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Friday, July 15, 2022

Weekly Commentary: Global Crisis Dynamics Update

Please join Doug Noland and David McAlvany this coming Thursday, July 21st, at 4:00 pm Eastern/ 2:00 pm Mountain time for the Tactical Short Q2 recap conference call, “Nowhere to Hide.” Click here to register.


CPI was up 9.1% y-o-y in June, the highest rate, as we all know by now, since 1981. Up 11.3% y-o-y, Producer Prices were also significantly above estimates. Retail Sales were stronger-than-expected, and there was even a decent pop in the Current Conditions component of the early-July confidence reading from the University of Michigan survey. Following last week’s strong payrolls report, data point to relatively resilient demand and pricing pressures. (Almost) Everything points to a second 75 bps hike at the FOMC’s July 27th meeting.

Yet 10-year Treasury yields dropped 16 bps this week to 2.92%, with yields now down about 56 bps from the June 14th peak. And with two-year yields up two bps this week (3.13%), the U.S. yield curve (2yr/10ry) ended the week inverted 20 bps. While conventional thinking points to imminent U.S. recession, it’s somewhat of a challenge to explain this week’s yield curve gyrations by domestic considerations. International developments make sense of it all.

Recall the Treasury curve inverted back at the end of March for the first time since the brief inversion in 2019 (and before that 2007). Not coincidently, the Chinese developer bond market was badly dislocating in March, as Country Garden, China’s largest developer, saw its yields surpass 30% (traded below 10% in February). Those Crisis Dynamics were quelled by a lengthy list of Beijing stimulus measures.

Crisis Dynamics have, however, returned more powerful than ever, leaving Beijing officials in quite a predicament. The old, the tried and true, isn’t working.

July 14 – Bloomberg (Shuli Ren): “It is spreading like wildfire. Homebuyers in China are refusing to pay the mortgage on properties they’ve bought but that their financially strapped developers can’t finish. Some say that they will only resume payments when construction restarts… The frustrated buyers accuse the developers of misusing sales proceeds and the banks of failing to safeguard their loans. China has never seen anything like this. As in the US — until the 2007 subprime crisis — the possibility of troubles in the mortgage market was vanishingly small.”

July 13 – Bloomberg: “A rapidly increasing number of disgruntled Chinese homebuyers are refusing to pay mortgages for unfinished construction projects, exacerbating the country’s real estate woes and stoking fears that the crisis will spread to the wider financial system. Homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, according to… China Real Estate Information Corp. That’s up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies… analysts including Shujin Chen. ‘The names on the list doubled every day in the past three days,’ Chen wrote… ‘The incident would dampen buyer sentiment, especially for presold products offered by private developers given the higher risk on delivery, and weigh on the gradual sales recovery.’”

July 15 – Bloomberg: “China is censoring crowd-sourced documents tallying the number of mortgage boycotts spreading across the country, potentially hampering a key source of data for global investors and researchers tracking the property crisis. Shared files managed on platforms including China’s Quora-equivalent Zhihu Inc. and on sites like Kdocs and Wolai have been banned following reports that the number of homebuyers refusing to pay mortgages surged in a span of days… The file sharing has provided a key battleground for homeowners who are shunning mortgage payments for apartments that haven’t been built on time.”

China’s households, developers, banks, regulators and Beijing officials are breaking ground on their introductory housing/mortgage finance bust. It’s worth noting that Consumer (mostly mortgage) borrowings almost doubled over the past five years (up 400% in 10yrs) to $10.85 TN. Chinese Bank Assets (up a record $1.945 TN during Q1!) surged 50% over the past five years (200% in 10 years) to an incredible $53.0 TN. Reports have mortgage Credit at $6.8 TN.

It was a historic, reckless bubble, and, as we’re witnessing, the bursting will be no less spectacular.

July 15- Bloomberg (Richard Frost): “Former UBS Group AG economist Jonathan Anderson once called it ‘the most important sector in the universe.’ More than a decade on, Chinese property is again grabbing the attention of global investors -- this time for all the wrong reasons. Mounting signs of stress this week in an industry that accounts for about a quarter of the world’s second-largest economy have roiled China’s credit markets, dragged down the nation’s bank stocks and pummeled commodities from iron ore to copper.”

Chinese aren’t necessarily known for their reverence for the sanctity of contracts. It’s started. Apartment buyers facing delays on their units refuse to honor their mortgages, and the word is spreading fast. And how might the typical owner respond when apartment values sink below the amount owed on their mortgage, especially for the estimated 60 to 100 million unoccupied units? For now, the mortgage boycott is a further major blow for a massive developer industry in collapse.

The Bloomberg China Real Estate Developers Index sank 10% this week. Number one developer Country Garden’s stock collapsed 27% (down 52% y-t-d). Vanke’s stock was down 18.9%, Longfor 20%, China Jinmao 13.7%, Agile Group 15.2%, China Overseas Land & Investment 10.8%, and China Resources 9.7%.

Yet stocks are a sideshow. Country Garden bond (3 1/8% 2025) yields surged 11.5 percentage points (11,543bps) this week to a record 41.02%, with a two-week gain of over 14 percentage points (14,085bps). Longfor bond yields this week surged 13 percentage points to 116%. This is a top-five Chinese developer whose bond yields began the year around 7%. Sunac, another top developer, saw its bond yields jump 600 bps this week to 112% (began the year at 22%). And let’s not forget #3: Evergrande yields rose another 358 bps this week to 141%. Basically, the market is saying they’re all either bust or heading in that direction.

One can easily tally a Trillion dollars of liabilities from a handful of these gargantuan developers caught in a bond collapse vise. Ramifications are enormous – likely momentous. It was ominous to see Chinese developers and banks at the top of the Asia CDS leaderboard this week. Lonfor CDS surged 225 bps. Vanke, China’s fourth-largest developer, saw its CDS trade above 500 bps this week for the first time (ended week at 502 bps). Vanke CDS traded at 250 bps in mid-June and was below 100 bps back in September.

July 14 – Bloomberg (Lorretta Chen): “Dollar-bond spreads for China’s bad-debt managers widened Thursday, as higher-than-expected June CPI in the US raised the potential of the biggest Fed interest-rate hike yet this year. Huarong’s 5.5% note due 2025 widened 35 bps to 585bps… Spread for Great Wall AMC’s 3.875% dollar bond due 2027 widened 6bps to 586bps, poised for a fourth-straight increase.”

July 13 – Bloomberg: “Chinese authorities held emergency meetings with banks after growing alarmed that an increasing number of homebuyers across the country are refusing to pay mortgages on stalled projects... The Ministry of Housing and Urban-Rural Development met with financial regulators and major Chinese banks this week to discuss the mortgage boycotts on concern that more buyers may follow suit… While there was no immediate solution, regulators asked local watchdogs and banks to report the impact, including property projects affected in their jurisdictions, as soon as possible, the people said. Some banks plan to tighten their mortgage lending requirements in high-risk cities, two of the people said.”

China’s CSI 300 Bank Index sank 7.7% this week (largest weekly loss since 2018) to near March 2020 lows. And the dam broke for Chinese bank CDS. China Construction Bank CDS jumped 17 Friday (25 on the week) to 123bps, surpassing the March 2020 pandemic crisis spike. With over $4 TN of assets, this is one of the largest banks in the world.

Of the other “big four,” Bank of China CDS surged 20 Friday (19 on the week) to 117 bps, the high back to 2014. China Development Bank CDS rose 11 this week to 107 bps (high since 2017). Industrial and Commercial Bank CDS rose four to 104 bps (high in data back to 2017).

China sovereign CDS jumped nine this week to 90 bps, just below the March 2020 spike (91.5bps).

