It significantly raises the stakes for a potential nightmare scenario: with less than five weeks until election day, the President contracts COVID-19. As if this election cycle wasn’t chaotic enough. As CNN put it: “A stunning new twist in a tumultuous year, throwing an election that is only 32 days away into chaos and raising the grave possibility of more American crises over governance and national security at an already perilous moment.” And from the Wall Street Journal: “The law of unknown consequences now is in full effect. The uncertainty starts, of course, with the actual state of the president’s health going forward. In the coronavirus pandemic, the world has seen that the difference between a mild case and severe reactions can be an enormous one.”

Whether it’s the recession, Credit issues, COVID consequences more generally, or even the President’s illness – markets have been well-conditioned for “mild case.” The S&P500 ended Friday’s session down just under 1% (the broader market actually closed higher on the day), a notably mild reaction to such a potentially destabilizing development. The perceived higher likelihood of a stimulus deal helped underpin financial markets. A Friday evening Bloomberg headline: “Escalating Chaos Again Proves Incapable of Derailing the S&P 500.”

Clearly, markets have grown comfortable seeing bad news in positive light. But to see the President – less than 24 from his positive test result – board Marine One for a planned several-day stay at Walter Reed Medical Center is unsettling to say the least.

A phenomenal market backdrop has become only more so. Let’s take the analysis back a year as we strive for an informed perspective. Federal Reserve Credit jumped $170 billion (to $3.946 TN) in the four weeks preceding October 2, 2019 – as the Fed restarted QE in response to heightened repo market instability. Fed Credit expanded an additional $252 billion between October and February 19th.

Bloomberg’s Tom Keene (September 23, 2020 TV interview): “It’s all great. I look at the Fed policy and the hope and the prayer. But the great conundrum out there… is this fear of asset Bubbles. Is a consumer discretionary stock with a 32 P/E the definition of an asset Bubble? …Are these asset Bubbles?”

Mike Schumacher – Wells Fargo Securities Head of Macro Strategy: “The Bubble term is interesting. People talk about it quite a bit. It’s hard to define it. What exactly is a Bubble? To me a bubble is something where prices explode upward with no tie to fundamentals and no clear link to policy changes. And what we’ve had in the last six months is a little different, because policy shifts have really boosted assets dramatically. So, I’d say it’s too soon to tell the Federal Reserve or the ECB that they’ve really put forth a Bubble. But that could happen in six or twelve months.”

“A bubble is something where prices explode upward with no tie to fundamentals and no clear link to policy changes.” There’s a big hole in this definition: Government policies typically play an instrumental role in Bubble Dynamics.

Fed Credit has expanded $3.294 TN over the past 56 weeks, an unprecedented expansion of central bank liquidity. Did the Fed further inflate a historic speculative Bubble, exacerbating market and economic fragilities heading into a pivotal election?

It is almost universally accepted that the Fed has acted responsibly and effectively in countering negative pandemic effects. Markets remain near all-time highs in the face of economic weakness and myriad uncertainties. Booming equities and Credit markets have provided powerful underpinnings to the real economy.

For most, the Bubble debate is not even relevant. General sentiments are harmonious with Treasury Secretary Steven Mnuchin’s comments from a couple weeks back: “Now is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet. There was a time when the Fed was shrinking the balance sheet and coming back to normal. The good news is that gave them a lot of room to increase the balance sheet, which they did. And I think both the monetary policy working with fiscal policy and what we were able to get done in an unprecedented way with Congress is the reason the economy is doing better.”

I had serious issues last September when the Fed introduced this notion of “insurance” monetary stimulus, moving forward with aggressive measures despite stocks near record highs and unemployment at 50-year lows. It was a move that clearly risked ratcheting up already severe market distortions. Then in January the risk of a highly problematic global pandemic became increasingly apparent. U.S. equities, however, completely disregarded this risk well into February (record highs on Feb. 19th). The S&P500 returned 16.7% between September 1st and February 19th, with the Nasdaq100 up 27%.

Were Fed stimulus measures responsible for extraordinary pre-COVID market gains? Did the restart of QE contribute to market COVID complacency? And most pertinent to this analysis, did the powerful advance and risk complacency contribute meaningfully to latent market fragility? Or, more directly, did a Fed-orchestrated Bubble create a dangerous speculative market dynamic whereby risks were disregarded until reaching the point where the dam broke and crash dynamics erupted? Did “policy changes” directly contribute to acute Bubble fragilities and a near market breakdown?

The VIX index traded as low as 14.49 on February 20th – a remarkably depressed level considering escalating pandemic risks. I would strongly argue the low cost of market “insurance” was a direct consequence of the Fed’s September adoption of an “insurance” policy stimulus approach. Why not sell put options and other market derivatives insurance with the Fed committed to moving early and aggressively to counter nascent market instability?

