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Crisis Management

The current global backdrop remains alarming and, especially on bad days, darn right frightening. Yet as a macro analyst of Credit, money and the markets, I'm the proverbial kid in a candy store.

De-risking/de-leveraging and attendant market tumult (once again) reached the point of provoking concerted global crisis management measures (see "Global Bubble Watch"). Japanese stocks surged 6.8% this week, with Chinese shares up 3.5%. The Mexican peso rallied 3.6%.

This week saw the People's Bank of China revalue the yuan currency higher ("biggest one-day advance" in more than a decade), a surprise move clearly meant to inflict pain upon the speculator community. One of China's internationally respected officials reemerged in the public stoplight, with PBOC "Governor Zhou Xiaochuan breaking his long silence to argue there's no basis for continued yuan depreciation" (Bloomberg). And what would Crisis Management be without talk of boosting government stimulus: "China is stepping up support for the economy by ramping up spending and considering new measures to boost bank lending" (Bloomberg).

With their economy apparently slipping back into recession in the face of ongoing massive QE, Japanese officials are keen to jump on the concerted global crisis management bandwagon. "Bank of Japan Gov. Haruhiko Kuroda... called on finance chiefs from the world's major economies to find ways to stabilize global financial markets..." (WSJ). And a Thursday headline from the Financial Times: "Japan will have to double down on stimulus to save Abenomics."

After witnessing a distressing bank stock collapse, European officials are desperate to (again) do "whatever it takes." "The European Central Bank won't hesitate to boost its stimulus in March if it believes recent financial-market turmoil or lower oil prices could weigh further on stubbornly low inflation, ECB President Mario Draghi said" (Dow Jones). The ECB "is calling for European Union banking law to change to allow supervisors the option of permitting banks to make discretionary payments to investors... rules currently block payments of dividends, bonuses or coupons on contingent convertible bonds, known as CoCos, if a lender posts losses..." (Bloomberg).

The Chinese were not alone in seeking to ambush currency speculators. Mexico's central bank stunned the markets by boosting rates 50 bps to 3.75%, while the Finance Ministry at the same time announced spending cuts. The peso surged almost 4%, "best daily gain since 2008."

Here at home, as Federal Reserve officials advance dovish rhetoric, "one and done" looks closer to winning the day. Most notably, "Hawkish Bullard Moves Into Dove Camp," stating that it's now "unwise" to follow through with additional hikes. "Two important pillars of the 2015 case for U.S. monetary policy normalization have changed. These data-dependent changes likely give the FMOC more leeway in its normalization program."

February 17 - Wall Street Journal (Paul Hannon): "Governments in the U.S., Europe and elsewhere should take 'urgent' and 'collective' steps to raise their investment spending and deliver a fresh boost to flagging economic growth, the Organization for Economic Growth and Development said... In its most forceful call to action since the financial crisis, the OECD said the global economy is suffering from a weakness of demand that can't be remedied through stimulus from central banks alone."

Inflationism was never going to work. And here we are after seven years of ongoing monetary stimulus and deficit spending - and the calls for more grow only louder. QE had no chance of success. Here we are in 2016 and inflated global securities and derivatives markets are more dangerous than ever. Inflating away debt problems was destined for failure. The world has added tens of Trillions of additional debt since 2008 and global Credit is more fragile than ever.

The precarious nature of "Terminal Phase" Credit Bubble excess is a fundamental CBB tenet. At this point, China is putting the historic U.S. mortgage finance Bubble to shame. The "Terminal Phase" sees underlying systemic risk expand exponentially. Not only does the quantity of Credit expand rapidly. The underlying quality of this Credit suffers progressive late-cycle deterioration. Think of 2006's Trillion dollars of subprime mortgage derivatives. There's just no escaping Credit Bubble reality: the more protracted the Terminal Phase, the more disastrous the consequences.

Total Chinese New Credit (aggregate "social financing") expanded $525 billion in January. This was more than 50% above estimates. It was also a record for Chinese Credit expansion and, surely, one of the biggest months of Credit growth in the history of mankind. There are important seasonal and special factors at play. Nonetheless, January Credit data supports/confirms the view that China's financial system has succumbed to a precarious self-destruction phase. Such egregious Credit creation may help meet 2016 growth goals. It will do anything but bolster flagging confidence in policymaking or China's financial system.

February 19 - Washington Post (Didi Tang): "Chinese President Xi Jinping made a rare, high-profile tour of the country's top three state-run media outlets Friday, telling editors and reporters they must pledge absolute loyalty to the party and closely follow its leadership in 'thought, politics and action.' The remarks by Xi... are the latest sign of the party's increasingly tighter control over all media and Xi's unceasing efforts to consolidate his powers... At CCTV, Xi was welcomed by a placard pledging loyalty to the party. 'The central television's family name is the party,' the sign read... 'The media run by the party and the government are the propaganda fronts and must have the party as their family name,' Xi told the propaganda workers at the meeting..."

