seen keeping gradual approach to rate hikes

[CNBC] Fed indicates it will let inflation run above 2 percent goal for 'temporary period'

[Reuters] Most Fed policymakers say rate hike likely needed 'soon,' minutes show

[Reuters] Turkish central bank raises rates sharply to put floor under lira

[BloombergQ] Trump Backs Away From China Deal Under Pressure by Trade Hawks

[Reuters] Trump mulling probe of auto imports on national security grounds

[Reuters] Trump blasts Mexico, Canada over NAFTA talks

[CNBC] Trump administration reportedly considering new tariffs on imported vehicles; Toyota shares fall

[Reuters] Tumbling lira casts shadow over Erdogan's June election

[BloombergQ] Turkey's Rate Hike a Relief, But More Needed: Analyst Roundup

[BloombergQ] North Korea Blasts Pence, Renews Threat to Cancel Trump Summit

[NYT] Emerging Markets Are Worrying Investors, Again

[NYT] Italy’s Populists Get a Green Light to Govern, in New Threat to Europe

[WSJ] Fed Minutes Signal Rate Increase in June

[WSJ] Little-Known Law Professor Gets Nod to Form Italy’s New Government

[FT] Erdogan’s siege mentality pushes Turkish lira to the brink

Wednesday's News Links

[BloombergQ] Stocks Fall, Bonds Gain as Risks Mount; Euro Drops: Markets Wrap

[Reuters] Turkey's lira tumbles 5 pct, plumbs new record lows

[Reuters] Euro/Swiss franc at 2-month lows as Italy concerns weigh

[GulfNews/Bloomberg] Turkey heads toward a currency crisis as lira goes into free fall

[Reuters] U.S.-China trade deal 'too hard to get done,' Trump says

[Reuters] U.S. new home sales fall less than expected in April

[BloombergQ] China's Trade Deal With U.S. Leaves Germany Squeezed in Middle

[Reuters] Trump says he will propose new tax cuts prior to November

[BloombergQ] Fed Minutes to Detail Views on Inflation Overshoot, Yield Curve

[BloombergQ] Emerging-Market Stress Just Begun as Record Debt Wall Looms

[BloombergQ] Turkey's Island of Market Calm Is a Mirage

[Reuters] U.S. home refinancing falls to lowest in 17-1/2 years: MBA

[BloombergQ] Investors Ask `Does Turkey Even Have a Central Bank Anymore?'

[CNN] Italy's next government is Europe's next crisis

[BloombergQ] Promises, Promises: Italy's Populists Face Governing Reality

[CNBC] 'World War III' worries me more than economic sanctions do, Russia's VTB Bank chief says

[WSJ] How Congress Rolled Back Banking Rules in a Rare Bipartisan Deal

[WSJ] The Sea of Leverage in Chinese Markets

[FT] Lira tumble reverberates across emerging market currencies

[FT] Turkish lira sell-off accelerates after rating agency warnings

[FT] Trump casts doubt on terms of China trade deal

[FT] Italy bonds and banks hit as sell-off resumes

[FT] M&A frenzy stokes fear of market nearing top of cycle

[FT] Italian bond fears turn to Monte Paschi debt

Tuesday, May 22, 2018

Tuesday Evening Links

[Reuters] Wall St. slides on U.S.-China trade talk uncertainty

[CNBC] Trump: There's no deal with China on ZTE, and I'm not satisfied with trade talks

[CNBC] Treasury Secretary Steven Mnuchin says steel and aluminum tariffs on China will stay in place

[CNBC] Inflation is coming to the US economy on an 18-wheel flatbed

[CNBC] Silicon Valley tech bubble is larger than it was in 2000, and the end is coming

[BloombergQ] Consumers Are Repaying Cell-Phone Debt Before Making Car Payment

[BloombergQ] Italy Turmoil Could Hamper Sealing Banking Union, Finland Warns

[Reuters] U.S. banks' quarterly profit jumps 27.5 percent on lower tax rate -FDIC

[CNBC] The State Dept issued 12 demands for Iran. They ratchet up oil market risk and trade tension

[Reuters] Trump to meet South Korea's Moon with North Korea summit hanging in the balance

[WSJ] Congressional Opposition Mounts Over White House Approach to Chinese Tech Deals

[WSJ] In Trade War With U.S., China Gets the Upper Hand

[FT] China’s lending bubble is history

[FT] Market pressure on Erdogan increases as lira hits record low

Tuesday's News Links

[Reuters] Stocks rise as U.S.-China trade talks advance

[BloombergQ] Oil Rises as Venezuela Sanctions Stoke Crude Supply Risk Concern

[FXLive] The Turkish lira touches another record low against the dollar

[BloombergQ] Italy a Submerging Market as Borrowing Costs Exceed Indonesia’s

[BloombergQ] Mnuchin Updates Trump on Concerns Over China Investments in U.S.

[BloombergQ] Trump Retreats From China Tariffs Amid White House Trade Discord

[Reuters] U.S. slaps heavy duties on Chinese steel shipped from Vietnam

[Reuters] China slashes auto import tariffs in boost to BMW, Tesla

[CNBC] Self-driving cars are scaring more people

[WSJ] Iran, Get Ready for the Battle Rial

[FT] US corporate bonds have worst start to year in decades

[FT] Leveraged loan rush sees borrowers gain balance of power

[FT] Political novice Giuseppe Conte proposed as Italy’s PM

[FT] Fitch warns Turkey credit profile at risk after June elections

Monday, May 21, 2018

Monday Evening Links

[Reuters] Wall Street advances on trade war truce; Russell 2000 hits record

[Reuters] U.S.'s Mnuchin: 'Significant' issues remain over NAFTA

[CNBC] Trump advisor Larry Kudlow: Tariffs are still on the table as a tool in China talks

[Reuters] Fed's Bostic repeats U.S. close to Fed's inflation, employment goals

[CNBC] Goldman Sachs: The fiscal outlook for the US 'is not good'

[BloombergQ] Europe's Italian Problem Is Bigger Than Brexit

[BloombergQ] In Italy, a Novice Premier May Face Rival Puppet-Masters

[BloombergQ] Steve Bannon Condemns Mnuchin's Trade Truce as China Giveaway

[Reuters] U.S. toughens stance on Iran, lists sweeping demands

[NYT] Is Capital or Labor Winning at Your Favorite. Company? Introducing the Marx Ratio

[FT] Fitch warns over Italian populists’ impact on debt levels

Monday's News Links

[Reuters] Stocks rally after Mnuchin says Sino-U.S. trade war 'on hold'