I’ve over the years used a flood insurance analogy in an attempt to underscore anomalies in market “insurance.” It was as if in February the cost of flood insurance remained unusually cheap in the face of torrential rainfall – knowing the barriers local authorities had erected up the river were restricting water-flow.

The longer a Bubble’s duration the easier it becomes to rebut its existence. Meanwhile, Bubble effects over time turn more structural. Protracted bull markets crystallize perceptions, while financial innovation ensures myriad instruments and strategies that work to perpetuate bullish flows and trading dynamics.

There becomes little doubt. It’s best to remain fully invested. Managed risk, not by adjusting portfolio composition but with options and other derivatives. “All weather” portfolios can be structured with Treasuries and other diversification tools functioning as internal hedges. And, in the event of acute market instability, there are myriad highly liquid ETFs that can be immediately shorted (or, in other cases, purchased) to efficiently hedge market risk.

Given time, risk embracement ensures mighty and unflagging flows into the risk markets. The bull market functions elegantly – validating perceptions of robust fundamentals and market conditions. Risks are downplayed, with complacency reinforced by readily available risk insurance and risk-mitigation strategies. It all works miraculously until it doesn’t – until the eventual disruptive eruption of “risk off” de-risking/deleveraging.

It is impossible for “the market” to offload risk. Any time a meaningful segment of the marketplace seeks to de-risk there becomes the critical issue of who has the wherewithal to “take the other side of the trade.” With market “insurance” remaining so inexpensive, it made sense back in January and February to maintain a “risk on” posture while also purchasing put options and other derivatives to hedge potential pandemic risks. Yet the accumulation of huge quantities of option protection created vulnerability to downside market dislocation. If large amounts of flood insurance were purchased and then the dam breaks – it immediately becomes a systemic issue.

When pandemic risk materialized (economic lockdowns, acute uncertainty and fear), those that had sold market insurance rushed to sell underlying instruments (futures, stocks, ETFs, etc.) to (dynamically/“delta”) hedge their rapidly expanding risk exposures. At the same time, a highly speculative market experienced an abrupt bout of liquidation. All the plans to sell highly liquid (equities and corporate bond) ETF shares – liquidation of speculative long positions and hedging-related shorting – quickly sparked illiquidity, dislocation and panic.

And what did we learn from such a terrifying experience? That “whatever it takes” Federal Reserve measures will embrace trillions of liquidity creation; the Fed is willing to expand purchases to include corporate bonds, ETF shares and, surely at some point, stocks; there are no longer limits to the type and scope of various Fed special financing vehicles; and the Federal Reserve is willing to greatly expand the scope of international swap arrangements.

We’re now a month away from pivotal elections with a high probability for general chaos, contested outcomes, and protracted uncertainty and instability. And now the President is in the hospital with COVID; infections are mounting within the halls of power; and general disarray has engulfed Washington. At about 3,350, the S&P500 remains within striking distance of last month’s all-time high.

The bottom line: The November 3rd election could be the most heavily hedged-against event in market history. Moreover, the most hedged event comes in the most speculative of market backdrops – which follows history’s greatest expansion of central bank liquidity. Tinderbox.

The marketplace has had months to purchase put options and other derivatives “insurance.” Too much of the marketplace has acquired products or adopted trading strategies that are expected to offload risk in the event of a meaningful market drop. In the event of negative developments and a resulting market downturn, massive sell-programs would kick in as sellers of market insurance move to hedge escalating risks. Moreover, an extraordinarily speculative market is susceptible to any shift in risk tolerance. In short, the potential for a self-reinforcing cascade of selling and market dislocation is today even greater than March.

Why do markets remain so dismissive of election-related risks and latent market fragility? The Fed, of course. And this has created a dangerous dynamic. Markets have become completely incapable of adjustment and correction. The nightmare scenario would see problematic developments, market dislocation, and Fed impotency in the face of acute market instability. Markets, of course, have faith in “whatever it takes” ensuring nightmares don’t become reality. But years of QE and bailouts (certainly including March) have nurtured a high-risk Bubble backdrop with the potential for mayhem.

Markets needed to have been left to stand on their own. The pandemic unleashed myriad risks – including market and economic dislocation, social upheaval and, even, the President and top government officials becoming ill. The pandemic elevated the risk of social, political and geopolitical instability. And it was not the Fed’s role to have so numbed the markets to risk. Such numbness has only exacerbated market and financial fragilities.

We’re now living the perilous consequence of the Fed using the securities markets as its key mechanism for system reflation. The system would today be less fragile had air been allowed to come out of equities and corporate bond Bubbles. Instead, highly inflated Bubbles create increasingly unwieldy risk dynamics in a pandemic backdrop of extraordinary instability and uncertainty.

