The renminbi traded at 6.8935 in early-Friday trading, with intensified selling pushing the Chinese currency to its lowest level (vs. the $) since May 26, 2017. The People’s Bank of China (PBOC) was compelled to support their currency, imposing a 20% reserve requirement on foreign-exchange forward contracts (raising the cost of shorting the renminbi). The PBOC previously adopted this measure back during 2015 tumult, before removing it this past September.
The re-imposition of currency trading reserve requirements indicates heightened concern in Beijing. Officials likely viewed modest devaluation as a constructive counter to U.S. trade pressures. In no way, however, do they want to face disorderly trading and the risk of a full-fledged currency crisis.
The renminbi rallied 1% on the PBOC move, ending slightly positive for the day (but down for the eighth straight week). Trading strongly prior to the PBOC move, the dollar index reversed into negative territory. Many EM currencies moved sharply on the renminbi rally. The South African rand reversed course and posted a 1.2% gain. The Brazilian real also jumped 1%. Curiously, the Japanese yen gained about 0.5%.
Overnight S&P500 futures, having traded slightly negative, popped higher on the renminbi rally. But EM equities were the bigger beneficiary. Brazil Ibovespa index gained 2.3% Friday. It increasingly appears the fortunes of the renminbi and EM markets are tightly intertwined.
The unfolding trade war is turning more serious. Beyond Friday’s currency move, China’s Finance Ministry – in measures to “guard its interests” – announced plans for significantly broader retaliation tariffs on U.S. goods.
August 3 – CNBC (Michael Sheetz): “China is preparing to retaliate in the escalating trade war with tariffs on about $60 billion worth of U.S. goods. The import taxes would range in rates from 5% to 25%, China’s Ministry of Commerce said… There are four lists of goods, one for each of the rates proposed. Many of the goods are agricultural-related, with others on various metals and chemicals. ‘The implementation date of the taxation measures will be subject to the actions of the US, and China reserves the right to continue to introduce other countermeasures,’ China’s release said… ‘Any unilateral threat or blackmail will only lead to intensification of conflicts and damage to the interests of all parties.'”
President Trump had already threatened to place tariffs on $200 billion of Chinese goods if Beijing moved to retaliate on earlier U.S. measures. Shortly after the Chinese retaliatory tariff announcement (and post-U.S. payrolls data), Larry Kudlow, Director of the National Economic Council, appeared on Bloomberg Television.
Bloomberg’s Jonathan Ferro: “You’ve sat across the table with the Chinese many, many times. What is your opinion – your insight – into what is happening to the Chinese economy currently?”
Kudlow: “Well, I’m not an expert. I do try to follow it and it looks to me – you all may disagree – it looks to me like the China economy is declining in growth – it’s weakening – almost across the board. And it looks like the People’s Bank of China is trying to pump it up by adding high-powered money and new credit and so forth. The currency fall is partly [because] they’ve stopped defending the yuan. They think it’s going to help offset the U.S. efforts to get rid of their unfair trading. Some of the currency fall, though, I think is just money leaving China because it’s a lousy investment. And if that continues that will really damage the Chinese economy. If money leaves China – and the currency could be a leading indicator – they’re going to be in a heap of trouble. And so I’m going to make the case that they are in a weak economic position – that’s not a good place for them to be vis-à-vis the trade negotiations – first point. Second point, they better not underestimate President Trump’s determination to follow through on our asks – IP theft is a no-go. Forced transfer of technology – no go. Non-reciprocal trading, on tariffs and non-tariff barriers. The President, he’s a trade reformer. We’ve said many times: “no tariffs, no tariff barriers, no subsidies. We want to see trade reforms.” China is not delivering. Their economy is weak; their currency is weak; people leaving the country. Don’t underestimate President Trump’s determination to follow through. I’m just telling you. I can’t speak for the Communist Party in China. I can speak for our President. Do not underestimate his determination to change trading practices on a fair, reciprocal plane.”
Ferro: “One thing you can definitely speak to, Larry, is the strategy of the President. It just seems to me the strategy of the administration at the moment is to exert maximum pain on the Chinese economy. Is that the direction of travel for you guys, Larry?”
Kudlow: “I would maybe rephrase it a bit. I think what we’re saying is we are serious. And in trade, as you well know, your guests know, negotiations often include the use of tariffs. And the President has said time and time again that targeted tariffs are going to be part of the game plan with China – unless and until they begin to meet our requests, which so far they have not. In fact, in the recent month or so we’ve had hardly any conversations with them at all. There is some hint now that they may wish to talk, although I can’t say that with certainty.”
The Shanghai Composite sank another 4.6% this week, increasing y-t-d losses to 17.1%. Meanwhile, the S&P500 gained 0.6%, boosting the S&P500’s 2018 return to 7.4%. As a large net importer, the U.S. is seemingly less economically sensitive to a trade war than the Chinese economy. U.S. equities have become immune to trade threats. Announcements that would have previously rattled stocks no longer carry much of a punch. As the market sees it, the administration may bluster, but they surely won’t risk jeopardizing the great bull market – especially leading up to the midterms.
As Mr. Kudlow stated rather unequivocally, the administration believes it has a very strong hand to play, while China’s hand is feeble – and turning only feebler. They have somewhat of a point. The U.S. economy is booming, and our securities markets remain resilient. Meanwhile, cracks in the Chinese Bubble seem to widen by the week. Beijing is feeling the heat. Yet I see important shortcomings in the administration’s analysis.
First, I’ll be surprised if hardball tactics work on Beijing. For one, the Chinese recognize Trump administration issues go way beyond unfair trade. Negotiations on trade are but the first salvo – so Beijing must be tough and show unflappable resolve. As they see it, give in now and they’ll face an unrelenting Washington power play. Display weakness on trade and the Americans would be emboldened to confront Beijing on the South China Sea or Taiwan. Chinese leadership sees the U.S. as trying to contain China’s ascent to their rightful place of global power, influence and prestige.
I also believe the Trump administration is overstating the strength of the hand it’s playing. The U.S. economic boom has attained significant momentum. Animal spirits are running hot and there remains a potent inflationary bias throughout the asset markets. But I would argue that the U.S. is today much more exposed to a shift in the global financial backdrop than is appreciated in Washington or by the markets. In my view, the unfolding trade war with China poses a clear and present threat to global finance.
