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Pushing Desperate Measures Too Far

Another unsettled week for global markets. Japan's Nikkei equities index rallied 6.5%. Italian bank stocks surged 10%, with the Europe STOXX 600 Bank Index up 8.1%. Germany's DAX equities index rallied 4.5%, with Spanish stocks up 5.0% and Italian 4.3%. The Hong Kong Hang Seng Financials surged 5.9%. The EM market rally continued. U.S. bank stocks jumped 7.0%. A Friday evening Bloomberg headline: "Rough Week for Shorts as Banks Send S&P 500 to Four-Month High."

Recalling back in 2008, U.S. financial stocks surged 10% in a single session. Reminiscent of 2008 market dynamics, global bonds aren't much buying into the equities market "risk on." Japanese 10-year (JGB) yield fell three bps (to negative 13bps), and German yields increased only four bps (to 13bps). Ten-year Treasury yields rose four bps, only taking back two-thirds of last week's decline. European periphery spreads tightened only marginally.

Policy-induced short squeezes do tend to take on lives of their own. This one's no exception. The basic premise is that years of central bank monetary inflation and market manipulation have nurtured a "global pool of speculative finance" of incredible dimensions. The unstable dynamic of "too much 'money' chasing too few real opportunities" - along with the associated "Crowded Trade" phenomenon - has made it extraordinarily difficult for active managers to compete with the indices. And as "money" continues to gravitate to passive bets on the major indices, the markets' dysfunctional trend-following/performance-chasing dynamic becomes only more deeply entrenched (and detached from fundamentals). When markets lurch higher, irrepressible forces begin pulling everyone in.

Recall back to the tumultuous January and early February period. Global "Risk Off" was in control. Crude traded down to about $27 a barrel. Global equities were under intense pressure, led lower by commodity producers and financial stocks. EM currencies were under liquidation. Chinese stocks were in free-fall, trading at about half the level of summer highs. The Chinese currency was under pressure, with unprecedented quantities of "money" fleeing the bursting Chinese Bubble.

The prevailing bullish view from December was that the U.S. economy was on solid footing, allowing the Fed to finally move forward with rate normalization. The European recovery had gained self-sustaining momentum. In Japan, yen devaluation had successfully boosted corporate profits and stock prices, positioning the economy for decent growth. The world was looking at China through rose-colored glasses, believing Chinese officials were adeptly orchestrating the mythological "soft-landing." At the same time, a compelling argument could be made that an ongoing Chinese boom was all that was holding a global deflationary spiral at bay. A Chinese hard landing would dictate major revision to large numbers of market and growth assumptions around the globe.

Keep in mind that Chinese system Credit ("total social financing") surged 12.4% in 2015, or almost $2.4 TN - a massive amount of Credit still insufficient to levitate global energy and commodity prices. The hard landing scenario - appearing increasingly probable back in January and February - would potentially see a significant slowing, or even halt, to the Chinese Credit boom.

It's worth recalling that total U.S. mortgage Credit expanded $1.4 TN in 2006, dropped to $95 billion in 2008 and then contracted $290 billion in 2009. After expanding 10.9% in 1988, U.S. corporate Credit contracted 2.1% in 1991. U.S. corporate Credit expanded about double-digits in both 1998 and 1999, with growth slowing to 3.2% in 2001 and then flat-lining in 2002 and 2003. More dramatically, 2007 saw 11.5% U.S. corporate Credit growth, which turned to a 5.2% contraction in 2009. Have Chinese officials actually convinced themselves that they've repealed the Credit Cycle?

Examining further back in U.S. Bubble history, the nineties began with 1990's $688 billion U.S. Non-Financial Debt (NFD). Credit issues (burst late-80s Bubble) and recession saw NFD growth slow to $527 billion (2/3 govt. borrowings) in 1991. The nineties Credit boom gained momentum throughout the decade, with over $1.0 TN of NFD growth in boom-years 1998 and 1999 (NFD growth averaged $770 billion annually throughout the nineties). NFD growth slowed to $884 billion in 2000, before resuming its rapid ascent. NFD growth was up to $1.695 TN by 2003, then surpassed $2.0 TN annually in Bubble years 2004 through 2007. Credit crisis saw NFD growth collapse to $829 billion in 2009, with an outright contraction of private-sector debt offset by massive Treasury borrowings.

U.S. data help put the spectacular Chinese Credit boom into clearer perspective. And when it comes to Credit Bubbles, there can be a fine line between burst and boom climax. Rather than the bust that appeared likely in 2016's initial weeks, the first quarter witnessed record Chinese Credit expansion. Friday data showed Chinese March total social financing jumping $360 billion (led by a surge in bank lending). This was somewhat less than January's incredible $520 billion expansion, though it did push Q1 Credit growth above $1.0 TN (historic).

