Please join Doug Noland and David McAlvany this Thursday, April 22nd, at 4:00 pm Eastern/ 2:00 pm Mountain time for the Tactical Short Q1 recap conference call, “Contemplating an Inflection Point.” Click here to register.

 

New data this week confirm the “global government finance Bubble” is alive and unwell. In the past, a $660 billion U.S. federal deficit over the course of a year would have been concerning. In today’s crazy world, it’s accomplished in a single month. March’s shortfall compares to the $119 billion deficit posted in March 2020. Last month pushed the deficit for the first-half of the fiscal year to a frightful $1.71 TN.

For the month, spending of $972 billion was up from the year ago $356 billion, while receipts increased to $268 billion from $237 billion. Washington borrowed 70 cents of every dollar it spent last month. About 50% of the $3.41 TN first-half expenditures were debt-financed. Worse yet, our federal government is on track for back-to-back years of $3.0 TN plus annual deficits.

The battle of rival global super-borrowers: China’s Aggregate Financing (their measure of broad system credit) jumped $512 billion during March, pushing Q1 growth to $1.569 TN. Over the past 15 months, China’s Aggregate Financing expanded an unprecedented $6.9 TN – or 17%. For perspective, this was 50% greater than the preceding 15-month expansion, a period of exceptionally strong Credit growth in its own right.

China’s Bank Loans expanded a stronger-than-expected $416 billion in March and $1.17 TN for the first quarter. First quarter lending was 8% ahead of booming Q1 2020, and 32% above growth from Q1 2019. China’s total Bank Assets ended 2020 at $49 TN, having expanded $7.9 TN, or 19%, over two years, and $18.5 TN, or 60%, in five years. Amazingly, Bank Assets have ballooned 10-fold since 2005.

China’s Consumer Loans gained $176 billion in March, 16% ahead of March 2020 growth, and second only to January’s $195 billion. At $393 billion, record Q1 Consumer Loan growth was more than double Q1 2020’s $185 billion. Corporate Loans gained $246 billion (down 22% from March ’20), with Q1 growth of $821 billion down 11% y-o-y. Corporate Bonds expanded $132 billion during the quarter, about 50% below record Q1 2020.

With system Credit growth in overdrive, a booming Chinese economic recovery is neither a surprise nor cause for celebration. One could argue March’s 34.2% y-o-y surge in Retail Sales, 18.5% annualized Q1 GDP growth, and the strongest monthly apartment price inflation (0.41%) in seven months point to overheating.

With recovery having attained momentum, Beijing has turned more assertive in signaling tougher oversight and a tightening of Credit conditions. Global markets have been dismissive of the Chinese tightening narrative, convinced a wary Beijing will retreat at the first inkling of systemic stress. According to IIF data, Chinese debt ended 2020 at a record 329% of GDP. A spectacular 15-month $7 TN Credit splurge has temporarily masked festering Credit and structural issues. The upshot is a deranged Credit system increasingly at risk of market instability, blowups and crises of confidence.

China Huarong International Holdings’ Credit default swap (CDS) prices began April at 147 bps and closed last Friday at 436 bps. In Thursday trading, this CDS price spiked to 1,466. Some offshore Huarong bond yields spiked to nearly 100%, signaling market fear of imminent default. Crisis management operations were at full-throttle Friday. Huarong wired funds for a bond payment due on Sunday. Chinese regulators, staying mum during the week, Friday announced Huarong’s operations and liquidity management were functioning normally, while requesting banks not withhold lending to the company. Huarong CDS prices ended the week near 1,000, down from Thursday’s panic but still indicating alarm.

At this point, it’s easy to dismiss Huarong as just another troubled Chinese institution that will be resolved well before it becomes a systemic issue – providing further proof that the great Beijing meritocracy has everything well under control. I would caution against this Halcyon interpretation. This week’s Huarong eruption marks a significant escalation in China’s unfolding Credit drama.

Huarong is one of four major “asset management companies” (AMCs) created in the late-nineties to acquire non-performing loans as part of Beijing’s plan to restructure its major (troubled) banking institutions. As a quasi-government institution, Huarong has enjoyed unlimited access to cheap bank and market finance.

April 14 – Dow Jones (Mike Bird): “Whenever a Chinese bond market panic begins, similar arguments are rehashed: The blowup is idiosyncratic, deleveraging has generally been going in the right direction and increasing openness to foreign capital presents opportunities for foreign investors. But this time around, the upheaval is particularly large and sudden. China Huarong Asset Management failed to publish its 2020 earnings in late March, saying it needed more time to complete a transaction. The company is a behemoth, with a total debt load of $162.34 billion as of the middle of last year, according to Capital IQ. The situation also has a certain undeniable irony: The firm began life as one of four large bad banks designed to clean up the country’s financial sector in the late 1990s. It has since become a broader financial holding company.”

Best I can tell, the various Huarong entities have assets of about $260 billion, with total debt between $162 billion and $209 billion (per Nikkei Asia’s Narayanan Somasundaram). Huarong has $44 billion of outstanding bonds, of which about half were issued off-shore (foreign currency denominated) and half due within a year. Huarong’s former CEO was executed in January for, among other things, accepting $277 million in bribes. With its implicit backing from Beijing (and associated top bond ratings), Huarong borrowed crazily and expanded into myriad businesses. It appears the company has struggled with most endeavors, including its core debt restructuring operations. The company recently delayed financial reporting until the completion of its own restructuring.

Beijing is mighty perturbed with the whole Huarong fiasco. Beyond its now exterminated ex-CEO, Chinese officials point blame to bond investors having thrown money at Huarong without regard to shady management or a reckless business strategy. This is a widespread issue. With Huarong – and the system more generally – Beijing has a newfound determination to push back against moral hazard risk.

April 14 – Bloomberg (Richard Frost): “Market turmoil surrounding China Huarong Asset Management Co. intensified on Wednesday as investors interpreted government silence on the embattled firm as a lack of official support. The Communist Party has yet to comment on the distressed-debt manager, which is controlled by the finance ministry, even as concern about a potential restructuring sent its dollar bonds plunging to distressed levels. China’s State Council, the country’s top administrative body, instead reinforced the idea that struggling state-backed companies shouldn’t rely on government support. In a statement late Tuesday, the State Council urged local government financing vehicles to restructure or enter liquidation if they can’t repay their debts. While it’s unclear if the comments were meant to send a veiled message about China Huarong, they added to the perception that the government is taking a tough stance on reining in risks to the financial system.”

I’ll assume at least PBOC officials are familiar with the U.S. GSE debacle, where implicit government guarantees were fundamental to a prolonged period of ill-advised leveraging, worsening market distortions, Credit and asset Bubbles, economic maladjustment and, in the end, the worst U.S. financial and economic crises in decades.

Moral hazard has traditionally played an integral role in financial booms. It became momentous during this age of unfettered market-based finance. Beijing made a catastrophic mistake in waiting this long to address implied Beijing guarantees for the AMCs, the banking system, and the entire Chinese Credit apparatus more generally.

April 13 – Bloomberg: “Chinese authorities want failing local government financing vehicles to restructure or go bust if they can’t repay their debts, suggesting the state-linked sector is closer to seeing its first defaults on publicly traded bonds. The LGFVs should ‘implement bankruptcy proceedings or liquidation in accordance with the law if they lose their ability to pay,’ according to… the State Council — or China’s cabinet… Local governments should not rely on LGFVs to finance their activities, the statement said, and LGFVs are banned from accepting documents offering guarantees from local officials or departments. The statement may further undermine investor faith in implicit support for state-backed companies as doubts over bad-debt manager China Huarong Asset Management Co.’s future continue to roil credit markets.”

