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New Age Mandate

A journalist's question during Mario Draghi's ECB post-meeting press conference: "...There was a sharp reaction from financial markets to your Sintra speech. You must have looked at the Fed experience of 2013. Is there any concern in the Governing Council that the so-called tantrum or a similar reaction can happen in the eurozone when you start discussing changes in your stance?"

Draghi: "I won't comment on market reactions, but let me give you the bottom line of our exchanges: basically, inflation is not where we want it to be, and where it should be. We are still confident that it will gradually get there, but it isn't there yet, and that's why the Governing Council reiterated the forward guidance, the asset purchase programme, the interest rates and all this package of monetary accommodation; and reiterated that the present very substantial monetary accommodation is still necessary. Let me read the introductory statement: 'Therefore a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.'

Draghi continued: "But let me just make clear one thing: after a long time, we are finally experiencing a robust recovery, where we only have to wait for wages and prices to move towards our objective. Now, the last thing that the Governing Council may want is actually an unwanted tightening of the financing conditions that either slows down this process or may even jeopardise it; and that's why we retain the second bias, or let's call it, reaction function. 'If the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.' And I think the Governing Council has given enough evidence that when flexibility is needed to achieve its objectives, it has been very able to find all that was needed. So that's why we keep this bias."

This exchange gets to the heart of a momentous issue. Recall the swift market reaction to "hawkish" Draghi's comments from Sintra (June 26-28 ECB Forum on Central Banking) and, soon after, ECB officials expressing that markets had misinterpreted his remarks. Markets this week were awaiting "dovish" clarification. Draghi soundly beat expectations.

The above (astute) question referred to the Fed's 2013 "taper tantrum" experience. While it received scant attention at the time, Bernanke's "The Fed will push back against a tightening of financial conditions" response to incipient market instability proved a pivotal extension to his historic monetary experiment. In hindsight, this was the chairman's vague introduction of a New Age Mandate: Central Banks Will Underpin Risk Embracement Throughout the Financial Markets. The Fed was prepared to employ aggressive stimulus measures in the event of self-reinforcing risk aversion and resulting marketplace liquidity issues. The Federal Reserve was signaling that it was ready to respond quickly to de-risking/de-leveraging dynamics - over time profoundly impacting risk-taking and securities pricing throughout the markets.

No longer would the Federal Reserve confine market-supporting measures to crisis backdrops. Apparently no reason not to upgrade the Fed put to 24/7. Their liquidity backstop was to ensure that selling momentum was not allowed to materialized. Sure enough, Bernanke's new mandate was a huge hit in the marketplace (S&P500 up more than 50% since 2013) and has been readily adopted by central bankers around the globe, certainly including Draghi's ECB. So few detractors. And typical of government "mandates," once adopted they're almost impossible to repeal.

"Will push back against a tightening of financial conditions" explains at least a few so-called "conundrums." Why is the VIX (and risk premia more generally) so low? Why are sovereign yields remaining near historic lows despite the Fed raising rates and other central banks planning to do the same? How can equities ignore mounting political and geopolitical risks?

If central banks have become so keen to protect markets from risk aversion, why shouldn't the cost of market "insurance" remain extraordinarily low? Why wouldn't speculators gravitate to products fashioned to profit from providing myriad forms of market risk mitigation (hawking flood insurance during a drought)? And, importantly, as Bubble risks escalate, why would sovereign yields around the globe not discount the high probability that central banks will at some point be called upon to make good on their New Mandate - i.e. respond to faltering Bubbles with aggressive new QE programs with enormous quantities of bonds/securities to purchase?

I am reminded of chairman Greenspan's asymmetrical policy approach - aggressively slashing rates when markets falter, while quite cautiously increasing rates while loose conditions fuel destabilizing excess. The Greenspan Fed's policy approach during the nineties provided a competitive advantage to U.S. securities markets. This "advantage" was a powerful magnet attracting global speculative flows, inflows instrumental in fueling "king dollar" distortions.

I refer to Mario Draghi as "the world's most important central banker." He these days holds command over the markets' preeminent liquidity backstop - in the most explicit terms. The Yellen Fed, raising rates and discussing balance sheet normalization, lacks the readiness enjoyed by Draghi. As such, the Fed now takes a backseat when it comes to the competitive advantage Draghi has conferred upon European securities markets.

In his press conference, Draghi refused to bite when questioned about the strong euro. This was taken as a lack of concern - and the euro surged.  I expect Draghi is monitoring euro strength with increasing concern, although he prefers not to publically challenge the currency market. I also assume he is skeptical of euro strength, expecting Fed policy normalization to be dollar positive. Perhaps he doesn't at this point fully appreciate the degree to which his market backstop underpins the euro, especially with a more dovish Yellen Fed and increasingly combustible Washington.

Italian 10-year yields sank 22bps this week to 2.07%. The Italian government borrowing for 10 years at about 2% is today's poster child for wildly distorted markets and inflated securities values. Spanish yields dropped 20 bps this week to 1.45%, and Portuguese yields fell 24 bps to 2.91%. Now down 180 bps y-t-d, Greek 10-year yields ended the week at 5.22%. Draghi's "whatever it takes" has worked wonders, especially for European periphery debt markets.

