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The Adjustment Cycle

Crude has rallied about 5% off of last month's lows. The Brazilian real closed Friday at 3.90, having posted a decent rally from the January closing low of 4.16 to the dollar. Brazilian equities have bounced about 10%. This week saw Brazil's currency rally 2.4%. In general, EM currencies and equities have somewhat stabilized, notably outperforming this week. Stocks posted gains in Brazil, Turkey and China. From Bloomberg: "Yuan in Longest Weekly Rally Since 2014 as China Raises Rhetoric." The dollar index this week dropped 2.6%, which most would have expected to lend some market support.

If crude, commodities, EM, the strong dollar and the weak yuan were weighing on global market confidence, why is it that global financial stocks have of late taken such a disconcerting turn for the worse?

Thursday headlines: "Credit Suisse posts first loss since 2008"; "Credit Suisse shares crash to 24-year low." This week saw Credit Suisse sink 15.2%, pushing y-t-d losses to 30.4%. European financial stocks continue to get hammered, some now trading near 2009 lows. Notably, Societe Generale this week fell 8.7% (down 25% y-t-d), Credit Agricole 6.1% (down 21%) and Deutsche Bank 5.2% (down 30%). From Bloomberg's Tom Beardsworth: "Credit-default swaps tied to subordinated debt issued by Deutsche Bank rose to the highest since July 2012..." The STOXX Europe 600 Bank Index dropped 6.2% this week, boosting y-t-d declines to 19.9%. FTSE Italia All-Shares Bank Index sank 10.1%, increasing 2016 losses to 30.6%.

February 4 - Bloomberg (Tom Beardsworth): "European banks and insurers' financial credit risk rose to the highest in more than two years, following a $5.8 billion loss at Credit Suisse Group AG and signs of a slowdown in the global economy. The cost of insuring subordinated debt climbed by 19 bps to 254 bps, the highest since July 2013, based on the Markit iTraxx Europe Subordinated Financial Index. An index of credit-default swaps tracking senior financial debt jumped six bps to 110 bps. Both indexes have risen for six days in a row..."

Here at home, the banks (BKX) sank 3.9%, trading this week at an almost 30-month low (down 16% y-t-d). The broker/dealers (XBD) fell 4.0%, sinking to the lowest level since December 2013 (down 18.7% y-t-d). Citigroup and Bank of America both have y-t-d (five-week) declines of 23%.

Why didn't the weaker dollar this week support financial stocks - and equities more generally? For one, long dollar is perhaps the most Crowded Gargantuan trade around. And those EM currencies and equity markets outperforming this week had become popular shorts. With the leveraged speculating community now under intense pressure, there's especially low tolerance/capacity for pain. It's one eye on the exit time. At this point, rather than supporting stabilization, dollar weakness spurs further de-risking/de-leveraging - commodities and EM not withstanding. It's reached the point where there is almost no place to hide. In the mirror image of financials, gold stocks are rather abruptly transforming from Crowded short to coveted store of value (HUI up 22% this week).

Financial stocks have mutated from market darlings to shorts. Such sensational shifts in market psychology are devastating for stock prices, market confidence and liquidity more generally. And as "Risk Off" appeared to attain critical momentum, this week saw heightened panic out of Crowded favorites. The Nasdaq 100 (NDX) fell 6.0%, increasing y-t-d losses to 12.4%. The biotechs (BTK) sank 5.4%, raising 2016 losses to 28.1%. The Morgan Stanley High Tech Index was hit 7.2% (down 15.7% y-t-d). The small cap Russell 2000 lost 7.2% this week (down 13.2% y-t-d).

The ongoing worldwide collapse in financial stocks provides powerful support for the bursting global Bubble thesis. After a brief respite, this week saw contagion effects return with a vengeance. Last year's commodities and EM downfall anticipated the faltering Chinese Bubble. These days, "developed" markets have begun to discount the vulnerability of Europe, the U.S. and the rest of the world to Bubble contagion effects originally emanating from the China/commodities/EM downturns. The dominos have started falling.