The U.S. boom is built on a foundation of loose finance. Finance has meaningfully tightened globally. I’ll reiterate my view that the global Bubble has been pierced at the “periphery” – more specifically, within the emerging markets. There are now serious fissures in China’s Bubble, a circumstance exacerbated both by EM fragilities and rising U.S. trade tensions.
In this incipient faltering global Bubble phase, instability at the “periphery” has so far engendered somewhat looser financial conditions in “core” markets. U.S. Treasury yields turned sharply lower following the May EM eruption, reversing what had the potential to evolve into tightened financial conditions. Lower market yields, along with looser conditions more generally, incited a rally and powerful short squeeze in U.S. equities.
A critical question going forward: How will evolving conditions at the global Bubble’s “periphery” impact the “core”? Recently, some stabilization at the “periphery” has seen waning safe haven Treasury demand. Treasury yields were back above 3.0% this week, before Friday’s rally saw yields decline to 2.95%.
Markets remain at this point comfortable that stress at the “periphery” will continue to bolster the “core.” This has been, after all, the case in recent years. After beginning 2016 at 2.27%, China and EM instabilities were behind a drop in Treasury yields through mid-year (as low as 1.36%). After a relatively brief pullback early in the year, U.S. equities disregarded global issues as they rallied for much of 2016. Importantly, loose U.S. financial conditions only loosened further, as global Bubble vulnerabilities had the FOMC sitting on its hands for a year between their initial and second “baby step” rate increases.
There remains a prevalent market view that unfolding global instability will have the Fed winding down “normalization” long before rate increases turn restrictive for the booming U.S. economy and securities markets. Besides, any unfolding bout of global risk aversion would ensure booming international flows into U.S. dollar securities markets.
To be sure, extended periods of loose finance deeply alter market perceptions, dynamics and structure. Years of QE market liquidity backstops fundamentally changed the way market participants view risk. There is today little concern for trouble at the “periphery” gravitating to the “core.” After all, the U.S. has been the primary beneficiary during repeated episodes of risk aversion and outflows from China, EM or even periphery Europe, for that matter.
Indeed, markets have been conditioned to view instability at the “periphery” as an opportunity. It’s now been a decade since tumult afflicted the “core.” Long forgotten is the traditional dynamic where risk aversion at the “periphery” commences a process of de-risking and de-leveraging – with expanding market illiquidity and contagion. This old market problem was seemingly nullified by activist central bankers.
Well, I believe the current backdrop creates extraordinary risk for a (surprising) reemergence of “Periphery to Core Crisis Dynamics”. It’s my view that massive global QE measures have for years been responsible for nipping de-risking/de-leveraging dynamics in the bud. The overabundance of cheap global finance ensured a surfeit of market liquidity that would readily accommodate incipient de-risking/de-leveraging at the “periphery.” In short, a global “system” awash in “money” ensured de-leveraging dynamics never attained momentum. Contagion risk stopped being an issue – quite a boon for global leveraged speculation. Moreover, even the mildest “risk off” dynamic at the “periphery” would ensure waves of inbound liquidity for the “core.” Latent fragilities at the “periphery” were kept under wraps, as global central bankers dragged their heels when contemplating the start of policy normalization.
An analyst on Bloomberg Television made the important point that global QE is today in the neighborhood of $25 billion monthly, down from $125 billion one year ago. Global QE will likely turn negative by year-end. This, I believe, significantly increases the likelihood of an unanticipated return of a destabilizing global contagion dynamic. Rather than instability at the “periphery” doing its usual handiwork to buoy Bubbles at the “core,” de-risking/de-leveraging dynamics increasingly have the potential to attain sufficient momentum to negatively impact the “core.”
The global liquidity backdrop is in the process of profound – if not yet obviously discernable – change. EM is increasingly vulnerable to a destabilizing bout of de-leveraging in a world of waning liquidity. Thus far, the faltering EM Bubble has incited flows to U.S. Bubble markets. However, an escalation of the unfolding EM crisis is at heightened risk of inciting a very problematic global de-leveraging – a “risk off” backdrop that would risk piercing vulnerable Bubbles even at the “core.” The consensus bullish view – holding EM as a buying opportunity and the U.S. as the mighty pillar of growth and stability – could prove dangerously complacent.
I believe there are great latent fragilities associated with the “Periphery to Core Crisis Dynamic.” Distorted markets have over years been conditioned to disregard such risk. I’ll presume the administration is simply oblivious, believing it’s deftly playing a hand of robust U.S. financial and economic systems. With such a competitive advantage, in their minds there’s never been a better opportunity to play hardball and put Beijing in its place.
It’s worth noting that 10-year Treasury yields declined four bps Friday. The Japanese yen (up 0.37%) also enjoyed a safe haven bid. Treasuries and the yen seemed to take a different view of developments than U.S. equities.
Friday afternoon Bloomberg headline: “Tit-For-Tat Becomes the Norm as U.S., China Dig In for Trade War.” The odds are not small that this Game of Chicken goes unresolved for a while. Clearly, it would be uncharacteristic of President Trump to back down. At the same time, President Xi has shown zero tolerance for any sign of weakness. Increasingly, Beijing is being very publicly backed into a corner (Bloomberg headline: “U.S.’s Kudlow Trash Talks China Calling It ‘Lousy Investment'”). Difficult to see China responding cordially.
“Trash Talking” China a few hours after the PBOC is compelled to intervene to bolster the flagging renminbi leaves me uncomfortable. There’s a problematic scenario that doesn’t seem all that improbable at this point: China faces increased financial instability, including capital flight and de-risking/de-leveraging. The PBOC becomes trapped in the dreadful EM dynamic of bolstering system liquidity in the face of mounting risk of a full-fledged currency crisis. Global markets fret the imposition of Chinese capital controls.
Meanwhile, China instability and trade fears see EM markets take another leg lower, with particular market concern for the highly levered Asian economies. De-risking/de-leveraging dynamics attain self-reinforcing momentum, as contagion effects engulf the global “periphery.” Fears of global financial fragility and economic vulnerability see risk aversion begin to gravitate toward the “core.” Fears of EM central bank and Chinese selling of U.S. Treasuries overwhelm safe haven buying, as de-risking/de-leveraging dynamics see a widening of Credit spreads and illiquidity begin to impact “core” fixed-income markets.