It's worth mentioning that Germany's DAX equities index sank 3.1% this week. France's CAC 40 fell 2.3%, with major equities indices down 2.1% in Spain and 1.4% in Italy. European equities have been a hot, crowd-favorite trade - and this week took their turn for a bout of Crowded Trade Punishment. Draghi's explicit liquidity backdrop provided a competitive advantage for the euro, as well as for European debt compared to European equities.

Draghi's predecessor, Jean-Claude Trichet, had it right with his "I will not pre-commit to anything." The Trichet ECB appreciated that pre-committing on policy would spur financial speculation and distortions. Trichet's resolve on such an important issue must have been at least partially a reaction to Fed policymaking - and how Greenspan's penchant for signaling the future course of policy cultivated destabilizing hedge fund and derivatives leveraged speculation. It's ironic that Draghi not only discarded "will not pre-commit to anything," he adopted the Greenspan and Bernanke approach but in a more audacious scheme.

There is no doubt that central bank liquidity backstops have promoted speculation, securities leveraging and derivatives market excess/distortions. I also believe they have been instrumental in bolstering passive/index investing at the expense of active managers. Who needs a manager when being attentive to risk only hurts relative performance? And the greater the risk associated with these Bubbles - in leveraged speculation, derivatives and passive trend-following - the more central bankers are compelled to stick with ultra-loose policies and liquidity backstops.

After all, who will be on the other side of the trade when all this unwinds? Who will buy when The Crowd moves to hedge/short bursting Bubbles? This is a huge problem. Central bankers have become trapped in policies that promote risk-taking and leveraging at this precarious late-stage of an historic Global Bubble. These days, central bankers cannot tolerate a "tightening of financial conditions," and they will have a difficult time convincing speculative markets otherwise.

Speaking of credibility issues...

July 20 - Bloomberg: "China's deleveraging campaign is taking on its toughest target yet: the public sector itself. While up to now policy makers have focused on a build-up of liabilities at smaller banks and big private-sector companies, President Xi Jinping has made clear that local government authorities and China's behemoth state-owned enterprises too must restrain borrowing. Xi's comments at a top financial-regulatory gathering last weekend were the latest signal of determination to head off any future destructive debt-bubble deflation. It's perhaps the hardest leverage nut to crack, because Communist Party officials have for decades risen through the ranks by borrowing to fund growth -- whether at local authority levels or atop an SOE monopoly... 'Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more thorough campaign,' said Helen Qiao, chief greater China economist at Bank of America Merrill Lynch in Hong Kong. 'We will see more measures being rolled out in the second half of 2017 and 2018,' she said... 'Focusing on cutting excess leverage in real economy, instead of in the financial sector' came as a surprise to some, said Zhu Haibin, chief China economist at JPMorgan... in Hong Kong. 'Cutting leverage means the gap between credit growth and nominal GDP growth will narrow -- but that could have knock-on risks and drag on economic growth itself.'"

It's helpful to remind ourselves that the Chinese have limited experience with runaway Credit Bubbles. This is their - borrowers, lenders, regulators and officials - first experience with a mortgage finance Bubble. They've never had to contend with overseeing the world's biggest banks (involved in all kinds of things all over the place). They've never had small banks borrow Trillions in the inter-bank lending market. So-called "shadow banking" has never been such a powerful force - throughout the markets and real economy. The Chinese have limited experience with "repo" financing and the murky world of derivatives. They are new to corporate debt securities boom and bust cycles. They've never had to contemplate complex counter-party issues where the counter-parties have become massive global financial players.

For years now, I've chronicled Chinese policymakers taking a way too timid approach to managing mounting Credit Bubble excess. In the process, they brought new meaning to Greenspan's "asymmetrical:" timid little baby steps against colossal financial and economic maladjustment, only to resort vehemently to the heavy hand of central control when Bubbles begin to falter.

Chinese officials appear more serious this time - though markets have over years become accustomed to not taking "tightening" measures seriously. Beijing's policy approach has been incongruous. They've employed various measures to tighten mortgage lending. More recently, officials have attempted to rein in "shadow" lending and some of the more conspicuous areas of financial excess (i.e. insurance and global M&A). At the same time, from a macro level Beijing has promoted the ongoing rapid money and Credit growth necessary to meet official GDP targets. Efforts to restrain Bubbles and systemic risk while spurring massive monetary inflation were never going to end successfully.

Repeating the above quote from BofA China economist Helen Qiao: "Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more thorough campaign." And from JPMorgan economist Zhu Haibin: "Focusing on cutting excess leverage in real economy, instead of in the financial sector came as a surprise to some..." Well, at this point, Chinese officials are confronting a harsh reality: there are few alternatives left. Systemic risk has only mushroomed in spite of myriad tightening measures and policy approaches.