[BloombergQ] Italian Assets Slump Again as Ripples Spread Across Europe

[Reuters] Italian bonds sell off as 5-Star, League inch toward government

[BloombergQ] Lira Leads Selloff as Dollar Hits Every Emerging-Market Currency

[CNBC] Mnuchin: We've made 'very meaningful progress' with China on trade issues

[BloombergQ] Mnuchin Urges Antitrust Review of Big Tech After Google Report

[BloombergQ] U.S.-China Trade Truce May Be Fleeting as Tensions Linger

[BloombergQ] No Experience Is No Drawback for Top Italy Premier Candidate

[Reuters] China will 'actively and steadily' deleverage, tackle risks: sources

[Reuters] BOJ wins approval for dropping its inflation target timeframe

[Reuters] CEFC Shanghai International defaults on $327 mln in bond payments

[BloombergQ] Shut Up, Investors Told, as Argentina Unleashes Crisis Crackdown

[BloombergQ] `God Help Turkey,' Says Brokerage as Lira Goes Into Meltdown

[BloombergQ] Bank Indonesia to Step Up Intervention as Currency, Bonds Slide

[BloombergQ] India’s Forex Reserves Slide On RBI Intervention

[WSJ] Rising Dollar Sparks Tumult in Emerging Markets

[FT] Italian assets hit hard by political risk over new government

[FT] Short-term US bond yield surpasses longer-dated peers

[FT] Chinese crunch on foreign deals threatens premium asset prices

[FT] Reputation of hedge funds is hacked back hard

Saturday, May 19, 2018

Saturday's News Links

[Reuters] China's second quarter GDP growth seen easing to around 6.7 percent - official think tank

[Reuters] China air force lands bombers on South China Sea island

[WSJ] Main Street Banks’ New Lending Rivals: Hedge Funds and Private Equity

[FT] China stops short of accepting US trade demands

[FT] Moqtada al-Sadr bloc wins Iraq election

Weekly Commentary: Crisis Watch

Where to begin? Contagion… The Argentine peso dropped another 5.0% this week, bringing y-t-d losses to 23.7%. The Turkish lira fell 3.9%, boosting 2018 losses to 15.4%. As notable, the Brazilian real dropped 3.7% (down 11.5% y-t-d), and the South African rand sank 4.0% (down 3.0% y-t-d). The Colombian peso fell 3.0%, the Chilean peso 2.7%, the Mexican peso 2.7%, the Hungarian forint 2.3%, the Polish zloty 2.1% and the Czech koruna 2.0%.

EM losses were not limited to the currencies. Yields continued surging throughout EM. Notable rises this week in local EM bonds include 54 bps in Brazil, 27 bps in South Africa, 34 bps in Hungary, 36 bps in Lebanon, 25 bps in Indonesia, 28 bps in Peru, 14 bps in Turkey, 20 bps in Mexico and 11 bps in Poland.

Dollar-denominated EM debt was anything but immune. Turkey's 10-year dollar bond yields spiked 41 bps to 7.16%, the high going back to May 2009. Brazil's dollar bond yields surged 29 bps to 5.58%, the highest level since December 2016. Mexico's dollar yields jumped 18 bps to 4.64%, the high going all the way back to February 2011. Dollar yields rose 19 bps in Chile, 28 bps in Colombia, 19 bps in Indonesia, 14 bps in Russia, 14 bps in Ukraine and 167 bps in Venezuela (to 32.80%). Losses are mounting quickly for those speculating in EM debt.

Developed bonds were under pressure as well. We'll begin with Italy:

May 17 - UK Guardian (Jon Henley): "Italy's new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the EU has been led by populist, anti-EU forces. From the EU's perspective, the coalition of the anti-establishment Five Star Movement (M5S) and the far-right League looks headstrong and unpredictable, possibly even combustible. Leaked drafts of their government 'contract' include provision for a 'conciliation committee' to settle expected disagreements. Mainly it looks alarming. Both parties toned down their fiercest anti-EU rhetoric during the election campaign, dropping previous calls for a referendum on eurozone membership… But as they approach power, the historical Euroscepticism of the M5S and the League is resurfacing. An incendiary early version of their accord called for the renegotiation of EU treaties, the creation of a euro opt-out mechanism, a reduction in Italy's contribution to the EU budget and the cancellation of €250bn (£219bn) of Italian government debt."

Italian 10-year yields surged 36 bps this week to 2.23%, the high since the spike last July. Perhaps even more dramatic, after ending last week at negative 29 bps, Italian 2-year yields surged 37 bps to a near 22-month high eight bps. The Italian to German two-year yield spread widened 36 bps this week to a 13-month high 68 bps.

Bonds throughout the euro zone periphery were under pressure. Greek 10-year yields surged 50 bps to a 2018 high 4.50%. Portuguese yields jumped 19 bps to 1.87%, and Spanish yields gained 17 bps to 1.44%. Elsewhere, Australian 10-year yields rose 12 bps to 2.90%, and New Zealand yields rose 14 bps to 2.86%.

Even with Friday's six bps decline, 10-year Treasury yields ended the week up eight bps to 3.06%. Thursday's 3.13% yield was the high going back to July 2011. With two-year yields adding a basis point this week, the two to 10-year spread widened seven bps to 51 bps. It's worth noting that 30-year yields jumped 10 bps this week to 3.21%, the high since June 2015, and benchmark MBS yields rose 10 bps to 3.76%, a high going back to July 2011.

May 17 - Bloomberg (Selcuk Gokoluk): "Debt levels that quadrupled in a decade have made emerging markets vulnerable to tightening financial conditions in the era of rising U.S. interest rates, Fitch Ratings said. Outstanding debt securities from developing nations have ballooned to $19 trillion from $5 trillion a decade earlier... Despite the development of local-currency bond markets, borrowers will be hobbled by higher external borrowing costs, a stronger dollar and slowdown of capital inflows, it said… 'If easy financial conditions tighten more sharply than expected, EM debt would come under pressure,' said Monica Insoll, the head of the credit market research team at Fitch. 'If investor appetite for EM risk reverses, issuers may face refinancing challenges even in their home markets, while capital outflows could put pressure on exchange rates or foreign exchange reserves.'"

It's worth repeating (from above): "Outstanding debt securities from developing nations have ballooned to $19 trillion from $5 trillion a decade earlier." Analysts this week were keen to note that EM market tumult has been less disruptive than the (soon passing) 2016 episode. Give it time. We're still in just the initial phase of Risk Off. Only a few weeks back, universal bullishness held sway over the emerging markets and economies. Buy one ETF and own them all!

It's worth recalling that the 2016 de-risking/de-leveraging episode was nipped in the bud by an upsurge in global QE (especially courtesy the ECB and BOJ) and a corresponding extension of easy money by the Federal Reserve. And let us not forget the commanding contribution from Beijing policymaking. After a modest slowdown in 2015, China's Credit growth surged in 2016 and that acceleration continued well into 2017. Two additional fateful years of surging global Credit and financial flows are now coming home to roost.