Few are yet willing to accept the harsh reality that the world has sunk back into crisis. The VIX ended the week at a somewhat elevated but non-crisis 23.38. Credit spreads have widened meaningfully but for the most part remain at a fraction of 2008 crisis levels. Indeed, markets remain hopeful that "whatever it takes" central banking is waiting in the wings to trigger rallies at the moment things turn disorderly. My view that crisis has reemerged is based on the analysis that de-risking/de-leveraging dynamics have reached a point of self-reinforcing momentum beyond the control of central bank policies. In short, The Adjustment Cycle has commenced and there's little left at this point to hold it back.

A multi-decade Credit Bubble is coming to an end. The past seven years has amounted to an incredible blow-off top - China; EM; global government debt; "whatever it takes" central bank inflationism; QE infinity; zero and now negative rates; a $3.0 TN hedge fund industry; a $3.0 TN ETF complex; unprecedented global corporate bond excess; historic M&A, stock buybacks and financial engineering; derivatives Bubble resurrection; and tech and biotech Bubbles 2.0 (to name only the most obvious). Importantly, global financial and economic imbalances - already unmatched by 2008 - went to even more precarious extremes.

Bubbles inflate both perceived wealth and future expectations. Meanwhile, in the real economy sphere, myriad Bubble facets work to destroy wealth. Mal-investment, over-investment and associated wealth destruction remain largely concealed so long as financial asset prices remain inflated. This is true as well for wealth redistribution. The unfolding adjustment process will deflate asset prices so as to converge more closely with underlying economic fundamentals.

Marking down Chinese debt to a more reasonable level will leave a gaping hole - in bank capital, in government finances and in household savings. This will set back China's transformation from production to a services/consumption-based economy by decades. Mark down European debt and asset prices to sensible levels and the banking system is insolvent and Europe's economy is right back in the ICU. Indicative of a faltering Bubble, European periphery spreads widened significantly this week (Greece, Portugal, Italy and Spain). Europe would be in much better shape today had it taken its medicine in 2012.

The U.S. economy has been perceived as the envy of the world. The bulls must be watching the big financial stocks in complete disbelief. I would argue that the U.S. has among the widest divergence between inflated financial wealth and deflating real economy prospects. It's worth noting that Amazon and Netflix have lost more than a quarter of their value over the past five weeks. LinkedIn dropped 44% Friday.

The unfolding adjustment cycle will be especially burdensome for beloved companies that generate little or no profits/cash flow - and the Bubble has cultivated scores of them. And as equities prices and wealth deflate, faltering profits will soon follow. Industries, companies, combinations, entities, deals and structures - that looked fruitful in the age of abundant cheap finance - will now be viewed through a gloomy prism. Bond and derivatives investors will become much more cautious. Financial conditions will tighten significantly.

There's a reasonable probability that global Credit growth is moving toward the weakest expansion in at least 60 years. U.S. Credit growth will be the weakest since at least 2009. And while Credit growth has slowed markedly in the U.S. over the past year, securities and asset prices ("perceived wealth") over this period were bolstered by unprecedented international flows. "Money" has been fleeing China, EM, euro & yen devaluation, and the world more generally. At the same time, I suspect that hundreds of billions of leveraged speculative flows inundated "king dollar" U.S. securities markets.

This week had a king-dollar inflection point feel to it. There's a problematic scenario that now seems a relatively high probability: De-leveraging/de-risking sees a reversal out of king dollar, while already tepid Credit growth slows sharply as markets falter and risk aversion takes hold. Financial stocks have already begun to discount this type of quite problematic backdrop for U.S. securities and asset prices. A disorderly unwind of leveraged positions concurrent with selling from derivative-related "dynamic" hedging programs would ensure market illiquidity and dislocation. And such a scenario could easily unfold concurrently on a global basis.

Kuroda was badly mistaken if he believed negative rates would weaken the yen (for more than hours). In a world of de-leveraging, there's a strong case to be made that negative rates are worse than doing nothing. I'm assuming more QE will be forthcoming - from all major central banks. That's certainly what the Treasury, JGB and bund markets are telegraphing.