In such a problematic global scenario, I ponder whether Beijing might perceive it’s playing with a relatively stronger hand than their U.S. adversary. Meanwhile, contagion effects would set their sights on the “periphery of the core.” This just doesn’t seem all that far-fetched.
It’s worth noting that Italian yields jumped another 18 bps points this week to 2.93% (Greek yields up 25 bps). And while the Bank of Japan sought to comfort markets with “easy forever,” the badly-distorted Japanese bond market is indicating instability. Mainly, it’s a problematic market and geopolitical backdrop pointing increasingly to “Periphery to Core Crisis Dynamics.” China, EM and the world are now just a disorderly collapse of the renminbi away from, in the words of Mr. Kudlow, “a heap of trouble.”
For the Week:
The S&P500 gained 0.8% (up 6.2% y-t-d), while the Dow was little changed (up 3.0%). The Utilities rose 1.2% (up 0.9%). The Banks added 0.7% (up 3.4%), while the Broker/Dealers lost 1.7% (up 3.0%). The Transports jumped 1.3% (up 4.6%). The S&P 400 Midcaps rose 1.3% (up 5.2%), and the small cap Russell 2000 increased 0.6% (up 9.0%). The Nasdaq100 advanced 1.4% (up 15.6%). The Semiconductors gained 0.7% (up 10.3%). The Biotechs added 0.5% (up 19.8%). With bullion down $10, the HUI gold index slipped 0.6% (down 14.4%).
Three-month Treasury bill rates ended the week at 1.97%. Two-year government yields declined three bps to 2.64% (up 76bps y-t-d). Five-year T-note yields dipped three bps to 2.81% (up 61bps). Ten-year Treasury yields slipped one basis point to 2.95% (up 54bps). Long bond yields added a basis point to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields declined two bps to 3.66% (up 71bps).
Greek 10-year yields jumped 25 bps to 4.06% (down 1bp y-t-d). Ten-year Portuguese yields rose six bps to 1.78% (down 16bps). Italian 10-year yields surged 18 bps to 2.93% (up 91bps). Spain’s 10-year yields rose five bps to 1.42% (down 15bps). German bund yields were little changed at 0.41% (down 2bps). French yields rose four bps to 0.74% (down 5bps). The French to German 10-year bond spread widened four to 33 bps. U.K. 10-year gilt yields gained five bps to 1.33% (up 14bps). U.K.’s FTSE equities index declined 0.5% (down 0.4%).
Japan’s Nikkei 225 equities index fell 0.8% (down 1.1% y-t-d). Japanese 10-year “JGB” yields added a basis point to 0.11% (up 6bps). France’s CAC40 slipped 0.6% (up 3.1%). The German DAX equities index dropped 1.9% (down 2.3%). Spain’s IBEX 35 equities index fell 1.3% (down 3.0%). Italy’s FTSE MIB index sank 1.7% (down 1.2%). EM equities were mixed. Brazil’s Bovespa index jumped 1.9% (up 6.5%), while Mexico’s Bolsa declined 0.7% (down 0.1%). South Korea’s Kospi index slipped 0.3% (down 7.3%). India’s Sensex equities index added 0.6% (up 10.3%). China’s Shanghai Exchange sank 4.6% (down 17.1%). Turkey’s Borsa Istanbul National 100 index was little changed (down 17.1%). Russia’s MICEX equities index added 0.2% (up 8.9%).
Investment-grade bond funds saw inflows of $1.211 billion, and junk bond funds had inflows of $37 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose six bps to 4.60% (up 67bps y-o-y). Fifteen-year rates jumped six bps to 4.08% (up 90bps). Five-year hybrid ARM rates gained six bps to 3.93% (up 78bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.63% (up 58bps).
Federal Reserve Credit last week declined $16.8bn to $4.232 TN. Over the past year, Fed Credit contracted $194bn, or 4.4%. Fed Credit inflated $1.422 TN, or 51%, over the past 300 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $22.4bn last week to $3.434 TN. “Custody holdings” were up $101bn y-o-y, or 3.0%.
M2 (narrow) “money” supply added $7.8bn last week to a record $14.156 TN. “Narrow money” gained $518bn, or 3.8%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits slipped $2.0bn, while Savings Deposits gained $4.3bn. Small Time Deposits increased $2.1bn. Retail Money Funds gained $1.3bn.
Total money market fund assets increased $8.6bn to $2.851 TN. Money Funds gained $191bn y-o-y, or 7.2%.
Total Commercial Paper declined $1.4bn to $1.067 TN. CP gained $97bn y-o-y, or 10.0%.
August 3 – Financial Times (Gabriel Wildau): “China’s central bank has raised the cost of betting on renminbi depreciation, a move intended to stabilise its currency following a sharp fall in recent weeks. The People’s Bank of China late on Friday announced the re-imposition of a 20 per cent reserve requirement on banks that sell dollars to clients using currency forwards. Banks will pass the cost of this requirement on to their clients, raising the cost of betting on renminbi weakness. The decision late in Beijing on Friday sparked a rally in the offshore yuan, which trades at major hubs outside of mainland China.”
The U.S. dollar index added 0.6% to 95.194 (up 3.3% y-t-d). For the week on the upside, the Canadian dollar increased 0.5%, the Mexican peso 0.4%, and the Brazilian real 0.1%. For the week on the downside, the South African rand declined 1.1%, the Swedish krona 1.0%, the South Korean won 0.9%, the Norwegian krone 0.8%, the British pound 0.8%, the euro 0.8%, the New Zealand dollar 0.7%, the Singapore dollar 0.3% and the Japanese yen 0.18%. The Chinese renminbi declined 0.20% versus the dollar this week (down 4.69% y-t-d).
The Goldman Sachs Commodities Index declined 0.6% (up 4.4% y-t-d). Spot Gold lost 0.8% to $1,214 (down 6.9%). Silver slipped 0.2% to $15.462 (down 9.8%). Crude declined 20 cents to $68.49 (up 13.4%). Gasoline dropped 4.5% (up 15%), while Natural Gas gained 2.6% (down 3%). Copper fell 1.4% (down 16%). Wheat surged 5.4% (up 36%). Corn gained 2.1% (up 10%).