We’re about a month from a potentially cataclysmic market reaction in the event of a highly unfavorable election outcome. I’ve written this in the past. Contemporary finance works miraculously so long as financial claims and asset prices continue inflating. It just doesn’t function well in reverse. And, importantly, the degree of dysfunction worsens following each repeated market bailout and resulting speculative Bubble resurgence.

Bloomberg’s Lisa Abramowicz: “Fund manager after fund manager has come on this show and said that we are at risk of creating an asset price Bubble if not having created it already. How does that factor into your calculus about when to tighten policy?”

Federal Reserve Vice Chairman Richard Clarida: “Well, that’s a good question, and obviously financial stability is always – and certainly as Powell said – an important consideration. We get regular briefings on financial stability. We issue a twice-yearly report, and we’re very attentive and attuned to that risk. But it’s also important to remember, Lisa, we have a dual mandate assigned from Congress which is maximum employment and price stability. If, hypothetically, we were to become concerned that financial stability put our maximum employment and price stability goals at risk, then we’d have to factor that in. But Lisa, we also believe that monetary policy – raising or lowering rates – is a pretty blunt instrument. And our inclination and our preference at the Fed is to work with other agencies on regulation, supervision, bank liquidity and other dimensions than simply raising or lowering rates to deal with financial stability.”

“If… financial stability put our maximum employment and price stability goals at risk…” “A consideration”? Clarida’s comments gets right to the heart of the problem. Financial stability should never have been subordinate to prices and employment; it is, instead, the overarching mandate to be nurtured and safeguarded with intense focus and steadfast resolve. We’re today in the most financially unstable environment of my over 30 years of analysis. Hopefully the President recovers quickly, the election goes smoothly, the pandemic abates, social tensions subside, and a semblance of normalcy returns. But even in the unlikely event of a series of best-case outcomes, this historic Bubble will continue to overhang financial stability.

For the Week:

The S&P500 rallied 1.5% (up 3.6% y-t-d), and the Dow rose 1.9% (down 3.0%). The Utilities jumped 3.4% (down 4.0%). The Banks recovered 5.1% (down 34.1%), and the Broker/Dealers jumped 4.8% (down 1.9%). The Transports added 0.2% (up 3.6%). The S&P 400 Midcaps surged 4.7% (down 7.8%), and the small cap Russell 2000 rose 4.4% (down 7.7%). The Nasdaq100 gained 0.9% (up 28.9%). The Semiconductors advanced 2.0% (up 20.1%). The Biotechs slipped 0.2% (up 4.2%). With bullion rallying $38, the HUI gold index rallied 1.4% (up 34.1%).

Three-month Treasury bill rates ended the week at 0.085%. Two-year government yields were little changed at 0.13% (down 144bps y-t-d). Five-year T-note yields increased two bps to 0.29% (down 140bps). Ten-year Treasury yields rose five bps to 0.70% (down 122bps). Long bond yields jumped nine bps to 1.49% (down 90bps). Benchmark Fannie Mae MBS yields slipped a basis point to 1.39% (down 132bps).

Greek 10-year yields fell four bps to 0.98% (down 45bps y-t-d). Ten-year Portuguese yields dropped five bps to 0.22% (down 22bps). Italian 10-year yields sank 10 bps to 0.78% (down 63bps). Spain’s 10-year yields declined three bps to 0.22% (down 25bps). German bund yields slipped a basis point to negative 0.54% (down 35bps). French yields declined one basis point to negative 0.26% (down 38bps). The French to German 10-year bond spread was little changed at 28 bps. U.K. 10-year gilt yields jumped six bps to 0.25% (down 58bps). U.K.’s FTSE equities index rallied 1.0% (down 21.7%).

Japan’s Nikkei Equities Index declined 0.8% (down 2.6% y-t-d). Japanese 10-year “JGB” yields increased a basis point to 0.02% (up 3bps y-t-d). France’s CAC40 recovered 2.0% (down 19.3%). The German DAX equities index rallied 1.8% (down 4.2%). Spain’s IBEX 35 equities index gained 1.9% (down 29.3%). Italy’s FTSE MIB index rose 2.0% (down 18.9%). EM equities were mixed. Brazil’s Bovespa index dropped 3.1% (down 18.7%), while Mexico’s Bolsa increased 0.2% (down 15.9%). South Korea’s Kospi index rose 2.2% (up 5.9%). India’s Sensex equities index rallied 3.5% (down 6.2%). China’s Shanghai Exchange was little changed (up 5.5%). Turkey’s Borsa Istanbul National 100 index gained 1.9% (unchanged). Russia’s MICEX equities index fell 1.5% (down 6.4%).

Investment-grade bond funds saw inflows of $2.077 billion, while junk bond funds posted outflows of $3.589 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined two bps to 2.88% (down 77bps y-o-y). Fifteen-year rates fell four bps to 2.36% (down 78bps). Five-year hybrid ARM rates were unchanged at 2.90% (down 48bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up eight bps to 3.11% (down 87bps).