China is on course for $3.5 TN of Credit growth this year - with a trajectory that is as precarious as it is unsustainable. If they do in fact take the necessary more systemic approach to containing Credit excess, it'll be a new ballgame in China and globally. Yet at this point officials are not taken seriously. That officials did not act with more resolve in previous tightening attempts creates the dilemma that only harsh measures will now suffice. Global markets met President Xi and other's pronouncements this week with a giant yawn. The expectation is that dramatic measures will not be imposed prior this autumn's Communist Party National Conference.

I'm reminded of the Rick Santelli central banker refrain, "What are you afraid of?" Yellen and Draghi seemingly remain deeply concerned by latent market fragilities. How else can one explain their dovishness in the face of record securities prices and global economic resilience. A headline caught my attention Thursday: "Bonds: ECB Gives 'Green Light' to Summer Carry Trades, BofA says." It's been another huge mistake to goose the markets this summer with major challenges unfolding this fall - waning central bank stimulus, Credit tightening in China and who knows what in Washington and with global geopolitics.


For the Week:

The S&P500 added 0.5% (up 10.4% y-t-d), while the Dow slipped 0.3% (up 9.2%). The Utilities jumped 2.5% (up 8.7%). The Banks fell 1.6% (up 3.2%), while the Broker/Dealers gained 1.5% (up 12.9%). The Transports sank 2.8% (up 4.7%). The S&P 400 Midcaps gained 0.5% (up 6.8%), and the small cap Russell 2000 rose 0.5% (up 5.8%). The Nasdaq100 gained 1.4% (up 21.8%), and the Morgan Stanley High Tech index advanced 1.4% (up 26.4%). The Semiconductors added 0.3% (up 22.2%). The Biotechs jumped 3.0% (up 31%). With bullion gaining $26, the HUI gold index rallied 3.5% (up 5.2%).

Three-month Treasury bill rates ended the week at 114 bps. Two-year government yields slipped two bps to 1.34% (up 15bps y-t-d). Five-year T-note yields declined six bps to 1.80% (down 12bps). Ten-year Treasury yields fell nine bps to 2.24% (down 21bps). Long bond yields dropped 11 bps to 2.81% (down 26bps).

Greek 10-year yields declined six bps to 5.22% (down 180bps y-t-d). Ten-year Portuguese yields dropped 24 bps to 2.91% (down 84bps). Italian 10-year yields sank 22 bps to 2.07% (up 26bps). Spain's 10-year yields fell 20 bps to 1.45% (up 7bps). German bund yields declined nine bps to 0.51% (up 30bps). French yields fell 11 bps to 0.75% (up 7bps). The French to German 10-year bond spread narrowed two bps to 24 bps. U.K. 10-year gilt yields fell 14 bps to 1.18% (down 6bps). U.K.'s FTSE equities index gained 1.0% (up 4.3%).

Japan's Nikkei 225 equities index was little changed (up 5.2% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.07% (up 3bps). France's CAC40 fell 2.2% (up 5.3%). The German DAX equities index sank 3.1% (up 6.6%). Spain's IBEX 35 equities index fell 2.1% (up 11.5%). Italy's FTSE MIB index declined 1.3% (up 10.2%). EM equities were mixed. Brazil's Bovespa index lost 1.1% (up 7.4%), while Mexico's Bolsa added 0.8% (up 13.0%). South Korea's Kospi gained 1.5% (up 20.9%). India's Sensex equities index was about unchanged (up 20.3%). China's Shanghai Exchange increased 0.5% (up 4.3%). Turkey's Borsa Istanbul National 100 index rose 1.6% (up 36.7%). Russia's MICEX equities index dropped 1.8% (down 13.8%).

Junk bond mutual funds saw inflows surge to $2.221 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell seven bps to 3.96% (up 51bps y-o-y). Fifteen-year rates declined six bps to 3.23% (up 48bps). The five-year hybrid ARM rate dropped seven bps to 3.21% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.06% (up 35bps).

Federal Reserve Credit last week expanded $13.7bn to $4.440 TN. Over the past year, Fed Credit declined $1.2bn. Fed Credit inflated $1.630 TN, or 58%, over the past 245 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.3bn last week to $3.319 TN. "Custody holdings" were up $90.9bn y-o-y, or 2.8%.

M2 (narrow) "money" supply last week surged $87.5bn to a record $13.615 TN. "Narrow money" expanded $770bn, or 6.0%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits fell $21.9bn, while Savings Deposits jumped $106.7bn. Small Time Deposits added $0.8bn. Retail Money Funds were little changed.

Total money market fund assets declined $9.9bn to $2.617 TN. Money Funds fell $98bn y-o-y (3.6%).

Total Commercial Paper rose $9.8bn to $970.4bn. CP declined $82.8bn y-o-y, or 7.9%.