Not long ago Chinese officials had set their sights on reining in rampant Credit growth. Having clearly reversed course, Credit expanded during the quarter at a blistering almost 20%. This compares to its recent target of 13% and China's GDP target of 6.5-7.0%. In such a circumstance, what is the prognosis for Chinese currency stability? Uncharted Territory.

With markets in a tailspin and "money" fleeing China, reasonable analysis back in January might have anticipated Chinese 2016 Credit slowing to, say, $1.5 TN. It will instead likely double this amount. When one is pondering the unstable 2016's market backdrop, it's helpful to think in terms of China as the marginal source of global Credit. The immediate good news for equities and commodities is that Chinese central planning still holds astounding sway over the nation's lending and investing. The ongoing good news for global bonds is that this historic experiment in state-directed Credit and economic management is in peril. The extremely bad news for China - as well as global markets and economy - is that $3.0 TN of unsound Credit at this very late stage of the Credit cycle ensures an even more destabilizing bust.

It must be tempting for the believers to again revel in the brute power of the "perpetual money machine." Yet the costs associated with the latest round of monetary inflation are steep. Not many months ago it appeared that China was determined to rein in excess, while the U.S. was ready to lead the world toward policy normalization. Today it's become rather obvious that China is out of control and global policymakers are trapped at near zero or negative rates and perpetual QE monetary inflation. What was always sold as temporary extraordinary measures is increasingly recognized as desperate "whatever it takes" indefinitely.

To reverse a rapidly strengthening de-risking/de-leveraging dynamic central bankers were compelled to convey to the markets that they were still very much in control with virtually limitless ammunition. Rates could go deeply negative. QE would expand as big as necessary. And, for emphasis, if required central banks still had "helicopter money" - printing 'money' and disseminating it directly to consumers - waiting in the wings. They pushed Desperate Measures too far this time.

April 12 - Reuters (Gernot Heller and Paul Carrel): "The European Central Bank's record low interest rates are causing 'extraordinary problems' for German banks and pensioners and risk undermining voters' support for European integration, Finance Minister Wolfgang Schaeuble told Reuters... Politicians from Chancellor Angela Merkel conservative camp, to which the finance minister belongs, have complained the ECB's ultra-low rates are creating a 'gaping hole' in savers' finances and pensioners' retirement plans as returns have dropped. Schaeuble suggested they risked fuelling the rise of euroscepticism in Germany, where voters flocked to the right-wing Alternative for Germany in state elections last month. 'It is undisputable that the policy of low interest rates is causing extraordinary problems for the banks and the whole financial sector in Germany... That also applies for retirement provisions.' 'That is why I always point out that this does not necessarily strengthen citizens' readiness to trust in European integration,' he added... A storm of protest erupted in thrifty Germany after ECB President Mario Draghi last month described the idea of so-called helicopter money - sending money directly to citizens - as a 'very interesting', if unexamined, concept."

April 10 - Reuters (Michelle Martin): "A chorus of conservative German politicians have criticised the European Central Bank for its interest rate policy, which they say is hitting the retirement provisions of ordinary Germans, could lead to asset bubbles and even boost the right-wing. German Finance Minister Wolfgang Schaeuble partly blamed the ECB's policy for the success of the right-wing Alternative for Germany (AfD) in recent regional elections, which saw it take up to a quarter of votes in a setback to Schaeuble's conservatives... The newspaper quoted Schaeuble as saying he had told ECB President Mario Draghi: 'Be very proud: You can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy.'"

April 14 - CNBC (Matthew J. Belvedere): "BlackRock chief Larry Fink said... that negative and low interest rates around the world are crushing savers, and those policies are 'going to become the biggest crisis globally.' ...Fink called on political leaders to step in and provide fiscal reform to complement monetary policy. 'We have become too dependent on central bankers' to boost the global economies, he said, stressing easy money policies were supposed to be a temporary healing. 'I don't call seven, eight years temporary... I don't see how that [still] has a positive impact.' 'Over 70% of our clients are retirement plans and insurance plans. Our clients are in pain... Our clients are very worried how they're going to be meet their liabilities' because the yields are so low in the bond market.'"

April 14 - Bloomberg (Finbarr Flynn and Gareth Allan): "The top executive of Japan's biggest bank delivered a rare criticism of the central bank, saying its negative interest-rate policy has contributed to anxiety among households and companies and prolonging it may weaken financial institutions. 'Both households and businesses have become skeptical about the effectiveness of policy measures to address the current economic problems,' Nobuyuki Hirano, president of Mitsubishi UFJ Financial Group Inc., said... Hirano said there's 'no guarantee' that negative rates will encourage companies to increase capital spending because low borrowing costs and deflation have been 'business as usual for over a decade.'"