Today's backdrop is more conducive to a protracted EM crisis backdrop, along with, I would argue, an especially destabilizing global market liquidity crunch. For one, the overheated U.S. economy has the Fed rather hamstrung. Their timid baby-step approach has worked to sustain excessively loose financial conditions. And while central bankers dilly-dallied, extreme fiscal stimulus coalesced with extreme monetary stimulus - creating a most potent concoction way too late in the economic cycle. Between fiscal stimulus, a capital investment boom and reenergized housing inflation, the Fed today confronts extraordinary uncertainty as it attempts to gauge the amount of economic stimulus and inflationary juice in the pipeline.

Fed rate hikes, rising market yields and the resurgent dollar receive most of the attention when analysts contemplate EM vulnerabilities. Issues related to China are deserving of more prominence in the analysis. Chinese officials have finally become more assertive in cracking down on financial excess. China's system Credit growth has slowed meaningfully, and there are indications that tighter financial conditions have begun to bite.

May 18 - Bloomberg (Carrie Hong): "Zhongyuan Yuzi Investment Holding Group Co. became the second Asian investment-grade company that failed to price a dollar-denominated bond offering this week after the 10-year U.S. Treasury yield hit the highest level since 2011. The Chinese local government financial vehicle decided not to proceed with a plan to sell dollar bonds on Thursday because of unfavorable market conditions… A day earlier, developer China Overseas Grand Oceans Group Ltd. also postponed a sale of five-year bonds… With the global borrowing benchmark surging this week combined with rising Libor funding cost, appetite for Asian dollar new issues is weakening…"

May 16 - Bloomberg (Lianting Tu, Carrie Hong and Denise Wee): "A slump in prices of higher-yielding bonds sold by Chinese banks risks spurring margin calls that will exacerbate the declines. Capital instruments sold by Bank of Qingdao Co. and other small Chinese lenders sank below 90 cents on the dollar this month, tumbling faster than other securities as a rise in Treasury yields sent jitters through Asian credit markets. Because the notes were marketed to wealthy individuals as part of structured products and those investors tend to be heavily leveraged, buyers may face margin calls when prices decline to between 80 cents and 90 cents on the dollar, said three people familiar with the debt…"

May 17 - Bloomberg: "The days when only obscure Chinese companies defaulted on their debt are ending. Four of the five issuers that have defaulted for the first time in 2018 are companies with public listings, which used to be regarded as assuring better governance and information disclosure. That's as many by this type of firm as happened in 2014 through 2017… For investors, the change means it's dangerous to make assumptions. 'Our first and foremost task now is to avoid stepping on mines,' says Wang Ming, chief operating officer at Shanghai Yaozhi Asset Management LLP, which oversees 12 billion yuan ($1.9bn) in assets. 'It's increasingly difficult to tell which one will default, which not.'"

China would not face today's degree of fragility had it not fatefully resuscitated Bubble Dynamics back in 2016. EM, as well, would be in a sounder position if it had begun to deal with excess and mounting vulnerabilities. Instead, for both China and EM it's been a case of extending Terminal Phase Excess, with an additional two years of rampant Credit expansion, extraordinary international "hot money" flows, and even deeper structural impairment.

May 17 - Bloomberg (Richard Frost and Emma Dai): "Hong Kong intervened to defend its currency peg for a second day after the city's dollar fell to the weak end of its trading band The Hong Kong Monetary Authority bought HK$9.5 billion ($1.2bn) of local dollars overnight, the third-biggest intervention since the defense began last month. The HKMA mopped up HK$1.57 billion on Wednesday. Lower rates than the U.S. have made the Hong Kong dollar an attractive target for shorting. The de facto central bank has now spent $7.95 billion protecting its currency system, which has the effect of tightening liquidity in a city that's grown fat on ultra-low borrowing costs."

From my vantage point, EM contagion has reached critical mass. There will be ebbs and flows, but we're now on Crisis Watch. De-risking/De-leveraging Dynamics have attained momentum, and the focus will be on waning global market liquidity and the next domino. The process of unwinding EM "carry trade" leverage has commenced. I ponder how much leverage has accumulated throughout Asian debt markets. Hong Kong's Monetary Authority has significant international reserves (over $400bn) to support its faltering currency peg. But I would expect the reversal of "hot money" flows to accelerate, pressuring central banks throughout Asia and EM more generally. To fund outflows, central bankers will be forced sellers of Treasuries (and other sovereign debt). It's worth noting that custody holdings held by the Fed for foreign Treasury holders have dropped $63bn over the past five weeks.

Back in 2015 and 2016, the monthly change in China's international reserves garnered significant market interest. Recall that after peaking at almost $4.0 TN in June 2014, reserves were down to about $3.0 TN by the end of 2016. But between January 2017 and January 2018, China's reserves recovered $160 billion, a significant quantity but still only a fraction of the previous decline. Hinting of a return of outflows, reserves have dropped $36 billion over the past three months.

Is there a big foreign "carry trade" component in Chinese debt instruments - in Hong Kong and the mainland? In the past, I posited "currency peg on steroids" - speculators could leverage in higher yielding Chinese instruments with confidence that Chinese officials would revalue the renminbi higher versus the dollar. The 2015/2016 renminbi devaluation corresponded with huge outflows and the drawdown of China's reserve holdings. Now, for almost 18 months the renminbi has enjoyed another period of managed appreciation - concurrent with a period of global exuberance for EM and Credit more generally. How much "hot money" and leverage was enticed by China's higher yields?

China appears increasingly vulnerable to EM contagion effects. Finance is tightening in EM, in China and globally. Over recent years, China has developed into the prevailing source of EM finance and trade. China and EM interdependency has been instrumental to their respective booms. Now comes the downside. I suspect "hot money" has begun exiting EM at least partially in anticipation of waning trade and financial flows from China. And a faltering EM Bubble certainly has negative ramifications for the increasingly fragile Chinese Bubble. If there is a big "carry trade" in Chinese Credit instruments, it's susceptible.

Previous problems have not gone away - they've instead festered and metastasized. EM debt, the China Bubble, Italy and euro monetary integration, to name just a few. This week was clearly an escalation in global de-risking/de-leveraging dynamics. How much speculative leverage has accumulated (since 2012) in Italian, Greek, Portuguese and Spanish debt? ECB rate manipulation and "money printing" stoked an artificial boom. It's come at a very steep price. Myriad problems associated with a deeply flawed monetary integration are waiting to resurface, as we're witnessing in Italy.

I know it sounds crazy - pure heresy - to most. But there's a shot that the world has commenced a crisis period that will unfold into something more comprehensive and challenging than 2008. And at least in the U.S., financial crisis is the furthest thing from people's minds. Not even on the radar. Not possible.

The VIX closed the week at 13.42. Blue skies as far as eyes can see. But to one that has been chronicling the "global government finance Bubble" now for over nine years, I really worry. Excess became systemic. Deep structural maladjustment - systemic. Global imbalances - unprecedented. The amount of global debt - previously unfathomable. And, deeply concerning, the world has become so much more divisive and hostile over the past decade.