Trump Administration Watch:
August 1 – Bloomberg (Bob Davis and Lingling Wei): “The U.S. turned up the heat… on China, with the Trump administration threatening to more than double proposed tariffs on imports while Congress passed a defense bill designed to restrict Beijing’s economic and military activity. The moves come as Beijing and Washington have failed to ease an escalating trade dispute, prompting the administration to seek additional leverage. The administration, which has already affixed tariffs on billions of dollars in Chinese imports, said it would consider more than doubling proposed tariffs on a further $200 billion worth of Chinese goods to 25%, up from an original 10%. Meantime, the Senate approved a defense-policy bill that both tightens U.S. national-security reviews of Chinese corporate deals and revamps export controls over which U.S. technologies can be sent abroad.”
August 1 – Bloomberg (Kathleen Hunter): “When it comes to coaxing China back to the trade negotiation table, the Trump administration is favoring the stick over the carrot. And China is tired of it… In a sign the standoff is reverberating in China, the Politburo signaled yesterday that policy makers will focus more on supporting economic growth and noted ‘blackmailing and pressuring’ will never work.”
July 30 – Reuters (Lesley Wroughton and David Brunnstrom): “U.S. Secretary of State Mike Pompeo announced $113 million in new technology, energy and infrastructure initiatives in emerging Asia…, at a time when China is pouring billions of dollars in investments into the region.”
August 1 – Wall Street Journal (Kate O’Keeffe and Siobhan Hughes): “Congress passed a defense-policy bill that some lawmakers say is tougher on China than any in history, as a bipartisan movement to confront Beijing gathers steam. The measure, an annual policy bill that authorizes $716 billion in total defense spending for the coming fiscal year, seeks to counter a range of Chinese government policies, including increased military activity in the South China Sea, the pursuit of cutting-edge U.S. technology and the spread of Communist Party propaganda at American institutions.”
August 1 – Wall Street Journal (Josh Zumbrun and Daniel Kruger): “Rising federal budget deficits are boosting the U.S. Treasury’s borrowing and could restrain a fast-growing economy as the cost of credit rises, too. The yield of 10-year Treasury notes climbed above 3% for the first time since June, as the Treasury Department announced it would increase auctions of U.S. debt by an additional $30 billion over the next three months… In all, the Treasury plans to borrow $329 billion from July through September-up $56 billion from the agency’s April estimate-in addition to $440 billion in October through December. The figures are 63% higher than what the Treasury borrowed during the same six-month period last year.”
July 29 – The Hill (Lloyd Green): “The economy hums while storm clouds darken the White House. Welcome to the final 100 days before the 2018 midterms. Even as the economy is experiencing is highest rate of growth since 2014, the electorate is angry. Donald Trump has taken command of center stage, and the public is not thrilled with what it sees. When Trump is underwater in Wisconsin, Michigan, and Minnesota, it is time for Republicans to worry. The question is how large a bite does Trump extract from Republican candidates this fall. Real Clear Politics puts the Democrats lead on the generic ballot at over 7 points, while FiveThirtyEight pegs the Democrats lead a tick higher. No, those numbers do not reflect a blue wave. But at the same time, they provide Republicans with little room for error, and even less reason for comfort.”
July 29 – Reuters (Lindsay Dunsmuir): “U.S. Treasury Secretary Steven Mnuchin said… that he believes the quickening pace of growth in the nation’s economy in the second quarter will persist for the next few years. ‘I don’t think this is a one- or two-year phenomenon. I think we definitely are in a period of four or five years of sustained 3% growth at least,’ Mnuchin said…”
July 27 – Reuters (Tucker Higgins): “President Donald Trump told talk show host Sean Hannity that he could imagine the economy growing at 8 or 9% on Friday – just hours after the Bureau of Economic Analysis showed that the GDP rose 4.1% in the second quarter. The president said that the gains could come from cutting the nation’s trade deficit ‘in half.’ ‘If I cut it in half, right there we will pick up three or four points,’ Trump said… ‘We’d be at eight or nine’ percent, he added.”
August 2 – Bloomberg (Ryan Beene, John Lippert and Jennifer A. Dlouhy): “The Trump administration, taking aim at one of former President Barack Obama’s signature environmental achievements, is proposing to suspend required increases in vehicle fuel economy after 2020 and unwind California’s authority to limit tailpipe greenhouse gas emissions in the state. The Environmental Protection Agency and National Highway Traffic Safety Administration jointly proposed on Thursday to cap fuel economy requirements at a fleet average of 37 mpg starting in 2020. Under the Obama plan, the fleetwide fuel economy would have risen gradually to roughly 47 mpg by 2025”
Federal Reserve Watch:
August 1 – Bloomberg (Cragi Torres): “Federal Reserve officials left U.S. interest rates unchanged and stuck with a plan to gradually lift borrowing costs amid ‘strong’ growth that backs bets for a hike in September. Economic activity has been ‘rising at a strong rate,’ and unemployment ‘has stayed low,’ the Federal Open Market Committee said… ‘Household spending and business fixed investment have grown strongly.’ While leaving rates on hold as expected, the committee repeated guidance for ‘further gradual increases’ in its policy benchmark, lining up September’s FOMC meeting for the third hike of the year.”
U.S. Bubble Watch:
August 1 – Bloomberg (Liz Capo McCormick and Saleha Mohsin): “The U.S. Treasury Department will raise the amount of long-term debt it sells to $78 billion this quarter while launching a new two-month bill. It also will lean more heavily on maturities out to five years. In its quarterly refunding announcement on Wednesday, the Treasury boosted the auction sizes of coupon-bearing and floating-rate debt from $73 billion the previous quarter. It was the third consecutive quarterly increase, as President Donald Trump’s fiscal policies widen the nation’s budget deficit.”
July 30 – Wall Street Journal (Sarah Krouse): “For the past century, a public pension was an ironclad promise. Whatever else happened, retired policemen and firefighters and teachers would be paid. That is no longer the case. Many cities and states can no longer afford the unsustainable retirement promises made to millions of public workers over many years. By one estimate they are short $4 trillion… Certain pension funds face the prospect of insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed. It is increasingly likely that retirees, as well as new workers, will be forced to take deeper benefit cuts.”