Candidly, I don't enjoy writing in these circumstances. It's reminiscent of the buildup to the 2008 market crash. It wasn't entirely clear how things would unfold back then, but I knew tens of millions would be badly hurt. Nowadays I fear for hundreds of millions, and the associated geopolitical... So far, the public hasn't panicked. Why would anyone sell now when stocks always recover? The adjustment process is just getting going.


For the Week:

The S&P500 fell 3.1% (down 8.0% y-t-d), and the Dow declined 1.6% (down 7.0%). The Utilities jumped 2.6% (up 8.1%). The Banks sank 3.9% (down 16%), and the Broker/Dealers dropped 4.0% (down 18.7%). The Transports gained 0.5% (down 7.5%). The S&P 400 Midcaps dropped 2.9% (down 8.5%), and the small cap Russell 2000 was hit 4.8% (down 13.2%). The Nasdaq100 sank 6.0% (down 12.4%), and the Morgan Stanley High Tech index dropped 7.2% (down 15.7%). The Semiconductors lost 4.5% (down 11.6%). The Biotechs were hammered 5.4% (down 28.1%). With bullion jumping $75, the HUI gold index surged 22.4% (up 33.0%).

Three-month Treasury bill rates ended the week at 29 bps. Two-year government yields slipped five bps to 0.72% (down 33bps y-t-d). Five-year T-note yields fell nine bps to 1.24% (down 51bps). Ten-year Treasury yields dropped eight bps to 1.84% (down 41bps). Long bond yields declined seven bps to 2.67% (down 35bps).

Greek 10-year yields jumped another 21 bps to 9.33% (up 201bps y-t-d). Ten-year Portuguese yields surged 25 bps to 3.11% (up 59bps). Italian 10-year yields rose 14 bps to 1.55% (down 4bps). Spain's 10-year yields gained 13 bps to 1.64% (down 13bps). German bund yields declined three bps to a nine-month low 0.29% (down 33bps). French yields were unchanged at 0.6% (down 36bps). The French to German 10-year bond spread widened three to 34 bps. U.K. 10-year gilt yields were unchanged at 1.56% (down 40bps).

Japan's Nikkei equities index sank 4.0% (down 11.6% y-t-d). Japanese 10-year "JGB" yields fell another seven bps to a record low 0.02% (down 24bps y-t-d). The German DAX equities index fell 5.2% (down 13.6%). Spain's IBEX 35 equities index lost 3.6% (down 10.9%). Italy's FTSE MIB index sank 7.5% (down 19.5%). EM equities were mostly higher. Brazil's Bovespa index increased 0.5% (down 6.4%). Mexico's Bolsa declined 0.9% (up 0.6%). South Korea's Kospi index increased 0.3% (down 2.2%). India's Sensex equities index fell 1.0% (down 5.7%). China's Shanghai Exchange recovered 0.9% (down 21.9%). Turkey's Borsa Istanbul National 100 index added 1.0% (up 3.5%). Russia's MICEX equities index slipped 0.2% (up 1.1%).

Junk funds saw outflows of $41 million (from Lipper). Notably, investment-grade bond funds saw their 11th consecutive week of outflows ($1.451bn).

Freddie Mac 30-year fixed mortgage rates fell seven bps to an eight-month low 3.72% (up 13bps y-o-y). Fifteen-year rates dropped six bps to 3.01% (up 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 3.77% (down 67bps).

Federal Reserve Credit last week declined $6.4bn to $4.445 TN. Over the past year, Fed Credit fell $16.6bn, or 0.4%. Fed Credit inflated $1.626 TN, or 58%, over the past 169 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week added $6.4bn to $3.274 TN. "Custody holdings" were up $15.6bn y-o-y, or 0.5%.

M2 (narrow) "money" supply surged $57.9bn to a record $12.467 TN. "Narrow money" expanded $747bn, or 6.4%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits rose $24bn, and Savings Deposits jumped $29.4bn. Small Time Deposits were little changed. Retail Money Funds added $2.7bn.

Total money market fund assets declined $4.8bn to $2.752 TN. Money Funds rose $67bn y-o-y (2.5%).

Total Commercial Paper increased $3.5bn to $1.065 TN. CP expanded $76bn y-o-y, or 7.7%.