How serious is Beijing about reining in government guarantees and moral hazard more generally? Clearly, they belatedly recognize some of the dangers associated with market distortions, resource misallocation and structural impairment. They’re surely also quite apprehensive with the scope of central government obligations that will be required when a deeply impaired financial system forces Beijing into massive bailouts and recapitalizations.

An analyst appearing on Bloomberg Asia Television stated Chinese banks have lent “Trillions” to the AMCs, essentially providing the funds necessary to offload the banks’ non-performing assets. This conveniently gets sour loans off the banking system’s books, though problems are allowed to fester on the AMC’s balance sheets (reminiscent of how the U.S. savings & loan industry mushroomed from a few billion dollar problem to a several hundred billion fiasco).

The Bloomberg guest analyst suggested actual Chinese bank non-performing assets could be 15% to 20% of assets (versus about 2% reported) – which implies a problem approaching $10 TN. And with Bank Loans expanding an unprecedented $4.2 TN over the past 15 months, it’s a fair bet the problem loan issue is poised to get a lot worse. It’s worth repeating the “Terminal Phase” Bubble Dynamic, whereby a rapid rise of Credit of deteriorating quality ensures a parabolic surge in systemic risk.

Such a spectacular Credit boom is vulnerable to waning growth momentum. Arguably, the ongoing wild Credit inflation rests on the market premise that Beijing support underpins the entire system. As such, China’s now colossal shadowy Credit apparatus collapses without confidence in Beijing’s implicit and explicit backing.

The entire edifice has become “too big to fail” – which markets have viewed in nothing but the most positive light. There’s troubled Huarong and the other vulnerable state-owned AMCs. The solvency of China’s fragile multi-Trillion “small” banking sector has been an issue. Solvency is also a concern for a few Trillion dollars of local government financing vehicles (LGFV) and other local government debt. To be sure, a tremendous amount is riding on Beijing’s shoulders.

Many believe the “great financial crisis” could have been avoided if only Lehman Brothers had been bailed out. Ben Bernanke and others are convinced the Great Depression was the result of a negligent Federal Reserve failing to print sufficient money to recapitalize the banking system. Dr. Bernanke’s flawed doctrine unleashed the greatest runaway global monetary inflation in history.

Especially after 2006 “Terminal Phase” excess (including $1 TN of subprime mortgage derivatives), there were literally Trillions of debt securities whose market prices had completely detached from underlying fundamentals and values. Crisis was unavoidable. A Lehman bailout would have only prolonged “Terminal” excess.

A post-1929 crash bank recapitalization would not have averted the Great Depression. An historic decade-plus Credit boom had created deep financial and economic structural maladjustment. Enormous amounts of speculative leverage had accumulated over a prolonged cycle, with a parabolic rise following Benjamin Strong’s infamous 1927 stock market “coup de whisky.” The critical policy blunders were made accommodating the boom.

Ebullient markets are today much too complacent. Credit crises tend to advance at a glacial pace – until something suddenly triggers an avalanche. China’s resurgent boom applies added pressure on Beijing. Chinese officials would prefer to see some modicum of market discipline in China’s $18 TN bond market, along with a slowdown in lending.

Reminiscent of the Fed in the late-twenties, Beijing would today hope to promote Credit flows to productive uses, while restraining non-productive and speculative Credit. But when Credit expands at such a feverish pace late in the boom cycle, resulting Monetary Disorder ensures liquidity flows in overabundance to inflating speculative Bubbles and uneconomic endeavors. The system turns dysfunctional, and it becomes impossible to effectively manage the confluence of destabilizing financial flows and the system’s progressive addiction to ever-increasing quantities of Credit.

Chinese Credit has been growing at a blistering pace, and Beijing has so far done little more than talk of cautious tightening measures. Yet we’re already witnessing a major blow-up. It’s worth noting CDS prices for the other AMC’s jumped this week. China Orient Asset Management CDS surged 20 to (at least a one-year high) 136 bps, with a two-week jump of 36 bps. According to ANZ research, China’s high-yield corporate spreads widened 44 bps this week, with China investment-grade 29 bps wider. Asia’s high-yield widened 26 bps, with investment-grade 16 bps wider. Interestingly, even China’s sovereign CDS traded above 45 mid-week, up from 38 to begin the week to the high since October.

This is how I would expect a Credit crisis to commence in China. Focus turns to implicit Beijing guarantees. Marginal borrowers lose access to cheap borrowings. Debt at the “periphery” begins to lose its perceived moneyness. Foreign investors in the crosshairs. Risk aversion and de-leveraging begin to gain some momentum. Financial conditions tighten.

All eyes on the Haurong and the AMCs. But pay attention as well to the small banking sector and the local government financing vehicles. But these are likely just the tip of the iceberg. Many things have surprised me over the course of this extraordinary cycle. That confidence has been sustained in Chinese Credit in the face of historic Bubble excess is at the top of the list.

For the Week:

The S&P500 gained 1.4% (up 11.4% y-t-d), and the Dow rose 1.2% (up 11.7%). The Utilities surged 3.7% (up 7.0%). The Banks slipped 0.2% (up 25.6%), while the Broker/Dealers gained 1.0% (up 22.5%). The Transports were unchanged (up 19.3%). The S&P 400 Midcaps jumped 1.9% (up 18.0%), and the small cap Russell 2000 rallied 0.9% (up 14.6%). The Nasdaq100 advanced 1.4% (up 9.0%). The Semiconductors declined 1.3% (up 16.4%). The Biotechs rallied 2.3% (down 3.3%). With bullion surging $33, the HUI gold index jumped 3.2% (down 2.5%).

Three-month Treasury bill rates ended the week at 0.01%. Two-year government yields added a basis point to 0.16% (up 4bps y-t-d). Five-year T-note yields declined three bps to 0.83% (up 47bps). Ten-year Treasury yields dropped eight bps to 1.58% (up 67bps). Long bond yields fell six bps to 2.27% (up 62bps). Benchmark Fannie Mae MBS yields sank eight bps to 1.86% (up 52bps).

Greek 10-year yields increased three bps to 0.90% (up 28bps y-t-d). Ten-year Portuguese yields surged 12 bps to 0.40% (up 37bps). Italian 10-year yields added two bps to 0.75% (up 20bps). Spain’s 10-year yields rose two bps to 0.39% (up 35bps). German bund yields gained four bps to negative 0.26% (up 31bps). French yields rose three bps to negative 0.01% (up 33bps). The French to German 10-year bond spread narrowed one to 25 bps. U.K. 10-year gilt yields slipped a basis point to 0.76% (up 57bps). U.K.’s FTSE equities index gained 1.5% (up 8.7% y-t-d).

Japan’s Nikkei Equities Index declined 0.3% (up 8.2% y-t-d). Japanese 10-year “JGB” yields declined two bps to 0.09% (up 7bps y-t-d). France’s CAC40 rose 1.9% (up 13.3%). The German DAX equities index gained 1.5% (up 12.7%). Spain’s IBEX 35 equities index increased 0.6% (up 6.7%). Italy’s FTSE MIB index rose 1.3% (up 11.3%). EM equities were mostly higher. Brazil’s Bovespa index jumped 2.7% (up 1.8%), and Mexico’s Bolsa rose 2.2% (up 10.6%). South Korea’s Kospi index gained 2.1% (up 11.3%). India’s Sensex equities index retreated 1.5% (up 2.3%). China’s Shanghai Exchange declined 0.7% (down 1.3%). Turkey’s Borsa Istanbul National 100 index rallied 1.1% (down 4.6%). Russia’s MICEX equities index recovered 3.2% (up 9.4%).