July 9 – Bloomberg: “An official at China’s banking and insurance regulator said authorities will use policy tools ‘flexibly and precisely’ at proper times to stabilize the economy, while banks and insurers will ‘go all out’ to bolster funding. Authorities will support an ‘appropriate’ acceleration in infrastructure investments as demand remains weak, and will broaden long-term fund-raising channels including private capital, said Liu Fushou, chief risk officer of the China Banking & Insurance Regulatory Commission. Policy makers will also step up monitoring of debt default risks among large enterprises and seek to quicken the introduction of the nation’s financial stability law, he said…”

Going “all out” with coerced lending at this stage of the cycle puts the entire banking system at only greater peril. Would Beijing continue to press the banks to lend aggressively if bank bonds were collapsing and depositors beginning to flee? This week’s CDS surge appeared to signal a new, more systemic Crisis Dynamics phase.

Contagion continues to gain momentum throughout the emerging markets. An EM CDS index traded up to 395 bps intraday Thursday (up 50bps w-t-d!), the high back to April 3, 2020 – before ending the week up 30 to 375 bps. For perspective, EM CDS hasn’t had a weekly 50 bps jump since September 2020.

De-risking/deleveraging has turned more systemic throughout the global “Periphery.” Indonesia CDS jumped 20 this week to 165 bps, the high since May 2020. Vietnam rose 21 bps to 188 bps (July ’20), Philippines 18 to 148 bps (March ’20), Malaysia nine to 112 bps (May ’20), India seven to 175 bps (May ’20), Thailand six to 73 bps (April ’20), and South Korea six to 54 bps. Hungary CDS surged 48 (to 230bps) and Romania 39 (to 347bps). CDS surged 31 in South Africa to 369 bps (high since May 2020) and 13 in Turkey to an almost 20-year high 883 bps.

“Frontier” markets appear to suffer acute illiquidity. Mongolia CDS surged 161 to 604 bps (high August ’20), Egypt 344 (to 1,507 bps), Kenya 269 (1,417 bps), Iraq 131 (798 bps), Namibia 126 (728 bps), Argentina 274 (1,947 bps), and Nicaragua 91 (695 bps). Colombia CDS surged 45 (332 bps), Brazil 37 (331 bps), Costa Rica 31 (335 bps), Uruguay 30 (167 bps), Peru 29 (158 bps), Guatemala 25 (332 bps), Panama 25 (158 bps), Chile 25 (141 bps), and Mexico 18 (196 bps).

This overload of data underscores the degree and depth of unfolding market stress. Asia, Latin America, Africa and Europe. Italian CDS surged 23 this week to 162 bps, just shy of the June 14th spike to 166 bps.

The ECB is expected to raise rates next week for the first time in 11 years. A little baby step is anticipated. European banks were slammed 5.2% this week, with Italian banks hammered 8.4% (3-wk drop 12.8%). The spread between 10-year Italian (3.28%) and German (1.13%) yields surged 20 bps this week to a one-month high 215 bps. This spread traded at 100 bps back in October and spiked to 242 bps during June 14th Periphery (“fragmentation”) market disorder.

July 14 – Financial Times (Amy Kazmin): “Italy’s populist Five Star Movement has refused to support Prime Minister Mario Draghi’s national unity government in a critical parliamentary vote, plunging the country into a fresh round of political turmoil… Five Star — the second largest party in parliament — boycotted Thursday’s vote on a €26bn package aimed at shielding Italians from the impact of worsening inflation. Five Star’s leader Giuseppe Conte said he could no longer back Draghi’s cross-party government, which he accused of not doing enough to help families facing surging food and energy costs. ‘I have a strong fear that September will be a time when families will face the choice of paying their electricity bill or buying food,’ Conte said after a party meeting…”

July 14 – Bloomberg (Carolynn Look, Alessandra Migliaccio, and Libby Cherry): “A financial-market crisis focused on Italy might augur the worst turmoil in the history of the euro. Just as German policy makers feared and soothsaying economists prophesied at the birth of the currency more than two decades ago, the weakness and indebtedness of the euro area’s third-largest economy risks becoming everyone else’s problem. That prospect loomed even closer on Thursday as Mario Draghi’s government on the brink. The Italian premier is preparing to resign…, potentially triggering a new phase of market turbulence. That would increase the pressure on European Central Bank President Christine Lagarde to craft a short-term solution, and would also likely underscore the need for a new political settlement to fix the flaws in the euro area.”

It appears the relative stability fostered by talk of the ECB’s new “fragmentation” tool was as fleeting as Beijing’s list of stimulus measures. It’s unclear to me what can now reverse intensifying global de-risking/deleveraging dynamics.

The Periphery to Core Dynamic is today especially illuminating. Crisis Dynamics are now overwhelming the “Periphery.” Things are “breaking.” “Hot money” is exiting China and EM, spurring a self-reinforcing dollar melt-up speculative dynamic. Trouble at the euro-zone “Periphery” (notably Italy) is driving euro weakness, fear of an existential euro crisis, and resulting dollar strength. Crazy BOJ policies spur yen weakness/dollar strength.

At the “Core,” Treasury yields decline while sinking commodities prices spur optimism that inflation has peaked. A consensus is building that a Fed pivot will see rate cuts next year. Recession will be mild (a "shower" rather than a "hurricane"). In equities and corporate Credit, optimism builds that market lows are in.

I worry that U.S. markets, overly focused on domestic (“Core”) considerations, are not paying appropriate attention to powerful Global Crisis Dynamics. Considering the backdrop, there’s a stunning degree of complacency. Meanwhile, global “Periphery” contagion and illiquidity are bearing down on the “Core.” And it’s actually typical for U.S. markets to dismiss global Crisis Dynamics. I’m thinking particularly of the Mexican “tequila” crisis in late-94, Asian Tiger Bubble collapses in ’97, and Russia/LTCM in ‘98.

There are key differences: Global Crisis Dynamics are systemic these days, as opposed to the regional blowups from the nineties. The scope of the bursting China Bubble is without precedent. Moreover, post-Bubble U.S. markets are today acutely fragile. Indeed, I can see a scenario where Crisis Dynamics gain further momentum in China, Europe and EM. U.S. stocks, taking out recent lows, commence another tumultuous leg lower, with some panic sparking dislocations in equities and already liquidity-challenged corporate debt markets. And if this scenario is delayed, the Fed hammers global markets on the 27th with another 75 bps hike.

Some final China thoughts. The renminbi was down almost 1% this week. Accelerating Chinese currency weakness would not be surprising. Renminbi selling turning disorderly would likely spur heightened contagion and global market instability.

July 11 – Wall Street Journal (Rebecca Feng): “International investors are rapidly unwinding what was once a popular trade in Chinese bonds. For years, foreigners loaded up on debt from Chinese state-owned lenders known as policy banks, which fund domestic and overseas projects like dams, roads and airports. The easy-to-trade yuan-denominated bonds were viewed as almost as safe as China’s sovereign debt, and paid higher interest rates. Russia’s invasion of Ukraine has prompted a rethink... Two of the three Chinese policy banks, China Development Bank and the Export-Import Bank of China, have lent billions of dollars to Russian borrowers that needed funding for uses including energy projects. They have been mostly silent about their exposures to Russia since the war broke out.”

Chinese Credit growth bounced back strongly in June, a dynamic that if continued could prove problematic for Chinese currency stability.

July 11 – Bloomberg: “China’s credit jumped much more than expected last month to the highest on record for June due to a strong rebound in bank lending and record government bond sales. Aggregate financing, a broad measure of credit, reached 5.2 trillion yuan ($775bn), the People’s Bank of China said... That was the highest for any June in comparable data back to 2017 and beat the consensus estimate of 4.2 trillion yuan. Financial institutions made 2.8 trillion yuan of new loans in the month, also better than economists’ projection.”

China has for years operated as banker to the EM “Periphery.” Now Beijing faces the predicament of throwing good “money” after bad or cutting bait and watching the dominoes begin to fall. And, by the way, how much of China’s $3.0 TN international reserve position is locked up in junk EM loans? We cannot today overstate the ramifications of Chinese financial instability.

July 13 – Wall Street Journal (Alexander Saeedy and Philip Wen): “As Sri Lanka’s foreign-exchange reserves began to dwindle under a mountain of debt early in the Covid-19 pandemic, some officials argued it was time to ask for a bailout from the International Monetary Fund, a politically fraught move that traditionally comes with painful austerity measures. But China, Sri Lanka’s largest single creditor, offered a tempting alternative: Skip the IMF’s bitter medicine for now and just keep adding on new debt to pay off the old, according to current and former Sri Lankan officials. Sri Lanka agreed, and soon $3 billion in new credits poured in from Chinese banks in 2020 and 2021. Now that plan has blown up, plunging Sri Lanka into chaos.”