Albeit the Germans, Japanese bankers, pension fund managers or even the general public, it's been a frustratingly long wait for policy normalization. And just when hope was running high, the rug was pulled right out from under. Around the world many had patiently accepted the favoritism and inequity of reflationary measures. But what was supposed to be extraordinary and temporary morphed into the normal and permanent: egregious wealth redistribution.

The course of global monetary policy increasingly lacks credibility. Patience has worn thin. Frustration and anger are being brought to the boil. Sure, global markets have gained momentum. But I actually think "whatever it takes" central banking has about run its course, with momentous ramifications for global market Bubbles. Reminiscent of how I felt in 2008, global markets would be a lot better off had they taken their medicine earlier.


For the week:

The S&P500 gained 1.6% (up 1.8% y-t-d), and the Dow rose 1.8% (up 2.7%). The Utilities were little changed (up 13.3%). The Banks rallied 7.0% (down 8.7%), and the Broker/Dealers jumped 5.7% (down 8.8%). The Transports advanced 3.1% (up 6.3%). The S&P 400 Midcaps jumped 2.6% (up 4.7%), and the small cap Russell 2000 surged 3.1% (down 0.4%). The Nasdaq100 rose 1.5% (down 1.1%), and the Morgan Stanley High Tech index gained 1.0% (down 2.4%). The Semiconductors increased 0.3% (up 1.5%). The Biotechs increased 1.3% (down 16.2%). Though bullion was down $6, the HUI gold index gained 2.1% (up 78.2%).

Three-month Treasury bill rates ended the week at 22 bps. Two-year government yields gained four bps to 0.73% (down 32bps y-t-d). Five-year T-note yields rose six bps to 1.21% (down 54bps). Ten-year Treasury yields added four bps to 1.75% (down 50bps). Long bond yields added a basis point to 2.56% (down 46bps).

Greek 10-year yields were unchanged at 8.71% (up 139bps y-t-d). Ten-year Portuguese yields dropped 18 bps to 3.15% (up 63bps). Italian 10-year yields added two bps to 1.33% (down 26bps). Spain's 10-year yields slipped two bps to 1.49% (down 28bps). German bund yields increased four bps to 0.13% (down 49bps). French yields rose four bps to 0.47% (down 52bps). The French to German 10-year bond spread was unchanged at 34 bps. U.K. 10-year gilt yields rose five bps to 1.41% (down 55bps).

Japan's Nikkei equities index rallied 6.5% (down 11.5% y-t-d). Japanese 10-year "JGB" yields fell three bps to negative 0.13% (down 39bps y-t-d). The German DAX equities index jumped 4.5% (down 6.4%). Spain's IBEX 35 equities index surged 5.0% (down 7.3%). Italy's FTSE MIB index jumped 4.3% (down 14.8%). EM equities equities moved higher. Brazil's Bovespa index surged 5.8% (up 23%). Mexico's Bolsa gained 1.5% (up 6.0%). South Korea's Kospi index gained 2.2% (up 2.7%). India's Sensex equities index advanced 3.9% (down 1.9%). China's Shanghai Exchange recovered 3.1% (down 13%). Turkey's Borsa Istanbul National 100 index rose 3.7% (up 19%). Russia's MICEX equities index gained 1.6% (up 8%).

Junk funds saw inflows of $85 million (from Lipper), the seventh straight week of positive flows.

Freddie Mac 30-year fixed mortgage rates slipped another basis point to a new three-year low 3.58% (down 9bps y-o-y). Fifteen-year rates dipped two bps to 2.86% (down 8bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 3.69% (down 47bps).

Federal Reserve Credit last week expanded $4.4bn to $4.448 TN. Over the past year, Fed Credit increased $0.8bn. Fed Credit inflated $1.637 TN, or 58%, over the past 179 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $14.1bn to $3.243 TN. "Custody holdings" were down $45.3bn y-o-y, or 1.4%.

M2 (narrow) "money" supply last week dropped $33.7bn to $12.607 TN. "Narrow money" expanded $674bn, or 5.7%, over the past year. For the week, Currency increased $1.3bn. Total Checkable Deposits gained $8.8bn, while Savings Deposits sank $44.2bn. Both Small Time Deposits Retail Money Funds were little changed.

Total money market fund assets declined $7.7bn to $2.731 TN. Money Funds rose $136bn y-o-y (5.3%).

Total Commercial Paper fell $8.6bn to $1.093 TN. CP expanded $61bn y-o-y, or 5.9%.