Chinese officials have apparently settled on a strategy: hold economic crisis at bay by stimulating rampant system Credit growth, while stabilizing the yuan currency with currency controls and heavy-handed market intervention. The flaw in this plan can be traced back to a loss of faith in China's financial and economic model, along with waning confidence in Chinese policies. "Money" wants out of China - and the more "money" created the more finance available to seek the exits. Chinese officials are determined to make life more challenging for those betting again the yuan. At the end of the day, however, massive "Terminal Phase" excess will ensure a highly destabilizing currency devaluation.

Policymakers retain the capacity to incite short squeezes. I don't recall much official protest while the speculating community was positioned leveraged long global risk assets. But to place bets against China, Europe or on "risk off" more generally, well, these days such acts provoke aggressive responses. In the past, this competitive advantage afforded to "risk on" proved instrumental in prolonging the global Bubble.

It was a big squeeze week - stocks, corporate bonds, currencies and EM. The Morgan Stanley High Tech index jumped 6.3% and U.S. biotechs surged 4.4%. The small caps rose 3.9%. The broker/dealers recovered 5.1%. The German DAX rallied 4.7%. Brazilian stocks rallied 4.4% and Russian stocks were up 3.9%.

With the caveat that short squeezes do tend to take on lives of their own, the key question remains whether concerted policy measures and attendant squeeze dynamics have the capacity to resuscitate the global Bubble. I believe the Bubble has burst and reflationary measures at this point only work to further destabilize.

It was one of those "dogs that didn't bark" weeks. It's worth noting that Italian bank stocks completely missed out on this week's global equities rally. For that matter, U.S. bank stocks were none too impressive. Treasuries gave up very little of recent strong gains. Commodities as well were in no hurry to price in a resurgent global economy. The Brazilian real slipped 0.5%, Turkish lira declined 0.7% and the South Korean won dropped 1.9% - despite a decent squeeze in EM currencies. German bund yields fell another six bps. European periphery spreads reversed little of recent widening. Curiously, the yen added to recent strong gains, completely disregarding the rally in risk assets.

At this stage of the cycle, policy-induced squeezes and market volatility only work to further derail market stability. There is increased chatter of mounting losses at some of the prominent hedge fund complexes. The pressure to further de-risk/de-leverage has turned intense. The market, economic, policy and geopolitical backdrops are too uncertain. Correlations between markets are too disjointed and unpredictable to leverage various sectors, assets classes or global markets. I'm sticking with the analysis that leveraged currency "carry trade" liquidity evolved into a powerful source of global market and economic fuel over recent years.

It is as well my view that acute currency market volatility - certainly spurred by policy experimentation and confusion - is a serious detriment to saving this faltering Credit cycle. Global policies appear too gimmicky for my taste. In short, market participants still have a lot of confidence in official willingness and ability to punish those betting on - or hedging against - "risk off." Much more importantly, confidence is waning in the capacity of policymakers to manage the unfolding global bust. Confidence is waning in the leveraged speculating community's ability to provide attractive returns while accepting reasonable risk. In general, confidence in leverage has evaporated - which changes so many things. At the same time, confidence is waning in political processes around the globe. And confidence is waning in the ability to keep the peace.


For the Week:

The S&P500 rallied 2.8% (down 6.2% y-t-d), and the Dow recovered 2.6% (down 5.9%). The Utilities increased 1.3% (up 6.4%). The Banks gained 2.2% (down 16.7%), and the Broker/Dealers rallied 5.1% (down 18.0%). The Transports jumped 3.4% (down 3.0%). The S&P 400 Midcaps gained 3.5% (down 6.6%), and the small cap Russell 2000 jumped 3.9% (down 11.1%). The Nasdaq100 rallied 3.6% (down 9.3%), and the Morgan Stanley High Tech index surged 6.3% (down 11.9%). The Semiconductors jumped 5.9% (down 8.7%). The Biotechs surged 4.4% (down 24.7%). With bullion down $11, the HUI gold index fell 3.0% (up 42.8%).

Three-month Treasury bill rates ended the week at 29 bps. Two-year government yields increased three bps to 0.74% (down 31bps y-t-d). Five-year T-note yields gained three bps to 1.23% (down 52bps). Ten-year Treasury yields added a basis point to 1.75% (down 50bps). Long bond yields increased a basis point to 2.61% (down 41bps).

Greek 10-year yields fell back 78bps to 10.25% (up 293bps y-t-d). Ten-year Portuguese yields dropped 29bps to 3.40% (up 88bps). Italian 10-year yields declined eight bps to 1.56% (down 3bps). Spain's 10-year yields slipped three bps to 1.70% (down 7bps). German bund yields fell six bps to 0.20% (down 42bps). French yields declined nine bps to 0.56% (down 43bps). The French to German 10-year bond spread narrowed three to 36 bps. U.K. 10-year gilt yields were unchanged at 1.41% (down 54bps).