For the Week:

The S&P500 declined 0.9% (down 18.9% y-t-d), and the Dow slipped 0.2% (down 13.9%). The Utilities dipped 0.3% (down 3.3%). The Banks gained 1.0% (down 21.3%), while the Broker/Dealers were little changed (down 18.4%). The Transports fell 1.4% (down 19.8%). The S&P 400 Midcaps declined 0.7% (down 18.9%), and the small cap Russell 2000 fell 1.4% (down 22.3%). The Nasdaq100 lost 1.2% (down 26.6%). The Semiconductors jumped 2.9% (down 31.7%). The Biotechs fell 2.6% (down 13.4%). With bullion falling $34, the HUI gold index sank 6.1% (down 21.4%).

Three-month Treasury bill rates ended the week at 2.245%. Two-year government yields added two bps to 3.13% (up 239bps y-t-d). Five-year T-note yields fell nine bps to 3.04% (up 177bps). Ten-year Treasury yields dropped 16 bps to 2.92% (up 141bps). Long bond yields dropped 17 bps to 3.08% (up 118bps). Benchmark Fannie Mae MBS yields fell 12 bps to 4.39% (up 232bps).

Greek 10-year yields dropped 17 bps to 3.50% (up 218bps y-t-d). Ten-year Portuguese yields fell 11 bps to 2.31% (up 184bps). Italian 10-year yields slipped a basis point to 3.28% (up 210bps). Spain's 10-year yields dropped 13 bps to 2.29% (up 173bps). German bund yields sank 21 bps to 1.13% (up 131bps). French yields dropped 13 bps to 1.75% (up 155bps). The French to German 10-year bond spread widened eight to 62 bps. U.K. 10-year gilt yields fell 14 bps to 2.09% (up 112bps). U.K.'s FTSE equities index slipped 0.5% (down 3.1% y-t-d).

Japan's Nikkei Equities Index rallied 1.0% (down 7.0% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.24% (up 17bps y-t-d). France's CAC40 was unchanged (down 15.6%). The German DAX equities index fell 1.2% (down 19.0%). Spain's IBEX 35 equities index lost 1.9% (down 8.8%). Italy's FTSE MIB index sank 3.9% (down 23.5%). EM equities were mostly under pressure. Brazil's Bovespa index sank 3.7% (down 7.9%), and Mexico's Bolsa index declined 1.1% (down 11.6%). South Korea's Kospi index dipped 0.8% (down 21.7%). India's Sensex equities index fell 1.3% (down 7.7%). China's Shanghai Exchange Index sank 3.8% (down 11.3%). Turkey's Borsa Istanbul National 100 index fell 2.1% (up 28.3%). Russia's MICEX equities index dropped 5.1% (down 44.3%).

Investment-grade bond funds posted outflows of $2.987 billion, while junk bond funds reported negative flows of $652 million (from Lipper).

Federal Reserve Credit last week added $3.6bn to $8.859 TN. Fed Credit is down $42bn from the June 22nd peak. Over the past 148 weeks, Fed Credit expanded $5.132 TN, or 138%. Fed Credit inflated $6.048 Trillion, or 215%, over the past 505 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $10.8bn to $3.366 TN. "Custody holdings" were down $173bn, or 4.9%, y-o-y.

Total money market fund assets increased $16bn to $4.574 TN. Total money funds were up $94bn, or 2.1%, y-o-y.

Total Commercial Paper gained $6.1bn to $1.171 TN. CP was up $41bn, or 3.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 21 bps to 5.51% (up 240bps y-o-y). Fifteen-year rates rose 22 bps to 4.67% (up 234bps). Five-year hybrid ARM rates gained 16 bps to 4.35% (up 194bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up eight bps to 5.77% (up 254bps).

Currency Watch:

For the week, the U.S. Dollar Index gained 1.0% to 108.06 (up 13.0% y-t-d). For the week on the upside, the Swedish krona increased 0.2%. On the downside, the Brazilian real declined 2.8%, the South Korean won 2.0%, the Japanese yen 1.8%, the British pound 1.5%, the South African rand 1.2%, the euro 1.0%, the Norwegian krone 1.0%, the Australian dollar 0.9%, the Canadian dollar 0.7%, the New Zealand dollar 0.4%, the Mexican peso 0.4% and the Singapore dollar 0.1%. The Chinese (onshore) renminbi declined 0.93% versus the dollar (down 5.94% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 2.1% (up 14.4% y-t-d). Spot Gold dropped 2.0% to $1,708 (down 6.6%). Silver fell 3.1% to $18.71 (down 19.7%). WTI crude sank $7.20 to $97.59 (up 30%). Gasoline slumped 6.8% (up 44%), while Natural Gas surged 16.3% to $7.02 (up 88%). Copper sank 8.2% (down 28.8%). Wheat lost 12.9% (up 1%), and Corn dropped 3.2% (up 2%). Bitcoin fell $1,023, or 4.7%, this week to $20,860 (down 55%).

Market Instability Watch:

July 14 – Bloomberg (Greg Ritchie and Naomi Tajitsu): “A gauge of the dollar’s strength skyrocketed to its highest level on record, eclipsing the peak from the Covid-19 pandemic. The Bloomberg Dollar Spot Index, which tracks the greenback against a basket of developed- and emerging-market currencies, rose as much as 1.2% to 1304.55 Thursday, pushing to fresh session highs after data showed US producer prices topped estimates. The level is above the mark it hit in March 2020, with the previous high in data stretching back to 2005.”

July 13 – Financial Times (Naomi Rovnick and Nicholas Megaw): “A closely watched signal of recession risk in Treasury markets… hit its most extreme level in more than 20 years, as hotter than expected inflation data fuelled investor bets that the Federal Reserve will aggressively raise interest rates. The yield on the two-year Treasury note, which is particularly sensitive to short-term rate expectations, rose 0.09 percentage points to 3.13% after data showed the annual rate of US consumer price inflation hit 9.1% last month.”

July 14 – Financial Times (Kate Duguid and Colby Smith): “Investors are shunning 20-year US government bonds, causing a distortion in the $23tn US Treasury market. Demand for the 20-year government debt security since its reintroduction in 2020 has been so weak that its price is far out of sync with the rest of the market and it is harder to trade. The price swings and lack of liquidity have made it even less popular with the long-term, conservative investors such as pension funds that would typically be its natural buyers. ‘The 20-year part of the market is just dead,’ said Edward Al-Hussainy, senior interest rates strategist at Columbia Threadneedle.”

July 14 – Bloomberg (Alexandra Harris): “The three-month London interbank offered rate for dollars notched its biggest increase since 2008, soaring to the highest level in more than three years as traders anticipate larger interest-rate hikes by the Federal Reserve. Libor rose for the fourth straight session, jumping almost 23 bps to 2.7403%, in the largest one-day increase since September 2008… Libor’s 2008 jump ‘was driven by credit-risk premium widening in interbank spreads, whereas this one is Libor playing catch up to OIS, which has jumped because of the hotter CPI print,’ said Rishi Mishra, an analyst at Futures First.”

July 15 – Reuters (Marc Jones): “Traditional debt crisis signs of crashing currencies, 1,000 bps bond spreads and burned FX reserves point to a record number of developing nations now in trouble. Lebanon, Sri Lanka, Russia, Suriname and Zambia are already in default, Belarus is on the brink and at least another dozen are in the danger zone as rising borrowing costs, inflation and debt all stoke fears of economic collapse. Totting up the cost is eyewatering. Using 1,000 bps bond spreads as a pain threshold, analysts calculate $400 billion of debt is in play. Argentina has by far the most at over $150 billion, while the next in line are Ecuador and Egypt with $40 billion-$45 billion.”