Come the next international crisis, it will not be the U.S. and a group of likeminded global central bankers coordinating a unified policy response. Expect a disparate group of bankers, politicians and strongmen autocrats pointing fingers, making threats and demanding action from others. If they can't after months successfully negotiate trade deals, how are they to respond to crisis dynamics that they are wholly unprepared for.

But I'm getting ahead of myself. The U.S. economic boom has a head of steam. The small caps traded to record highs this week. To the naked eye, things look sound and sustainable. If only it weren't a Bubble Illusion. The NYT's Kevin Roose this week penned an insightful article, "The Entire Economy Is MoviePass Now. Enjoy It While You Can."

"I've got a great idea for a start-up. Want to hear the pitch? It's called the 75 Cent Dollar Store. We're going to sell dollar bills for 75 cents - no service charges, no hidden fees, just crisp $1 bills for the price of three quarters. It'll be huge. You're probably thinking: Wait, won't your store go out of business? Nope. I've got that part figured out, too. The plan is to get tons of people addicted to buying 75-cent dollars so that, in a year or two, we can jack up the price to $1.50 or $2 without losing any customers. Or maybe we'll get so big that the Treasury Department will start selling us dollar bills at a discount. We could also collect data about our customers and sell it to the highest bidder. Honestly, we've got plenty of options. If you're still skeptical, I don't blame you. It used to be that in order to survive, businesses had to sell goods or services above cost. But that model is so 20th century. The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road. Over all, 76% of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to… Jay Ritter, a professor at the University of Florida's Warrington College of Business. That was the largest number since the peak of the dot-com boom in 2000, when 81% of newly public companies were unprofitable. Of the 15 technology companies that have gone public so far in 2018, only three had positive earnings per share in the preceding year… The rise in unprofitable companies is partly the result of growth in the technology and biotech sectors, where companies tend to lose money for years as they spend on customer acquisition and research and development… But it also reflects the willingness of shareholders and deep-pocketed private investors to keep fast-growing upstarts afloat long enough to conquer a potential winner-take-all' market."

We've created a Bubble economic structure that will function especially poorly come faltering markets and a tightening of financial conditions.

For the Week:

The S&P500 declined 0.5% (up 1.5% y-t-d), and the Dow dipped 0.5% (unchanged). The Utilities sank 3.1% (down 7.8%). The Banks fell 1.2% (up 2.6%), while the Broker/Dealers added 0.4% (up 11.2%). The Transports increased 0.2% (up 1.1%). The S&P 400 Midcaps added 0.2% (up 2.3%), and the small cap Russell 2000 jumped 1.2% (up 5.9%). The Nasdaq100 declined 1.2% (up 7.3%).The Semiconductors slipped 0.4% (up 7.4%). The Biotechs gained 0.9% (up 11.4%). With bullion sinking $26, the HUI gold index dropped 2.5% (down 7.6%).

Three-month Treasury bill rates ended the week at 1.85%. Two-year government yields added a basis point to 2.55% (up 66bps y-t-d). Five-year T-note yields gained five bps to 2.89% (up 68bps). Ten-year Treasury yields jumped eight bps to 3.06% (up 65bps). Long bond yields rose nine bps to 3.20% (up 46bps). Benchmark Fannie Mae MBS yields jumped 10 bps to 3.76% (up 76bps).

Greek 10-year yields surged 50 bps to 4.50% (up 42bps y-t-d). Ten-year Portuguese yields gained 19 bps to 1.87% (down 8bps). Italian 10-year yields jumped 36 bps to 2.23% (up 21bps). Spain's 10-year yields rose 17 bps to 1.44% (down 12bps). German bund yields added two bps to 0.58% (up 15bps). French yields gained four bps to 0.83% (up 5bps). The French to German 10-year bond spread widened two to 25 bps. U.K. 10-year gilt yields gained six bps to 1.50% (up 31bps). U.K.'s FTSE equities index increased 0.7% (up 1.2%).

Japan's Nikkei 225 equities gained 0.8% (up 0.7% y-t-d). Japanese 10-year "JGB" yields gained almost two bps to 0.06% (up 1bp). France's CAC40 rose 1.3% (up 5.7%). The German DAX equities index added 0.6% (up 1.2%). Spain's IBEX 35 equities index dropped 1.5% (up 0.7%). Italy's FTSE MIB index sank 2.9% (up 7.3%). EM equities were mostly lower. Brazil's Bovespa index dropped 2.5% (up 8.7%), and Mexico's Bolsa fell 2.3% (down 7.5%). South Korea's Kospi index declined 0.7% (down 0.3%). India’s Sensex equities index dropped 1.9% (up 2.3%). China’s Shanghai Exchange gained 0.9% (down 3.4%). Turkey's Borsa Istanbul National 100 index recovered 0.5% (down 11.2%). Russia's MICEX equities declined 0.8% (up 10.3%).

Investment-grade bond funds saw inflows of $3.069 billion, while junk bond funds posted outflows of $542 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped six bps to 4.61% (up 59bps y-o-y). Fifteen-year rates gained seven bps to 4.08% (up 81bps). Five-year hybrid ARM rates rose five bps to 3.82% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.72% (up 64bps).

Federal Reserve Credit last week declined $3.1bn to $4.314 TN. Over the past year, Fed Credit contracted $125bn, or 2.8%. Fed Credit inflated $1.504 TN, or 53%, over the past 289 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $9.4bn last week to a five-month low $3.387 TN. "Custody holdings" were up $153bn y-o-y, or 4.7%.

M2 (narrow) "money" supply rose $16.0bn last week to a record $13.971 TN. "Narrow money" gained $511bn, or 3.8%, over the past year. For the week, Currency increased $0.5bn. Total Checkable Deposits sank $64.8bn, while savings Deposits surged $70.9bn. Small Time Deposits added $2.1bn. Retail Money Funds gained $7.2bn.

Total money market fund assets rose $11.5bn to $2.818 TN. Money Funds gained $173bn y-o-y, or 6.6%.

Total Commercial Paper jumped $9.6bn to $1.069 TN. CP gained $82.3bn y-o-y, or 8.3%.

Currency Watch:

The U.S. dollar index jumped 1.2% to 93.637 (up 1.6% y-t-d). For the week on the upside, the Swiss franc increased 0.2%. For the week on the downside, the South African rand declined 4.0%, the Brazilian real 3.7%, the Mexican peso 2.7%, the Swedish krona 1.7%, the Norwegian krone 1.5%, the euro 1.4%, the Japanese yen 1.3%, the New Zealand dollar 0.9%, the South Korean won 0.8%, the Canadian dollar 0.7%, the British pound 0.5%, the Singapore dollar 0.5% and the Australian dollar 0.4%. The Chinese renminbi declined 0.72% versus the dollar this week (up 1.99% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.0% (up 10.6% y-t-d). Spot Gold fell 1.9% to $1,293 (down 0.8%). Silver dropped 1.8% to $16.455 (down 4.0%). Crude gained 58 cents to $71.28 (up 18%). Gasoline jumped 2.0% (up 24%), and Natural Gas rose 1.5% (down 4%). Copper declined 1.5% (down 7%). Wheat rallied 3.9% (up 21%). Corn jumped 1.5% (up 15%).