Currency Watch:

The U.S. dollar index recovered 0.6% this week to 94.71 (down 4.0% y-t-d). For the week on the upside, the South African rand increased 2.8%, the Australian dollar 2.2%, the Brazilian real 1.6%, the Canadian dollar 1.3%, the Mexican peso 1.3%, the British pound 0.5% and the Swedish krona 0.3%. The For the week on the downside, the Swiss franc declined 1.5%, the euro 1.0%, the Japanese yen 0.6% and the Norwegian krone 0.2%. The Chinese yuan slipped 0.2% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index gained 2.2% (up 7.9% y-t-d). Spot Gold slipped 0.5% to $1,234 (up 16%). Silver jumped 5.9% to $16.26 (up 18%). WTI Crude added 74 cents to $40.40 (up 9%). Gasoline increased 0.4% (up 15%), while Natural Gas dropped 4.0% (down 18%). Copper jumped 3.3% (up 1%). Wheat was little changed (down 2%). Corn rallied 4.5% (up 6%).

Fixed-Income Bubble Watch:

April 12 - Wall Street Journal (Achel Louise Ensign): "The $147 billion question for banks: Will energy companies max out their credit lines? When big banks announce earnings starting Wednesday, the spotlight will be on vast energy loans that most investors didn't know much about until recently. These unfunded loans have been promised to energy companies, which haven't yet tapped the money... In the first quarter, a handful of energy borrowers announced more than $3 billion of drawdowns against these types of loans. Those commitments are expected to trickle down to bank earnings and saddle firms with more energy exposure just as they are trying to pare it back. 'Let's not sugarcoat it. This is not necessarily a loan a bank wants to make at this point,' said Glenn Schorr, a bank analyst at Evercore ISI."

April 13 - Bloomberg (Asjylyn Loder): "The pain isn't over for the Wall Street banks that financed the oil boom. JPMorgan Chase & Co., which kicked off bank earnings Wednesday, added $529 million to its provision for loan losses on oil, natural gas and gas pipelines, bringing the total set aside to cover souring energy bets to more than $1.3 billion. The addition was more than the $500 million the bank forecast."

April 14 - Bloomberg (Carol Ko): "Defaults for U.S. high-yield bonds have topped $14 billion in April -- the largest monthly volume in two years, according to Fitch Ratings -- and the month isn't even half over. The speculative-grade default rate for the past 12 months is on pace to reach 3.9% in April, up from 2.1% for the same period a year ago, after Peabody Energy Corp. and Energy XXI Ltd. filed for bankruptcy this week..."

April 14 - Bloomberg (Finbarr Flynn and Gareth Allan): "Investors poured the most money in more than four years into junk-bond debt last month as memories faded of December's collapse of Third Avenue Management's mutual fund, which sent tremors through the high-yield credit market. About $10.7 billion in net inflows streamed into junk funds in March, according to Morningstar... 'It seemed it was a big scare at the time,' Morningstar analyst Alina Lamy said... 'Based on the past couple of months, it seems like they forgot about it pretty quickly.'"

April 11 - Bloomberg (Michelle Davis): "Investors that lend to U.S. junk-rated companies aren't being compensated for the looming credit shakeout that could push defaults to record highs, according to UBS... credit strategists Matthew Mish and Stephen Caprio. 'There is a bubble in speculative grade credit,' Mish and Caprio wrote... 'Simply put, clients were not being compensated for the credit risk.' A slowdown in U.S. growth could cause the bubble to pop, stressing the lower-quality companies that constitute almost half of the universe of speculative-grade bonds and loans. Investors that crowded into the debt could suffer massive losses, Caprio said..."

Global Bubble Watch:

April 9 - Wall Street Journal (Hans Bentzien, Tom Fairless and Andrea Thomas): "German Finance Minister Wolfgang Schäuble called on governments in Europe and the U.S. to encourage their central banks to gradually exit easy-money policies, in the strongest sign yet of Berlin's growing impatience with the ultralow interest rates of the European Central Bank. 'There is a growing understanding that excessive liquidity has become more a cause than a solution to the problem,' Mr. Schäuble said, comparing the move away from easy-money policies to ending a drug addiction. The unusually blunt comments from Chancellor Angela Merkel's closest political ally come as the ECB has repeatedly ramped up its stimulus in recent months, seeking to support economic growth in the face of rising global headwinds and financial-market volatility."

April 12 - Reuters (David Lawder): "The International Monetary Fund warned... of the risk of political isolationism, notably Britain's possible exit from the European Union, and the risk of growing economic inequality as it cut its global economic growth forecast for the fourth time in a year. ...The IMF said the global economy was vulnerable to shocks such as sharp currency devaluations and worsening geopolitical conflicts. In its latest World Economic Outlook, the IMF forecast global economic growth of 3.2% this year, compared to a forecast of 3.4% in January. The growth estimate also was lowered in July and October of last year."

April 12 - Bloomberg (Andrew Atkinson): "The International Monetary Fund cut its U.K. growth forecast and warned of 'severe' damage to the world economy if Britain leaves the European Union... With polls suggesting the June 23 referendum remains too close to call, uncertainly over the outcome has driven down the pound and prompted Bank of England Governor Mark Carney to warn that a Brexit is the biggest domestic threat to U.K. financial stability."