July 9 – Financial Times (Nikou Asgari): “Investors have pulled $50bn from emerging market bond funds this year in the latest sign of how a sharp tightening of monetary policy in developed economies and the war in Ukraine has sparked a flight from the asset class. The net outflows from EM fixed income funds are the most severe in at least 17 years, far worse than were recorded during a bout of acute concern about China’s economy in 2015, data collated by JPMorgan show. ‘It has been pretty dramatic,’ said Marco Ruijer, emerging markets portfolio manager at William Blair, adding that the combination of soaring global inflation, tightening central bank monetary policy and Russia’s invasion of Ukraine has culminated in ‘a perfect storm’ for emerging market debt.”

July 15 – Reuters (Francesco Canepa): “A government crisis in Italy is complicating a politically sensitive plan devised by the European Central Bank to support indebted euro zone countries on the bond market before it even starts in earnest. In an unprecedented effort to cap borrowing costs, the ECB said last month it would buy more of a given state's bonds if its debt yields rose too far in an unwarranted fashion. The scheme, using the proceeds of the ECB's existing bond holdings as well as a new mechanism to be unveiled next week, was a response to a sudden rise in yields across southern Europe.”

July 14 – Bloomberg (Erin Hudson): “In hindsight, maybe it wasn’t a good idea to lend hundreds of millions of dollars at rock-bottom interest rates to a money-losing used-car seller, a payday lender, or a hospital chain in the middle of a pandemic. But that’s what happened during 2021 amid insatiable demand for junk bond offerings… More than 220 US dollar-denominated corporate bonds issued last year are trading with spreads greater than 1,000 bps… That’s a more dismal showing than bonds sold pre-pandemic: around 150 notes issued in 2019 change hands at that level, despite trading for longer. Collectively, the 2021 issues trade for an average 55 cents on the dollar to yield 13.2%, with average coupons of 7%.”

July 14 – Reuters (Howard Schneider): “Two new analyses from Federal Reserve staff have concluded that strains in the U.S. Treasury market could complicate the central bank's plans to reduce its balance sheet by amplifying the effect of those reductions on financial markets and raising interest rates more than anticipated. The papers, from researchers at the Atlanta and Kansas City Fed regional banks, are similar to other efforts to estimate how markets may be influenced as the Fed allows the trillions of dollars of securities it bought to support the economy during the coronavirus pandemic to mature and ‘roll off’ its balance sheet.”

Bursting Bubble/Mania Watch:

July 14 – CNBC (Arjun Kharpal and Ryan Browne): “The two words on every crypto investor’s lips right now are undoubtedly ‘crypto winter.’ Cryptocurrencies have suffered a brutal comedown this year, losing $2 trillion in value since the height of a massive rally in 2021. Bitcoin, the world’s biggest digital coin, is off 70% from a November all-time high of nearly $69,000. That’s resulted in many experts warning of a prolonged bear market known as ‘crypto winter.’”

July 14 – Reuters (Hannah Lang): “Celsius Network listed a $1.19 billion deficit on its balance sheet in a bankruptcy court filing on Thursday, a day after the cryptocurrency lender filed for Chapter 11. New Jersey-based Celsius froze withdrawals last month, citing ‘extreme’ market conditions, cutting off access to savings for individual investors and sending tremors through the crypto market.”

July 12 – Bloomberg (David Pan): “Nearly all industrial scale Bitcoin miners in Texas have shut off their machines as the companies brace for a heat wave that is expected to push the state’s power grid near its breaking point. Miners such as Riot Blockchain Inc., Argo Blockchain Plc and Core Scientific Inc., who operate millions of energy-intensive computers to secure the Bitcoin blockchain network and earn rewards in the token, flocked to the Lone Star State thanks to its low energy costs and liberal regulations on crypto mining…”

July 14 – Reuters (Noor Zainab Hussain and David Henry): “JPMorgan Chase & Co's Jamie Dimon struck a cautious note on the global economy as America's largest bank reported a worse-than-expected 28% fall in quarterly profit and suspended share buybacks in the face of growing risks of a recession. The chief executive also stressed the need to build capital reserves due to increasing requirements from regulators, while flagging a number of concerns including the war in Ukraine, high inflation and the ‘never-before-seen’ quantitative tightening as threats to global economic growth.”

July 13 – Bloomberg (Prarthana Prakash): “Venture capitalists are reckoning with their worst quarter in almost a decade as economic uncertainty and lackluster returns have prompted investors to hold back following the startup funding boom in 2021. Global funding to startups fell 23% in the the second quarter from the first, to $108.5 billion, according to… CB Insights. While the US drove almost half of all funding -- $52.9 billion -- that was still down 25% from the previous quarter and marked its lowest funding amount since 2020. The report indicates that the drubbing the crypto and public markets have taken in recent weeks is affecting private companies as well.”

July 14 – Reuters (Manya Saini and Niket Nishant): “Venture capital dealmaking in the United States dipped in the first half of 2022, as investors shied away from signing large checks for startups due to uncertain macroeconomic conditions and market turmoil… The value of deals struck in the first half of 2022 dropped to $144.2 billion, due to an ongoing stock market rout driven by fears of a looming recession, raging inflation and aggressive rate hikes, from $158.2 billion over the same period last year. VC dealmaking hit an all-time high of over $340 billion in 2021, as firms ramped up bets on high-tech, biotech, healthcare and fintech startups, buoyed by excess liquidity and an accommodative monetary policy.”

July 15 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “U.S. equity funds witnessed outflows for the third week in a row in the week ended July 13… According to Refinitiv Lipper data, U.S. equity funds faced outflows of $1.41 billion, compared with $5.45 billion worth of net selling in the previous week.”

July 11 – Financial Times (Siddharth Venkataramakrishnan): “Klarna, once Europe’s most valuable private tech company, has had its pricetag slashed from $46bn to $6.7bn at a difficult fundraising that highlights the crash in many tech valuations. Michael Moritz, chair of Klarna and a partner at investor Sequoia, blamed ‘investors suddenly voting in the opposite manner to the way they voted for the past few years’. He predicted that ‘after investors emerge from their bunkers, the stocks of Klarna and other first-rate companies will receive the attention they deserve’.”

Russia/Ukraine War Watch:

July 13 – Associated Press (Fatima Hussein): “With thousands of sanctions already imposed on Russia to flatten its economy, the U.S. and its allies are working on new measures to starve the Russian war machine while also stopping the price of oil and gasoline from soaring to levels that could crush the global economy. The Kremlin’s main pillar of financial revenue — oil — has kept the Russian economy afloat despite export bans, sanctions and the freezing of central bank assets… Washington and its allies want to form a buyers’ cartel to force Russia to accept below-market prices for oil.”

July 12 – Reuters (Tom Balmforth and Pavel Polityuk): “Ukraine said… it had carried out a long-range rocket strike against Russian forces and military equipment in southern Ukraine, territory it says it is planning to retake in a counter-offensive using hundreds of thousands of troops. The strike hit an ammunition dump in the town of Nova Kakhovka in the Kherson region and killed 52 people... It came after Washington supplied Ukraine with advanced HIMARS mobile artillery systems which Kyiv says its forces are using with growing efficiency.”

Economic War/Iron Curtain Watch:

July 14 – Reuters: “Saudi Arabia, the world's largest oil exporter, more than doubled the amount of Russian fuel oil it imported in the second quarter to feed power stations to meet summer cooling demand and free up the kingdom’s own crude for export... Russia has been selling fuel at discounted prices after international sanctions over its invasion of Ukraine left it with fewer buyers.”

July 12 – Reuters (Michelle Nichols): “Brazil is looking to buy as much diesel as it can from Russia and some of the deals were being closed ‘as recently as yesterday,’ Brazilian Foreign Minister Carlos Franca said… ‘We have to make sure that we have enough diesel to the Brazilian agribusiness and, of course, for Brazilian drivers,’ Franca told reporter... ‘So that's why we were looking for safe and very reliable suppliers of diesel - Russia is one of them.”