Market Dislocation Watch:

May 16 - Bloomberg (Robert Burgess): "Ask most any smart investor what could cause the next crisis in markets and the likely answer would be a sharp rise in borrowing costs brought on by a selloff in the bond market. But the thing about markets is that the pain usually originates in places where it's least expected. That may be the case now with emerging markets. The fact is, investors have had a few years now to prepare for the inevitable rise in bond yields that is currently underway. That's seen in the record bets against U.S. Treasuries. What hasn't been expected is the big slump in EM, which attracted a record $315 billion in non-resident portfolio debt flows in 2017…"

Trump Administration Watch:

May 18 - Bloomberg (Eric Martin, Josh Wingrove and Jenny Leonard): "President Donald Trump's chief Nafta negotiator said the U.S., Canada and Mexico are 'nowhere near close to a deal' to update the region's 24-year-old free-trade pact as U.S. lawmakers warn that time is almost up to reach a agreement that can pass the current Congress. 'There are gaping differences on intellectual property, agricultural market access, de minimis levels, energy, labor, rules of origin, geographical indications, and much more,' U.S. Trade Representative Robert Lighthizer said… 'We of course will continue to engage in negotiations, and I look forward to working with my counterparts to secure the best possible deal for American farmers, ranchers, workers, and businesses.'"

May 16 - Reuters (Doina Chiacu and David Lawder): "The United States is still pushing for a deal to revise the North American Free Trade Agreement (NAFTA), the White House said…, while a top Mexican official held out the possibility of an agreement in the coming weeks. President Donald Trump is committed to getting a better agreement with Canada and Mexico, White House press secretary Sarah Sanders told Fox News. 'We still want to see something happen and we're going to continue in those conversations. They're ongoing now and we're pushing forward and hopeful that we can get something done soon,' said Sanders."

May 16 - Reuters (John Irish): "China's foreign minister on… took a swipe at the United States' trade policy and defended international free trade on the basis of World Trade Organisation regulations. 'Trade unilateralism goes against the current of history,' Wang-Yi said… 'We must preserve international free trade on the basis of WTO rules.'"¬¬

May 16 - Bloomberg: "The Trump administration is delivering the World Trade Organization 'three hard blows' that could destroy the body's ability to regulate global commerce, China's ambassador to the Geneva-based body said. 'The U.S. is blocking selection of new Appellate Body members, taking restrictive trade measures under Section 232 and threatening to impose tariff measures of $50 billion of goods imports from China under Section 301 of U.S. domestic law,' said Zhang Xiangchen, China's envoy to the WTO since last year. 'Any one of these, if left untreated, will fatally undermine the functioning of the WTO.'"

May 16 - Politico (Andrew Restuccia, Nancy Cook and Doug Palmer): "Tensions between Trump administration moderates and hard-liners on trade with China are boiling over ahead of talks with Chinese negotiators in Washington this week - and as President Donald Trump seems increasingly eager to reach a deal. Peter Navarro, a Beijing critic and the standard-bearer of the president's harsh campaign rhetoric on China, had a screaming match with Treasury Secretary Steven Mnuchin, a moderate, during an initial round of talks in Beijing two weeks ago. On Wednesday, his name wasn't on a Treasury Department list of U.S. officials who will meet with Chinese Vice Premier Liu He and the rest of the Beijing delegation at Treasury on Thursday and Friday."

May 17 - Bloomberg (Toluse Olorunnipa): "John Bolton's desire to turn North Korea into the next Libya isn't going over so well in Pyongyang, where Kim Jong Un's government has threatened to cancel upcoming talks with the U.S. in part because of the U.S. national security adviser's remarks. Bolton drew the ire of the North Korean government for saying that the country's nuclear disarmament should follow the 'Libya model' embraced by Muammar Qaddafi, who was later overthrown and killed in a U.S.-backed uprising."

May 13 - Reuters (Valerie Volcovici and Richard Cowan): "The United States threatened on Sunday to impose sanctions on European companies that do business with Iran, as the remaining participants in the Iran nuclear accord stiffened their resolve to keep that agreement operational. White House national security adviser John Bolton said U.S. sanctions on European companies that maintain business dealings with Iran were 'possible,' while Secretary of State Mike Pompeo said he remained hopeful Washington and its allies could strike a new nuclear deal with Tehran."

May 11 - Wall Street Journal (Louise Radnofsky, Stephanie Armour and Joseph Walker): "President Donald Trump unveiled dozens of initiatives aimed at curbing high drug prices Friday, a raft of modest moves that left the pharmaceutical industry relieved and buoyed their stocks. 'We're going to take on one of the biggest obstacles to affordable medicine: the tangled web of special interests,' Mr. Trump said… 'The drug lobby is making an absolute fortune at the expense of American consumers.'"

May 13 - Reuters (Valerie Volcovici and Michael Martina): "U.S. President Donald Trump pledged on Sunday to help ZTE Corp 'get back into business, fast' after a U.S. ban crippled the Chinese technology company, offering a job-saving concession to Beijing ahead of high-stakes trade talks this week. Trump's unexpected announcement was a stunning reversal, given Washington's tough stance on Chinese trade practices that have put the world's two largest economies on course for a possible trade war… 'Too many jobs in China lost. Commerce Department has been instructed to get it done!' Trump wrote on Twitter…"

May 14 - Politico (Andrew Restuccia and Doug Palmer): "Wilbur Ross has largely been sidelined in high-stakes trade negotiations with China in the latest signal that President Donald Trump is losing confidence in his commerce secretary… Ross - whom Trump once affectionately called a 'killer,' a high compliment in the president's lexicon - has steadily become a bit player, with the president regularly leaning on Treasury Secretary Steven Mnuchin, U.S. Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro. The commerce secretary's standing took another hit this week when the president tweeted criticism of the department's recent decision to block the Chinese phone-maker ZTE from accessing U.S. technology…"

Federal Reserve Watch:

May 15 - Reuters (Howard Schneider and Ann Saphir): "Federal Reserve Chair Jerome Powell's top deputies are edging toward a clash that could shape the pace of interest-rate hikes in coming months, as well as how the Fed should prepare for and combat the next economic downturn. The fault lines are technical as well as philosophical and include a debate over whether the economy has shifted into a higher gear, giving the Fed room for more interest-rate hikes and perhaps reducing the need for controversial tools like bond-buying to fight future recessions. They come as tax cuts and government spending boost growth and inflation, giving policymakers the breathing room to debate whether to retool the Fed's basic policy approach to give themselves more firepower even if slower future economic growth is unavoidable."