Investment-grade bond funds saw inflows of $6.434 billion, while junk bond funds posted outflows of $132 million (from Lipper).

Federal Reserve Credit last week expanded $35.4bn to $7.692 TN. Over the past 83 weeks, Fed Credit expanded $3.930 TN, or 105%. Fed Credit inflated $4.881 Trillion, or 174%, over the past 440 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $5.1bn to $3.554 TN. “Custody holdings” were up $236bn, or 7.1%, y-o-y.

Total money market fund assets fell $30.1bn to $4.454 TN. Total money funds dropped $70bn y-o-y, or 1.5%.

Total Commercial Paper jumped $35.2bn to an 11-year high $1.207 TN. CP was up $149bn, or 14.0%, year-over-year.

Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.04% (down 27bps y-o-y). Fifteen-year rates fell seven bps to 2.35% (down 45bps). Five-year hybrid ARM rates sank 12 bps to 2.80% (down 54bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 3.06% (down 63bps).

Currency Watch:

For the week, the U.S. dollar index declined 0.7% to 91.556 (up 1.8% y-t-d). For the week on the upside, the South African rand increased 2.1%, the Brazilian real 1.7%, the New Zealand dollar 1.6%, the Norwegian krone 1.5%, the Australian dollar 1.5%, the Swedish krona 1.2%, the Mexican peso 1.2%, the British pound 0.9%, the Japanese yen 0.8%, the euro 0.7%, the Singapore dollar 0.6%, the Swiss franc 0.5%, the South Korean won 0.4% and the Canadian dollar 0.2%. The Chinese renminbi increased 0.49% versus the dollar this week (up 0.1% y-t-d).

Commodities Watch:

April 11 – Bloomberg (Shruti Srivastava and Swansy Afonso): “Gold imports by India surged in March to the highest monthly total in nearly two years as a slump in prices stoked demand for jewelry during the ongoing wedding season. Overseas purchases increased more than sevenfold to 98.6 tons last month from 13 tons a year earlier… That would be the highest since May 2019.”

The Bloomberg Commodities Index jumped 3.0% (up 10.9% y-t-d). Spot Gold roses 1.9% to $1,777 (down 6.4%). Silver jumped 2.8% to $25.97 (down 1.6%). WTI crude rallied $3.81 to $63.13 (up 30%). Gasoline surged 4.0% (up 45%), and Natural Gas jumped 6.1% (up 6%). Copper advanced 3.2% (up 18%). Wheat rose 2.5% (up 2%). Corn slipped 0.6% (up 19%). Bitcoin jumped $3,672, or 6.3%, this week to $62,005 (up 113%).

Coronavirus Watch:

April 13 – CNBC (Nate Rattner): “As U.S. Covid cases rise, the country is also administering vaccine shots at the swiftest pace ever. Cases are on the rise in 27 states, with Michigan continuing to lead the nation in daily new infections per capita. Following more than 70,000 coronavirus cases reported on Monday, the seven-day average of daily new cases in the U.S. is 68,960, according to data from Johns Hopkins University. That figure is up 7% from one week ago.”

April 13 – Associated Press (Zeke Miller, Lauran Neergaard and Matthew Perrone): “The U.S…. recommended a ‘pause’ in use of the single-dose Johnson & Johnson COVID-19 vaccine to investigate reports of rare but potentially dangerous blood clots, setting off a chain reaction worldwide and dealing a setback to the global vaccination campaign.”

April 12 – CNBC (Berkeley Lovelace Jr.): “The World Health Organization said… the trajectory of the coronavirus pandemic is now ‘growing exponentially,’ with more than 4.4 million new Covid-19 cases reported over the last week. Maria Van Kerkhove, the agency’s technical lead for Covid-19, said ‘we’re in a critical point of the pandemic… This is not the situation we want to be in 16 months into a pandemic where we have proven control measures. It is the time right now where everyone has to take stock and have a reality check of what we need to be doing,’ she said…”

April 14 – Reuters (Shilpa Jamkhandikar and Sumit Khanna): “India’s new coronavirus infections hit a record level… with Mumbai set to be locked down at midnight, but hundreds of thousands of pilgrims still thronged to a religious festival in the north of the country. The country reported 184,372 cases in the last 24 hours, health ministry data showed, taking total infections to 13.9 million.”

April 13 – CNBC (Berkeley Lovelace Jr.): “Moderna’s Covid-19 vaccine was more than 90% effective at protecting against Covid and more than 95% effective against severe disease up to six months after the second dose, the company said…”

April 10 – Reuters (Maayan Lubell): “The coronavirus variant discovered in South Africa may evade the protection provided by Pfizer/BioNTech’s COVID-19 vaccine to some extent, a real-world data study in Israel found, though its prevalence in the country is very low and the research has not been peer reviewed.”

Market Mania Watch:

April 15 – Financial Times (John Plender): “There are no two ways about it, argues Jeremy Grantham: ‘The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble’. The co-founder of Boston-based-based fund manager GMO says: ‘Featuring extreme overvaluation, explosive price increases, frenzied issuance and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.’ Coming from a man who was famously prescient about the bursting of bubbles in 2000 and 2008, this red alert about investment risk, issued in January, merits attention.”

April 15 – Financial Times (Chris Flood): “A trillion dollars in new cash has surged into exchange traded funds over the past 12 months… Global net investor inflows into exchange traded funds and products reached $359.2bn in the first three months of 2021, the busiest quarter on record, according to… ETFGI. That lifted net global ETF inflows since the end of March 2020 to just over $1tn. ‘We have never previously seen ETF inflows reach $1tn in a twelve-month period. More investors are using ETFs to put their money to work in equity markets as the increasing pace of coronavirus vaccination programmes and continuing stimulus initiatives have led to a welcome improvement in the outlook for the global economy,’ said Deborah Fuhr, the founder of ETFGI.”

April 13 – Bloomberg (Claire Ballentine): “After one of the strangest years ever, ETF debuts are once again ramping up to capture cash flooding the industry. About 100 new ETFs have debuted so far in 2021, the best start to a year in at least a decade… That compares to 54 by this time in 2020 and 45 in 2019. As stocks continue to break records and the economic recovery in the U.S. heats up, investors are pouring money into ETFs — which is enticing issuers in the $6 trillion industry to release new strategies that can gobble up the cash. ‘ETFs continue to attract more assets with big inflows this year, and big inflows attract reasons to list more ETFs,’ said Christian Fromhertz, chief executive officer of Tribeca Trade Group. In the first quarter alone, U.S. listed ETFs attracted more than $243 billion total, the biggest haul on record. More than $200 billion poured into equity funds alone.”

April 15 – Financial Times (Michael Mackenzie): “BlackRock’s assets under management ballooned to a record $9tn in the first quarter, boosted by record fund inflows across its investment platform, led by fixed income.”