Russia/China/U.S. Watch:

July 12 – Newsweek (Brendan Cole): “Russian President Vladimir Putin recently told Russian lawmakers that the war in Ukraine has signaled the end of the U.S.-led international order. During a meeting with the Russian parliament's leadership, Putin took aim at the Western response to the war that started with Russia's invasion of Ukraine… ‘They should have realized that they have already lost from the very beginning of our special military operation,’ Putin said… ‘Its beginning also means the beginning of a radical breakdown of the American world order.’ Putin said that ‘this is the beginning of the transition from liberal-globalist American egocentrism to a truly multipolar world’ and that this process ‘can no longer be stopped.’ For Putin, the status quo was a world based on ‘selfish rules’ in which there is nothing ‘but a desire for hegemony.’”

Inflation Watch:

July 13 – Associated Press (Christopher Rugaber): “U.S. inflation surged to a new four-decade high in June because of rising prices for gas, food and rent, squeezing household budgets and pressuring the Federal Reserve to raise interest rates aggressively -- trends that raise the risk of a recession. The government’s consumer price index soared 9.1% over the past year, the biggest yearly increase since 1981, with nearly half of the increase due to higher energy costs… The biggest shock has been energy prices, which soared 7.5% just from May to June. Gas prices have skyrocketed nearly 60% compared with a year ago.”

July 13 – Wall Street Journal (Gwynn Guilford): “Climbing prices for food, energy and housing squeezed shoppers’ wallets in June, driving consumer inflation to a 9.1% annual rate, the highest in nearly 41 years… More than half of what the average household spends in each month goes toward these items combined… A trip to the supermarket is increasingly a blast from the distant past. Grocery prices shot up at their fastest pace since 1979 in June, rising 12.2% from a year before. Margarine prices rose 34.5% in June, the fastest annual pace since 1975. Hot-dog prices climbed 16.3% in June, the most since the late 1970s, as outdoor grilling season got under way. A shopper with a sweet-tooth faced cookie prices that leapt 14.7% from a year before, while those for frozen or refrigerated pies and other pastries shot up 17.2%.”

July 14 – Associated Press (Paul Wiseman): “Inflation at the wholesale level climbed 11.3% in June compared with a year earlier, the latest painful reminder that inflation is running hot through the American economy. The… producer price index — which measures inflation before it hits consumers — rose at the fastest pace since hitting a record 11.6% in March. Last month’s jump in wholesale inflation was led by energy prices, which soared 54% from a year earlier. But even excluding food and energy prices, which can swing wildly from month to month, producer prices in June jumped 8.2% from June 2021. On a month-to-month basis, wholesale inflation rose 1.1% from May to June, also the biggest jump since March.”

July 11 – Reuters (Dan Burns): “U.S. consumers see inflation rising further in the year ahead but expect a more moderate pace over the longer term… The median expectation among consumers for the rate of inflation in the next year rose to 6.8% in June, the highest since the survey's launch in 2013, from 6.6% in May... But their view of the rate of inflation three years from now dropped to 3.6%, the lowest since January, from 3.9%.”

July 14 – Bloomberg (Matthew Boesler and Prashant Gopal): “Rents rose in the US last month at the fastest pace since 1986, helping to propel overall inflation to a fresh four-decade high. An index measuring rent of a primary residence was 0.8% higher in June than the month before, an acceleration from the 0.6% increase recorded in May… In the 12 months through June, rents were up 5.8%. Those costs are soaring across the country as would-be homebuyers get priced out by the fastest-rising mortgage rates in decades and slide back into the overcrowded rental market.”

July 10 – Wall Street Journal (Leslie Scism): “U.S. businesses are paying more for insurance, but unlike other higher costs tied to inflation this has been going on for several years now… Commercial insurance prices in the U.S. rose 12% on average in this year’s first quarter, compared with the year-earlier period, according to… Marsh McLennan. Many businesses have faced double-digit annual rate increases since 2019, as insurers put a price war behind them. ‘Our clients are very weary of the continued rate-increase environment,’ said Christopher Lang, Global Placement Leader, US & Canada, for the Marsh unit. The cumulative increase since 2018 has been about 50%, he said.”

Biden Administration Watch:

July 9 – Wall Street Journal (William Mauldin and Charles Hutzler): “U.S. Secretary of State Antony Blinken admonished Beijing over its support for Russia in a meeting with his Chinese counterpart, a sign of how the invasion of Ukraine is complicating efforts to put relations between the two superpowers on steadier footing. The chief U.S. diplomat sat down with Chinese Foreign Minister Wang Yi on Saturday with the aim of improving communication between the countries despite deep-seated differences… ‘More than four months now into this brutal invasion, the PRC still stands by Russia,’ Mr. Blinken said, using the acronym for the People’s Republic of China, in a press briefing after the meeting.”

July 11 – Associated Press (Zeke Miller and Josh Boak): “The White House… said it believes Russia is turning to Iran to provide it with ‘hundreds’ of unmanned aerial vehicles, including weapons-capable drones, for use in its ongoing war in Ukraine. U.S. National Security Adviser Jake Sullivan said it was unclear whether Iran had already provided any of the unmanned systems to Russia, but said the U.S. has ‘information’ that indicates Iran is preparing to train Russian forces to use them as soon as this month.”

Federal Reserve Watch:

July 11 – Reuters (Howard Schneider): “Abrupt changes to the federal funds rate could stress the economy and financial markets, with steady and well-communicated increases preferable given the uncertainty about how hard and fast rate hikes will hit business and household spending, Kansas City Fed president Esther George said… But ‘the speed at which interest rates should rise...is an open question,’ she said… ‘The pace at which this path unfolds will need to be carefully balanced against the state of the economy and financial markets,’ George said in what amounts to the bluntest warning yet from a policymaker that the central bank may be at risk of overdoing it.”

July 11 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of Atlanta President Raphael Bostic said the US economy can cope with higher interest rates and repeated his support for another jumbo move when the central bank meets later this month. ‘Right now I’m pretty comfortable,’ he told reporters... ‘I’m confident that the economy will be able to withstand this next move. I would support a 75 basis-point’ increase.”

U.S. Bubble Watch:

July 14 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits increased to an eight-month high last week, suggesting some cooling in the labor market… Initial claims for state unemployment benefits rose 9,000 to a seasonally adjusted 244,000 for the week ended July 9, the highest since mid-November 2021.”

July 13 – Bloomberg (Matthew Boesler and Prashant Gopal): “Higher tax revenues and the phasing out of pandemic-relief spending chopped the US federal government’s budget deficit by a record $1.7 trillion in the first nine months of the fiscal year. The $515 billion gap for the October-to-June period compares with $2.24 trillion in the same period a year ago… Receipts rose about 26% in the nine-month period, to $3.84 trillion, with more than half of that coming from individual income taxes, while spending dropped about 18%, to $4.35 trillion. One area not helping the deficit is an increase in federal borrowing costs thanks to inflation and Federal Reserve interest-rate hikes. Interest payments on public debt have climbed $102 billion so far in the fiscal year.”

July 15 – Bloomberg (Olivia Rockeman): “US retail sales were stronger than expected in June, but after several economists adjusted the data for inflation, they still point to a leveling off in spending. The value of overall retail purchases increased 1%, after an upwardly revised 0.1% decline in May… ‘Padded by high savings and rising wages, American households are spending nearly as much money as they did earlier, but largely to keep up with higher prices, not to actually buy more stuff,’ Sal Guatieri, senior economist at BMO Capital Markets, said…”

July 13 – Reuters: “U.S. small-business confidence dropped to the lowest level in nearly 9-1/2 years in June amid concerns about inflation, but demand for labor remained solid…, a survey showed… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 3.6 points last month to 89.5, the lowest level since January 2013. Thirty-four percent of owners said that inflation was their biggest single problem in running their business, an increase of six points from May and the highest level since the fourth quarter of 1980… The NFIB survey showed 50% of owners reported job openings they could not fill in June, down a point from May's reading, which tied the previous record high.”

July 13 – CNBC (Diana Olick): “Mortgage applications to purchase a home fell 4% for the week and were 18% lower than the same week one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index… ‘Purchase applications for both conventional and government loans continue to be weaker due to the combination of much higher mortgage rates and the worsening economic outlook,’ said Joel Kan, an MBA economist. ‘After reaching a record $460,000 in March 2022, the average purchase loan size was $415,000 last week, pulled lower by the potential moderation of home-price growth and weaker purchase activity at the upper end of the market.’”