August 2 – CNBC (Fred Imbert): “Private payrolls in the U.S. increased by more than expected last month as companies get a boost from lower corporate taxes, ADP and Moody’s Analytics said… Jobs in the U.S. increased by 219,000 in July, while economists… expected a gain of 185,000. July’s job gains were the best since February, when 241,000 jobs were added. Jobs growth for the previous month was also revised up to 181,000 from 177,000. ‘The job market is booming, impacted by the deficit-financed tax cuts and increases in government spending,’ said Mark Zandi, chief economist of Moody’s Analytics…”
July 31 – Wall Street Journal (Laura Kusisto): “Home-price gains held steady in May, as a lack of sale inventory helped prevent a meaningful slowdown in price growth despite rising mortgage rates and growing affordability challenges. The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 6.4% in May, identical to the year-over-year increase reported in April. An index of 10 cities gained 6.1% over the year, down from 6.4% the prior month. The 20-city index gained 6.5%, down from 6.7% the previous month.”
August 1 – CNBC (Diana Olick): “The long list of housing headwinds is finally taking its toll on potential buyers. Housing demand fell 9.6% in June, compared with June 2017, according… Redfin. That is the largest decline since April 2016. Red-hot home prices, rising mortgage interest rates, very few listings at the entry level and a high rate of student loan debt have weighed on buyers for a while, but a strong economy and growing employment had mitigated those factors. Now, however, a market stalemate is developing as rates and prices continue to rise, further weakening affordability.”
July 31 – Reuters (Lucia Mutikani): “U.S. consumer spending increased solidly in June as households spent more at restaurants and on accommodation, building a strong base for the economy heading into the third quarter, while inflation rose moderately… The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month. Data for May was revised up to show consumer spending advancing 0.5% instead of the previously reported 0.2% gain.”
July 29 – Wall Street Journal (Kelsey Gee): “Americans looking to land a first job or break into a dream career face their best odds of success in years. Employers say they are abandoning preferences for college degrees and specific skill sets to speed up hiring and broaden the pool of job candidates. Many companies added requirements to job postings after the recession, when millions were out of work and human-resources departments were stacked with résumés… ‘Candidates have so many options today,’ said Amy Glaser, senior vice president of Adecco Group, a staffing agency with about 10,000 company clients in search of employees. ‘If a company requires a degree, two rounds of interviews and a test for hard skills, candidates can go down the street to another employer who will make them an offer that day.'”
July 31 – Wall Street Journal (Laura Kusisto): “The construction business is having trouble attracting young job seekers. The share of workers in the sector who are 24 years old or younger has declined in 48 states since the last housing boom in 2005, according to… Issi Romem, chief economist at construction data firm BuildZoom. Nationally, the share of young construction workers declined nearly 30% from 2005 through 2016… While there’s no single reason why younger folks are losing interest in a job that is generally well-paid and doesn’t require a college education, their indifference is exacerbating a labor shortage that has meant fewer homes being built and rising prices, possibly for years to come.”
July 31 – Reuters (Richa Naidu and Martinne Geller): “With toilet roll and tissues swept up in an escalating international trade row, it’s not just Procter & Gamble’s Charmin that’s going to get the squeeze. Higher prices in the wake of possible tariffs would exacerbate what is already mounting pressure on consumer product company profits from soaring costs from pulp, a main ingredient in tissues, diapers and sanitary towels. P&G, the purveyor of Charmin toilet paper, Bounty towels and Puffs tissues, said on Tuesday that it had recently begun notifying retailers of a 5% average price increase…”
July 29 – Reuters (Patrick McGroaty and Bob Tita): “Consumers are starting to see higher prices for recreational vehicles, soda, beer and other goods that now cost more to make as a result of recent tariffs on metals and parts. When costs rise, manufacturers generally must choose whether to absorb bigger bills for aluminum, steel and imported components, or pass the increases along to customers. In recent days many manufacturers, including Coca-Cola Co. and Polaris Industries Inc., have said they plan to raise prices. U.S. steel and aluminum prices are up 33% and 11%, respectively, since the start of the year…”
July 31 – CNBC (Tae Kim): “Morgan Stanley believes the dramatic drops in some high-flying technology stocks this month is further evidence the stock market will go lower. ‘The weaker earnings beat from several Tech leaders and outright misses from Netflix and Facebook were simply additional support for our [defensive] call,’ chief U.S. equity strategist Michael Wilson said… And the average investor could suffer even more this time, Wilson said. ‘We think a coming correction will be biggest since February, although it could very well have more of a negative impact on the average portfolio if it is centered on Tech, Discretionary, and small caps,’ the note said.”
July 31 – Financial Times (John Plender): “If value investors have been on the rack in recent times, their experience has stemmed, at least in part, from inadequate exposure to Faang stocks – the fabled Facebook, Amazon, Apple, Netflix and Google/Alphabet. Since last Thursday’s spectacular $120bn fall in Facebook’s market capitalisation we have witnessed a great tech sell-off that may point to a watershed in the value versus passive investment saga. Yet by now, as in the tech bubble of the late 1990s, many value investors (who buy stocks that they think are undervalued) have thrown in the towel and bought into the Faangs. So is this a rerun of the dot.com story?”
July 30 – Wall Street Journal (Liz Hoffman): “In December 2008, with the financial world in a tailspin, Goldman Sachs… issued stock options to 350 of its top executives and board members. By the time they expire later this year, these options will have earned their owners-most of whom left Goldman years ago-at least $3 billion… The windfall shows how far Wall Street firms, or at least their stock prices, have come since the crisis. Goldman is less profitable than it was a decade ago, but its share price last year surpassed the previous high set in 2006. Shares of JPMorgan… continue to hit new heights.”
August 1 – Bloomberg (Oshrat Carmiel and Jeremy Hill): “This has become a summer of discontent for those trying to sell their homes in New York City’s leafy suburbs — in no small part because of the Trump administration. In affluent enclaves in Westchester County, New Jersey and Connecticut, a federal cap on state and local property tax deductions has begun to bite hard. Longtime homeowners who dreamed of offloading their empty nests are finding their plans complicated by the tax bill, as would-be buyers hold back… The issue is especially acute in areas of Westchester, the county with the nation’s highest-property taxes, where annual bills of $35,000, $50,000 and more are not uncommon.”
August 2 – CNBC (Fred Imbert): “China is not taking the United States’ latest tariff threat lightly and vows to hit back if the U.S. moves forward. ‘China is fully prepared and will have to retaliate to defend the nation’s dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries,’ the Chinese Ministry of Commerce said in a statement… ‘The carrot and stick tactic won’t work.’ The ministry’s remarks came after President Donald Trump instructed U.S. Trade Representative Robert Lighthizer to consider raising proposed tariffs on $200 billion in Chinese goods to 25% from 10%.”