Currency Watch:

February 3 - Bloomberg (Lananh Nguyen and Andrea Wong): "The dollar posted its biggest two-day drop since March, extending a decline that wiped out its rally at the start of the year. The greenback fell against all of its 16 major peers except the pound... Signs of a slowing U.S economy have hurt the dollar by derailing wagers on diverging policies between central banks. Currency traders are catching up to the bond market, where 10-year yields sank to the lowest in a year on Wednesday..."

January 31 - Wall Street Journal (Juliet Chung and Carolyn Cui): "Some of the biggest names in the hedge-fund industry are piling up bets against China's currency, setting up a showdown between Wall Street and the leaders of the world's second-largest economy. Kyle Bass's Hayman Capital Management has sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar... About 85% of Hayman Capital's portfolio is now invested in trades that are expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years -- a bet with billions of dollars on the line, including borrowed money. 'When you talk about orders of magnitude, this is much larger than the subprime crisis,' said Mr. Bass, who believes the yuan could fall as much as 40% in that period."

The U.S. dollar index sank 2.6% this week to 96.96 (down 1.8% y-t-d). For the week on the upside, the Japanese yen increased 3.5%, the Swiss franc 3.1%, the euro 3.0%, the Brazilian real 2.4%, the New Zealand dollar 2.2%, the British pound 1.8%, the Swedish krona 1.5% and the Norwegian krone 1.4%. For the week on the downside, the South African rand declined 0.9% and the Australian dollar 0.2%. The Chinese yuan was little changed versus the dollar.

Commodities Watch:

February 5 - Bloomberg (Javier Blas): "After a year of low oil prices, only 0.1% of global production has been curtailed because it's unprofitable, according to a report from consultants Wood Mackenzie Ltd. that highlights the industry's resilience. The analysis... suggests that oil prices will need to drop even more -- or stay low for a lot longer -- to meaningfully reduce global production."

The Goldman Sachs Commodities Index fell 3.0% (down 6.4% y-t-d). Spot Gold surged 4.9% to an almost six-month high $1,173 (up 10.6%). March Silver jumped 5.4% to $15.03 (up 9%). March WTI Crude declined $1.25 to $31 (down 16%). March Gasoline sank 10.0% (down 22%), and March Natural Gas dropped 10.4% (down 12%). March Copper gained 1.1% (down 2.1%). March Wheat fell 2.6% (down 1%). March Corn declined 1.7% (up 2%).

Fixed-Income Bubble Watch:

February 4 - Bloomberg: "The cost of insuring Chinese sovereign debt against default climbed to the highest level since a record cash crunch in June 2013 as a slowing economy erodes confidence in the nation's assets. Credit-default swaps protecting government bonds against non-payment for five years rose for a fourth day on Wednesday to 140 bps... The contracts increased 19 bps in January, the biggest jump in 16 months. Government notes are falling for a third week."

February 2 - Bloomberg (Aleksandra Gjorgievska): "Credit markets were ensnared in the global equities selloff Tuesday, with measures of corporate default risk in the U.S. jumping to a two-week high. The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, jumped 26 bps to 536 bps... A similar index for investment-grade debt jumped 4.6 bps to 108.652, also a two-week high."

February 3 - Bloomberg (Jodi Xu Klein): "The number of U.S. companies that have the highest risk of defaulting on their debt is nearing a peak not seen since the height of the financial crisis. With the energy industry crumbling amid record low oil prices, the number of companies with the lowest credit ratings reached 264 as of Feb. 1, just shy of the high of 291 set in April 2009, according to... Moody's... That's a 44% jump in the past 12 months, Moody's said. 'The majority of new additions came from oil & gas, followed by metals & mining, chemicals and coal,' Moody's analyst Julia Chursin wrote... In the last month alone as many as 20 firms were added to the list..."