Japan's Nikkei equities index rallied 6.8% (down 16.1% y-t-d). Japanese 10-year "JGB" yields dropped seven bps to a record low 0.00% (down 26bps y-t-d). The German DAX equities index rallied 4.7% (down 12.6%). Spain's IBEX 35 equities index rose 3.5% (down 14.1%). Italy's FTSE MIB index gained 2.4% (down 21.1%). EM equities rallied. Brazil's Bovespa index rose 4.3% (down 4.2%). Mexico's Bolsa gained 2.3% (up 0.9%). South Korea's Kospi index jumped 4.4% (down 2.3%). India's Sensex equities index rose 3.1% (down 9.2%). China's Shanghai Exchange recovered 3.5% (down 19.2%). Turkey's Borsa Istanbul National 100 index jumped 2.9% (up 1.8%). Russia's MICEX equities index surged 3.9% (up 1.8%).

Junk funds saw inflows of $66 million (from Lipper). After a one-week hiatus, investment-grade bond funds saw outflows of $1.122 billion.

Freddie Mac 30-year fixed mortgage rates were unchanged at an eight-month low 3.65% (down 11bps y-o-y). Fifteen-year rates were unchanged at 2.95% (down 10bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 3.75% (down 58bps).

Federal Reserve Credit last week expanded $12.6bn to a two-month high $4.459 TN. Over the past year, Fed Credit slipped $14.8bn, or 0.3%. Fed Credit inflated $1.648 TN, or 58%, over the past 171 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.0bn to an almost 11-month low $3.255 TN. "Custody holdings" were down $7.6bn y-o-y, or 0.2%.

M2 (narrow) "money" supply last week sank $73.1bn to $12.415 TN. "Narrow money" expanded $628bn, or 5.3%, over the past year. For the week, Currency declined $1.0bn. Total Checkable Deposits fell $9.0bn, and Savings Deposits dropped $61.1bn. Small Time Deposits were little changed. Retail Money Funds declined $1.4bn.

Total money market fund assets gained $7.5bn to $2.763 TN. Money Funds rose $82bn y-o-y (3.1%).

Total Commercial Paper rose $7.2bn to a 14-month high $1.084 TN. CP expanded $92bn y-o-y, or 9.3%.

Currency Watch:

February 19 - Financial Times (Gabriel Wildau): "China's central bank has removed a closely watched foreign exchange data series from its website in a move likely to provoke suspicion that the government is attempting to conceal the extent of capital outflow. In a regular monthly data table published late on Thursday, the People's Bank of China removed the data category 'Position for forex purchase', which tracked total foreign exchange purchases by both the central bank and other financial institutions. In its place, a separate series that captures only central bank forex purchases is substituted. A rise in forex purchases is considered a sign of capital inflows, while a drop suggests outflows. Analysts expressed puzzlement at the change..."

The U.S. dollar index gained 0.6% this week to 96.59 (down 2.1% y-t-d). For the week on the upside, the Mexican peso increased 3.6%, the South African rand 3.0%, the Canadian dollar 0.6%, Australian dollar 0.5%, Japanese yen 0.5%, Norwegian krone 0.5% and the New Zealand dollar 0.1%. For the week on the downside, the Swiss franc declined 1.4%, the euro 1.1%, the British pound 0.7%, the Swedish krona 0.6%, and the Brazilian real 0.5%. Chinese yuan gained 0.8% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.4% (down 5.8% y-t-d). Spot Gold lost 0.9% $1,227 (up 15.6%). March Silver fell 2.5% to $15.36 (up 11.3%). March WTI Crude increased 50 cents to $29.64 (down 20%). March Gasoline dropped 8.0% (down 24%), while March Natural Gas sank 8.6% (down 23%). March Copper recovered 2.6% (down 2.3%). March Wheat gained 0.9% (down 1%). March Corn rose 1.6% (up 3%).

Fixed-Income Bubble Watch:

February 17 - Bloomberg (Rich Miller): "Federal Reserve policy makers are beginning to worry that a corporate-credit squeeze will constrict the economic expansion. With banks tightening standards on business loans and investors demanding higher yields on some corporate debt, companies may find it harder and more expensive to raise the money they need to grow. The concern is that could prompt them to cut back on spending and hiring, hurting the U.S. economy in the process. ...Janet Yellen flagged the Fed's focus on credit availability for businesses in an appearance before Congress last week. 'That is an important factor' in assessing the outlook for the economy and Fed interest-rate policy, she said on Feb. 10."

February 16 - CNBC (Tom DiChristopher): "A growing number of energy firms are at risk of filing for bankruptcy this year as debt pressure mounts, Deloitte's John England said... Nearly 35% of publicly traded oil and gas exploration and production companies around the world -- about 175 firms -- are at high risk of falling into bankruptcy, the... firm reported. Not only do these companies have high debt levels, but their ability to pay interest on those loans has deteriorated, according to the firm."

February 19 - Reuters (Anjuli Davies): "Worldwide mergers and acquisitions deals have fallen 23% to $336 billion so far this year compared with last year, but cross-border activity by amount targeting U.S.-based companies reached a record high, Thomson Reuters data shows. After hitting a record high by deals value in 2015, worldwide M&A activity has been hurt this year by falling oil prices, worries about slowing growth in China and the health of the financial sector."