May 14 - CNBC (Natasha Turak): "The U.S. should keep its debt-to-GDP in mind before things 'get out of hand,' Federal Reserve Bank of Cleveland President Loretta Mester said… Asked by CNBC's Joumanna Bercetche if she was worried about the outlook for rising U.S. debt, Mester was measured but encouraged monitoring the debt level, which is at its highest since just after World War Two. 'I think we have to be taking into account the health of U.S. economy, in terms of are we on a sustained fiscal path?' Mester replied. 'And I do think that's something we should be thinking of now as we go forward, and not waiting till things get too far out of hand.'"

U.S. Bubble Watch:

May 14 - CNBC (Jeff Cox): "America's budget deficit and unemployment rate are heading in opposite directions - something that's never happened during post-World War II peacetime and could cause a significant jump in interest rates. Goldman Sachs projects, for instance, that the 10-year Treasury note could be yielding 3.6% next year. The deficit increase is coming due to the recent barrage of fiscal stimulus from Congress, including a $1.5 trillion tax cut approved in December 2017 and a $1.3 trillion spending bill aimed at keeping the government operating through the end of the fiscal year. Normally such moves would come in the early stages of an economic recovery. The U.S. economy, though, is in the eighth year of its post-financial crisis expansion…"

May 11 - Reuters (Richard Leong): "The U.S. economy is likely growing at a 2.97% annualized pace in the second quarter, little changed from the 2.96% rate calculated a week earlier, the New York Federal Reserve's Nowcast model showed…"

May 15 - CNBC (Diana Olick): "A sharp sell-off in the bond market is sending mortgage rates to the highest level in seven years. The average contract rate on the 30-year fixed will likely end the day as high as 4.875% for the highest creditworthy borrowers and 5% for the average borrower… Mortgage rates, which loosely follow the yield on the 10-year Treasury, started the year right around 4% but began rising almost immediately. They then leveled off in March and early April, only to begin rising yet again."

May 15 - Wall Street Journal (Akane Otani, Ben Eisen and Chelsey Dulaney): "U.S. companies are ramping up spending on their businesses at the fastest pace in years, a long-awaited development after years of tepid growth. Spending on factories, equipment and other capital goods by companies in the S&P 500 is expected to have risen to $166 billion in the first quarter, up 24% from a year earlier, according to Credit Suisse…. It is on track for the fastest pickup since 2011 and a record for the first quarter of a year. The jump has been aided by the U.S. tax-code overhaul, which is putting more cash in companies' coffers."

May 17 - Axios (Steve LeVine and Chris Canipe): "At a time of rock-bottom joblessness, high corporate profits and a booming stock market, more than 40% of U.S. households cannot pay the basics of a middle-class lifestyle - rent, transportation, child care and a cellphone, according to a new study. Quick take: The study, conducted by United Way, found a wide band of working U.S. households that live above the official poverty line, but below the cost of paying ordinary expenses. Based on 2016 data, there were 34.7 million households in that group - double the 16.1 million that are in actual poverty…"

May 17 - Wall Street Journal (Janet Adamy): "American women are having children at the lowest rate on record, with the number of babies born in the U.S. last year dropping to a 30-year low… Some 3.85 million babies were born last year, down 2% from 2016 and the lowest number since 1987, according to the Centers for Disease Control and Prevention's National Center for Health Statistics. The general fertility rate for women age 15 to 44 was 60.2 births per 1,000 women-the lowest rate since the government began tracking it more than a century ago…"

China Watch:

May 14 - Reuters (Kevin Yao and Fang Cheng): "China reported weaker-than-expected investment and retail sales in April and a drop in home sales, clouding its economic outlook even as policymakers try to navigate debt risks and defuse a heated trade row with the United States. Fixed asset investment grew the slowest since 1999 while the pace of retail sales softened to a four-month low, suggesting a long-anticipated slowdown in the world's second-largest economy may finally be setting in even as protectionism is on the rise. The lone bright spot on Tuesday's activity data was industrial output, which jumped more than expected as automobile and steel production surged."

May 13 - Reuters (Shu Zhang and Engen Tham): "Chinese insurers are channeling funds through shadow lenders to real estate and local government infrastructure projects in a bid to boost returns, six insurance and trust sources told Reuters. The practice undermines Beijing's efforts to cut local debt risk and curb a property bubble, highlighting the difficulties regulators face in reining in shadow lending and applying regulations uniformly across China's $15 trillion asset management sector… The amount insurers have allocated to alternative assets - trusts, asset management plans and bank wealth management products - has surged rapidly since authorities relaxed investment rules in 2012. Analysts warn that the complex and opaque structure of such products makes it difficult for insurers to see the ultimate borrowers and to then gauge their real exposure - a risk magnified by the long investment periods involved."

May 18 - Bloomberg: "China's regulator is warning companies to be mindful of currency and interest-rate risks when issuing offshore notes as mainland firms aggressively tap the dollar-bond market amid tighter cash conditions onshore. Chinese companies planning to sell overseas notes with tenors of over one year need to explain the rationale and feasibility of the borrowing, according to a statement on National Development and Reform Commission's website... Companies should consider forex, interest rates and other factors before issuing debt, it said. Chinese companies sold a record $75.6 billion dollar bonds so far this year… Offshore issuance from Chinese borrowers has surged in the wake of tougher access to funding in the onshore market as the government reduces financial leverage."

May 14 - Reuters (Kevin Yao and Yawen Chen): "China's property investment growth slowed in April while sales marked their biggest fall in six months as higher borrowing costs and increased curbs on buyers weighed on demand, backing views that a key driver of the economy is losing some momentum. Real estate investment rose 10.2% in April from the same period a year earlier, compared with a 10.8% rise in March… New household loans, mostly mortgages, slowed to 528.4 billion yuan in April from 580 billion yuan in March…"

Central Bank Watch:

May 14 - Bloomberg (Piotr Skolimowski, Jana Randow and Alessandro Speciale): "European Central Bank policy maker Francois Villeroy de Galhau signaled that he expects bond purchases to end this year and an interest-rate hike could follow in 2019, putting him in the camp of officials who see the current euro-area slowdown as temporary. …The French central banker said inflation will resume its acceleration in coming months, with underlying price pressures set to strengthen… The ECB could say a rate increase will follow the halting of net asset purchases by 'at least some quarters, but not years' he said…"

Global Bubble Watch:

May 17 - Bloomberg (Sridhar Natarajan): "Warren Buffett once called them 'financial weapons of mass destruction.' Now Pope Francis, of all people, is taking aim at derivatives. In a sweeping critique of global finance released by the Vatican…, the Holy See singled out derivatives including credit-default swaps for particular scorn. 'A ticking time bomb,' the Vatican called them. The unusual rebuke -- derivatives rarely reach the level of religious doctrine - is in keeping with Francis's skeptical view of unbridled global capitalism. 'The market of CDS, in the wake of the economic crisis of 2007, was imposing enough to represent almost the equivalent of the GDP of the entire world. The spread of such a kind of contract without proper limits has encouraged the growth of a finance of chance, and of gambling on the failure of others, which is unacceptable from the ethical point of view,' the Vatican said in the document."