Global Bubble Watch:

February 5 - Financial Times (Thomas Hale and Rochelle Toplensky): "Financial stocks had some respite on Friday from a torrid week in which leading institutions plumbed their lowest levels in a generation on worries about the sector's exposure to slowing economic growth. Share prices of major banks have plunged this week, with Credit Suisse hitting a 24-year low and Deutsche falling to 2009 prices. Santander, BBVA and UniCredit also traded at levels last seen during the eurozone crisis. Bank weakness is truly global. US banks were downbeat on fourth-quarter earnings and the S&P financials are down nearly 11.1% in 2016. Indices for European and Japanese banks have lost nearly a quarter of their value this year. Ultra-loose monetary policy, including the adoption of negative rate policy in Japan and expectations of further easing in Europe, has heightened fears for global economic growth."

February 4 - Financial Times (Laura Noonan, Rochelle Toplensky and Ralph Atkins): "Credit Suisse shares tumbled to a 24-year low on Thursday as the Swiss bank's first full-year loss since 2008 brought home the pain market volatility, subdued global growth and low or negative interest rates are inflicting on global finance. Investors have sent US financial stocks down by over 11% this year, and European bank equities by nearly 20%... Globally, the financial sector is the worst performing in the MSCI World index in 2016... Vowing to step up drastic cost cuts, Credit Suisse chief executive Tidjane Thiam warned of a 'particularly challenging' time for banks. 'Clearly the environment has deteriorated materially during the fourth quarter of 2015 and it is not clear when some of the current negative trends in financial markets and in the world economy may start to abate,' he said. Credit Suisse shares were down 13% by late afternoon in Europe... About $330bn has been wiped off the value of the largest 90 US financial stocks since the start of the year. Shares in several titans of the US banking industry have been routed. Morgan Stanley, Citigroup and Bank of America have each lost at least a fifth of their market capitalisations."

February 3 - New York Times (Peter Eavis): "Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come. The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China's troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country's annual economic output... But it's not just China. Wherever governments and central banks unleashed aggressive stimulus policies in recent years, a toxic debt hangover has followed."

February 5 - Bloomberg (Greg Quinn): "Canada's unemployment rate posted a surprise increase last month on weakness at goods-producing companies, and unemployment in oil hub Alberta reached the highest since 1996. The number of jobs fell by 5,700 and the unemployment rate climbed to 7.2% from 7.1%..."

February 4 - Bloomberg (Jesse Riseborough): "Glencore Plc's credit rating was cut to the lowest investment grade at Standard & Poor's as the assessor downgrades a raft of commodities producers following a rout in prices... The downgrade reflects 'the very challenging market outlook and the increased uncertainty about demand,' it said, adding that the outlook on Glencore's rating was stable."

U.S. Bubble Watch:

February 2 - Bloomberg (Anna-Louise Jackson and Dakin Campbell): "The 2016 financial stock rout worsened Tuesday as the country's biggest investment banks plunged almost 5% amid a gathering storm of economic and financial threats. Goldman Sachs Group Inc. sank the most since November 2012 to lead the Dow Jones Industrial Average to a 295-point loss, while Citigroup Inc., Bank of America Corp. and Morgan Stanley slid 4.7% or more. The KBW Bank Index declined 3.2% to extend its bear-market plunge since July to 23%."

February 2 - Reuters (Caroline Valetkevitch and Marcus E. Howard): "The capital spending slump that originated in the hard-hit energy sector appears to be spreading more widely across other U.S. industries. Companies cutting or flat-lining their capital expenditures in 2016 outpace those that say they will increase spending by a factor of more than two to one, according to a Reuters analysis. Companies in industries as diverse - and relatively strong - as healthcare, consumer goods and restaurants are among those tightening their belts in yet another sign that economic growth in 2016 may be anemic."

January 31 - Bloomberg (Sho Chandra): "Manufacturing in the U.S. shrank in January for a fourth consecutive month as businesses cut staffing plans. Growth resumed in new orders and production, indicating some stabilization in the industry. The 48.2 reading for the Institute for Supply Management's index followed December's 48 level that was the weakest since June 2009..."

February 4 - Bloomberg (Victoria Stilwell): "Worker productivity slumped in the fourth quarter by the most in almost two years, leading to a pickup in U.S. labor costs that threaten corporate profits. The measure of employee output per hour of work decreased at a 3% annualized rate in the final three months of last year... Productivity has languished since the end of the last recession..."