April 12 – Bloomberg (Vildana Hajric and Lu Wang): “It’s a bubble, according to a survey of retail stock investors. And they don’t want to miss it. An E*Trade Financial survey found that roughly three-quarters of retail investors believe the market is ‘fully or somewhat’ in a bubble, a 3 percentage-point increase from the previous quarterly poll. At the same time, bullish sentiment has increased, rising to pre-pandemic levels at 61%. ‘Optimism grew as the market hit new all-time highs, vaccines increased, stimulus measures continued, and earnings estimates are high,’ said Mike Loewengart, managing director of investment strategy…”

April 14 – Bloomberg (Crystal Tse and Katie Roof): “Cryptocurrency exchange Coinbase Global Inc. reached a valuation of $105 billion in its trading debut Wednesday, as Bitcoin hit a record high and investors bet on digital currencies going mainstream. The company’s shares climbed as high as $405.05… to reach the $105 billion valuation…”

April 16 – Bloomberg (Joanna Ossinger and Vildana Hajric): “While Coinbase Global Inc. captured the headlines with its market debut, the frenzy around digital tokens is taking its zaniest turn yet in the price of a token created as a joke. Dogecoin, boosted by the likes of Elon Musk and Mark Cuban, rallied roughly 180% Friday, according to CoinMarketCap.com, reaching a market value of more than $48 billion. It’s now up 18,000% from a year ago, when it traded for $0.002… Doge’s surge is part of a rise in altcoins, a term for all the digital tokens that have sprung up in imitation of Bitcoin. Like most of them, its use case is limited, making it a tool for speculators and raising concern that a bubble is inflating in a crypto world now worth more than $2.25 trillion.”

April 13 – Bloomberg (Ben Bain, Heather Perlberg, Gillian Tan and Crystal Tse): “U.S. regulators are throwing another wrench into Wall Street’s SPAC machine by cracking down on how accounting rules apply to a key element of blank-check companies. The Securities and Exchange Commission is setting forth new guidance that warrants, which are issued to early investors in the deals, might not be considered equity instruments and may instead be liabilities for accounting purposes. The move… threatens to disrupt filings for new special purpose acquisition companies until the issue is resolved. The accounting considerations mark the latest effort by the SEC to clamp down on the white-hot SPAC market.”

Market Instability Watch:

April 15 – Bloomberg (Kyungji Cho): “The recent stumble by a major Chinese distressed debt manager continued to drag down dollar bonds from other borrowers in the country Thursday. China Huarong Asset Management Co., which has some $22 billion in dollar notes, slid further as uncertainty about its financial health deepened. The firm’s perpetual debt fall the most, with a 2.875% note slumping 8.6 cents on the dollar to about 48.3 cents… Average spreads on all investment-grade Chinese dollar securities widened about 6 bps… That led to premiums on Asian notes — many of which are from China — blowing out about 5-6 bps in a ninth day of increases, the longest streak since March 2020… The moves have pushed the extra spread on Asian over U.S. notes to the highest since 2014.”

April 13 – Bloomberg (Kyungji Cho and Ameya Karve): “Credit markets in Asia have been shaken by a selloff in one of China’s largest bad-debt managers, raising concern that other heavily leveraged borrowers may also stumble. The Markit iTraxx Asia ex-Japan credit-default swap index of investment-grade bonds widened about 2 bps, after recent reports of a looming restructuring at bad-debt manager China Huarong Asset Management Co., traders said. The gauge is set for a seventh day of increases, the longest streak since December 2018, and is at its highest since October last year…”

April 13 – Bloomberg (Cathy Chan and Steven Arons): “The collapse of Archegos…, an investment firm that few even on Wall Street had heard of until it imploded last month, is changing a lucrative, decades-old part of global banking. Nomura… and Credit Suisse… have started to curb financing in the business with hedge funds and family offices. European regulators are looking at risks banks are taking when lending to such clients, while in the U.S., authorities started a preliminary probe into the debacle. Together, steps taken from Washington to Zurich and Tokyo could portend some of the biggest changes since the financial crisis to a cornerstone of global banking known as prime brokerage.”

April 12 – Financial Times (Joe Rennison, Eric Platt, Colby Smith and Philip Stafford): “Rules written in the aftermath of the 2008 financial crisis to limit the potential for a blow-up like Archegos Capital have still not been fully implemented, throwing a spotlight on regulators in a fiasco that has shocked Wall Street and raised questions on Capitol Hill. Crucial parts of the 2010 Dodd-Frank Act, an 848-page law that was meant to shore up big banks and temper excessive risk taking in the derivatives market, have been delayed again and again. Critics are now arguing that had regulators implemented the rules faster, the implosion of Bill Hwang’s family office and the multibillion-dollar losses it caused two banks could have been limited.”

April 14 – Reuters (Tom Arnold, Natalia Zinets, Karin Strohecker): “Fund managers are trimming exposure to Russia and Ukraine on fears that years of tensions could finally erupt into outright war, bringing economic ruin for Ukraine and more sanctions on Russia. But with largest build up of Russian troops on the Ukrainian border since Moscow’s annexation of Crimea in 2014, and uncompromising rhetoric from the Kremlin, some investors feel market positioning is still not cautious enough. ‘People are very sanguine,’ said Tim Ash, senior EM sovereign strategist at BlueBay Asset Management. ‘I’ve covered Ukraine for 33 years, including 2014, and it looks pretty serious. I’m surprised the market reaction is not perhaps a bit more aggressive really.’”

Inflation Watch:

April 13 – Reuters (Lucia Mutikani): “U.S. consumer prices rose by the most in more than 8-1/2 years in March as increased vaccinations and massive fiscal stimulus unleashed pent-up demand, kicking off what most economists expect will be a brief period of higher inflation… The consumer price index jumped 0.6% last month, the largest gain since August 2012, after rising 0.4% in February. A 9.1% surge in gasoline prices accounted for nearly half of the increase in the CPI. Gasoline prices rose 6.4% in February.”

April 13 – Bloomberg (Marcy Nicholson): “The frenzy sweeping the lumber market will likely keep going through the summer peak of U.S. home building as labor shortages and depleted inventories mean that supplies can’t keep up with skyrocketing demand. Tightness is acute across the entire timber supply chain. Sawmills have had trouble ramping up fast enough to meet the surge in demand. Meanwhile, trucking delays and worker shortages at lumber yards have added to costs, which are now getting passed on to consumers. Lumber futures have surged more than 60% to record highs this year… Soaring wood costs have already added more than $24,000 to the price of the average new U.S. house, according to National Association of Home Builders.”

April 14 – Reuters (Lucia Mutikani): “U.S. import prices rose more than expected in March, lifted by higher costs for petroleum products and tight supply chains, the latest indication of inflation heating up as the economy reopens… Import prices increased 1.2% last month after advancing 1.3% in February.”

April 11 – Bloomberg (Henry Ren): “Stubbornly high shipping expenses for businesses are getting sealed into contracts for the next 12 months, forcing companies to pass the extra costs on to consumers… Along the bellwether trade lane linking Asia with North America, contract rates in recent weeks are coming in around $2,500 to $3,000 for a 40-foot container — 25% to 50% higher than a year ago, according to George Griffiths, an editor on the global container freight-pricing team at S&P Global Platts.”

April 14 – Reuters (Craig Torres and Liz Capo McCormick): “Federal Reserve officials are just as worried about an inflation rate that runs too cold as one that runs too hot. While rising prices are in the spotlight now as the economy reopens and demand surges, the longer-run trends that have suppressed costs globally could re-emerge as the pandemic ends, some policy makers warn. That would make it harder to deliver on their new strategy of running inflation above their 2% target for a time in order to achieve that goal over the longer run. ‘We are probably more likely to be successful with the new monetary policy regime than if we didn’t have it,’ Boston Fed President Eric Rosengren said… But based on the experience of the last decade ‘you have to take seriously the idea that it is not going to be that easy to get 2% inflation.’”

April 14 – Reuters (Jonnelle Marte): “Inflation could be volatile in the near term as the economy recovers from the pandemic but overall price increases should remain subdued and the Federal Reserve knows how to act if inflation gets too high, New York Fed President John Williams said… ‘We know how to deal with inflation,’ Williams said… He expects inflation overall to stay near the Fed’s 2% target, he said. ‘The economy is coming back pretty strong right now,’ as more Americans are vaccinated against the coronavirus and supported by robust fiscal aid, Williams said.”