Currency Watch:

The U.S. dollar index dropped 1.4% to 93.858 (down 8.3% y-t-d). For the week on the upside, the Norwegian krone increased 2.1%, the Swiss franc 1.9%, the euro 1.7%, the New Zealand dollar 1.5%, the South Korean won 1.3%, the Japanese yen 1.3%, the Brazilian real 1.2%, the Australian dollar 1.1%, the South African rand 0.9%, the Canadian dollar 0.8%, the Swedish krona 0.8%, and the Singapore dollar 0.7%. On the downside, the British pound declined 0.8% and the Mexican peso fell 0.5%. The Chinese renminbi increased 0.13% versus the dollar this week (up 2.63% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.6% (down 6.9% y-t-d). Spot Gold gained 2.1% to $1,255 (up 8.9%). Silver rallied 3.3% to $16.457 (up 3%). Crude declined 77 cents to $45.77 (down 15%). Gasoline added 0.2% (down 6%), while Natural Gas slipped 0.3% (down 21%). Copper gained 1.2% (up 9%). Wheat fell 2.3% (up 22%). Corn gained 1.0% (up 12%).

Trump Administration Watch:

July 20 - Bloomberg (Greg Farrell and Christian Berthelsen): "The U.S. special counsel investigating possible ties between the Donald Trump campaign and Russia in last year's election is examining a broad range of transactions involving Trump's businesses as well as those of his associates, according to a person familiar with the probe... The investigation also has absorbed a money-laundering probe begun by federal prosecutors in New York into Trump's former campaign chairman Paul Manafort... The president told the New York Times on Wednesday that any digging into matters beyond Russia would be out of bounds. Trump's businesses have involved Russians for years, however, making the boundaries fuzzy."

July 19 - Reuters (Amanda Becker and Susan Cornwell): "As their seven-year effort to repeal and replace Obamacare derailed in the U.S. Senate, Republicans faced the prospect of doing the once unthinkable: working with Democrats to make fixes to former President Barack Obama's 2010 healthcare law. Bipartisan breakthroughs would likely come in the form of individual bills targeted at issues such as stabilizing insurance markets or lowering prescription drug costs. A wholesale overhaul of healthcare, senators say, is a bridge too far for the two parties, locked for years in an ideological battle on that issue and many others."

July 18 - Wall Street Journal (Richard Rubin and Kate Davidson): "House Republicans are unveiling an ambitious fiscal plan on Tuesday to rewrite the tax code, revamp medical malpractice laws, change federal employees' retirement benefits and partially repeal the Dodd-Frank financial regulations—all in one bill that wouldn't require any votes from Democrats to pass. The strategy, embedded in the House GOP fiscal 2018 budget, faces political and procedural obstacles, including many of the same ones that derailed the party's health-care bill in the Senate. For instance, Republicans will have a narrow margin in the Senate and will have to comply with budgetary rules that restrict which policies can be included."

July 19 - Bloomberg (Andrew Mayeda and Saleha Mohsin): "The brief honeymoon between the world's two largest economies appears to be over. Three months ago, President Donald Trump had warm words for his Chinese counterpart Xi Jinping after the two leaders bonded at Trump's Mar-a-Lago resort in Florida. Within weeks, the Trump administration was touting early wins in talks with China, including more access for U.S. beef and financial services as well as help in trying to rein in North Korea. Now, the two sides can barely agree how to describe their disagreements."

July 17 - Reuters (Roberta Rampton): "President Donald Trump promised... he would take more legal and regulatory steps during the next six months to protect American manufacturers, lashing out against trade deals and trade practices he said have hurt U.S. companies. Trump climbed into an American-made fire truck parked behind the White House, took a swing with a baseball bat in the Blue Room, and briefly donned a customized Stetson cowboy hat in front of cheering manufacturing company executives from all 50 states gathered to hear him praise their products. 'I want to make a pledge to each and every one of you: No longer are we going to allow other countries to break the rules, steal our jobs and drain our wealth,' Trump said."

July 17 - Politico (Nancy Cook and Andrew Restuccia): "Peter Navarro, one of the White House's top trade advisers, is widely viewed throughout the West Wing and Capitol Hill as a prickly personality with extreme policy ideas. But he has nonetheless emerged as an influential force in the White House who appeals to President Donald Trump's protectionist impulses... His clout, dating back to the campaign, has informed the president's thinking on everything from NAFTA to new lumber tariffs to potential trade restrictions on steel and aluminum. A former economics professor..., Navarro has a well-established reputation as an academic with hardline views on the threat that China poses to the U.S."

July 14 - Reuters (Howard Schneider): "The budget deficit for President Donald Trump's first two years in office will be nearly $250 billion higher than initially estimated due to a shortfall in tax collections and a mistake in projecting military healthcare costs, budget chief Mick Mulvaney reported... In a mid-year update to Congress, Mulvaney, director of the Office of Management and Budget, revised the estimates supplied in late May when the Trump administration submitted its first spending plan. Since then, Mulvaney said, the deficit projected for the current fiscal year has increased by $99 billion, or 16.4%, to $702 billion. For 2018, the deficit will be $149 billion more than first expected, increasing by 33% to $589 billion."

China Bubble Watch:

July 17 - Bloomberg: "China's economy grew faster than expected in the second quarter, putting the nation on track to meet its growth target this year and giving backing to officials in their campaign to corral oncoming financial risk. Data showing that the world's second-largest economy expanded 6.9% in the second quarter... was released hours after the Communist Party's People's Daily newspaper warned of potential 'gray rhinos' -- highly probable, high-impact threats that people should see coming, but often don't. In China's case it's the relentless buildup of risks caused by the debt-fueled investment that's contributing to growth, a development tackled by a major meeting of top leaders in Beijing at the weekend. Until now, regulators have homed in on financial-sector excesses; that probe is now widening to debt in the broader economy, a shift that prompted a sell-off in domestic stocks."