May 17 - Bloomberg (Sid Verma): "In credit markets, it's America first no longer. A wave of foreign selling of U.S. corporate bonds threatens to unhinge global debt markets from their bullish moorings, according to HSBC… After a multi-year binge, the largest owners of America Inc.'s debt -- overseas investors -- are paring their exposures as higher short-term U.S. rates drive up hedging costs, especially for Europeans. The accompanying pressure on the biggest corporate bond market risks hobbling credit bulls around the world. 'Our analysis of foreign investors in U.S. dollar and euro suggests major changes in global capital flows are underway,' strategists led by Jamie Stuttard wrote… While European issuers will benefit from repatriation flows, a 'disorderly' retrenchment from dollar debts would ensure no developed credit market escapes the 'bearish correlations.' Higher relative yields and the U.S. economic recovery lured a tide of capital inflows in recent years. Now short-term dollar rates are at crisis-era levels, increasing the cost for foreigners to hedge their exposures, and dimming the market's allure even as yields on U.S. investment-grade notes rise to seven-year highs."

May 15 - Bloomberg (Greg Quinn): "Canadian home sales fell to the lowest in more than five years in April, as tougher mortgage qualification rules deterred buyers. The number of homes sold last month declined 2.9% from March, the Canadian Real Estate Association said… Declines were recorded in about 60% of cities tracked including Vancouver, Calgary, Toronto and Montreal."

May 18 - Bloomberg (Frederik Balfour): "A rare bottle of 60-year-old Macallan whisky sold for HK$7.96 million ($1.01 million) at Bonhams Hong Kong on Friday, smashing the record for the most expensive bottle ever sold at auction. The bottle sold for more than twice the high estimate of HK$4.5 million."

Europe Watch:

May 17 - Bloomberg (Alessandra Migliaccio): "Italy's populist parties are planning an overhaul of its banking system that would reverse years of national and international regulatory policy. A 39-page draft program published by Corriere della Sera and confirmed by Five Star and League officials contains plans including a strategy review for Banca Monte dei Paschi di Siena SpA, the lender that was nationalized last year… The program also laid out plans to reimburse retail shareholders of banks that have been wound down; review the Basel banking accords whose parameters 'threaten the existence of Italy's small and medium companies;' and separate investment banking from deposit-taking consumer banking."

May 14 - Reuters (Lisa Jucca): "Italy's impending radical government will be a headache for the European Union. After days of intense talks, the anti-establishment 5-Star Movement and the rightist League are closing in on a joint political programme and will report to President Sergio Mattarella on Monday afternoon. Both resent Brussels' fiscal oversight, and its failure to help with Italy's migration crisis. Their policies will likely stir up tensions with European partners… According to Italian media reports, 5-Star, which represents the poor constituencies of Italy's South, and the League, which draws support from the entrepreneurial North, have drawn up an agenda comprising tax cuts, looser early retirement rules and more handouts for Italy's jobless. If these are all implemented, Italy's fiscal bill could rise by 100 billion euros a year, local economists estimate, equivalent to almost 6% of gross domestic product."

May 16 - Bloomberg (Mark Gilbert): "It's Groundhog Day again for the euro. It doesn't really matter whether talks in Italy between the Five Star Movement and the League still include plans to seek a write-off of 250 billion euros ($295bn) of the nation's debts and secure an exit mechanism from the euro, as the Huffington Post reported. The fact that these ideas were even mooted shows that the common currency remains deeply flawed almost two decades after its introduction. On Wednesday, German Chancellor Angela Merkel called on the governments of the 19-member euro zone to accelerate efforts to integrate the bloc, including enhancing the European Stability Mechanism to create a 'common backstop' in the region. The idea of common debt obligations gets revived repeatedly in Brussels. But aren't such moves to ever-closer union exactly what Italian voters rejected by voting for populist anti-European parties in their most recent election?"

May 14 - Reuters (Piotr Skolimowski): "Economic growth slowed across Europe at the start of the year, with Germany seeing its pace of expansion cut in half amid weaker trade. The 0.3% increase in Europe's largest economy was softer than forecast and the weakest in more than a year. Dutch and Portuguese growth also cooled more than expected in the first quarter, while a similar trend was seen across central and eastern Europe. A deceleration in euro-area momentum to 0.4% was confirmed…"

Fixed Income Bubble Watch:

May 18 - Bloomberg (Sally Bakewell and Kiel Porter): "Buyout titans are benefiting as banks get less fearful about leveraged buyouts. When Leonard Green & Partners recently decided to buy a majority stake in SRS Distribution Inc., banks led by Bank of America Corp. and Barclays Plc sought loans and bonds to help finance the $3.6 billion buyout. Investors have so far been willing to increase debt for the building supply company to more than seven times a measure of earnings, a level that just a few years ago would have raised regulators' eyebrows. That deal isn't unusual. Debt in leveraged buyouts is creeping above the six times level that regulators said in 2013 was potentially too risky, after commitments to private equity deals scorched banks during and after the crisis. The average company in an LBO had borrowings equal to 6.4 times earnings before interest, taxes depreciation and amortization in 2018, according to Fitch… Last year it was 6.2 times Ebitda and in 2016, it was 5.9 times. The higher debt burdens are a symptom of memories getting shorter as the economic expansion grows longer."

May 13 - Wall Street Journal (Ryan Dezember and Peter Rudegeair): "KKR & Co. is raising its bet on high-interest, short-term home loans, the latest sign that Wall Street firms are aiming to cash in on the risky but lucrative house-flipping market. Borrowers of residential transitional loans-or flip loans, as they are better known-use the money to buy a property, renovate it and then try to quickly resell at a profit. They have become a lucrative and growing niche of finance in recent years. Nomura Holdings Inc. estimates that flippers will borrow some $15 billion this year, nearly 25% more than last year. KKR is the latest example of Wall Street's growing interest in the area."

EM Bubble Watch:

May 16 - Bloomberg (Ben Bartenstein): "While money managers from Goldman Sachs… to UBS Wealth Management still tout investing opportunities in emerging markets, the asset class has one notable critic: Harvard professor Carmen Reinhart. The… economist points to mounting debt loads, weakening terms of trade, rising global interest rates and stalling growth as reasons for concern. In fact, developing nations are worse off than during their two most recent moments of weakness: The 2008 global financial crisis and 2013 taper tantrum, when equities endured routs of 64% and 17% respectively. 'The overall shape they're in has a lot more cracks now than it did five years ago and certainly at the time of the global financial crisis,' Reinhart said… 'It's both external and internal conditions.'"

May 14 - Financial Times (Kate Allen): "Investors who bought some of the riskiest emerging market sovereign bond sales in the past year have been left nursing paper losses as a strengthening dollar has rattled sentiment for emerging markets. JPMorgan's emerging markets bond index has lost 5.1% since the start of this year. Some of the worst-hit bonds are those from countries that were rarely seen in debt markets until last year, when demand for sovereign debt paying attractive fixed yields was paramount among investors."