July 14 – Yahoo Finance (Alexandra Semenova): “Chief Executive Jamie Dimon doubled down on his earlier warning about the possibility of an economic downturn… The leader of the nation’s largest bank cautioned risks to the U.S. economy appear ‘nearer than they were before’ in a call with reporters following the bank's most recent quarterly report. ‘I'm simply saying, there's a range of potential outcomes from a soft landing to a hard landing, driven by how much interest rates go up, the effectiveness of quantitative tightening, and defective, volatile markets,’ Dimon said…”

July 8 – Reuters (Lucia Mutikani): “U.S. consumer credit rose at its slowest pace in four months in May as Americans pulled back on credit card usage… Total consumer credit increased by $22.35 billion, the smallest since January, after rising by a downwardly revised $36.76 billion in April…”

July 11 – CNBC (Diana Olick): “Americans are canceling deals to buy homes at the highest rate since the start of the Covid pandemic. The share of sale agreements on existing homes canceled in June was just under 15% of all homes that went under contract, according to… Redfin. That is the highest share since early 2020, when homebuying paused immediately, albeit briefly. Cancelations were at about 11% one year ago. Higher mortgage rates and surging inflation are causing many potential homebuyers to reconsider their purchases.”

July 9 – Wall Street Journal (AnnaMaria Andriotis): “Consumers have never paid more to finance their cars. Monthly payments on loans given out in June to buy a new car averaged an all-time high of $686, according to… Edmunds... That is up 4% from January and 13% above a year ago. A growing share of people are paying much more. A record 12.7% of new-car buyers who signed up for a loan in June have a monthly payment of at least $1,000, according to Edmunds. That share is up from roughly 7% a year earlier, 5% in June 2019 and 2% in June 2010.”

July 14 – Bloomberg (Jennifer Epstein): “Manhattan apartment rents reached another record high in June, with even more pain to come for prospective tenants as the market heads into its most competitive season. New leases were signed last month at a median of $4,050, according to… Miller Samuel Inc. and brokerage Douglas Elliman Real Estate…”

Fixed-Income Bubble Watch:

July 14 – Bloomberg (Teresa Xie): “Credit defaults are on track to rise in North America, Europe, Asia, and Australia, according to a survey by the International Association of Credit Portfolio Managers... The economic slump is likely to occur later this year or in 2023, according to the survey. Until then, consumers and businesses in North America are cushioned by ample liquidity from cash injections during the Covid-19 pandemic and historically low interest rates. ‘There is an increasing recognition that the Federal Reserve will take rate action even if it will affect the economy,’ said Som-lok Leung, executive director of the IACPM. ‘Defaults are currently at rock bottom but that will change as we go through the year.’”

China Watch:

July 15 – Bloomberg: “China’s economy grew at the slowest pace since the country was first hit by the coronavirus outbreak two years ago… The 0.4% expansion in gross domestic product reported for the three months to June, when dozens of cities including Shanghai and Changchun imposed lockdowns, was the second weakest ever recorded. Goldman Sachs… promptly cut its full-year growth forecast to 3.3%, saying the figures suggest Covid lockdowns last quarter took a heavier-than-expected toll on the economy. The slowdown means Beijing will miss its GDP target of about 5.5% by a wide margin this year, the first time that’s likely to happen.”

July 14 – Bloomberg: “China’s broad budget deficit in the first six months of the year widened to a record as government spending climbed and falling land sales and tax breaks cut income. The budget deficits for all levels of government was a combined 5.1 trillion yuan ($758bn), according to… data from the Ministry of Finance... That was the highest ever for the first half of any year and compares with a shortfall of just 718 billion yuan at the same point in 2021 and a gap of 3.4 trillion yuan in 2020.”

July 13 – Reuters (Ellen Zhang and Ryan Woo): “China's exports rose at the fastest pace in five months in June as factories revved up after the lifting of COVID lockowns, but a sharp slowdown in imports, fresh virus flare-ups and a darkening global outlook pointed to a bumpy road ahead... Analysts say the rebound in exports reflected an easing of supply chain disruptions and port congestion… Outbound shipments in June rose 17.9% from a year earlier, the fastest growth since January…”

July 12 – Bloomberg: “Across China, homebuyers are refusing to pay mortgages as property developers drag on construction projects, escalating the country’s real estate crisis and risks of bad debt for banks. Buyers of 35 projects across 22 cities have decided to stop paying mortgages as of July 12 due to project delays and a drop in real estate prices, Citigroup Inc. analysts led by Griffin Chan wrote… The payment refusals underscore how the storm engulfing China’s property sector is now affecting the country’s middle class, posing a threat to social stability. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults. Now is ‘a critical time for social stability,’ said Chan, adding that ‘the forgoing of down payments may bring social instability.’”

July 15 – Reuters (Xie Yu and Liangping Gao): “Chinese regulators' assurances of help in delivering property projects on time failed to convince some homebuyers threatening to stop mortgage payments and investors continued to sell shares in embattled developers on Friday. A growing nationwide homebuyers' boycott has rekindled investor concerns about the China's slumping property sector, which accounts for a quarter of the economy, and raised fears banks could face hefty writedowns. Up to 1.5 trillion yuan ($220bn) of mortgage loans are linked to unfinished Chinese residential projects, ANZ estimated... Shares in Chinese property developers extended losses, even after the banking watchdog vowed to strengthen coordination with other regulators to ‘guarantee the delivery of homes’ and at least 10 banks said mortgages related to risky projects are relatively small, and risks are controllable.”

July 11 – Bloomberg: “China Evergrande Group suffered its first rejection from local creditors to extend a bond payment, a development that may result in a landmark onshore default and encourage investors to take a tougher stance against other developers battered by the nation’s property debt crisis. Holders of a puttable yuan-denominated bond from the firm’s main onshore unit Hengda Real Estate Group Co. rejected a plan to further extend payment past a July 8 deadline by six months…”

July 10 – Reuters (Donny Kwok): “Chinese property developer Ronshine China Holdings Ltd has not made interest payments on its June 2023 and December 2023 notes, totalling $27.9 million, in the latest blow to China's embattled property market… ‘In light of its current liquidity position, the group cannot guarantee that it will be able to perform repayment obligations of the interest on senior notes mentioned above and other senior notes when they fall due or within the relevant grace period,’ chairman Ou Zonghong said.”

July 12 – Bloomberg (Wei Zhou): “Dollar bonds of Chinese developers fell across the board Tuesday, with stress spreading from junk-rated names to investment-grade peers including China Vanke Co… Notes from Vanke, the country’s second-largest builder by contracted sales fell as much as 5 cents on the dollar…, on track for their biggest declines since March 2020. Investment-grade dollar bonds from peers Longfor Group Holdings Ltd. and Sino-Ocean Group Holding Ltd. were also poised to set record lows.”

July 8 – Bloomberg: “China’s consumer prices grew faster than expected in June, partly driven by a rebound in pork prices, although the government’s Covid Zero strategy continued to depress demand. Factory-gate inflation moderated on cooling commodity prices. Consumer prices grew 2.5% last month from a year earlier, beating economists’ expectations of a 2.4% gain…That is the strongest pace in two years and compares with 2.1% growth in May. The producer price index, meanwhile, rose 6.1%...”

July 15 – Bloomberg (Linda Lew): “China reported its highest daily Covid-19 case tally in seven weeks as a new cluster emerged in the southern province of Guangxi, underscoring the difficulty of achieving the country’s Covid Zero strategy in the face of more infectious strains of the virus. The country reported 432 infections for Thursday, up from 292 on Wednesday and the most since May 25. More than a third, or 165 cases, were found in Guangxi province, centered around Beihai, a coastal city of 1.83 million people.”