July 15 - New York Times (Keith Bradsher): "China's top leaders have gathered every five years since 1997 for a National Financial Work Conference. At past gatherings, they have created entire regulatory agencies and rearranged the rules for huge markets, almost overnight. So economists and regulators have been almost breathlessly speculating about this summer's work conference. Would the regulatory commissions overseeing the banking, securities and insurance industries be merged into the central bank? Would the legal definition of securities be broadened to shed some regulatory daylight on widespread activities like shadow banking, peer-to-peer online investment networks and off-balance-sheet wealth management products? But the actual results of the two-day work conference... were much more, well, modest, to put it politely. The biggest accomplishment of the conference appeared to be an announcement that a commission would be established under the auspices of the cabinet. The commission would meet regularly to discuss issues of financial stability."

July 18 - Bloomberg: "China's push to rein in financial risks is rippling through the economy, with regulators targeting everything from corporate acquisitions to returns on the savings products banks sell to yield-hungry consumers. On Tuesday, Bloomberg reported that the banking regulator had told lenders to lower interest rates on wealth-management products, a popular vehicle for domestic savers, after yields in the $4 trillion industry jumped in past months. Officials also extended their campaign against risky overseas acquisitions... The two developments dovetail with the theme of the past weekend's top-level financial conference in Beijing: As President Xi Jinping prepares for a twice-a-decade leadership transition this fall, authorities will take a dim view of anything that clashes with their efforts to contain risks in the financial sector. The central bank will take a lead role in administering a cabinet-level regulatory committee that was unveiled at the conference. 'The message from the leadership last weekend was very clear -- financial stability is now regarded as an important element of national security,' said Raymond Yeung, the Hong Kong-based chief economist at Australia & New Zealand Banking Group Ltd."

July 16 - Bloomberg: "For investors, possibly the most important thing that happened in China during the weekend was a closed-door conference on regulation that could set the scene for the financial sector's next five years. Many details remain unclear. The most concrete decision out of the meeting so far is President Xi Jinping's announcement of the creation of a cabinet-level committee to coordinate financial oversight - a task currently divided among four regulators including the People's Bank of China. The National Financial Work Conference convenes twice a decade, yet officials follow its edicts for years to come... 'Xi's decision to ramp up the regulatory powers of the PBOC and to establish a commission to oversee financial stability and development reflects the increasing financial sector vulnerabilities in the Chinese financial system,' said Rajiv Biswas, Asia-Pacific Chief Economist at IHS Markit... 'The Chinese government wants to prevent a financial crisis in China that could create shock waves in the domestic economy and create a rising risk of social unrest.'"

July 18 - Reuters (Adam Jourdan): "China's banking regulator will tighten control over risks in the financial markets, work more closely with the central bank and other regulators, and 'resolutely follow' the leadership of a newly-formed financial stability committee... The China Banking Regulatory Commission's comments come after President Xi Jinping said... that the central bank would take a bigger role with a Financial Stability and Development Committee to be set up under the State Council. Beijing sees financial security as a vital part of national security and has been looking to crack down on risky behavior in the financial markets, such as insurers selling high-risk products and companies taking on excessive debt. The China Banking Regulatory Commission (CBRC) said... it would strengthen controls to avoid financial risks, including those related to liquidity, credit and shadow banking. It said there was a 'step-by-step' plan to reduce 'chaos' in the market, without giving details."

July 15 - Financial Times (Tom Mitchell): "Xi Jinping instructed China's state-owned enterprises to lower their debt levels but stopped short of announcing the creation of a new financial super-regulator to rein in mounting risks in the sector, as some had expected. 'Deleveraging at SOEs is of the utmost importance,' the Chinese president said at this weekend's National Financial Work Conference, which convenes only once every five years. He added that the country's financial officials must also 'get a grip' on so-called 'zombie' enterprises kept alive by infusions of cheap credit. Vigilance against mounting financial risks has become the top policy priority for Mr Xi, who wants to ensure economic and social stability in the run-up to a Communist party congress that will mark the beginning of his second five-year term."

July 17 - Bloomberg: "China plans to cut off some funding for billionaire Wang Jianlin's Dalian Wanda Group Co. after concluding the conglomerate breached restrictions for overseas investments... The scrutiny could rein in Wang's ambitious attempt to create a global entertainment empire, including Hollywood production companies and a giant cinema chain he's built up through acquisitions from the U.S. to the U.K. Six investments... were found to have violations... The retaliatory measures will include banning banks from providing Wanda with financial support linked to these projects and barring the company from selling those assets to any local companies... The move is an unprecedented setback for the country's second-richest man, who has announced more than $20 billion of deals since the beginning of 2016. By targeting one of the nation's top businessmen, the government is escalating its broader crackdown on capital outflows and further chilling the prospects of overseas acquisitions..."