Global Bubble Watch:

February 14 - Bloomberg: "China's central bank handed investors a confidence booster, strengthening the yuan's fixing by the most in three months and talking up the currency as markets reopened after the week-long Lunar New Year break. The yuan had its biggest one-day advance since a peg to the dollar was scrapped more than a decade ago..."

February 14 - Bloomberg (Enda Curran): "China's central bank has stepped up efforts to restore stability to the nation's currency and economy, with Governor Zhou Xiaochuan breaking his long silence to argue there's no basis for continued yuan depreciation. The nation's balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, Zhou said in an interview... That's an escalation in verbal support after such comments have been left in recent months to deputies and the central bank research department's chief economist. Zhou dismissed speculation that China plans to tighten capital controls and said there's no need to worry about a short-term decline in foreign-exchange reserves. The country has ample holdings for payments and to defend stability, he said."

February 16 - Bloomberg: "China is stepping up support for the economy by ramping up spending and considering new measures to boost bank lending. The nation's chief planning agency is making more money available to local governments to fund new infrastructure projects, according to people familiar with the matter. Meantime, China's cabinet has discussed lowering the minimum ratio of provisions that banks must set aside for bad loans, a move that would free up additional cash for lending. Officials are upping their rhetoric too. Premier Li Keqiang said policy makers 'still have a lot of tools in the box' to combat the slowdown in the world's No. 2 economy..."

February 18 - Wall Street Journal (Takashi Nakamichi): "Bank of Japan Gov. Haruhiko Kuroda... called on finance chiefs from the world's major economies to find ways to stabilize global financial markets at a planned gathering later this month, highlighting Tokyo's struggle to fight headwinds from overseas. 'It is quite important for the U.S. and China---the world's largest and second largest economies---and other major economies such as the eurozone and Japan to coordinate their actions when necessary,' Mr. Kuroda said... 'It is desirable that the G-20 will do as much as it can to help stabilize the international financial markets.'"

February 15 - Dow Jones (Tom Fairless and Todd Buell): "The European Central Bank won't hesitate to boost its stimulus in March if it believes recent financial-market turmoil or lower oil prices could weigh further on stubbornly low inflation, ECB President Mario Draghi said. 'The ECB is ready to do its part' to bolster the eurozone's economy, Mr. Draghi told European lawmakers in Brussels, underlining the bank's readiness to reconsider its €1.5 trillion stimulus at its next policy meeting on March 10."

February 19 - Bloomberg (Boris Groendahl): "The European Central Bank is calling for European Union banking law to change to allow supervisors the option of permitting banks to make discretionary payments to investors and staff even when a lender loses money in a given year. EU rules currently block payments of dividends, bonuses or coupons on contingent convertible bonds, known as CoCos, if a lender posts losses or reports zero profit, and breaches regulatory buffers."

February 17 - Wall Street Journal (Paul Hannon): "Governments in the U.S., Europe and elsewhere should take 'urgent' and 'collective' steps to raise their investment spending and deliver a fresh boost to flagging economic growth, the Organization for Economic Growth and Development said... In its most forceful call to action since the financial crisis, the OECD said the global economy is suffering from a weakness of demand that can't be remedied through stimulus from central banks alone."

U.S. Bubble Watch:

February 16 - MarketWatch (Ellie Ismailidou): "The fourth-quarter earnings season, currently wrapping up, is shaping up as the worst quarter for earnings growth since the financial crisis, Bank of America analysts said... With 87% of companies in the S&P 500 SPX, having reported results for the last three months of 2015, overall earnings per share are slated to show a drop of 4% from a year earlier, making it the worst quarter for growth since the third quarter of 2009, according to the B. of A. report."

February 18 - Wall Street Journal (Corrie Driebusch and Deborah Gage): "The IPO market is foundering. Of the almost 175 companies that made their U.S. stock-market debuts in 2015, more than 70% are now trading below their IPO prices. On average their stocks are down about 20%. Nine of last year's 10 largest U.S.-listed IPOs are now trading below their initial sale price. On average, those 10 stocks are down about 25%. That has created a hostile environment for new IPOs, a shift that could have far-reaching effects across Silicon Valley, which breeds many of these new companies... There were no U.S. initial public offerings in January, and so far in February there have been only four new listings..."

February 18 - Bloomberg (Charles Stein): "Mutual funds are vulnerable to runs that can spill over and cause problems in the broader financial system, according to a blog post published... on Liberty Street Economics by staffers at the Federal Reserve Bank of New York. The authors, Nicola Cetorelli, Fernando Duarte and Thomas Eisenbach, argue that a run can occur when heavy withdrawals from a mutual fund cause the fund company to sell illiquid assets at fire sale prices. In that situation, the post says, investors will have an incentive to get their money out early, triggering a race for the door that can have a ripple effect beyond the original fund. 'Redemption runs at the fund level trigger fire sales that depress market prices and spread losses to the broader financial system,' the authors wrote."