July 14 – Reuters (Liangping Gao and Ryan Woo): “China's new home prices were unchanged in June after falling in the past two months, as strict COVID-19 curbs were eased and consumers took advantage of a slew of stimulus measures such as cuts in mortgage rates and smaller down payments. Average new home prices in 70 major cities were steady month-on-month, after a 0.1% drop in May and a 0.2% decline in April…”

July 11 – Bloomberg (Zixu Wang and Austin Ramzy): “After a rare mass demonstration, bank depositors demanding their money back were beaten, kicked to the ground and dragged away in the city of Zhengzhou… A financial scandal in central China has touched depositors across the country, some of whom placed their life savings in four rural banks offering high rates of return, then found their funds frozen as investigators examined allegations of widespread fraud. When the bank customers began showing up in person to demand their money, the authorities in the city of Zhengzhou tried to use health code apps meant to prevent the spread of Covid-19 to prevent them from traveling. The city retreated after a backlash, and several officials were punished. But the depositors kept coming, with as many as a thousand gathering on Sunday.”

July 11 – AFP: “Customers of rural Chinese banks whose withdrawals have been frozen will begin to get some money back Friday, regulators said, after depositors clashed with authorities at a rare protest over the weekend. China's rural banking sector has been hit hard by Beijing's efforts to rein in a property bubble and spiralling debt, in a financial crackdown that has had ripple effects across the world's second-largest economy. Four banks in Henan province froze cash withdrawals in mid-April in the face of regulatory scrutiny into alleged mismanagement, leaving thousands of savers without funds and sparking sporadic demonstrations.”

July 13 – Financial Times (Ryan McMorrow, Nian Liu, Hudson Lockett, Tabby Kinder and Eleanor Olcott): “Clicking through his pitch deck, the cash-starved Chinese founder of a drone company has begun to wonder — do the investors sitting across the table even have money to spend? ‘We have to figure out if they come just because they have to do their job or if they really have money at hand,’ said the 28-year-old, who asked not to be named… ‘Raising money used to be hard but manageable, but since 2021 it has become difficult for both us and the investors,’ he said. Private equity and venture capital managers in China say small and middle-sized groups are facing the greatest fundraising challenges to lock in capital for five or 10 years and longer.”

July 11 – Reuters (Farah Master): “Macau shut all its casinos for the first time in more than two years…, sending shares in gaming firms tumbling as authorities struggle to contain the worst coronavirus outbreak yet in the world's biggest gambling hub. The city's 30-plus casinos and other businesses will shut for one week and people were ordered to stay at home though short trips for essential services were allowed.”

July 12 – Bloomberg: “A blistering heatwave sweeping across southern China is threatening crops and adding strain to the local power grids, as the Asian nation becomes the latest region around the globe battling searing temperatures… Hot weather in China is coming at a crucial time for the nation’s early rice to fill and harvest. The heat may hurt rice yields and is negative for cotton growth as well, the country’s meteorological department said.”

July 13 – Bloomberg: “Scorching temperatures across China have turned deadly, with hospitals reporting patients dying of heat stroke, as officials begin curtailing power to factories to ensure sufficient supply for air-conditioners. The heatwave that’s affected 900 million people over the past month is intensifying, with 76 weather stations reporting record high temperatures on Wednesday that exceeded 42 degrees Celsius (108 Fahrenheit) in some places. Polyester and textile factories in Zhejiang province began receiving power rationing notices this week, according to the South China Morning Post.”

Central Banker Watch:

July 13 – Bloomberg (Christopher Anstey): “Central banks across the globe are speeding up interest-rate hikes, seeking to crush an inflation surge partly of their own making. Wednesday saw Canada’s central bank hike a greater-than-expected full percentage point following two half-point moves, South Korea raise by a half point after several quarter-point moves, and New Zealand increase by a half point for a third straight meeting. After a 75 basis-point hike in Chile, the action returned to Asia with Singapore’s central bank unexpectedly tightening policy Thursday morning and the Philippine central bank following shortly afterward with its own surprise three-quarter-point move. Bets on a jumbo rate increase in Australia also surged after a stronger-than-expected jobs report.”

July 13 – Reuters (Sujata Rao, Dhara Ranasinghe, Yoruk Bahceli, Tommy Wilkes and Saikat Chatterjee): “The Bank of Canada… delivered the first 100-bps rate increase among the world's advanced economies in the current policy-tightening cycle as officials there eyeballed ‘higher and more persistent’ inflation. In delivering their largest rate increase since 1998, BOC policymakers also noted the increased risk of price increases becoming entrenched. The increase leapfrogs the Fed's 75 bps increase last month for the largest since central banks began responding to inflation in force earlier this year.”

July 12 – Bloomberg (Matthew Brockett): “New Zealand’s central bank raised interest rates by half a percentage point for a third straight meeting and said it will continue to tighten policy ‘at pace’ until it’s sure inflation is contained. The Reserve Bank’s Monetary Policy Committee increased the Official Cash Rate to 2.5% from 2%...”

July 12 – Bloomberg (Sam Kim): “The Bank of Korea doubled the margin of its latest rate increase on Wednesday and promised more hikes to come, as it stepped up its battle against inflation now running at a 23-year high. The central bank joined a global wave of larger rate increases by pushing up its seven-day repurchase rate by a half-percentage point to 2.25%...”

July 12 – Reuters (David Milliken): “The Bank of England's independence will be put to the ultimate test as it seeks to bring inflation back down to its 2% target from more than 9%, Governor Andrew Bailey said… The cost-of-living squeeze is a big political issue in the contest to replace Boris Johnson as prime minister, and some Conservative lawmakers believe the BoE was too slow to raise rates and wrong to continue asset purchases until last December.”

July 10 – Bloomberg (Caroline Connan and Sotiris Nikas): “European Central Bank Governing Council member Yannis Stournaras said a new tool to keep debt-market turmoil at bay as interest rates rise may not need to be used if it’s powerful enough to persuade investors not to test it. In a Bloomberg Television interview…, Stournaras said there’s a ‘very good debate’ under way on the instrument, expressing confidence in a ‘consensual, efficient solution’ that he hopes will surprise markets ‘on the positive side.’ ‘I believe that there is a lot of truth in the idea that if we convince markets that this is going to be a strong tool, we might not need it,’ the dovish Bank of Greece governor said. ‘We’ll have it on the shelf. This is the good scenario.’”

Global Bubble and Instability Watch:

July 12 – Reuters (Jane Lanhee Lee): “A supply chain crisis triggered by the global pandemic deprived makers of PCs and smartphones to cars of computer chips needed to make their products. All that suddenly changed over three weeks from late May to June, as high inflation, China's latest COVID lockdown, and the war in Ukraine dampened consumer spending, especially on PCs and smartphones. Chip shortages turned into a glut in some sectors, taking Wall Street by surprise. By late June, memory chip firm Micron… said it would reduce production. The market reversal caught Micron off guard, admitted Chief Business Officer Sumit Sadana.”

July 13 – Reuters (Wayne Cole): “Australia's unemployment rate dived to a 48-year low in June as hiring outstripped all expectations, while record vacancies suggested the labour market was set to tighten yet further and perhaps justify even larger increases in interest rates. Figures from the Australian Bureau of Statistics on Thursday showed net employment had surged 88,400 in June from May, when it jumped 60,600. That blew away market forecasts…”

July 11 – Bloomberg (Wayne Cole): “A measure of Australian consumer sentiment slid for an eighth straight month to match pandemic lows in July as the surging cost of living and rising interest rates darkened the national mood.”

Europe Watch:

July 15 – Reuters (Crispian Balmer and Giuseppe Fonte): “Italy might need early elections to overcome a political impasse, government officials said on Friday, after Prime Minister Mario Draghi tendered his resignation in the wake of a mutiny by a coalition partner. President Sergio Mattarella rejected Draghi's resignation… and asked him to address parliament next week to get a clearer picture of the political situation. If unity cannot return swiftly to government ranks, the only alternative would be for an election to be called in the autumn, Foreign Minister Luigi Di Maio said, warning that an early vote would be welcomed by Russia, but would damage Italy's economy.”