Biden Administration Watch:

April 12 – Reuters (David Morgan and Jarrett Renshaw): “President Joe Biden sought to demonstrate his much-touted interest in working with Republicans in Congress on Monday, with a bipartisan White House meeting as lawmakers prepared to grapple with his $2.3 trillion proposal to improve U.S. infrastructure. The Democratic president appears to be losing political capital with 10 Senate Republicans who have signaled an openness to working with Democrats, according to aides and observers.”

April 13 – Bloomberg (Laura Davison): “Seventeen New York Democrats told House Speaker Nancy Pelosi that any economic recovery bills funded by tax increases will also need to fully restore the state and local tax, or SALT, deduction to get their support. ‘We will not hesitate to oppose any tax legislation that does not fully restore the SALT deduction,’ the group said…”

April 15 – Bloomberg (Alberto Nardelli, Nick Wadhams and Jennifer Jacobs): “The Biden administration imposed a raft of new sanctions on Russia, including long-feared restrictions on buying new sovereign debt, in retaliation for alleged misconduct related to the SolarWinds Corp. hack and efforts to disrupt the U.S. election. The new measures sanction 32 entities and individuals, including government and intelligence officials, and six Russian companies… The U.S. is also expelling 10 Russian diplomats working in Washington… The Biden administration is barring U.S. financial institutions from participating in the primary market for new debt issued by the Russian central bank, Finance Ministry and sovereign wealth fund.”

April 11 – Reuters (Doina Chiacu): “U.S. Secretary of State Antony Blinken said… the United States is concerned about China’s aggressive actions against Taiwan and warned it would be a ‘serious mistake’ for anyone to try to change the status quo in the Western Pacific by force. ‘What we’ve seen, and what is of real concern to us, is increasingly aggressive actions by the government in Beijing directed at Taiwan, raising tensions in the Straits,’ Blinken said…”

April 14 – Reuters (Yimou Lee): “Taiwan President Tsai Ing-wen told emissaries visiting at U.S. President Joe Biden’s request… the island would work with the United States to deter threats from Chinese military activities… ‘We are very willing to work with like-minded countries, including the United States, to jointly safeguard the peace and stability of the Indo-Pacific and deter adventurous manoeuvres and provocations,’ Tsai said.”

April 14 – Bloomberg (Ben Bain): “The U.S. Senate cleared Gary Gensler to lead the Securities and Exchange Commission, allowing President Joe Biden’s choice for Wall Street’s top sheriff to take over the regulator as it faces myriad market threats. Gensler… is poised to confront everything from the fallout of the GameStop Corp. trading frenzy to the deluge of special purpose acquisition companies and the collapse of Archegos Capital Management. As chairman, he’ll also face intense pressure from progressive Democrats, who want him to promptly toughen oversight that was weakened during the Trump administration.”

April 13 – Reuters (Pete Schroeder and Michelle Price): “Market participants this week staked out their positions on how to fix systemic risks in the $4.9 trillion U.S. money market fund industry, in what is shaping up to be the first big fight for U.S. President Joe Biden’s financial regulators. After taxpayers bailed them out for the second time in 12 years during the pandemic-induced turmoil in March 2020, money market funds – a key source of short-term corporate and municipal funding – are facing a regulatory reckoning which could potentially change the industry beyond all recognition.”

April 12 – Bloomberg (Saleha Mohsin): “The Biden administration is stepping up scrutiny of China’s plans for a digital yuan, with some officials concerned the move could kick off a long-term bid to topple the dollar as the world’s dominant reserve currency, according to people familiar… Now that China’s digital-currency efforts are gathering momentum, officials at the Treasury, State Department, Pentagon and National Security Council are bolstering their efforts to understand the potential implications, the people said.”

Federal Reserve Watch:

April 11 – Associated Press (Christopher Rugaber): “The U.S. economy is poised for an extended period of strong growth and hiring, the chair of the Federal Reserve said…, though the coronavirus still poses some risk. Chair Jerome Powell… also said that he doesn’t expect to raise the Fed’s benchmark interest rate… this year. And he downplayed the risk of higher inflation stemming from sharp increases in government spending and expanding budget deficits. ‘We feel like we’re at a place where the economy’s about to start growing much more quickly and job creation coming in much more quickly,’ Powell said. ‘This growth that we’re expecting in the second half of this year is going to be very strong. And job creation, I would expect to be very strong.’”

April 14 – Wall Street Journal (Paul Kiernan): “Federal Reserve Chairman Jerome Powell said… the central bank will begin to slow the pace of its bond purchases ‘well before’ raising interest rates. The Fed has been buying at least $120 billion a month of Treasury debt and mortgage-backed securities since last June… Since December, the central bank has said the economy must make ‘substantial further progress’ toward its goals of maximum employment and 2% inflation before it scales back those purchases. ‘We will taper asset purchases when we’ve made substantial further progress toward our goals, from last December when we announced that guidance,’ Mr. Powell said… ‘That would in all likelihood be before—well before—the time we consider raising interest rates.’”

April 14 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said that getting three-quarters of Americans vaccinated would be a signal that the Covid-19 crisis was ending, a necessary condition for the central bank to consider tapering its bond-buying program. ‘It’s too early to talk about changing monetary policy,’ Bullard said… ‘We want to stay with our very easy monetary policy while we are still in the pandemic tunnel. If we get to the end of the tunnel, it will be time to start assessing where we want to go next.’”

April 16 – Reuters (Jonnelle Marte and Ann Saphir): “The U.S. economy is set to take off as more Americans are vaccinated, the virus gets under control and consumers become more comfortable engaging in economic activity, Federal Reserve Governor Christopher Waller said… ‘I think the economy is ready to rip,’ Waller said… Waller said he expects the U.S. economy to grow by 6.5% this year, for inflation to rise by about 2.5% and for the unemployment rate to drop to about 5% by year end.”

U.S. Bubble Watch:

April 12 – Reuters (David Lawder): “The U.S. government posted a March budget deficit of $660 billion, a record high for the month, as direct payments to Americans under President Joe Biden’s stimulus package were distributed… The deficit for the first six months of the 2021 fiscal year ballooned to a record $1.706 trillion, compared to a $743 billion deficit for the comparable year-earlier period… The March 2021 deficit was the third highest U.S. monthly deficit on record, surpassed by gaps of $864 billion in June 2020 and $738 billion in April 2020.”

April 15 – CNBC (Jeff Cox): “A fresh batch of stimulus checks sent consumer purchases surging in March as the U.S. economy continued to get juice from aggressive congressional spending. Advance retail sales rose 9.8% for the month… That compared to the Dow Jones estimate of a 6.1% gain and a decline of 2.7% in February.”