Federal Reserve Watch:

February 17 - Bloomberg (Steve Matthews): "Federal Reserve Bank of St. Louis President James Bullard said recent financial-market turmoil and a further decline in investors' expectations for inflation have given the central bank scope to delay interest-rate increases. 'I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations,' Bullard, who votes on the policy-setting Federal Open Market Committee this year, said..."

February 16 - Bloomberg (Christopher Condon): "The former U.S. Treasury official who led the 2008 bailout program for the nation's biggest banks says in his new role at the Federal Reserve that Congress and regulators should consider breaking them up to protect the financial system from another crisis. Federal Reserve Bank of Minneapolis President Neel Kashkari... said his regional Fed bank will study ways to toughen U.S. banking laws to prevent another financial crisis. Regulators should consider options including breaking up the nation's largest financial institutions, loading them up with 'so much capital that they virtually can't fail' and taxing leverage to make the system safer, he said. Tougher oversight will require new legislation, he added."

China Bubble Watch:

February 16 - Bloomberg: "China's broadest measure of new credit surged to a record as a seasonal lending binge coincided with a recovery in property prices. Aggregate financing rose to 3.42 trillion yuan ($525bn) in January, according to... the People's Bank of China..., compared with the median forecast of 2.2 trillion yuan... New yuan loans jumped to 2.51 trillion yuan, also a record and beating the median estimate of 1.9 trillion yuan... 'Chinese banks expanded their balance sheet aggressively in the first month of this year, which implies an implicit support from the government to counter the economic slowdown,' said Zhou Hao, senior economist at Commerzbank... 'In addition, Chinese corporates should have turned to onshore for funding, while offloading some external borrowing.'"

February 17 - Financial Times (Don Weinland): "Fraudulent loans are on the rise in China as economic growth slows, threatening to further undermine the country's $29tn banking system, which is already under pressure from an indebted corporate sector. A series of loan frauds has ripped holes in the balance sheets of a range of lenders... The latest victim to emerge is Bank of Liuzhou where $4.9bn (Rmb32.8bn) in fraudulent loans were discovered by the bank late last year... That represents more than 40% of the bank's total assets of Rmb80bn at the end of 2014 -- a dent so large on the bank's balance sheet that it is likely to require government intervention... Fraud, which often takes the form of forging collateral, is also a result of corruption, where local government enterprises bribe small banks to grant them huge loans... In the case of Liuzhou, a new chairman at the bank in 2014 discovered the massive pile of debt accrued by one borrower during the tenure of the previous bank head. Upon that revelation, the borrower, a businessman, allegedly ordered the murder of the chairman, China Business Journal reported. An investigation by the bank reportedly showed that the businessman and certain relatives had forged collateral and proof of business operations to borrow $4.9bn."

February 13 - New York Times (Keith Bradsher): "As the Chinese economy stumbles, wealthy families are increasingly trying to move large sums of money out of the country... To get around the country's cash controls, individuals are asking friends or family members to carry or transfer out $50,000 apiece, the annual legal limit in China. A group of 100 people can move $5 million overseas. The practice is called Smurfing, named after the blue, mushroom-dwelling cartoon characters, and it is part of an exodus of capital that is casting doubt on China's economic prospects and shaking global markets. Over the last year, companies and individuals have moved nearly $1 trillion from China."

February 17 - Bloomberg (Lianting Tu): "Chinese lenders are reacting to a regulatory crackdown on shadow financing by increasing activity in their more opaque receivables accounts, a practice Commerzbank AG estimates may result in losses of as much as 1 trillion yuan ($153bn) over five years. Banks are increasingly using trusts or asset management plans to lend and recording them as funds to be received rather than as loans, which are subject to stricter regulatory oversight and capital limits... 'Chinese banks haven't provisioned for receivables and those are essentially riskier loans,' said Xuanlai He, credit analyst at Commerzbank... 'The eventual losses will have significant impact on China's economy because you could have contagion risk in banking sector.'"

February 14 - Bloomberg (Enda Curran): "A surge in China's imports from Hong Kong has raised fresh concern trade invoices are being manipulated to get capital out of the country. January data... show imports from the territory leaped 108% from a year earlier even as total imports dropped by 18.8% and inbound shipments from other major trading partners fell."

February 16 - Bloomberg: "Soured loans at Chinese commercial banks rose to the highest level since June 2006 as the nation's economic expansion slowed to the weakest pace in a quarter century. Nonperforming loans rose 7% from September to 1.27 trillion yuan ($196bn) by December... Including 'special-mention' loans, where future repayment is at risk but yet to become nonperforming, the industry's total troubled loans swelled to 4.2 trillion yuan, representing 5.46% of total advances. Concern over borrowers' ability to service debt has weighed on Chinese lenders, with shares of the nation's four largest banks trading at valuations at least 35% below a gauge of their emerging-nation peers."

February 16 - Financial Times (Gabriel Wildau): "A high-stakes battle between China's central bank and speculators taking aim at the renminbi escalated last week with US hedge fund manager Kyle Bass's starkly worded letter to investors predicting a Chinese debt and currency crisis. Zhou Xiaochuan, People's Bank of China governor, broke months of silence at the weekend with comments playing down the decline of China's foreign exchange reserves to a more than three-year low and stressing that Beijing was not seeking to devalue its currency. This came a few weeks after state media warned George Soros against 'declaring war' on the renminbi."