July 14 – Reuters (Francesco Canepa and Gavin Jones): “Ten years after his 'whatever it takes' pledge saved the euro, Mario Draghi is once again in the middle of a debt crisis - but the Italian prime minister and former head of the European Central Bank will need more than just words to solve this one. Just like a decade ago, investors are questioning whether some euro zone countries can continue to roll over their public debts, which have ballooned during the pandemic and are becoming more expensive to refinance as the ECB prepares to raise interest rates.”

July 12 – Bloomberg (Alexander Weber): “Investor confidence in Germany’s economy slumped to the lowest since 2011 as the country faces the growing prospect of a recession and risks mount that it’s shut off from Russian energy supplies. Snapping two months of gains, the ZEW institute’s gauge of expectations fell to -53.8 in July from -28 in the previous month, missing economists’ estimates.”

EM Crisis Watch:

July 13 – Associated Press (Krishan Francis and Krutika Pathi): “The president of Sri Lanka fled the country early Wednesday, slipping away in the middle of the night only hours before he was to step down amid a devastating economic crisis that has triggered severe shortages of food and fuel. President Gotabaya Rajapaksa, his wife and two bodyguards left aboard a Sri Lankan Air Force plane bound for the city of Male, the capital of the Maldives…”

July 15 – Financial Times (Jonathan Wheatley and Nikou Asgari): “Sri Lanka’s debt default and political implosion have reignited fears that other emerging market countries could be heading into similar trouble as blistering inflation and rising US interest rates send investors fleeing. Sovereign bond yields have ballooned to levels that point to intensifying strains across more than a dozen developing economies… ‘It’s pretty shocking to see this scale of a collapse in bond prices,’ said Charlie Robertson, global chief economist at Renaissance Capital, adding that the sell-off is ‘one of the biggest I’ve seen in 25 years’.”

July 13 – Financial Times (Michael Pooler and Carolina Ingizza): “Brazil has passed a constitutional amendment allowing Jair Bolsonaro’s government to spend an extra R$41.3bn ($7.6bn) on welfare payments, in a move critics say is designed to boost his popularity ahead of a re-election campaign.”

July 14 – Bloomberg (Khine Lin Kyaw): “The Central Bank of Myanmar ordered companies and individual borrowers to suspend repayment of foreign loans, the latest in a series of steps to defend the nation’s dwindling foreign exchange reserves… Companies in Myanmar have at least $1.2 billion in outstanding dollar-denominated loans…”

Japan Watch:

July 13 – Reuters (Tetsushi Kajimoto): “Four out of five large Japanese firms are passing on higher commodity costs to customers or intend to do so, a Reuters poll found, a sharp rise from the previous survey six months ago as surging input prices and a weak yen drive up import costs. Almost three quarters of firms polled also intend to lift prices of their main goods and services in the latter half of this year, illustrating a shift away from a cautious, deflationary price-setting mindset.”

Leveraged Speculation Watch:

July 8 – Reuters (Carolina Mandl): “Hedge funds posted a negative performance in June, bringing losses this year to almost 6%, as volatility across markets accelerated, a report by… HFR showed… The fund weighted composite index fell 3.08% last month. All main four different hedge fund categories tracked by HFR - equity, event-driven, macro and relative value - posted losses in June. ‘Powerful risk off trends accelerated in June driving extreme financial market volatility with hedge funds trading through a wide range of risks including not only generational inflation, increasing interest rates, the continuation of the Russia/Ukraine war and record energy price increases, but also the increased likelihood of a consumer-led US economic recession,’ Kenneth J. Heinz, president of HFR said…”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 13 – Reuters (Arpan Varghese and Scott Disavino): “Texas's power grid operator on Wednesday took emergency measures to avoid rolling blackouts as soaring electricity demand threatened to outpace available supplies amid a stifling heatwave. The Electric Reliability Council of Texas (ERCOT), which operates the grid that serves more than 26 million customers, initiated a rarely used emergency program that is triggered when supplies fall below a critical safety margin.”

July 12 – Bloomberg (Alice Kantor): “The rising cost of living is forcing more people to move back in with their parents. Others are finding it impossible to move out. And it’s not just young adults who are struggling — the pandemic and surging prices for everything from rent and electricity to food and gas have pushed a record number of people, including those in their 40s and 50s, to return to their parents’ homes. The share of Americans living in multigenerational households more than doubled between 1971 and 2021, to 18% of the population, and shows no signs of peaking, according to a recent Pew Research survey.”

July 10 – Financial Times (Rana Foroohar): “I used to scoff at colleagues who, following the election of Donald Trump, predicted that the US would someday splinter into separate states. I am not laughing any more. Supreme Court rulings over the past few weeks have deepened the fissures that have been opening up in America for years. These are rooted not just in Trump’s election and the progressive backlash to it, but can be traced right back to the 2008 financial crisis. Policy decisions made by both Republicans and Democrats since then (including the bailout of banks rather than homeowners, and big corporate tax cuts) have eroded trust in American institutions, which is now at a record low, according to Gallup.”

July 14 – Bloomberg (Michael Hirtzer): “Ranchers in top cattle state Texas can’t sell their herds fast enough with 100-degree Fahrenheit temperatures making it too expensive to sustain animals. Costs for feed, fertilizer and fuel have been soaring. There’s also a lack of water in the state, and little hay. That’s resulting in a firehouse of cattle getting auctioned at Texas sale barns. Emory Livestock Auction Inc… is seeing nearly quadruple normal rates with ranchers in ‘panic mode,’ said Jack Robinson, an 83-year-old auctioneer. ‘It’s dry and there’s no hay around,’ said Scott Frazier, a crop and livestock farmer in coastal Nueces County... ‘It’s hard to justify keeping them.’”

July 13 – Associated Press (Helena Alves and Joseph Wilson): “A spate of wildfires is scorching parts of Europe, with firefighters battling blazes in Portugal, Spain, Croatia and southern France… amid an unusual heat wave that authorities are linking to climate change.”

Covid Watch:

July 12 – Wall Street Journal (Jon Kamp and Jared S. Hopkins): “Covid-19 is circulating widely as the BA.5 Omicron subvariant elevates the risk of reinfections and rising case counts, spoiling chances for a summer reprieve from the pandemic across much of the U.S. Covid-19 levels are high in a fifth of U.S. counties, according to the Centers for Disease Control and Prevention’s metric based on case and hospital data, a share that has been mostly rising since mid-April. BA.5 is estimated to represent nearly two in three recent U.S. cases that are averaging just more than 100,000 a day, CDC data show. The true number of infections may be roughly six times as high, some virus experts said… ‘We think we’re in a very high level of community transmission, second only to the Omicron peak from the wintertime,’ said Jeffrey Duchin, health officer for the public-health agency covering Seattle and King County, Wash.”

July 15 – Financial Times (Donato Paolo Mancini): “An Omicron sub-variant that is spreading rapidly in India and has been detected in several European countries may be better than other coronavirus strains at overcoming immunity provided by prior infection and vaccines. BA.2.75… appeared to have mutated in a way that could indicate ‘major immune escape’, said the World Health Organization’s chief scientist Soumya Swaminathan, adding that it showed a ‘clear growth advantage’ over other variants in India.”

Geopolitical Watch:

July 13 – Reuters (Ben Blanchard): “The U.S. Ronald Reagan carrier strike group is carrying out security operations in the South China Sea on Wednesday, the U.S. navy said. ‘Our presence in the South China Sea demonstrates America's commitment to a free and open Indo-Pacific,’ Capt. Fred Goldhammer, the commanding officer of USS Ronald Reagan, said…”

July 11 – Financial Times (Demetri Sevastopulo): “FBI director Christopher Wray often uses US speeches and congressional testimony to warn about Chinese espionage, but in a rare move last week he took his message to the UK to raise global awareness of the threat. In an interview…, Wray called for a continued focus on China even though America and its allies are heavily invested in responding to Russia’s invasion of Ukraine. ‘We want to make sure that this [China] threat, which in many ways is the greatest, broadest, most comprehensive, long-term threat that we and our allies face, stays top of mind,’ Wray told the Financial Times. He was speaking before a joint event with Ken McCallum, the head of UK intelligence agency MI5, in which the pair warned business leaders about the rising threat from Chinese espionage.”