January 30 - Reuters: "Puerto Rico on Friday presented a plan to creditors that asks them to take a deep discount on their debt - an aggregate of around 45%, two sources familiar with the situation said, as the debt-ridden island tries to pull itself out of fiscal crisis. With a 45% poverty rate and exodus of its population to the United States, Puerto Rico is trying to solve an economic crisis before substantial debt payments come due in May and July. The U.S. territory has defaulted on some of its debt and is trying to persuade creditors to take concessions."

Federal Reserve Watch:

February 3 - Bloomberg (Jana Randow): "Two top Federal Reserve officials said policy makers need to take into account tighter financial conditions when they meet next month to decide whether to raise interest rates again. 'Recent developments reinforce the case for watchful waiting,' Fed Governor Lael Brainard said... New York Fed President William Dudley said... that financial conditions are 'considerably tighter' than in December, and if they remained in place by March, 'we would have to take that into consideration in terms of that monetary-policy decision.'"

China Bubble Watch:

February 1 - Bloomberg (Lilian Karunungan): "China will probably have to step up capital controls as even the world's biggest foreign-exchange stockpile won't be sufficient to defend the yuan, according to Societe Generale SA. If 65 million residents, or about 5% of the population, each took the maximum allowed $50,000 out of China that would wipe out the $3.3 trillion of reserves, Jason Daw, head of Asian currency strategy... said... China needs a stockpile of at least $2.8 trillion to cope with a balance-of-payments crisis, Societe Generale estimates based on the International Monetary Fund's methodology. 'Just because you have the world's biggest foreign-exchange reserves, the domestic monetary implications of running down your reserves at a rapid pace shouldn't be underestimated,' Kit Juckes, a global strategist at Societe Generale, said... 'They have a clear choice: tightening the capital account or allowing the currency to depreciate more quickly.'"

January 31 - Reuters (Samuel Shen and John Ruwitch): "Chinese police have arrested 21 people involved in the operation of peer-to-peer (P2P) lender Ezubao, the official Xinhua news agency said on Monday, over an online scam it said took in some 50 billion yuan ($7.6bn) from about 900,000 investors. Ezubao was a Ponzi scheme, the Xinhua report said, and more than 95% of the projects on the online financing platform were fake."

February 3 - Bloomberg: "Almost overnight, Ding Ning and Zhang Min struck it rich with the hot new thing in Chinese finance. In 18 short months, they transformed an old-line industrial company into an Internet phenomenon through the seeming magic of peer-to-peer lending. It was all a lie -- a vast Ponzi scheme that appears to have been orchestrated by the Bernie Madoffs of China. The story thus far is a tangled tale that stretches from China's fertile heartland in Anhui province to the war-torn reaches of northern Myanmar to the palm-fringed streets of Beverly Hills. Just where it will end is still anyone's guess. But already China's regulator has warned that the explosive growth of so-called P2P lending -- not only in China, but around the world -- means other problems could be lurking out there, too... Ezubo's model, allowing the online public to invest in underlying assets in leasing contracts and get returns from the cash flow paid by lessors, made it one of the country's more than 3,600 peer-to-peer lenders. The industry has drawn unlikely companies, such as nail and screw maker Yucheng Group, to an exploding frenzy of lending totaling 982 billion yuan ($149bn) in 2015, almost quadruple the amount in 2014."

January 31 - Bloomberg (Kyoungwha Kim): "Chinese stocks extended the steepest monthly selloff since the global financial crisis after an official factory gauge slumped to a three-year low, some of the nation's largest companies warned of disappointing earnings and traders unwound margin debt. The Shanghai Composite Index slid 1.8% to 2,688.85 at the close, extending its loss this year to 24%."

February 2 - Bloomberg: "China's central bank has told lenders it will require greater control over the amount of wealth management product funds they give to brokerages and other financial institutions to manage... The People's Bank of China held a meeting with large commercial banks Monday, the people said, asking not to be identified... It told lenders it will also impose more limits on the amount of proprietary funds managed by other institutions, and that it will tighten control of leverage taken on when buying bonds, they said. Chinese banks have been scaling up their wealth management businesses as they vie for deposits. Standard & Poor's estimates the banking sector's outstanding off-balance-sheet wealth management products grew by 35% to 13.6 trillion yuan ($2.1 trillion) in 2015..."