February 14 - Bloomberg: "A slide in China's exports in January was eclipsed by an even bigger tumble in imports... Overseas shipments declined 11.2% in January in U.S. dollar terms from a year earlier..., compared with a 1.4% drop in December. Imports extended a stretch of declines to 15 months, tumbling 18.8%, leaving a record trade surplus of $63.3 billion."

February 16 - Bloomberg: "China's unprecedented jump in new loans at the start of 2016 is fueling concern that excessive credit growth is piling up risks in the nation's financial system. The increase in China's debt relative to gross domestic product could pressure the country's credit rating, Standard & Poor's said..., less than a week after the cost to insure Chinese bonds against default rose to a four-year high. Credit growth is storing up 'big problems' in the economy that will weigh on the yuan and stocks, said George Magnus, an economic adviser to UBS Group AG."

February 14 - Bloomberg (Frederik Balfour): "In the latest sign that Hong Kong's property correction is deepening, a parcel of land sold by the government in the New Territories went for nearly 70% less per square foot than a similar transaction in September."

Central Bank Watch:

February 15 - Financial Times (Henny Sender): "Ahead of a recent appearance in Hong Kong, one minder for Ben Bernanke suggested the former chairman of the Federal Reserve be asked not about the cost of quantitative easing, but about the impact of the policy instead. For years, central bankers have been reluctant to suggest that unconventional monetary policies even had costs. But while developed markets plunge ever deeper into uncharted financial territory as a result of central bank actions, the drawbacks and the limitations of such policies are finally becoming apparent. The negative effects will become even more obvious over time. This will occur as asset price inflation -- the main consequence of central bank policies -- goes into reverse, robbing financial engineering of its efficacy and flattening the yield curve. Suddenly, the success of central bankers in lifting financial asset prices through unconventional monetary policies seems to be coming to an end."

EM Bubble Watch:

February 15 - Reuters (Sujata Rao): "Turkish sovereign dollar bonds sold off heavily on Monday and default insurance costs rose amid escalating military tensions around its border with Syria. Turkey vowed the 'harshest reaction' against Kurdish militia if they approach the northern Syrian town of Azaz."

February 18 - Reuters (Alexandra Ulmer and Girish Gupta): "Venezuela's central bank... released long-awaited data showing the depth of the OPEC country's recession, a day after President Nicolas Maduro announced a package of measures seen as insufficient to salvage the unraveling economy. The bank reported that Venezuelan inflation hit 180.9% in 2015, one of the highest rates in the world, while the economy contracted 5.7%."

Brazil Watch:

February 17 - Bloomberg (Steve Dickson): "Banco do Brasil SA, Itau Unibanco Holding SA and Banco Bradesco SA were among more than two dozen Brazilian financial-services firms that had credit grades lowered by Standard & Poor's because of a downgrade of the government's debt. S&P reduced global scale credit ratings on 17 companies and national scale ratings on 27 firms... Such ratings take into account the strength of a company's country, triggering reviews and adjustments when sovereign grades move. S&P lowered Brazil's long-term foreign-currency rating one level Wednesday to BB, two-steps below investment grade, and said more downgrades are possible. Brazil is in its worst recession in more than a century..."

February 14 - Bloomberg (Ben Bartenstein and Filipe Pacheco): "In his two decades covering Brazil, Fitch Ratings's Joe Bormann says he's never seen the nation's companies in such a dire state. To appreciate just how bad things are, consider this: Brazilian courts granted more than 5,500 bankruptcy filings in 2015, the most since 2008... Brazil's deepest two-year recession in more than a century and plummeting commodity prices are leaving businesses in industries from steel to air travel among the most at risk of default, according to Fitch. And more pain is looming in Latin America's biggest economy as borrowing costs soar, predicts Bormann..."

Leveraged Speculation Watch:

February 14 - Financial Times (Mary Childs and Miles Johnson): "Some of the largest and well known US hedge funds have suffered further sharp losses from this year's rout in equities and commodities, raising the prospect that investors pull more money from the industry. Popular bets in equities, currencies and commodities have backfired on a number of hedge funds this year, confounding some of the industry's highest profile investors... The current market turmoil follows poor results for many hedge funds during 2015, increasing worries for managers about rising redemptions, a process that intensifies further selling of assets like equities."

February 16 - Bloomberg (Suzy Waite and Bei Hu): "Hedge funds in Asia, which navigated turbulent markets to post gains in 2015, had nowhere to hide in January. As global stocks, currencies, commodities and risky bonds were roiled in a renewed frenzy of selling in January, hedge funds including those from Quam Asset Management Ltd. and Greenwoods Asset Management Ltd. fell more than 10% last month, while one from Springs Capital fell more than 20%. As a group, Asia-focused hedge funds declined 3.1%, their worst start to a year since 2008, according to... Eurekahedge Pte... 'January was a bloodbath to the whole world,' Chris Choy, chief investment officer for the Quam China Focus Segregated Portfolio, said..."