May 14 - Financial Times (Kate Allen): "Emerging economies with shorter debt maturities and less fiscal scope to accommodate rising debt costs are most vulnerable to a tightening of global financial conditions, according to… Moody's. The study singled out Egypt, Bahrain, Pakistan, Lebanon and Mongolia as particularly at risk; Sri Lanka and Jordan are also 'highly exposed' to an interest rate shock, Moody's said. With global interest rates rising and emerging market nations accumulating a rapidly-increasing debt pile, concerns are growing that they could be hit with a financing crisis. The IMF warned earlier this year that 40% of low-income developing countries face 'significant debt-related challenges'. Investors who bought some of the riskiest emerging market sovereign bond sales of the past year have in recent weeks been left nursing paper losses as a strengthening dollar rattles sentiment for emerging markets."

May 15 - Bloomberg (Guy Johnson and James Hertling): "Turkish President Recep Tayyip Erdogan said he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month. With the Turkish lira at a record low against the dollar… Erdogan told Bloomberg… that after the vote transforms Turkey into a full presidential system, he expects the central bank will have to heed his calls for lower interest rates. The central bank's key rate is now 13.5%, compared with 10.9% consumer-price inflation. 'When the people fall into difficulties because of monetary policies, who are they going to hold accountable? …They'll hold the president accountable. Since they'll ask the president about it, we have to give off the image of a president who's influential on monetary policies.' That 'may make some uncomfortable,' he said. 'But we have to do it. Because it's those who rule the state who are accountable to the citizens.'"

May 15 - Financial Times (Roger Blitz, Jonathan Wheatley and Laura Pitel): "When banks and investment funds sent senior representatives to dine with Recep Tayyip Erdogan, they probably expected the Turkish president to deliver a reassuring message about investing in his country. But by the end of Monday's lunch at Bloomberg's London office, they were left wondering whether there was any longer an argument for risking their money in his country's currency, stocks and government bonds. The message was uncompromising. The Turkish president, seeking re-election next month, made clear that not only was he steadfastly opposed to raising rates, he was intent on taking control of monetary policy."

May 16 - Bloomberg (Ferdinando Giugliano): "Turkey's president Recep Tayyip Erdogan has issued a stark warning to his country's central bank. If he wins a presidential parliamentary election next month, he says he'll clamp down on central bank independence to keep interest rates low. This is obviously a terrible idea, and comes at the worst possible moment. The lira is in freefall and inflation on the rise. Turkey needs a strong monetary authority, not a stooge obeying the president's bizarre orders. Erdogan has long held wrong-headed views on the impact of interest rates. Unlike the vast majority of economists, he believes a tight monetary policy causes rather than tames inflation. In an interview with Bloomberg TV…, he went a step further, saying he was ready to interfere with the central bank if it didn't follow his advice. 'It's those who rule the state who are accountable to the citizen,' he said."

May 16 - Wall Street Journal (Richard Barley): "Who's next? The fear of contagion is stalking emerging markets again, but Argentina and Turkey have put themselves in the firing line while others have distanced themselves from it. The shakeout in emerging markets sparked by the 'taper tantrum' of 2013 put the spotlight on countries with relatively wide current-account deficits… Right now, the uncomfortable spotlight is on Argentina, where the peso has fallen more than 23% against the dollar this year and the country is seeking support from the International Monetary Fund, and Turkey, where the lira has fallen more than 15%. Both stand out for having current-account deficits estimated by the International Monetary Fund in 2018 at more than 5% of gross domestic product: the widest of the emerging-market members of the Group of 20 nations."

May 15 - Reuters (Dave Graham and Christine Murray): "Mexican presidential frontrunner Andres Manuel Lopez Obrador extended his lead to more than 12 points over his nearest rival ahead of the July 1 vote, according to a poll published on Tuesday. The survey by polling firm Consulta Mitofsky showed Lopez Obrador, running for the third time, had 32.6% of support, up from 31.9% in April. Second-placed Ricardo Anaya, the candidate of the 'For Mexico in Front' coalition of three parties from the right and left, saw his backing fall slightly to 20.5%..."

May 16 - Bloomberg (Liau Y-Sing and Kartik Goyal): "Mahathir Mohamad's return may spell more pressure on Malaysia's beleaguered bond market - almost a decade of efforts spent narrowing a fiscal deficit is at risk just when capital is flowing out of emerging markets. Already reeling from the impact of a stronger dollar and higher U.S. Treasury yields, ringgit sovereign securities may face a further blow as newly-elected Prime Minister Mahathir presses ahead with a plan to scrap a consumption tax and reinstate fuel subsidies. Bond investors and rating companies are worried that may hurt efforts to narrow a persistent budget shortfall."

Japan Watch:

May 16 - Bloomberg (Yuko Takeo): "Japan's first economic contraction in two years is expected to be only a speed bump on the road to further, yet slower growth. The economy shrank in the first quarter at an annualized rate of 0.6% due to capital investment unexpectedly falling 0.1% and flat private consumption. Growth is forecast to resume in the current quarter as global trade and Japanese exports regain traction."

Geopolitical Watch:

May 16 - Reuters (Gabrielle T├ętrault-Farber): "Russian President Vladimir Putin and his Turkish counterpart Tayyip Erdogan, in a phone call, expressed serious concern over the number of casualties in the protests on the Gaza border, the Kremlin said…"

May 16 - CNBC (Natasha Turak): "Turkey's President Recep Erdogan and Israeli Prime Minister Benjamin Netanyahu went at each other's necks via Twitter, accusing each other of brutality and human rights abuses. The spat… went down in the wake of violence on the Israeli-Gaza border on Monday during which Israeli forces killed at least 60 Palestinian protesters, coinciding with the opening of the U.S. embassy in Jerusalem. Turkey's government loudly condemned the killings. 'Israel is wreaking state terror. Israel is a terror state,' Erdogan said in a speech for state television… 'What Israel has done is a genocide. I condemn this humanitarian drama, the genocide, from whichever side it comes, Israel or America.' In response, Netanyahu shared some choice words for the Turkish president on Twitter, saying, 'Erdogan is among Hamas's biggest supporters and there is no doubt that he well understands terrorism and slaughter. I suggest that he not preach morality to us.'"

May 13 - Reuters (Ahmed Aboulenein and Maher Chmaytelli): "Populist cleric Moqtada al-Sadr, a long-time adversary of the United States, has all but won Iraq's parliamentary election, the electoral commission said, in a surprise turn of fortune for the Shi'ite leader. In the first election since Islamic State was defeated in the country, Iran-backed Shi'ite militia chief Hadi al-Amiri's bloc was in second place, while Prime Minister Haider al-Abadi, once seen as the front-runner, trailed in third."