August 1 – Financial Times (Gabriel Wildau): “China’s leadership has signalled a shift towards supporting short-term economic growth following a nearly two-year battle against excessive debt, just as a trade war with the US also threatens the economy. Communist party leaders agreed at a politburo meeting to adjusted the official monetary policy stance from ‘prudent and neutral’ to merely ‘prudent’ – a clear move towards loosening. The politburo communiqué also cited ‘maintaining steady and healthy economic growth’ as the number one task. Some critics warn that the country is resorting to its old playbook of debt-fuelled spending to ease a slide in growth – an approach that could worsen the long-term risks that the deleveraging campaign had sought to tame. Tuesday’s politburo’s declaration follows a series of new growth-supporting measures announced over the past fortnight, from tax cuts and new infrastructure spending to central-bank cash injections and a softening of regulations designed to curb shadow banking.”
July 31 – Wall Street Journal: “The bad economic numbers keep coming from China. Second-quarter GDP growth slowed to 6.7%, due in part to a record low increase in fixed-asset investment. On Tuesday the manufacturing purchasing managers’ index, a leading indicator, hit a five-month low, and on Monday the yuan fell to a 13-month low against the U.S. dollar. Chinese stocks have lost one-fifth of their value since January and are near a two-year low. All these lows have caused some in Washington to conclude that Beijing is losing the trade war. With the grim statistics, the thinking goes, Chinese leaders will have to make concessions and cut a deal quickly.”
August 1 – Bloomberg: “China’s central bank has started actively encouraging banks to extend more credit by taking a softer stance on loan quotas, people familiar…said, as authorities ratchet up efforts to bolster a cooling economy. The People’s Bank of China has delivered the message via so-called window guidance… The central bank hasn’t provided specific targets, but it indicated a willingness to be more flexible on banks’ government-imposed lending caps, the people said.”
July 30 – Financial Times (Gabriel Wildau and Tom Mitchell): “Foreigners seeking ‘strategic’ stakes in listed Chinese companies could face broader national security reviews under new rules drafted by China’s commerce ministry, a sign Beijing is preparing to hit back at western efforts to curb Chinese acquisitions of sensitive technologies. The proposed amendments to existing investment rules… expand the universe of foreign investments covered by China’s formal national security review process.”
August 2 – Bloomberg: “China is building a very 21st century empire-one where trade and debt lead the way, not armadas and boots on the ground. If President Xi Jinping’s ambitions become a reality, Beijing will cement its position at the center of a new world economic order spanning more than half the globe. Already, China has extended its influence far beyond that of the Tang Dynasty’s golden age more than a millennium ago. The most tangible manifestation of Xi’s designs is the new Silk Road he first proposed in 2013. The enterprise morphed into the ‘Belt and Road’ initiative, a mix of foreign policy, economic strategy, and charm offensive that, nurtured by a torrent of Chinese money, is rebalancing global political and economic alliances. Xi calls the grand initiative ‘a road for peace.’ Other world powers such as Japan and the U.S. remain skeptical about its stated aims and even more worried about unspoken ones, especially those hinting at military expansion.”
July 29 – Financial Times: “China’s Belt and Road Initiative is commonly seen as a programme to fund and build infrastructure in some 78 countries around the globe. It is also Beijing’s bid to reshape the world by offering an alternative developmental vision to the US-led world order. In the Chinese context, it is the linchpin of President Xi Jinping’s grand design to create a ‘community with a shared future for mankind’. As such, the Belt and Road (BRI) is officially intended to showcase an open, inclusive form of development which benefits all countries that participate. To criticise BRI, therefore, is to censure a rising China’s proposition to the world. Yet there is growing evidence that the infrastructure projects are falling short of Beijing’s ideals and stirring controversy in the countries they were intended to assist. Debt sustainability, governance flaws and general opacity are some of the main issues.”
July 29 – Bloomberg (Chris Anstey and Narae Kim): “China used to rail against the outsize role of the U.S. dollar. But in a major turnaround, the world’s second-biggest economy has started embracing the currency of its larger rival. Chinese companies and banks-and even the government-sold bonds denominated in dollars at a record pace last year, and underwriters expect that growth to continue for years. The roughly half-trillion-dollar market has two key attractions for China’s borrowers. For some, it’s an easier place to raise cash than at home… For others, dollars are simply easier to use to fund acquisitions and investments abroad. The upshot: There’s a large and growing supply of dollar securities that offer exposure to Chinese companies for investors wary of diving into the country’s increasingly accessible yuan-denominated domestic debt. The offshore bond market is also set to provide a stake in President Xi Jinping’s ‘Belt and Road’ initiative (BRI)-a grand plan that envisions deepening trade and investment ties with countries across the Eurasian landmass and beyond. Bankers see the BRI as a key source of growth in Chinese dollar bonds.”
August 1 – Bloomberg: “Recent optimism in China’s debt market will soon be put to the test, with investors able to demand early repayment for as much as 544.7 billion yuan ($80bn) of debt by year-end. The amount of local bonds with put options that hit trigger points in the coming five months comes to almost 1.4 times the tally from January to July… While China’s credit markets are still functioning relatively smoothly — even as corporate defaults run at a record pace — the worry is that a swathe of repayment demands from puttable bondholders may upset that equilibrium.”