February 18 - Wall Street Journal (Rob Copeland): "Hedge-fund giant Citadel cut more than a dozen members of its investment staff this week in the wake of early losses for the firm in 2016. The Chicago-based firm, led by billionaire Kenneth Griffin, parted ways with analysts, associates and portfolio managers in its multibillion dollar Surveyor Capital arm. Surveyor is one of Citadel's three internal units that bet on and against stocks worldwide... The moves come as Mr. Griffin grapples with a money-losing stretch unusual for one of the hedge-fund world's marquee names."

February 19 - Bloomberg (Beth Jinks): "Icahn Enterprises LP, billionaire investor Carl Icahn's publicly traded holding company, may be cut to junk after losing 'a significant amount of value in the last several months,' Standard & Poor's Ratings Services said... Icahn Enterprises shares have tumbled about 50% in the past 12 months, with sharp declines in its commodity holdings... Icahn Enterprises has more than $12 billion in total debt."

Europe Watch:

February 15 - Reuters (Giuseppe Fonte and Francesco Canepa): "The European Central Bank is in talks with the Italian government about buying bundles of bad loans as part of its asset-purchase program and accepting them as collateral from banks in return for cash, the Italian Treasury said. The move could give a big boost to a recently approved Italian scheme aimed at helping banks offload some of their 200 billion euros ($225bn) of soured credit and free up resources for new loans. Nonetheless, it would likely fuel a debate in other countries about whether the ECB is taking on too much risk by buying asset-backed securities (ABS) based on loans that have not been repaid for roughly three months."

February 16 - Bloomberg (Karin Matussek and Alessandro Speciale): "The European Central Bank was likened to a dictatorship as Germany's top court began re-examining whether a bond-buying program underpinning Mario Draghi's 2012 pledge to do 'whatever it takes' to save the euro complies with the nation's constitution. Just eight months after the European Union's highest tribunal backed ECB President Draghi's proposals, Germany's Federal Constitutional Court is revisiting the nation's role in the Outright Monetary Transactions mechanism, or OMT. Critics... are trying to convince the German judges to issue a ruling limiting the role of Germany's central bank in the program. 'The ECB is like a financial dictator,' said Markus Kerber, a lawyer teaching finance in Berlin who is a plaintiff in the case. The Bundesbank, Germany's central bank, 'is obliged to oppose the program.' The court in Karlsruhe is reviewing lawsuits filed in 2012 that attack the OMT and are part of a long-running national dispute over the program, which has never been implemented."

February 15 - Financial Times (James Politi): "To celebrate the looming two-year anniversary of his time as Italy's prime minister, Matteo Renzi has chosen a slideshow to tout his accomplishments in office. The self-congratulatory presentation seems to suggest that Italians have dozens of reasons to rejoice... But Mr Renzi's slideshow carefully shields the harsher reality: luck recently seems to have turned against him... On Friday, figures from Italy's statistical agency showed that the economy grew by just 0.1% in the fourth quarter of 2015. The data raised the worrying possibility that Italy's fragile and sluggish recovery is not poised to accelerate as expected..., and may be slowing again. Meanwhile, Italian banks have been among the hardest hit in the recent global market rout, sparking concerns the country could be vulnerable in a new financial crisis. That is not all: Italy is confronting a strategic dilemma over how to respond to the growing threat of Isis, just 200 miles south of the Sicilian island of Lampedusa."

Japan Watch:

February 14 - Bloomberg (Keiko Ujikane): "Japan's economy contracted in the final three months of 2015 as the nation struggles to break free of a cycle of expansion and contraction despite more than three years of the Abenomics program. Gross domestic product shrank an annualized 1.4% in the three months ended Dec. 31, following a revised 1.3% gain in the third quarter..."

February 13 - Financial Times (Ben McLannahan): "The deputy governor of the Bank of Japan has called on the country's government to pull its weight, as the central bank strains to haul the world's third-largest economy decisively out of deflation. Last month the BoJ embarked on its latest round of easing, saying it would start charging for excess reserves deposited at the central bank. At the time, it said it wanted to provide a shot of stimulus at a critical moment, just ahead of the annual Spring round of wage negotiations between companies and workers' groups. In a speech in New York on Friday, deputy governor Hiroshi Nakaso said the government needed to do more to boost Japan's growth potential."

Geopolitical Watch:

February 14 - Bloomberg (Henry Meyer, Ian Wishart and Andrey Biryukov): "Russian Prime Minister Dmitry Medvedev said his country is in a new Cold War with the U.S. and its allies, underscoring the tenuous level of trust that's putting a day-old plan for a truce in Syria at risk. The clash, with echoes of superpower rhetoric during the 20th century, played out at the Munich Security Conference on Saturday even as Russia, Europe and the U.S. say they're seeking cooperation to end Syria's civil war, resolve the armed standoff in eastern Ukraine and make progress toward lifting European economic sanctions against Russia... 'The political line of NATO toward Russia remains unfriendly and closed,' Medvedev said... 'It can be said more sharply: We have slid into a time of a new Cold War.'"