April 15 – Bloomberg (Vince Golle): “Growth at manufacturers in the Philadelphia region and New York state and rebounded in April, reflecting stronger orders and increased shipments as the economy continues its recovery from the Covid-19 pandemic. The Federal Reserve Bank of Philadelphia’s general activity index surged to 50.2 — the highest since April 1973 — from a revised 44.5 in March…”

April 15 – Associated Press (Christopher Rugaber): “The number of Americans applying for unemployment benefits tumbled last week to 576,000, a post-COVID low… Applications plummeted by 193,000 from a revised 769,000 a week earlier. Jobless claims are now down sharply from a peak of 900,000 in early January…”

April 14 – CNBC (Diana Olick): “Total mortgage application volume decreased 3.7% for the week, according to the Mortgage Bankers Association… Mortgage applications to purchase a home fell 1% for the week but were 51% higher than a year ago, although annual comparisons will be an outlier for the next month as the housing market ground to a halt at the start of the pandemic…”

April 15 – Wall Street Journal (Nicole Friedman): “The U.S. housing market is 3.8 million single-family homes short of what is needed to meet the country’s demand, according to a new analysis by… Freddie Mac. The estimate represents a 52% rise in the nation’s home shortage compared with 2018, the first time Freddie Mac quantified the shortfall. The figures underscore the severity of the housing deficit, which is a major factor fueling the current red-hot housing market. The shortage is especially acute for entry-level homes, which makes it more expensive for first-time home buyers to enter the market, said Sam Khater, chief economist at Freddie Mac. ‘We should have almost four million more housing units if we had kept up with demand the last few years,’ Mr. Khater said. ‘This is what you get when you underbuild for 10 years.’”

April 14 – Financial Times (Imani Moise and Laura Noonan): “Three of the largest US banks reported higher than expected profits on Wednesday, fuelled by breakneck growth in investment banking fees, buoyant capital markets and lower credit costs because of an improving economy. But the traditional banking business of taking deposits and making loans continued to grow less profitably and executives warned that the boost to earnings from those activities would likely fade. JPMorgan… beat earnings expectations by 21 cents a share, partially driven by a 57% surge in investment banking fees… Goldman Sachs said a 73% jump in dealmaking fees pushed return on equity to 31%, its highest level since 2009 and far ahead of the 14% it promised investors under a strategy laid out a year ago.”

April 12 – Bloomberg (Shahien Nasiripour): “The 25 biggest U.S. banks collectively reduced their loan holdings by 8% in the year through March, according to the Federal Reserve’s latest weekly survey. Total loans fell by $447 billion to $5.45 trillion… Meanwhile, total deposits, which provide the funds that banks lend out to borrowers, jumped 16% to $10.13 trillion. Their combined loan-to-deposit ratio now sits at 53.9%, the lowest reading in 36 years…”

April 11 – Wall Street Journal (Theo Francis and Kristin Broughton): “CEO pay surged in 2020, a year of historic business upheaval, a wrenching labor market for many workers and unprecedented challenges for many leaders. Median pay for the chief executives of more than 300 of the biggest U.S. public companies reached $13.7 million last year, up from $12.8 million for the same companies a year earlier and on track for a record… Pay kept climbing in 2020 as some companies moved performance targets or modified pay structures in response to the Covid-19 pandemic and accompanying economic pain.”

April 15 – Financial Times (Derek Brower and Justin Jacobs): “A vital source of funding for the US oil sector is drying up as private investors retreat, prompting stricken operators to make ‘last gasp’ efforts to boost production and cash flow to lure in buyers. The exodus mirrors shale’s experience in public markets, where even before last year’s crash investors had soured on an industry notorious for poor returns and weak environmental, social and governance performance. ‘Private equity has been decimated in this downturn,’ said Wil VanLoh, head of Quantum Energy Partners, one of the largest PE investors in the shale patch. ‘The total quantum of money available out there to private companies has shrunk and is going to stay much, much smaller.’”

Fixed Income Watch:

April 15 – Bloomberg (Lisa Lee): “Junk-rated borrowers are shifting their sights toward U.S. leveraged loans, sometimes at the expense of high-yield bonds, putting sales of the floating-rate debt on course for a record year of issuance… Barclays Plc, which last week raised forecasts for sales in both markets, reckons that leveraged loan issuance (minus repricings which only cut the borrowing cost) will exceed junk bonds by some $20 billion this year. At a target of $430 billion to $450 billion of supply, 2021 would be an all-time high for U.S. leveraged loans. About $173 billion of loans have been sold this year already, just slightly below the $177 billion for U.S. high-yield bonds…”

China Watch:

April 12 – Bloomberg (Anjani Trivedi): “How do you clean up a mess created by the clean-up crew? That’s what Beijing is contending with as one of its largest liquidators of bad debt — established to mop up China’s $43 trillion banking system — has gone out and created a shambles of its own. At the center of the ongoing bondholder nightmare is China Huarong Asset Management Co., the nation’s largest distressed asset manager, which sits on 1.73 trillion yuan ($263bn) of assets and is majority-owned by the Ministry of Finance. Lai Xiaomin, the institution’s top executive until 2018, was sentenced to death for bribery and bigamy and executed in January… Who will be left holding the bag if Chinese regulators let more state-backed institutions like Huarong fail? The fate of its offshore unit, a key entity, hangs in the balance along with $22 billion of dollar bonds outstanding. A restructuring with deep haircuts for everyone who enabled Huarong’s bad behavior should be expected at this point.”

April 15 – Bloomberg: “The People’s Bank of China signaled its intention to contain rising leverage by adding just enough cash to maintain medium-term liquidity. Stocks fell as expectations that the central bank would loosen its purse string were dashed. The PBOC injected 150 billion yuan ($23bn) into the financial system on Thursday… That more-or-less matches the 100 billion yuan due and 56.1 billion yuan of targeted loans maturing on April 25. While money markets barely reacted, the decline in stocks showed how equity traders are struggling to come to terms with plans by Chinese policy makers to gradually wind back pandemic-fueled stimulus.”

April 14 – South China Morning Post (Chad Bray and Georgina Lee): “China Huarong Asset Management Company, one of China’s five national managers of distressed debt, could be on the verge of a major restructuring – and that is spooking debt investors. Dollar-denominated bonds for Huarong have tumbled sharply in recent weeks after the company warned that it would not report its results on time because of a ‘relevant transaction,’ the details of which have not been disclosed publicly… Concerns about the company’s outlook have arisen as more foreign investors are piling into the US$18 trillion Chinese bond market as index compilers have moved to add more Chinese debt to their major benchmarks.”

April 13 – Financial Times (Thomas Hale): “The prices of bonds issued by China’s largest manager of distressed debt tumbled to record lows as global investor fears mounted over its financial health following the execution of its former chair for bribery. Concerns surrounding state-owned Huarong Asset Management, a conglomerate with about Rmb1.7tn ($260bn) of assets and $22bn in outstanding offshore debt, have been growing since it said it would delay the release of its financial results at the start of April.”

April 15 – Financial Times (Thomas Hale): “A mainland Chinese credit rating agency has warned over the health of Huarong Asset Management, the state-backed distressed debt manager, which has become the focus of a market sell-off in Asia this week. China Chengxin Credit said… it was cutting its credit outlook on the company to ‘negative’ because of concerns over its declining profitability and high debt levels.”

April 15 – Bloomberg: “Lai Xiaomin, former chairman of China Huarong Asset Management Co., was found guilty of accepting $277 million in bribes, as well as bigamy, crimes serious enough to see him summarily executed in January. Such extreme behavior — and consequences — are rare in any country. But in China, more modest but still flagrant mismanagement is common in the $54 trillion financial industry. In 2020 alone, the country’s top banking regulator issued almost 3,200 violations against institutions and 4,554 against individuals…; it levied fines totaling 2.3 billion yuan ($352.2 million)… Among the infractions, Chinese investigators found fabricated financial statements, executives’ nannies and chauffeurs installed as controlling shareholders, and favorable rates and sweetheart deals for investors and relatives.”

April 13 – Bloomberg: “Evergrande is falling further behind the vast majority of its largest peers in meeting stricter Chinese borrowing limits, raising refinancing risks for the country’s most indebted developer. China Evergrande Group remained in breach of all key measures for debt levels at the end of last year, even as almost half of the country’s 66 major developers met them, up from 14 six months earlier… With China’s property sector accounting for about 29% of economic output, regulators are determined to rein in its risk, introducing so-called ‘three red lines’ that cap borrowing.”