July 17 - Bloomberg: "Home prices surged in China's smaller cities even as property curbs dragged down values in Beijing and Shanghai in June, highlighting the challenge for authorities trying to limit bubble risks. New-home prices... rose month-on-month in 60 of 70 cities... That compared with 56 in May. In Beijing, prices fell 0.4%, the biggest decline in two years, and in Shanghai the decline was 0.2%. That compared with increases in some smaller cities, such as Bengbu in Anhui, where the gain was about 2%, translating into a 17% increase from a year earlier. Restrictions in bigger cities are spurring buying in smaller ones, underscoring the challenge China's leaders face as they seek to cool asset bubbles and contain risks ahead of a party reshuffle later this year."

July 18 - Financial Times (Gabriel Wildau): "China's small-cap stocks touched a two-and-a-half-year low on Tuesday, as investors lost their appetite for speculative bets on frothy sectors like technology. Launched in 2009, the Shenzhen-based ChiNext is modelled on Wall Street's Nasdaq as a home for start-up companies in emerging sectors. Information technology makes up almost 40% of ChiNext by market capitalisation, offering an attractive contrast with the Shanghai bourse, which is weighted towards old-economy stalwarts like banks, property developers and manufacturers."

Europe Watch:

July 17 - Reuters (Vikram Subhedar and Valentina Za): "Italian banks could take 10 years to reduce their level of non-performing loans (NPLs) to the European average, Morgan Stanley said..., adding that setting up a 'bad bank' could help. A recession that ended in 2014 saddled Italian banks with 349 billion euros ($400bn) in impaired debts, one third of Europe's total, while a clogged judicial system and sluggish economic growth made it tough to recover non-performing debts. But a series of state-led steps involving capital injections and a plan to bailout Monte dei Paschi, the world's oldest bank, have provided some relief."

Central Bank Watch:

July 20 - Wall Street Journal (Evelyn Cheng): "The European Central Bank delayed discussion over whether to wind down its giant bond-buying program, underlining a recent tone of caution from global policy makers as they fight weak inflation. ECB President Mario Draghi on Thursday welcomed a 'robust' economic recovery in the 19-nation eurozone, but warned that stronger growth wasn't yet translating into higher consumer prices. 'We need to be persistent and patient because we aren't there yet,' Mr. Draghi said... The bank will discuss the future of bond purchases, known as quantitative easing, in the fall, he said. 'Basically inflation is not where we want it to be and where it should be.' The ECB mirrored a message of caution emanating from other major central banks, which are struggling to understand why prices aren't picking up more rapidly despite robust economic growth."

July 19 - Financial Times (Mehreen Khan): "Investors are back in thrall to global central banks. A shift in communication from policymakers in the eurozone and UK has prompted money managers to raise concerns about the threat to bond markets from any central bank missteps. Just under half of investors surveyed by Bank of America Merrill Lynch (48%) think global monetary policy has become 'too stimulative' for a brightening world economy - the highest proportion since April 2011. The shift in investor sentiment towards low interest rates across the developed world comes after the European Central Bank has begun tentative shifts in its communication over its stimulus measures. European markets were roiled at the end of June after Mario Draghi, ECB president, hinted at a change at the central bank's bond buying scheme which has been running since March 2015."

Global Bubble Watch:

July 19 - Wall Street Journal (Steven Russolillo): "Stock markets go up and down: It is a fact of life. Except in 2017. Three major stock-market benchmarks in the U.S., Europe and Asia have avoided pullbacks this year, commonly defined as 5% declines from recent highs. Never in at least the past 30 years have all three indexes—the S&P 500, MSCI Europe and MSCI Asia-Pacific ex-Japan—gone a calendar year without falling at some point by at least 5%. In good years and bad, markets tend to fluctuate wildly, with stock indexes often falling by double-digit percentages before bouncing back. That hasn't been the case this year, another reflection of the historically low volatility that has gripped the world. The CBOE Volatility Index, or VIX, finished Friday at its lowest since 1993. Of course, 2017 is only a little more than half over... But the last time equity markets went this deep into a year without all three of those benchmark indexes suffering at least 5% pullbacks was nearly a quarter-century ago, in 1993..."

July 17 - CNBC (Fred Imbert): "BlackRock, the world's largest asset-management firm, said... its exchange-traded funds business had a record quarter. The company said net inflows into its iShares business totaled a record $74 billion in the second quarter, pushing the unit's assets above $1.5 trillion. 'Growth was balanced among iShares Core funds, precision exposures and financial instruments, demonstrating that ETFs are no longer used only as passive allocations, but increasingly by active investors to generate alpha in their portfolios,' CEO Larry Fink said... ETFs now accounts for approximately 27% of BlackRock's total assets under management of $5.689 trillion."

July 19 - Wall Street Journal (Stephanie Yang): "Oil prices are having a tough year. So are some commodity traders. Major commodity players such as banks and hedge funds have stumbled, as low volatility and a faltering oil recovery derailed returns during the first half. The S&P GSCI commodity index slumped 10.2% in that period, the worst first-half performance since 2010. Part of the troubles come from a lack of volatility this year that has made trading more challenging, traders said. Range-bound markets offer little opportunity for investors and traders to profit from major price moves and arbitrage divergences."