July 31 – Bloomberg: “Chinese investors flocked into money-market products at a rate outpacing equities and bonds last quarter, adding to what is already the biggest segment of the nation’s mutual fund industry. Mutual funds investing in low-risk, short-term debt instruments grew 5.4% last quarter to 7.7 trillion yuan ($1.1 trillion), compared to the 3.7% increase in bond funds and a drop of 1.3% in equity funds…”
July 31 – New York Times (Chris Buckley): “China’s top leader, Xi Jinping, seemed indomitable when lawmakers abolished a term limit on his power early this year. But months later, China has been struck by economic headwinds, a vaccine scandal and trade battles with Washington, emboldening critics in Beijing who are questioning Mr. Xi’s sweeping control. Censorship and punishment have muted dissent in China since Mr. Xi came to power. So Xu Zhangrun, a law professor at Tsinghua University in Beijing, took a big risk last week when he delivered the fiercest denunciation yet from a Chinese academic of Mr. Xi’s hard-line policies, revival of Communist orthodoxies and adulatory propaganda image. ‘People nationwide, including the entire bureaucratic elite, feel once more lost in uncertainty about the direction of the country and about their own personal security, and the rising anxiety has spread into a degree of panic throughout society,’ Professor Xu wrote…”
July 29 – Financial Times (Ben Bland): “Andy Chan, a young independence activist, and his Hong Kong National party’s tiny band of supporters do not look – or sound – like a serious threat to the territorial integrity of an emerging superpower. So the recent proposal by the Beijing-appointed government in Hong Kong to ban his fledgling organisation on ‘national security’ grounds looks to some observers like a serious overreaction… But from Beijing’s perspective, its intensifying squeeze on opposition groups in semi-autonomous Hong Kong – and its pushback against de facto independent Taiwan – is not only proportionate and justified, but essential. Communist party officials see Taiwan and Hong Kong’s democratic values as a direct threat to Beijing’s one-party rule – and to its new mission to promote the Chinese authoritarian model of development overseas.”
July 30 – Bloomberg (Natasha Doff): “Here’s a reminder of emerging-market fragility as global financial conditions tighten: their dollar burdens are higher than ever and still rising. Credit issued to developing-economy borrowers excluding banks has surged to $3.7 trillion by the end of March, fueled by a 16 percent year-on-year rise in new debt supply, the Bank for International Settlements said on Monday. Close to $500 billion comes from China, by far the biggest single issuer, with African and Middle Eastern nations also rapidly increasing their borrowing. The latest numbers underscore the relentless boom in the dollar credit cycle, even as investors fret over rising borrowing costs and an upswing in the U.S. currency. The premium money managers demand to hold developing-economy dollar bonds over Treasuries rose to the widest since 2016 last month before easing in recent weeks.”
August 1 – Reuters (Rodrigo Campos): “Trading in emerging market credit default swaps soared 79.3% to $468 billion in the second quarter of 2018 from $261 billion in the same quarter a year earlier… Trading in emerging market CDS dipped 4.1% from the previous quarter’s $488 billion, according to a survey from EMTA, the emerging markets debt-trading and investment industry trade association. It was, however, the second highest quarterly volume in records going back to 2009…”
August 2 – Wall Street Journal (Christopher Whittall): “Turkey’s embattled financial system needs foreign investors. Its plunging currency shows only the bravest are choosing to stick around. Turkey has one of the biggest piles of foreign-denominated debt in the developing world, much of which comes due in the next year, and a currency whose dramatic decline makes it ever more expensive to pay off. The lira has lost a quarter of its value this year against the dollar, and took another leg down Wednesday and Thursday after the Trump administration sanctioned two Turkish officials following Ankara’s refusal to free an American pastor. Bond yields have exploded higher amid very high inflation and stocks have fallen.”
July 30 – Financial Times (Steve Johnson and Chloe Cornish): “Turkish inflation figures released on Friday are likely to provide a reminder why investors were so stunned when the country’s central bank left interest rates on hold last week. Economists predict that inflation accelerated to more than 16% in July, a reading that risks putting more pressure on a currency… And while Donald Trump’s threat that the US will impose ‘large sanctions’ over Turkey’s prosecution of an American pastor is a new headwind for the lira, investors and analysts say the currency’s ailments are both longstanding and more fundamental.”
July 29 – Financial Times (Kiran Stacey and Farhan Bokhari): “Pakistan is drawing up plans to seek its largest ever bailout from the IMF, with senior finance officials set to present the option to Imran Khan soon after he takes office. Any loan from the IMF, which officials believe is necessary to resolve the country’s escalating foreign reserves crisis, would see the fund impose restrictions on public spending. Such limits would make it difficult for Pakistan’s charismatic new leader to fulfil some of his election promises such as building an ‘Islamic welfare state’.”
August 1 – Reuters (Ori Lewis): “Imran Khan, Pakistan’s former cricket captain and newly elected prime minister, is on a sticky wicket. His victory in last week’s polls was secured in part on a pledge to ramp up spending on public services. Yet the coffers are empty and a balance of payments crisis looms. Instead of the ‘Islamic welfare state’ he hoped to create, his aides are forced to ponder the prospect of an IMF deal. Even that safety net may not be at hand. Mike Pompeo, US secretary of state, says Washington will oppose any bailout that pays off Chinese loans on grounds that this would be unfair to US taxpayers. For years, a dispute between China and the west has been simmering over the terms of development financing. Unfortunately for Mr Khan’s new government, Pakistan is where it threatens to boil over.”
Central Bank Watch:
August 2 – Financial Times (Gavin Jackson and Delphine Strauss): “The Bank of England raised interest rates to their highest level in almost a decade on Thursday, saying recent data vindicated policymakers’ view that the first quarter slowdown in UK growth was temporary. Members of the Monetary Policy Committee voted unanimously for a 25 bps increase, taking the BoE’s benchmark interest rate to 0.75%… The Bank of England is the third major central bank to meet this week, and has joined the US Federal Reserve in signalling further interest rate rises are on the way.”
August 1 – Bloomberg (Ira Dugal): “India’s Monetary Policy Committee decided to raise the benchmark interest rate by 25 bps…, while retaining a ‘Neutral’ monetary policy stance. The committee voted 5-1 to hike the repo rate from 6.25% to 6.5%.”
Global Bubble Watch:
August 1 – Bloomberg (Dana El Baltaji): “It’s been a slow July for emerging-market bond sales. Borrowers raised $118 billion this month from 981 issues, the least since July 2013… That’s because yields for emerging-market debt climbed for six straight months, the longest streak since at least 1998…”
July 31 – Bloomberg (Chikako Mogi): “The day after Haruhiko Kuroda pledged to allow greater swings in Japan’s giant bond market while pushing back against rapid increases, traders are putting him to the test. Moves in 10-year government debt futures were so extreme on Wednesday — a drop of as much as 0.5%, the most in almost two years — that they triggered an emergency margin call from the clearing house. In the cash market, the yield on benchmark securities rose 6 bps to an 18-month high of 0.12%.”