April 16 – Bloomberg: “China’s economy strengthened in the first quarter of the year as consumer spending rose more than expected, putting it on course to join the U.S. as twin engines for a global recovery in 2021. Gross domestic product climbed 18.3% in the first quarter from a year earlier, largely in line with the 18.5% predicted… Retail sales beat expectations while industrial output growth moderated. The latest data puts China on course to grow well above its annual target of more than 6%…”

April 15 – Bloomberg: “China’s home prices grew at the fastest pace in seven months in March as a fear of missing out among buyers persisted in a traditionally fast season for sales. New home prices in 70 cities, excluding state-subsidized housing, rose 0.41% last month from February, when then gained 0.36%… Values in the secondary market, which faces less government intervention, climbed 0.4%, the most in 22 months.”

April 12 – Reuters (Gabriel Crossley and Stella Qiu): “China’s exports rose sharply in March while imports growth surged to the highest in four years in yet another boost to the nation’s economic recovery, signalling improving global demand amid progress in worldwide COVID-19 vaccination… Total Chinese imports jumped 38.1% year-on-year last month, the fastest pace since February 2017 on high commodity prices, beating a 23.3% forecast and compared with 17.3% growth in February.”

April 11 – Bloomberg (Coco Liu): “After China imposed a record antitrust fine on Alibaba Group Holding Ltd., the e-commerce giant did an unusual thing: It thanked regulators. ‘Alibaba would not have achieved our growth without sound government regulation and service, and the critical oversight, tolerance and support from all of our constituencies have been crucial to our development,’ the company said in an open letter. ‘For this, we are full of gratitude and respect.’”

April 11 – Reuters (Cheng Leng, Julie Zhu, Pei Li, Kane Wu): “China’s competition watchdog is adding staff and other resources as it ramps up efforts to crack down on anti-competitive behaviour, especially among the country’s powerful companies, people with knowledge of the matter told Reuters. Beijing’s plan to bulk up the State Administration for Market Regulation (SAMR) comes as China revamps its competition law with proposed amendments including a sharp increase in fines and expanded criteria for judging a company’s control of a market.”

April 13 – Bloomberg (Zheping Huang): “China ordered 34 internet corporations… to rectify their anti-competitive practices within the next month, signaling that Beijing’s scrutiny of its most powerful firms hasn’t ended with the conclusion of a probe into Alibaba… Shares in Tencent Holdings Ltd. and Meituan extended losses after the State Administration for Market Regulation issued a stern statement emphasizing it will continue to eradicate abuses of information and market dominance among other violations. Also summoned to an ad-hoc meeting with the watchdog… were industry leaders including TikTok owner ByteDance Ltd., search giant Baidu Inc. and JD.com Inc. Regulators warned internet companies to ‘heed Alibaba’s example,’ reaffirming their intent to abolish forced exclusivity among other practices.”

April 11 – Reuters (Samuel Shen and Scott Murdoch): “A growing number of Chinese tech start-ups are cancelling plans to list on Nasdaq-style markets at home with some eyeing Hong Kong share sales instead, as regulators tighten scrutiny of IPO applicants after the halting of Ant Group’s $37 billion float.”

Global Bubble Watch:

April 12 – Bloomberg (Yoojung Lee): “The rally in tech shares has taken the number of people with fortunes of more than $100 billion to eight. Google co-founders Larry Page and Sergey Brin joined the exclusive club last week, entering a group dominated by U.S. tech entrepreneurs, according to the Bloomberg Billionaires Index. The world’s eight richest people together hold fortunes of more than $1 trillion and have added $110 billion combined this year.”

April 11 – Reuters (Davide Barbuscia): “The International Monetary Fund said… countries in the Middle East and Central Asia need to curb their financing requirements, as a surge in government debt, exacerbated by the pandemic, threatens recovery prospects… In the Middle East and North Africa, fiscal deficits widened to 10.1% of GDP in 2020 from 3.8% of GDP in 2019.”

April 14 – Bloomberg (Alfred Cang, David Ramli and Chanyaporn Chanjaroen): “At 33, Ng Yu Zhi had all the trappings of a wildly successful trader: a Rolodex full of rich clients, a three-story villa in a posh Singapore neighborhood and a Pagani Huayra supercar reportedly worth more than $5 million. Local prosecutors allege Ng also had a dark secret: His lavish lifestyle, they say, was built on lies. In a case that has riveted Singapore’s moneyed-classes, Ng was charged last month with four counts of fraud for allegedly raising at least S$1 billion ($740 million) from investors for commodity trades that didn’t exist. The police have called it one of the city-state’s largest-ever suspected investment fraud schemes.”

Central Banker Watch:

April 14 – Bloomberg (William Horobin and Alexander Weber): “The European Central Bank could end its pandemic emergency program within less than a year while adapting its monetary policy tools to keep supporting the economy after the crisis, French Governor Francois Villeroy de Galhau said. ‘We could possibly exit PEPP by March 2022,’ the Bank of France chief told… Bloomberg… ‘It would not mean an abrupt tightening of our monetary policy, reinvestments under PEPP would go on. We could also have net asset purchases with our other program.’”

Europe Watch:

April 12 – Financial Times (Guy Chazan): “The race to succeed Angela Merkel descended into disarray… when the two parties in her centre-right bloc endorsed rival candidates for chancellor in September’s Bundestag election. The Christian Democratic Union threw its weight behind Armin Laschet, the party’s leader, while its smaller Bavarian sister party the CSU said it was backing the prime minister of Bavaria, Markus Söder. The competing endorsements set the stage for a trial of strength between two parties whose alliance has been one of the mainstays of the German political system since the end of the second world war.”

EM Watch:

April 12 – Financial Times (Max Seddon, Eva Szalay and Jonathan Wheatley): “Russia’s rouble has rekindled an intense sensitivity to the risk of US sanctions, sinking during Moscow’s latest military build-up on the border with Ukraine and picking up only on Tuesday’s announcement of talks between Joe Biden and Vladimir Putin. The country’s currency has dropped more than 3% in the past month to trade at around 76 to the US dollar.”

April 11 – Financial Times (Bryan Harris, Michael Pooler and Carolina Pulice): “After seven months in lockdown, Michele Marques received some unwelcome news when she returned to work: while she was away the prices of almost all the products she uses as a hairdresser had soared. ‘A box of gloves rose 200%. Colouring products increased at least 100%,’ said the 37-year-old from São Paulo… ‘I had to raise the price of my services, too.’ It is a dynamic that is playing out across Brazil, adding an extra layer of complexity to the country’s coronavirus crisis, which has already claimed the lives of almost 350,000 individuals and pushed hospital services to the brink.”

Japan Watch:

April 14 – Reuters (Hideyuki Sano): “Japanese firms with strong Chinese ties are seeing their shares fall ahead of a meeting of Prime Minister Yoshihide Suga and U.S. President Joe Biden, as investors fear pressure to align Japan more closely with Washington’s tough stance on Beijing.”

Leveraged Speculation Watch:

April 13 – Bloomberg (Cathy Chan and Takashi Nakamichi): “Nomura… is beginning to tighten financing for some hedge fund clients following the Archegos Capital Management LP fiasco that may cost Japan’s biggest brokerage an estimated $2 billion, according to people familiar… The restrictions include curbing leverage for some clients previously granted exceptions to margin financing limits… Nomura is taking steps to reduce risk at its prime brokerage unit in the wake of the Archegos collapse that may result in combined losses of $10 billion for global banks…”

April 15 – Financial Times (Laurence Fletcher): “Hedge funds have navigated the GameStop short squeeze and the collapse of family office Archegos Capital to post their best first quarter of performance since before the global financial crisis. Funds generated returns of just under 1% last month to take gains in the first three months of the year to 4.8%, the best first quarter since 2006, according to… Eurekahedge. Recent data from HFR, meanwhile, show funds made 6.1% in the first three months of the year, the strongest first-quarter gain since 2000.”