July 17 - Bloomberg (Josh Wingrove and Erik Hertzberg): "Canada's hottest housing market is definitely cooling down. Total home sales in Greater Toronto dropped to 5,977 in June, the lowest level since 2010 and down 15.1% from the month prior... Average prices are down 14.2% since March -- the fastest 3-month decline in the history of the data back to 1988 -- while the ratio of sales to new listings sits at its lowest level since 2009. The June data comes after a series of measures by policy makers to tighten access to the market -- and before the Bank of Canada hiked its benchmark interest rate last week, the first increase since 2010..."

July 17 - Reuters (Andrea Hopkins): "Resales of Canadian homes fell 6.7% in June from May, the largest monthly drop since 2010 and the third straight monthly decline as Toronto sales plunged... The industry group said actual sales... were down 11.4% from June 2016, while home prices were up 15.8% from a year earlier..."

July 20 - CNBC (Evelyn Cheng): "Just as many on Wall Street are warming up to bitcoin, one of the lone financial analysts who forecast a surge when the digital currency was just six cents now has an extremely negative view. 'A bearish trifecta — the Elliott wave pattern, optimistic psychology and even fundamentals in the form of blockchain bottlenecks — will lead to the collapse of today's crypto-mania,' analyst Elliott Prechter wrote in the July 13 edition of The Elliott Wave Theorist... The price activity and manic sentiment that led to present prices have dwarfed even the Tulip mania of nearly 400 years ago... The success of Bitcoin has spawned 800-plus clones (alt-coins) and counting, most of which are high-tech, pump-and-dump schemes.' 'Nevertheless, investors have eagerly bid them up,' Prechter added."

Fixed Income Bubble Watch:

July 18 - Financial Times (Peter Wells and Jennifer Hughes): "Japanese companies have tapped bond markets for record amounts this year, taking advantage of investors' continued demand for yield amid a wider boom in the region's dollar debt markets. Companies have sold $195.3bn worth of yen and dollar-denominated bonds so far this year, according to Dealogic. That puts the market 10% ahead of this point in 2016, and surpasses the previous year-to-date record of $187bn set in 2012. The surge has been driven by a rise in sales of dollar-denominated bonds, which at $59.8bn are running at almost twice their level of five years ago — a trend echoed across the region's markets."

U.S. Bubble Watch:

July 18 - Wall Street Journal (Laura Kusisto): "Foreigners are buying U.S. homes at a record rate, helping push up prices in coveted coastal cities already squeezed by supply shortages. In all, foreign buyers and recent immigrants purchased $153 billion of residential property in the U.S. in the year ended in March, nearly a 50% jump from a year earlier, according to a National Association of Realtors report... That surpassed the previous record for foreign investment set in 2015, when foreigners purchased nearly $104 billion of U.S. residential property. The dramatic increase was unexpected given the strong U.S. dollar, turmoil in the political arena and restrictions on Chinese buyers looking to take money out of the country..."

July 18 - Reuters (Adam Jourdan and Shu Zhang): "Foreign purchases of U.S. residential real estate surged to the highest level ever in terms of number of homes sold and dollar volume. Foreign buyers closed on $153 billion worth of U.S. residential properties between April 2016 and March 2017, a 49% jump from the period a year earlier... Foreign sales accounted for 10% of all existing home sales by dollar volume and 5% by number of properties. In total, foreign buyers purchased 284,455 homes, up 32% from the previous year... Chinese buyers led the pack for the fourth straight year..."

July 17 - New York Times (Adam Nagourney and Conor Dougherty): "A full-fledged housing crisis has gripped California, marked by a severe lack of affordable homes and apartments for middle-class families. The median cost of a home here is now a staggering $500,000, twice the national cost. Homelessness is surging across the state. In Los Angeles, booming with construction and signs of prosperity, some people have given up on finding a place and have moved into vans with makeshift kitchens, hidden away in quiet neighborhoods. In Silicon Valley — an international symbol of wealth and technology — lines of parked recreational vehicles are a daily testimony to the challenges of finding an affordable place to call home."

July 19 - Bloomberg (Michelle Jamrisko): "Residential construction ended the second quarter on a stronger note as groundbreaking on new homes rebounded in June to the fastest annualized pace in four months... Residential starts increased 8.3% to a 1.22 million annualized rate (est. 1.16 million)."

July 17 - Bloomberg (Gabrielle Coppola): "It's classic subprime: hasty loans, rapid defaults, and, at times, outright fraud. Only this isn't the U.S. housing market circa 2007. It's the U.S. auto industry circa 2017. A decade after the mortgage debacle, the financial industry has embraced another type of subprime debt: auto loans. And, like last time, the risks are spreading as they're bundled into securities for investors worldwide... In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion were, topping average pre-crisis levels, according to Wells Fargo & Co."

July 17 - Financial Times (Joe Rennison): "A measure of loan delinquencies in bonds backed by US commercial mortgages rose by the most since July 2011 last month, according to Fitch Ratings. Loan delinquencies within an index maintained by the ratings agency moved 22 bps higher to 3.72% in June from 3.5% in May, as $1.24bn of underlying debt turned sour."