April 13 - Bloomberg (Andrew Mayeda): "Global policy makers need to guard against a self-reinforcing 'spiral' of weakening growth and rising debt that could require a coordinated response by the world's major economies, according to the IMF's top fiscal watchdog. Most countries are on a higher debt path than they were a year ago, the International Monetary Fund said... Fiscal deficits in 2015-2016 in emerging economies are projected to exceed levels during the global financial crisis, as countries struggle with low oil prices, cooling investor sentiment and intensifying geopolitical tensions."

April 11 - Financial Times (Robin Wigglesworth and Stephen Foley): "The deteriorating ability of money managers to beat their indices has led to investors accelerating a shift towards passive strategies such as exchange traded funds... Equity funds that are actively managed have suffered net outflows of $34.9bn globally this year but stock market ETFs have taken in another $7.6bn, according to... EPFR... Last year, ETFs attracted nearly $200bn while actively managed equity funds lost $124bn."

U.S. Bubble Watch:

April 10 - Financial Times (Attracta Mooney): "The US public pension system has developed a $3.4tn funding hole that will pile pressure on cities and states to cut spending or raise taxes to avoid Detroit-style bankruptcies. According to academic research shared exclusively with FTfm, the collective funding shortfall of US public pension funds is three times larger than official figures showed, and is getting bigger. Devin Nunes, a US Republican congressman, said: 'It has been clear for years that many cities and states are critically underfunding their pension programmes and hiding the fiscal holes with accounting tricks.'"

April 11 - CNBC (Tom DiChristopher): "Companies are relying on financial engineering to achieve profit growth in the face of middling U.S. economic gains, S&P Investment Advisory Services Chairman Mike Thompson said... 'A lot of what you do see in terms of the profit growth you do have now is engineering,' such as stock buybacks and global labor arbitrage, he told CNBC... 'These are the levers companies have to work with. They're taking advantage of the fact that there's a lot of opportunities to just continue to engineer their earnings.' Company reports are expected to show a 6.9% decline in S&P 500 earnings per share for the first three months of the year..."

April 15 - Reuters (Rodrigo Campos and David Gaffen): "The S&P 500 is close to its record high as earnings season heats up, but one of the major drivers of the market's advance - stock buybacks - looks to be sagging. U.S. companies announced about $182 billion in buybacks in the first quarter, according to Birinyi Associates research, putting buybacks on pace for their weakest year since 2012. Strategists link this, in part, to falling cash flow, a trend that is expected to worsen in coming quarters."

April 11 - Bloomberg (Joe Carroll): "Chesapeake Energy Corp. pledged 'substantially all' of its gas fields, office buildings and derivatives contracts to maintain access to a $4 billion credit line as the shale driller grapples with falling energy prices. The shares surged the most since their debut 23 years ago. Chesapeake renegotiated a revolving credit agreement for the third time in 16 months and convinced lenders to postpone the next evaluation until June 2017..."

April 13 - Bloomberg (Tiffany Kary, Tim Loh and Jim Polson): "Peabody Energy Corp. filed for bankruptcy on Wednesday, the most powerful convulsion yet in an industry that's still waiting for the coal market to bottom out. The company is seeking to reorganize U.S. operations in federal court in its hometown of St. Louis, reducing an estimated $10.1 billion in debt... It's the biggest U.S. corporate bankruptcy this year by liabilities... Founded in 1883 by 24-year-old Francis S. Peabody with $100, a wagon and two mules, the miner is now the largest private-sector coal company in the world. It joins four other large coal companies that have sought bankruptcy during the slump..."

April 13 - Bloomberg (Brian Eckhouse): "SunEdison Inc., the renewable-energy company already teetering on the brink of bankruptcy, missed a bond payment this month. The company was supposed to pay $2.6 million April 1 on its 2% convertible bonds, which are due in 2018, according to data compiled by Bloomberg. SunEdison has a grace period through May 1."

April 15 - Bloomberg (Claire Boston and Dan Wilchins): "Soured loans to companies jumped 67% at the three biggest U.S. banks in the first quarter, the latest sign that corporate credit quality is eroding after energy prices plunged. At Bank of America Corp., JPMorgan... and Wells Fargo & Co., bad loans to companies reached their highest levels since at least 2013... Charles Peabody, a banking analyst at Portales Partners, downgraded JPMorgan to 'underperform' from 'market perform' in February in part because of concerns about the potential for mounting credit losses. 'We're at the very early stages of an inflection point in corporate credit quality, and it's getting worse from here,' Peabody said."