July 30 – Bloomberg (Enda Curran and Alessandro Speciale): “Governments are stepping up just as central banks crawl away from crisis-era settings. While the shift is modest, it suggests more support for a global expansion buffered by trade tensions and bouts of market turbulence. Morgan Stanley estimates that the fiscal deficits in four of the world’s biggest economies… will rise to 2.8% of gross domestic product in 2018 and 3% in 2019, from 2.5% last year. President Donald Trump’s tax overhaul, the biggest since the Reagan era, helped push U.S. growth to 4.1% in the second quarter, the fastest since 2014. Trade foe China is using tax cuts and infrastructure spending to underpin demand. The European Central Bank estimates the euro region’s fiscal stance will be ‘mildly expansionary’ this year.”
July 31 – Bloomberg (Emily Cadman): “Australia’s property slump deepened in July, with housing prices falling the most in almost seven years. National dwelling values dropped 0.6% last month — the biggest fall since September 2011 — as declines in Sydney and Melbourne accelerated, according to CoreLogic… Prices have now fallen for 10 straight months due to a combination of lending curbs, stretched affordability and reduced investor demand.”
July 30 – Reuters (Wayne Cole): “Growth in Australian home loans for investment hit record lows in June as tighter lending standards and hikes in some mortgage rates sucked the life out of the buy-to-let sector, piling further pressure on house prices.”
August 2 – Financial Times (Adam Samson): “Italian bonds sustained a fresh blow on Thursday, sparking the largest rise in yield since June, during a turbulent week for the global fixed income market. The country’s benchmark 10-year bond yield was up 14.2 bps in recent trade to 2.939%. It was the biggest increase since June 21 and brought the yield to the highest level since June 11… On the shorter end of the curve, the two-year yield climbed as high as 1.023% from Wednesday’s closing level of 0.783%.”
July 31 – Reuters (Kevin Costelloe and Alessandro Speciale): “Italy’s economic growth slowed to the weakest pace in almost two years, possibly spelling trouble for the populist government’s costly projects. Gross domestic product expanded 0.2% in the three months through June, down from 0.3% in the first quarter…”
July 29 – Reuters (Madeline Chambers): “Support for German Chancellor Angela Merkel’s conservative bloc, trying to move beyond a bitter dispute over migrant policy that threatened the coalition, has fallen to its lowest level since 2006, a poll showed on Sunday.”
July 31 – Bloomberg (Enda Curran): “Bank of Japan Governor Haruhiko Kuroda’s policy tweaks have either strengthened the long-running stimulus or mark a stealth ‘baby step’ toward normalizing policy. Or both? The BOJ on Tuesday made adjustments to two pillars of its policy that could be interpreted as steps toward normalization: It said it would let the 10-year yield rise just a bit higher, to 0.2% from 0.1%, and it cut in half the amount of bank reserves that would face its negative rate of minus 0.1%. On the other hand, it also introduced ‘forward guidance,’ pledging to keep short- and long-term rates at extremely low levels for an ‘extended period of time,’ though that’s not dramatically different from its long-running pledge… to continue its stimulus program ‘as long as it is necessary.'”
July 31 – Reuters (Jamie McGeever): “Not for the first time in the past 20 years, the challenges of global monetary policymaking have been laid bare by the Bank of Japan. By opting not to tighten policy…, as it had looked like it might, the BOJ highlighted how difficult it is for central banks to unwind extraordinary, crisis-era policy before the economy turns, no matter how much they may want to. It was another reminder that when it comes to extraordinary easing measures like QE and zero or negative interest rates, as The Eagles put it in ‘Hotel California’: ‘You can check out any time you like, but you can never leave’.”
Fixed Income Bubble Watch:
July 30 – Reuters: “The U.S. Treasury Department on Monday sold $51 billion in three-month debt at interest rate of 2.000 percent, the most it paid dealers and investors at a three-month bill auction in more than a decade…”
August 1 – Bloomberg (Cecile Gutscher and Yakob Peterseil): “Jim Schaeffer has found a glitch in his supply chain — and reckons it could be an early warning sign that demand in the red-hot leveraged loan market is set to cool. The deputy chief investment officer at Aegon Asset Management was collecting loans to create his firm’s next collateralized loan obligation. These are typically stored with a third party, which holds them on its books until there’s enough to bundle into a transaction. Yet when Schaeffer called on his usual warehouse providers, they were not keen to take on more exposure. ‘The market of warehouse providers is not as receptive,’ said Schaeffer, who helps oversee $103 billion of fixed-income assets. ‘That pause by warehouse providers is an indication that CLO demand could slow, which could impact the strong technical we have experienced.'”
Leveraged Speculator Watch:
August 2 – Financial Times (Megan Greene): “I was recently informed by the owner of an artificial intelligence fund that markets do not listen to economists any more. Rather than immediately dust off my CV and see what transferable skills I might have, I dug around for evidence of his claim and found there was something to it. A fundamental shift in market structure towards rules-based, passive investing over the past decade means a lot of trading is no longer based on fundamentals. But just because some markets do not pay attention to economists, it does not mean economists should not pay attention to these markets. On the contrary – this shift in market structure could well be a trigger for the next global downturn. The US Federal Reserve is concerned enough that ‘Changing Market Structure and Implications for Monetary Policy’ is the topic for this year’s economic symposium in Jackson Hole.”
July 29 – Reuters (Matthew Mpoke Bigg): “Iran’s currency hit a new record low on Sunday, dropping past 100,000 rials to the U.S. dollar as Iranians brace for Aug. 7 when Washington is due to reimpose a first lot of economic sanctions.”
August 1 – Reuters (Ori Lewis): “Israel would deploy its military if Iran were to try to block the Bab al-Mandeb strait that links the Red Sea to the Gulf of Aden, Prime Minister Benjamin Netanyahu said…”
August 2 – Financial Times (Guy Chazan): “An idea that was once unthinkable is, in the age of Trump, now beginning to seem like a sensible policy option. Should Germany acquire a nuclear bomb? The answer is yes, according to Christian Hacke, one of the country’s most distinguished political scientists. In an article for Die Welt am Sonntag in July, he said Germany was, ‘for the first time since 1949, without a US nuclear umbrella’. He added: ‘In an extreme crisis [we] are defenceless! In the worst-case scenario, Germany can only rely on itself.’ Many in Berlin dismissed the piece as silly season nonsense. But the anxiety it reflected is real enough. US President Donald Trump’s furious attacks on Germany have sown panic in Berlin, calling into question alliances and allegiances that once seemed inviolable, and forcing a rethink of security arrangements that have underpinned Germany’s world view for more than 60 years.”