February 4 - Reuters (Clare Jim and Engen Tam): "China is cracking down on a popular method of moving money out of the country, putting a limit on purchases of insurance products in Hong Kong using the country's ubiquitous UnionPay credit and debit cards, two sources told Reuters. The limit for each transaction made in Hong Kong by using UnionPay cards issued in the mainland to pay premiums will be curbed at $5,000... Agents have been aggressively marketing life insurance products that can be paid for in yuan and used as collateral for offshore foreign currency loans, private bankers and insurance agents say."

January 31 - Bloomberg: "China's official factory gauge signaled a record sixth straight month of deterioration, raising the stakes for policy makers struggling to prop up the economy amid a second bear market in stocks since June and a currency at a five-year low. The purchasing managers index dropped to a three-year low of 49.4 in January... The reports could complicate the dilemma for policy makers: add monetary stimulus to help stem the slowdown in growth, or avoid more easing that could exacerbate record capital outflows and put more pressure on the yuan."

February 5 - Bloomberg (Greg Quinn): "Chinese brokerages posted 'ugly' earnings for January amid the stock market's worst start to a year, China International Capital Corp. said. Combined net income for 18 publicly traded brokerages plunged 87% in January from a year earlier to 980 million yuan ($149 million)... The Shanghai Composite Index slumped 23% last month..."

February 3 - Wall Street Journal (Kathy Chu and Julie Steinberg): "Chinese companies have launched a record wave of foreign acquisitions in the first few weeks of 2016 as they seek inroads into overseas markets amid China's slowing economy and falling currency... Including the ChemChina deal, the combined value of China's outbound mergers and acquisitions has reached about $68 billion so far this year, the strongest volume ever for this period and already more than half of 2015's record annual tally, according to... Dealogic."

January 31 - Bloomberg (Frederik Balfour): "Hong Kong home sales slumped to the lowest in at least a quarter-century last month, Centaline Property Agency Ltd. Estimated... Centaline estimated January sales of new and secondary homes would reach 3,000 units, the lowest monthly figure since it started tracking data in January 1991. The previous low was 3,786 units in November 2008..."

Central Bank Watch:

February 4 - Reuters: "The risk of acting too late on ultra low inflation is greater than that of acting too early as a wait-and-see stance could lead to a lasting loss of confidence, European Central Bank president Mario Draghi said... 'Adopting a wait-and-see attitude and extending the policy horizon brings with it risks: namely a lasting de-anchoring of expectations leading to persistently weaker inflation,' Draghi told a conference... 'And if that were to happen, we would need a much more accommodative monetary policy to reverse it,' Draghi said. 'Seen from that perspective, the risks of acting too late outweigh the risks of acting too early.'"

February 4 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda said the central bank has ample room to expand stimulus further and is prepared to cut interest rates deeper into negative territory, signaling a readiness to act again to hit his ambitious inflation target. Even after deploying what he described as 'the most powerful monetary policy framework in the history of modern central banking,' Kuroda said he remained open to devising new means to revive the economy if existing tools did not work. 'If we judge that existing measures in the toolkit are not enough to achieve (our) goal, what we have to do is to devise new tools,' Kuroda said... 'I am convinced that there is no limit to measures for monetary easing,' he said."

Brazil Watch:

February 5 - Bloomberg (David Biller): "Brazil's annual inflation rate unexpectedly accelerated in January after a controversial central bank decision to keep interest rates unchanged last month. Swap rates jumped. The benchmark IPCA consumer price index rose 10.71% in 12 months through January, the fastest since November 2003."

February 2 - Bloomberg (David Biller): "Brazil's 2015 industrial output contracted the most in at least 12 years after an unexpected drop in December that signaled an even deeper fourth quarter contraction for Latin America's largest economy."

EM Bubble Watch:

February 2 - Bloomberg (Natasha Doff): "Companies in developing nations face more than $7 of bond repayments this year for every $1 their governments must return. That's making investors nervous. The premium bondholders demand to own developing-nation corporate debt rather than sovereign bonds widened to 168 bps on Jan. 27, the greatest gap since October 2011. That signals investors are as pessimistic about the financial health of businesses as they were during the global market turmoil caused by the euro-area debt crisis and the U.S. debt-ceiling impasse."