April 13 - Reuters (Megan Cassella): "The U.S. government posted a $108 billion budget deficit in March, more than double the amount from the same period last year... The government had a deficit of $53 billion in March of 2015, according to the Treasury's monthly budget statement. Analysts polled by Reuters had expected a $104 billion deficit for last month... The current fiscal year-to-date deficit was $461 billion, up 5% from a $439 billion deficit this time last year."

April 12 - Reuters (Lucia Mutikani): "U.S. small business confidence fell to a fresh two-year low in March amid persistent worries about sales and profits, the latest indication that economic growth braked sharply in the first quarter."

April 11 - Bloomberg (Caleb Melby): "Comcast Corp. paid Michael J Cavanagh $40.6 million in his first year as the largest U.S. cable company's chief financial officer. He's the best-paid CFO at a publicly traded U.S. company... Cavanagh's compensation included a $1.8 million salary, $16.5 million in stock awards, $4 million in option awards, a $6 million cash bonus and $11.8 million in deferred compensation..."

China Bubble Watch:

April 15 - Bloomberg: "So much for the hard landing scenario. Chinese leaders appear to have stabilized their $10 trillion-plus economy by relying on a tried and true playbook: unleash a torrent of credit to power a borrowing surge and spending splurge. The flood of money has helped house prices rebound, spurred investment, stabilized markets and buoyed consumers. It also ensured that gross domestic product in the first quarter came in at a 6.7% gain from a year earlier, matching expectations and well within the government's 2016 target of 6.5% to 7%."

April 15 - Bloomberg: "China may have $1.3 trillion loans extended to borrowers that don't have sufficient income to cover interest payments, with potential losses equivalent to 7% of the country's gross domestic product, according to the International Monetary Fund. Loans 'potentially at risk' would amount to 15.5% of total commercial lending... That compares with the 5.5% problem loan ratio reported by China's banking regulator after including nonperforming and special-mention loans."

April 13 - Bloomberg: "Dongbei Special Steel Group Co. defaulted on bonds a third time since its chairman was found dead by hanging last month, adding to mounting debt nonpayments in China... The firm... cited tight cash flow and said it is raising money through various means. Chinese firms are struggling with surging debt burdens as Premier Li Keqiang seeks to weed out zombie corporations amid the country's worst economic slowdown in a quarter-century. At least seven firms have missed local note payments this year, already reaching the tally for the whole of 2015. 'Dongbei Special Steel's default won't be a one-off incident this year as more and more cases are likely to surface among loss-making and cash-strapped companies, especially in sectors such as steel and coal,' Jiming Zou, a senior analyst at Moody's..., said..."

April 14 - Bloomberg: "China's real estate investment staged a comeback with surging home sales, helping to stabilize economic growth in the first quarter. The credit-fueled rebound may be short-lived after some top cities imposed measures to cool the property market. The value of homes sold jumped 71% in March to 869.8 billion yuan ($134.1bn) in the biggest year-on-year increase since at least 2015..."

April 14 - Bloomberg (Lianting Tu and Molly Wei): "Chinese companies canceled more than four times the amount of bond offerings in April compared with a year earlier, as defaults by state-owned enterprises increased financing costs. At least 37 Chinese firms postponed or scrapped 35.2 billion yuan ($5.4bn) of planned note sales through April 13... 'Credit risk is spiking with recent defaults so the market is in a panic,' said Ji Weijie, a credit analyst at China Securities Co... No one wants to buy low-rated bonds right now. The China Railway Materials incident has had the biggest impact on the market recently because the company has a high rating of AA+ and it is completely state owned.'"

April 12 - Reuters (Sue-Lin Wong): "China will step up its crackdown on underground banks this year as the country's economic slowdown and market volatility has sparked a wave of capital outflows, according to a senior official in the country's foreign exchange regulator. The State Administration of Foreign Exchange 'will continue to work with the public security bureau and other departments to focus on cracking down on underground banks, to intimidate people who use underground banks, to block channels for underground bank transactions,' Zhang Shenghui, head of SAFE's inspection division, was quoted as saying... Transactions by underground banks topped 1 trillion yuan last year..."

April 13 - CNBC: "The trade picture in the world's second-largest economy staged a turnaround in March, with exports rising at the fastest clip since February 2015... Dollar-denominated exports rose 11.5% on-year, recovering from a 25.4% slump hit in February that marked a seven-year trough. Imports meanwhile fell an annual 7.6%, unchanged from February... That left Beijing with a surplus of $29.86 billion for the month, compared with February's $32.59 billion surplus."