February 15 - Financial Times: "Tension between Russia and Turkey has reached a new peak as the two countries step up military action in Syria in support of opposing sides, edging closer to direct confrontation in the country's increasingly internationalised war. The growing rift between the two countries -- with each now attacking rebels the other supports -- has alarmed Western diplomats amid fears Russia is seeking to undermine Nato by ramping up its clash with Ankara. 'It seems to us that just like in the Baltics, Russia wants to try and push at Nato's ability to stand behind all its members,' said a Nato official. A senior European official said Russian President Vladimir Putin was seeking to destabilise Recep Tayyip Erdogan, his Turkish opposite number."

February 16 - Bloomberg (Selcan Hacaoglu): "There's only one major group of combatants in the Syrian war that's backed by both Russia and the U.S. -- and now Turkey is attacking it. Since the weekend, Turkey has unleashed its 155-millimeter heavy guns across the border with Syria. The targets are Kurdish forces, whose recent advance is a key part of the Russian plan to extend President Bashar al-Assad's control over Syria. Turkish President Recep Tayyip Erdogan... refused to stop the shelling and said Turkey was acting in self-defense. Syria's five-year war has turned into a tangled web of proxy conflicts between global and regional powers, with a growing risk that some of them could clash directly. Right now the most dangerous flashpoint is between Russia and NATO member Turkey, which shot down a Russian plane in November. Since then tensions have steadily built as the Assad-Russia alliance -- with help from the Kurds -- threatens to surround Turkish-backed rebels in Aleppo, Syria's biggest city."

February 18 - Reuters (Ercan Gurses and Humeyra Pamuk): "Turkish Prime Minister Ahmet Davutoglu blamed a Syrian Kurdish militia fighter working with Kurdish militants inside Turkey for a suicide car bombing that killed 28 people in the capital Ankara, and he vowed retaliation in both Syria and Iraq. A car laden with explosives detonated next to military buses as they waited at traffic lights near Turkey's armed forces' headquarters, parliament and government buildings in the administrative heart of Ankara... Davutoglu said the attack was clear evidence that the YPG, a Syrian Kurdish militia that has been supported by the United States in the fight against Islamic State in northern Syria, was a terrorist organization and that Turkey, a NATO member, expected cooperation from its allies in combating the group. Within hours, Turkish warplanes bombed bases in northern Iraq of the Kurdistan Workers Party (PKK)..."

February 17 - Wall Street Journal (Gordon Lubold and Chun Han Wong): "China has positioned surface-to-air missiles on a disputed island in the South China Sea, ...one of the most aggressive military steps so far by Beijing in a burgeoning standoff with Washington involving warplanes, naval destroyers and increasingly frequent public warnings. The placement and timing of the missile deployment carried significance, coming as U.S. President Barack Obama met in California on Tuesday with leaders of Southeast Asian nations embroiled in territorial disputes with China."

February 17 - Wall Street Journal (Chun Han Wong and Gordon Lubold): "The Obama administration sharply criticized Chinese President Xi Jinping... after charging that China's military had deployed batteries of advanced missiles on a disputed South China Sea island. Secretary of State John Kerry said the missile deployment was at odds with a pledge made by Mr. Xi while visiting the White House last year to refrain from militarizing clusters of disputed islands throughout the South China Sea. Chinese officials... said they plan to keep strengthening defensive capabilities in the South China Sea."

February 15 - Reuters (Rujun Shen): "Any move by China to fly jet fighters from runways on its new man-made islands in the disputed South China Sea would be destabilizing and would not deter U.S. flights over the area, a senior U.S. naval officer said... Vice Admiral Joseph Aucoin, the commander of the U.S. Navy's Seventh Fleet, also urged Beijing to be more open over its intentions in the South China Sea, saying it would relieve 'some of the angst we are now seeing'."

February 15 - Reuters (Ben Blanchard): "China will likely announce another large rise in defence spending next month, as the ruling Communist Party seeks to assuage the military's unhappiness at sweeping reforms and as worries over the South China Sea and Taiwan weigh on Beijing. Military spending last year was budgeted to jump by 10.1%, outpacing slowing, single-digit GDP growth, and another double-digit rise looks set to be announced... One source with ties to the military who meets regularly with senior officers told Reuters a 30% increase in spending this year had been mooted in military circles..."

February 18 - Bloomberg (Aliaksandr Kudrytski Volodymyr Verbyany): "Two years after Ukrainians shed blood on the streets of Kiev to crush a Kremlin-backed kleptocracy, the country of more than 40 million people is back on the brink of failed-state status. The government's long descent into chaos reached a new nadir this week, when amid reform delays and a cacophony of corruption claims President Petro Poroshenko sought Prime Minister Arseniy Yatsenyuk's removal in parliament, only to be rejected by a majority that included two dozen members of his own bloc. More defections followed as Yuliya Tymoshenko, the darling of the Orange Revolution a dozen years ago, pulled her party out of the ruling coalition."


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