February 3 - Financial Times (Max Seddon): "Ukraine's economy minister resigned in dramatic fashion on Wednesday, accusing a senior presidential ally of blocking his attempts to root out graft and stymieing his plans for reform. Speaking in Kiev, Aivaras Abromavicius said he had no desire 'to serve as a cover-up for covert corruption, or become puppets for those who, very much like the old government, are trying to exercise control over the flow of public funds'."

Leveraged Speculation Watch:

February 1 - Wall Street Journal (David Benoit): "Activists' returns aren't keeping up with their influence. Investors such as William Ackman and Carl Icahn may be able to rattle corporate boardrooms and send their targets' stocks temporarily soaring. But their portfolios have declined in recent months... Mr. Ackman's Pershing Square Capital Management LP's publicly traded fund reported a negative return of 21% for 2015, its worst year ever... January hasn't been any better for Pershing... The public fund has reported an 11% slide through Tuesday. Meanwhile, Mr. Icahn...has suffered a 14% drop this year at his publicly traded investment vehicle, bringing its 12-month decline to 46%."

February 4 - Bloomberg (Cindy Huang and Dani Burger): "Companies with the highest short interest were among the best performers in the Standard & Poor's 500 Index Thursday. Short interest as a percentage of shares outstanding for the top 10 gainers sits at 11%, according to... Bloomberg and Markit Ltd. That compares with the benchmark's average of 3.4%"

Europe Watch:

February 4 - Bloomberg (Ian Wishart): "The slowdown in emerging economies is posing a major threat to recovery in the euro area, the European Commission said as it trimmed its 2016 growth forecast for the 19-nation region and warned inflation would be much slower than expected. The commission sees consumer-price growth averaging just 0.5% this year, half the pace forecast in November... It cut its prediction for economic expansion in the currency bloc to 1.7% from 1.8% and said the largest economies of Germany, France and Italy will all perform worse than predicted just three months ago."

Japan Watch:

February 4 - Reuters (Leika Kihara): "Just days before the Bank of Japan stunned financial markets with its radical adoption of negative interest rates, members of the central bank's own policy board had also been taken by surprise by the move. Most of the nine board members were only told of the scheme in the week leading up to Friday's rate review... The startling speed and secrecy with which such a major policy shift was executed suggest its intent was more about delivering a shock to markets that would weaken the yen, than about maximizing the stimulative impact of further easing. That would be in keeping with the single-minded style of central bank Governor Haruhiko Kuroda... but could risk entrenching divisions between BOJ policymakers. 'If you're a board member, you're told about the plan at the last minute,' said a former board member... 'It's hard to argue against it or draft a counter proposal when there's so little time left.'"

Geopolitical Watch:

February 3 - Reuters: "The risk of open war between Russia and Ukraine is greater than it was a year ago and Russian President Vladimir Putin has begun an 'information war' against Germany, Ukrainian President Petro Poroshenko told the German newspaper Bild. Poroshenko... said Russia had implemented 'not one single point' of the Minsk accord, which includes a ceasefire between Ukrainian troops and pro-Russian rebels in eastern Ukraine. Russia was building up its military presence on the border with Ukraine, he said. 'The danger of an open war is greater than last year,' Poroshenko told Bild... 'Russia is investing a great deal in war preparations.'"

January 30 - Associated Press: "China strongly condemned the United States after a U.S. warship deliberately sailed near one of the Beijing-controlled islands in the hotly contested South China Sea to exercise freedom of navigation and challenge China's vast territorial claims. The missile destroyer Curtis Wilbur sailed within 12 nautical mile of Triton Island in the Paracel chain 'to challenge excessive maritime claims of parties that claim the Paracel Islands,' without notifying the three claimants beforehand, Defense Department spokesman Mark Wright said... China responded swiftly. Defense Ministry spokesman Yang Yujun issued a statement saying the U.S. action 'severely violated Chinese law, sabotaged the peace, security and good order of the waters, and undermined the region' s peace and stability...'"


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