ECB Watch:

April 11 - Financial Times (Stefan Wagstyl and Claire Jones): "German political leaders are blaming the European Central Bank's easy money policies for the rise of the rightwing Alternative for Germany party, in a dramatic escalation of tensions between Berlin and Frankfurt. Stung by the AfD's success in last month's regional elections, top politicians in chancellor Angela Merkel's conservative CDU/CSU bloc have gone on the offensive against the central bank... The AfD secured the best results for any German rightwing party since the second world war by opposing chancellor Angela Merkel's open-door refugee policy. Yet the populist party has also won backing by criticising loose eurozone monetary policies that are deeply unpopular in Germany."

Europe Watch:

April 13 - Reuters (Renee Maltezou): "The International Monetary Fund wants Greece's European partners to grant Athens substantial relief on its debt which it sees remaining 'highly unsustainable', according to a draft IMF memorandum... Greece and inspectors from its EU/IMF lenders adjourned talks on a crucial bailout review, mainly due to a rift among the lenders over a projected fiscal gap by 2018 and over Athens' resistance to unpopular reforms. They will resume the review after this week's IMF spring meetings in Washington, where the lenders are also expected to discuss Greek reforms and debt... 'Despite generous concessional official financing and further reform plans... debt dynamics are projected to remain highly unsustainable,' the IMF draft said. 'To restore debt sustainability, in addition to our reform efforts, decisive action by our European partners to grant further official debt relief will be essential.'"

April 13 - Bloomberg (Birgit Jennen, Patrick Donahue, Rainer Buergin and Arne Delfs): "German Chancellor Angela Merkel's fractious coalition partners can at last agree on one thing: it's all Mario Draghi's fault. After months of bickering over refugees, the three coalition parties are taking advantage of a lull in the crisis to address widening alarm over dwindling pensions and savings. That's translated into a slew of criticism of the record-low interest rates set by the European Central Bank under Draghi. The opening volley was delivered by Finance Minister Wolfgang Schaeuble, who last week laid part of the blame for the rise of the populist Alternative for Germany party at the ECB president's feet... Merkel joined the fray on Tuesday, addressing the effects of low interest rates in a closed door meeting with lawmakers from her Christian Democratic Union in Berlin..."

April 10 - Reuters (Mark Bendeich): "The chairman of France's second-biggest retail bank is more worried about Europe's banking sector now, in some ways, than when he took the reins at BPCE bank during the depths of the global financial crisis in 2009. Francois Perol said... that negative interest rates in the euro zone were a major problem, squeezing interest margins in a way that was unsustainable over the longer term. 'I am much more worried than I was in 2009 in certain respects,' Perol said... 'It was 100% clear what had to be done (in 2009)... I think it's more of a difficult situation for banks (now) because fundamental changes are underway in an environment that's incredibly challenging due to negative interest rates.'"

April 13 - Financial Times (Thomas Hale): "...Fitch has warned of the risks facing large Italian banks as a result of the government's latest efforts to prop up the country's financial sector. Fears over Italy's lenders have intensified recently because of an estimated €360bn of non-performing loans, increasing pressure to raise capital. That spurred the announcement of a €5bn bank rescue fund this week. Called 'Atlante', the fund will be backed by large Italian banks and buy shares in other lenders, as well as NPLs. Italy's latest plan to rescue the sector has ignited volatile share trading in the sector this week. The FTSE All-Share Italia Banks index rose 8.6% on Wednesday, however the benchmark remains nearly 31% lower so far this year."

Japan Watch:

April 11 - Bloomberg (Toru Fujioka): "The surging yen and slumping stocks are increasing pressure on the Bank of Japan to add to monetary stimulus, less than three months after Governor Haruhiko Kuroda bolstered his arsenal with a negative interest-rate. The currency is back where it was before Kuroda expanded his record asset-purchase program in October 2014 and Japanese shares are falling as foreign investors head for the exit... The stakes are rising, with data out Tuesday showing that Japanese loan growth slowed to the weakest in three years in March..."

April 13 - Bloomberg (Brian Eckhouse): "For the past three years, Prime Minister Shinzo Abe could usually count on surging corporate earnings to back up the case that his policies were turning around Japan. No more. Pretax profit at the biggest companies will drop about 10% in the three months ending June, the biggest slump since Abe took office in late 2012, Daiwa Securities Group Inc. estimates."

EM Bubble Watch:

April 13 - Bloomberg (Enda Curran): "China and India are both grappling with escalating bad debt challenges lurking in their banking systems. Yet the two Asian economic giants are embracing markedly different strategies to clean up the mess. Impaired loans have reached a decade high in China and are at their most in 14 years in India, posing a threat to two economies that increasingly have fueled global growth... Authorities in both countries have adopted sharply divergent approaches. India's central bank Governor Raghuram Rajan has set a deadline of March 2017 for banks to finish the bulk of a clean-up of their books, in a bid to revive lending in the $2 trillion economy. Shares in Indian banks have been among the region's worst performers, outside Japan, over the past year."