April 13 – Bloomberg (Steven Arons and Nicholas Comfort): “Europe’s top financial watchdog has asked some of the bloc’s largest banks for additional information on their exposure to hedge funds after the recent collapse of Archegos Capital Management.”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 12 – Reuters (Yuka Obayashi and Aaron Sheldrick): “Japan will release more than 1 million tonnes of contaminated water from the destroyed Fukushima nuclear plant into the sea, the government said…, a move China called ‘extremely irresponsible’, while South Korea summoned Tokyo’s ambassador in Seoul to protest. The first release of water will take place in about two years, giving plant operator Tokyo Electric Power time to begin filtering the water to remove harmful isotopes, build infrastructure and acquire regulatory approval.”

April 16 – Wall Street Journal (Stephanie Yang): “The worst drought in half a century is hitting Taiwan, adding strain to an island that is home to two-thirds of the world semiconductor manufacturing capacity during the worst global chip shortage in recent memory. The drought’s impact on semiconductor producers, which require voluminous quantities of water to churn out chips, is so far modest as the government creates exceptions for these manufacturers. But companies are starting to make adjustments, and officials have warned that the water shortage could worsen without adequate rainfall.”

Geopolitical Watch:

April 14 – Reuters (Patricia Zengerle, Mark Hosenball, Daphne Psaledakis): “U.S. spy agency leaders said… China is an ‘unparalleled’ priority, citing Beijing’s regional aggression and cyber capabilities as they testified at a public congressional ‘Worldwide Threats’ hearing for the first time in more than two years. ‘Given that China is an unparalleled priority for the intelligence community, I will start with highlighting certain aspects of the threat from Beijing,’ Director of National Intelligence Avril Haines told the Senate Intelligence Committee. She described China as increasingly ‘a near-peer competitor challenging the United States in multiple arenas.’”

April 13 – Reuters (Jonathan Landay and Mark Hosenball): “China’s push for global power is the leading threat to U.S. national security, while Russia’s efforts to undermine American influence and assert itself as a major actor also pose a challenge, said a U.S. intelligence report… While China and Russia are presented as the leading challenges, Iran and North Korea will also test U.S. national security, the report said.”

April 14 – Wall Street Journal (Chao Deng): “A former U.S. senator and two former U.S. deputy secretaries of state have arrived in Taiwan, leading the first unofficial delegation dispatched by President Biden… Christopher J. Dodd, a former Democratic senator…, and former senior State Department officials Richard Armitage and James Steinberg touched down in Taipei on Wednesday… During their three-day stay, the U.S. delegation will dine with Taiwan’s President Tsai Ing-wen and the foreign minister, and discuss bilateral relations, the Taiwan side said. Taiwan’s… Taiwanese officials would brief the U.S. delegation on China’s recent provocations against the island and across the region, and call for increased support from Washington on trade, security and economic matters.”

April 12 – Wall Street Journal (Lingling Wei and Bob Davis): “It quickly became obvious in Anchorage, Alaska, last month that Chinese President Xi Jinping’s diplomatic envoys hadn’t come carrying olive branches. Instead they brought a new world view. As Biden administration officials expected in their first meeting with Chinese counterparts, Yang Jiechi, Mr. Xi’s top foreign-policy aide, and Foreign Minister Wang asked them to roll back Trump-era policies targeting China. Beijing wanted to restore the kind of recurring “dialogue” Washington sees as a waste of time… Mr. Yang also delivered a surprise: a 16-minute lecture about America’s racial problems and democratic failings. The objective, say Chinese officials, was to make clear that Beijing sees itself as an equal of the U.S. He also warned Washington against challenging China over a mission Beijing views as sacred—the eventual reunification with Taiwan.”

April 13 – Reuters: “China described its military exercises near Taiwan as ‘combat drills’…, upping the ante as senior former U.S. officials arrived in Taipei on a trip to signal President Joe Biden’s commitment to Taiwan and its democracy. Taiwan has complained over the proximity of repeated Chinese military activity, including fighter jets and bombers entering its air defence zone and a Chinese aircraft carrier exercising off the island…”

April 9 – Wall Street Journal (Ann M. Simmons): “The recent deployment of Russian troops along Ukraine’s border and Moscow’s indication that it could intervene in the event of a full-scale war in eastern Ukraine are dimming hopes for a peaceful resolution of the conflict that has festered for seven years and cost thousands of lives. Kremlin spokesman Dmitry Peskov told reporters… Russia had the right to move its forces across its territory at its discretion and was simply taking precautions given the ‘dangerous, explosive region at its borders’ with eastern Ukraine. Mr. Peskov warned that the situation on the contact line was extremely unstable and said ‘the dynamics…create the danger of a resumption of full-scale hostilities.’”

April 13 – Associated Press (Vladimir Isachenkov): “Russia’s defense minister said… the country’s massive military buildup in the west was part of readiness drills amid what he described as threats from NATO… Speaking at a meeting with the top military brass, Shoigu said the ongoing exercise was a response to what he claimed were continuous efforts by the United States and its NATO allies to beef up their forces near Russia’s borders.”

April 13 – Associated Press (John Gambrell): “Iran will begin enriching uranium up to 60% purity after an attack on its Natanz nuclear facility, a negotiator said…, pushing its program to higher levels than ever before though still remaining short of weapons-grade. The announcement marks a significant escalation after the sabotage that damaged centrifuges, suspected of having been carried out by Israel — and could inspire a further response from Israel amid a long-running shadow war between the nations.”

April 12 – Reuters (Karen Lema): “Philippine and U.S. soldiers started two weeks of military exercises… against a backdrop of rising tensions in the South China Sea, though the drills were reduced in scale due to the coronavirus pandemic.”

April 14 – Bloomberg (Shaun Courtney and Michael Riley): “A White House plan to rapidly shore up the security of the U.S. power grid will begin with a 100-day sprint, but take years more to transform utilities’ ability to fight off hackers, according to details of a draft version of the plan… The plan is the policy equivalent of a high-wire act: it provides incentives for electric companies to dramatically change the way they protect themselves against cyber-attacks while trying to avoid political tripwires that have stalled previous efforts… Among its core tenets, the Biden administration’s so-called ‘action plan’ will incentivize power utilities to install sophisticated new monitoring equipment to more quickly detect hackers, and to share that information widely with the U.S. government.”

April 14 – Financial Times (Michael Hasenstab): “Markets have been gripped by cryptocurrency fever. The price of bitcoin has attained new highs while debate has raged over the emergence of cryptocurrency technology. But these may be a sideshow for a big developing trend — the rapid digitalisation of the renminbi. This shift, combined with other macroeconomic and political factors, could be the key that accelerates the decline of the dollar’s dominance as the world’s leading reserve currency. It could also hasten the acceptance of the renminbi as the main rival to the US currency. Central banks around the world have been grappling in recent years with the concept of digital currency technology. Few nations, though, are as aggressive as China in their approach to developing a so-called central bank digital currency. Such a currency would be overseen by a central governmental authority, removing the element of anonymity that is fundamental to the decentralised, blockchain-ledger of popularised cryptocurrencies like bitcoin or ethereum. The theoretical benefits of government oversight of these new digital assets are numerous.”