July 18 - Reuters (Dan Freed and David Henry): "Big U.S. banks are starting to pay corporations, financial firms and rich people more to hold on to their deposits, but ordinary consumers will have to wait longer to see more than a few pennies for every $100 they stash in their accounts. Banks including JPMorgan..., Bank of America Corp, Wells Fargo & Co and PNC Financial Services Group lifted rates for sophisticated customers' deposits during the second quarter, executives said... The increases followed the Federal Reserve's decision in June to lift its key interest rate target for the third time in six months. Main Street depositors are not yet seeing the same benefits..."

July 17 - New York Times (Stacy Cowley and Jessica Silver-Greenberg): "Tens of thousands of people who took out private loans to pay for college but have not been able to keep up payments may get their debts wiped away because critical paperwork is missing. The troubled loans, which total at least $5 billion, are at the center of a protracted legal dispute between the student borrowers and a group of creditors who have aggressively pursued them in court after they fell behind on payments. Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing... Some of the problems playing out now in the $108 billion private student loan market are reminiscent of those that arose from the subprime mortgage crisis a decade ago..."

July 18 - Bloomberg (Camila Russo): "Initial coin offerings, a means of crowdfunding for blockchain-technology companies, have caught so much attention that even the co-founder of the ethereum network, where many of these digital coins are built, says it's time for things to cool down in a big way. 'People say ICOs are great for ethereum because, look at the price, but it's a ticking time-bomb,' Charles Hoskinson, who helped develop ethereum, said... 'There's an over-tokenization of things as companies are issuing tokens when the same tasks can be achieved with existing blockchains. People are blinded by fast and easy money.'"

Japan Watch:

July 20 - Bloomberg (Toru Fujioka): "The Bank of Japan kept its monetary stimulus program unchanged even as it pushed back the projected timing for reaching 2% inflation for a sixth time. The downgraded price outlook will raise more questions about the sustainability of the BOJ's stimulus at time when other major central banks are turning toward normalizing their monetary policy... By again delaying the timing for hitting its price goal, the BOJ acknowledged the need to continue easing for at least several more years..."

July 17 - Bloomberg (Masahiro Hidaka and Toru Fujioka): "Some officials at the Bank of Japan are increasingly concerned about the sustainability of the BOJ's purchases of exchange-traded funds, according to people familiar with discussions... But the chances of any change at this week's policy meeting are low, they said... Concerns include the risk that the central bank could end up owning such large amounts of the free-floating shares of some listed companies in the Nikkei-225 Stock Average that it could seriously distort the market... Still, they say it's unlikely the matter will be discussed in detail at the two-day policy meeting ending July 20."

EM Bubble Watch:

July 16 - Wall Street Journal (Joe Leahy and Andres Schipani): "Michel Temer faces the fight of his political career as Brazil's Congress considers whether the president should be tried for corruption. Mr Temer was indicted in the Supreme Court last month by the independent public prosecutors' office after he was caught on tape allegedly discussing bribes with Joesley Batista, a former chairman of JBS, the world's largest meatpacker. Brazil's constitution offers special protections for politicians, making it hard to bring any one of them down... However, it is not impossible, as Dilma Rousseff, the leftwing former president, found when she was impeached last year for manipulating the budget — a move that brought Mr Temer to power. Congress is set to decide on August 2."

Leveraged Speculation Watch:

July 18 - Bloomberg (Dakin Campbell): "Lloyd Blankfein's roots are letting him down. Goldman Sachs Group Inc. traders turned in their worst first-half performance since Lloyd Blankfein rose from that business to become chief executive officer in 2006. Revenue from trading stocks and bonds in the first six months of 2017 tumbled 10%, dropping to the lowest level since before Blankfein took over from Hank Paulson 11 years ago. Second-quarter revenue from the fixed-income unit plunged 40%."

July 16 - Wall Street Journal (Ryan Dezember): "A $2 billion private-equity fund that borrowed heavily to buy oil and gas wells before energy prices plunged is now worth essentially nothing, an unusual debacle that is wiping out investments by major pensions, endowments and charitable foundations. EnerVest Ltd., a Houston private-equity firm that focuses on energy investments, manages the fund. The firm raised and started investing money in 2013, when oil was trading at more than double the current price of about $45 a barrel. But the fund added $1.3 billion of borrowed money to boost its buying power. That later caused it trouble when oil prices tumbled. Now the fund's lenders... are negotiating to take control of the fund's assets to satisfy its debt..."

Geopolitical Watch:

July 17 - Bloomberg (Selcan Hacaoglu, Dana Khraiche, and Glen Carey): "Turkey is building up its military presence in Qatar, an adviser to President Recep Tayyip Erdogan said, in defiance of a Saudi-led bloc's demand that the Turkish military pull out of the emirate. 'Turkey's steady buildup continues there, protecting the border and the security of the Qatari government,' adviser Ilnur Cevik said... The growing Turkish military footprint further entrenches positions on either side of the Saudi-Qatar divide that broke open last month."


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