April 12 - Bloomberg (Alaa Shahine): "Saudi Arabia's credit worthiness was downgraded at Fitch Ratings after the plunge in oil prices. The kingdom's rating was lowered one level to AA-, the fourth-highest investment grade... It maintained a negative outlook for the credit, signaling the possibility of more downgrades."

April 12 - Bloomberg (Colin McClelland): "South African investors are shifting cash overseas at the most-sustained pace since outflows triggered by the end of apartheid as political upheaval undermines confidence in the continent's second-biggest economy. Money poured out of the country for the 16th consecutive quarter in the final three months of 2015..."

Leveraged Speculation Watch:

April 14 - Reuters (Edward Krudy): "New York City's largest public pension is exiting all hedge fund investments in the latest sign that the $4 trillion public pension sector is losing patience with these often secretive portfolios at a time of poor performance and high fees. The board of the New York City Employees Retirement System (NYCERS) voted to leave blue chip firms such as Brevan Howard and D.E. Shaw after their consultants said they can reach their targeted investment returns with less risky funds. The move by the fund... follows a similar actions by the California Public Employees' Retirement System (Calpers), the nation's largest public pension fund, and public pensions in Illinois. 'Hedges have underperformed, costing us millions,' New York City's Public Advocate Letitia James told board members... 'Let them sell their summer homes and jets, and return those fees to their investors.'"

April 13 - Bloomberg (Martin Z Braun): "New York City's pension fund for civil employees is weighing exiting its $1.5 billion portfolio of hedge fund investments because of lagging performance, high fees and the riskiness of the asset class. A vote to terminate the funds... will come as soon as Thursday... Hedge funds make up 3% of the civil employees' fund's $51 billion portfolio. 'Hedge funds are charging exorbitant fees for high-risk and opaque investments' said New York City Public Advocate Tish James. 'Our public employees work hard for their money, and they deserve to know their investments are secure. We can and must invest responsibly and also honor our fiduciary responsibility.'"

April 14 - Bloomberg (Simone Foxman): "Tudor Investment Corp. clients have asked to pull more than $1 billion from the hedge fund firm founded by billionaire Paul Tudor Jones after three years of lackluster returns... The withdrawals mark a setback for the $13 billion firm, one of the oldest and well regarded in the industry."

April 14 - CNBC (Jeff Cox): "After years of lackluster returns, hedge funds are finding some footing. The nearly $3 trillion industry posted its best performance in more than four years in March, by one account, though it still lagged the S&P 500 stock market benchmark. Preqin, which tracks the alternative asset industry, said its own benchmark for hedge funds rose 2.82% for the month, the best total since January 2012."

Brazil Watch:

April 11 - Bloomberg (Raymond Colitt and Arnaldo Galvao): "Brazilian security forces are deploying thousands of troops and erecting barricades in the capital city of Brasilia this week to prevent violent clashes as Congress holds key votes on the impeachment of President Dilma Rousseff. The city's rare state of alert reflects concern that the country's polarized political climate will reach a fever pitch in coming days."

Geopolitical Watch:

April 14 - Reuters (Jack Stubbs, Lidia Kelly, Dmitry Solovyov, Maria Kiselyova, Gleb Stolyarov and Anastasia Lyrchikova): "Media reports about offshore accounts in Panama are a 'provocation', Russian President Vladimir Putin said..., blaming U.S. officials and U.S. bank Goldman Sachs for attempts to influence Russian elections. The leak of confidential documents from a Panamanian law firm earlier this month has had political repercussions in many countries, after shining a spotlight on the offshore wealth of politicians and public figures worldwide."

April 13 - Reuters: "Two Russian warplanes with no visible weaponry flew simulated attack passes near a U.S. guided missile destroyer on April 12 in international waters off Russia, a U.S. official said..., describing it as one of the most aggressive acts in recent memory."

April 11 - Bloomberg (Andy Sharp): "The Group of Seven nations should stop inflaming territorial disputes in Asian waters and focus its energy on dealing with a slumping global economy, China said... 'China is strongly dissatisfied with relevant moves taken by G-7,' Foreign Minister spokesman Lu Kang said... 'We urge G-7 members to abide by their promise of not taking sides on territorial disputes, respect the efforts by regional countries, stop all irresponsible words and actions, and make constructive contribution to regional peace and stability.'"

April 13 - Washington Post (Simon Denyer): "In the disputed waters of the South China Sea, fishermen are the wild card. China is using its vast fishing fleet as the advance guard to press its expansive territorial claims in the South China Sea, experts say. That is not only putting Beijing on a collision course with its Asian neighbors, but also introducing a degree of unpredictability that raises the risks of periodic crises. In the past few weeks, tensions have flared with Indonesia, Malaysia and Vietnam as Chinese fishermen, often backed up by coast guard vessels, have ventured far from their homeland and close to other nations' coasts."


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