Federal Reserve Credit last week declined $15.7bn to $7.016 TN. Over the past year, Fed Credit expanded $3.124 TN, or 80.3%. Fed Credit inflated $4.206 Trillion, or 150%, over the past 412 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.0bn to $3.412 TN. “Custody holdings” were down $29.3bn, or 0.9%, y-o-y.

M2 (narrow) “money” supply fell $19.6bn last week $18.720 TN, with an unprecedented 30-week gain of $3.213 TN. “Narrow money” surged $3.664 TN, or 24.3%, over the past year. For the week, Currency increased $3.9bn. Total Checkable Deposits slipped $1.2bn, while Savings Deposits rose $23.4bn. Small Time Deposits fell $5.5bn. Retail Money Funds declined $1.1bn.

Total money market fund assets declined $10.4bn to a six-month low $4.404 TN. Total money funds surged $941 y-o-y, or 27.2%.

Total Commercial Paper sank $40.2bn to a three-year low $945bn. CP was down $147bn, or 13.5% year-over-year.

Currency Watch:

October 1 – Bloomberg (Kriti Gupta): “The Chinese yuan’s best quarter in 12 years is drawing renewed international attention to the currency. The onshore renminbi gained 3.8% in the three-month period ending Sept. 30, the most since early 2008, while its offshore counterpart advanced more than 4%. That’s more than Group-of-10 currencies including traditional havens like the Swiss franc and Japanese yen.”

For the week, the U.S. dollar index declined 0.8% to 93.81 (down 2.8% y-t-d). For the week on the upside, the South African rand increased 3.7%, the Mexican peso 3.3%, the Norwegian krone 2.8%, the Swedish krona 2.8%, the Australian dollar 1.9%, the British pound 1.5%, the New Zealand dollar 1.5%, the Singapore dollar 1.0%, the Swiss franc 0.8%, the euro 0.7%, the Canadian dollar 0.6%, the Japanese yen 0.3%, and the South Korean won 0.3%. For the week on the downside, the Brazilian real declined 2.2%. The Chinese renminbi increased 0.5% versus the dollar this week (up 2.54% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.3% (down 13.7% y-t-d). Spot Gold rallied 2.1% to $1,900 (up 25.1%). Silver recovered 4.1% to $24.029 (up 34.1%). WTI crude dropped $3.20 to $37.05 (down 39%). Gasoline fell 7.5% (down 34%), and Natural Gas sank 13.1% (up 11%). Copper added 0.2% (up 7%). Wheat surged 5.3% (up 3%). Corn rallied 4.0% (down 2%).

Coronavirus Watch:

October 1 – CNBC: “Participants in two of the leading coronavirus vaccine trials told CNBC that they are experiencing high fever, body aches, bad headaches, day-long exhaustion and other symptoms after receiving the shots. In interviews, all five participants — three in Moderna’s study and two in Pfizer’s late-stage trials — said they think the discomfort is worth it to protect themselves against the coronavirus. Luke Hutchison… said he was bed bound with a fever of over 101, shakes, chills, a pounding headache and shortness of breath after receiving his second dose in Moderna’s phase three trial. Another participant, testing Pfizer’s candidate, similarly woke up with chills, shaking so hard he cracked a tooth after taking the second dose.”

September 28 – Reuters (Andreas Rinke and Alexander Huebner): “Chancellor Angela Merkel told leaders of her Christian Democrats (CDU) on Monday that coronavirus infection rate could hit 19,200 per day in Germany if the current trend continues but stressed that the economy must be kept running…”

Market Instability Watch:

September 27 – Wall Street Journal (Amrith Ramkumar and Julia-Ambra Verlaine): “Investors are betting on one of the most volatile U.S. election seasons on record, wagering on unusually large swings in everything from stocks to currencies as they brace for what could be a weekslong haul of unpredictable events. The bets go beyond the Wall Street hedging that typically precedes an election. Traders are scooping up a variety of investments that would pay out if volatility extends far beyond Election Day itself, concerned that the outcome of the presidential contest could remain unclear into December. Whether fueled by a slow or contested counting process, futures and options prices show that an ambiguous election result is now the stock market’s baseline expectation…”

September 28 – Financial Times (Robin Wigglesworth in Oslo and Eric Platt): “Investors are growing more jumpy about the risk of a disputed US presidential election, stepping up preparations for a potential period of market volatility as the costs of insuring against turbulence rise. Futures tied to the Vix volatility index… have long reflected investor concerns that the result could become contentious. This has led to what some traders term a ‘volatility kink’ around the November vote. But that kink has grown more pronounced since President Donald Trump indicated he might not concede if he were defeated in the November 3 election. Futures markets suggest that investors now fret that any turmoil could last for several months.”

October 1 – Financial Times (Gillian Tett): “Once upon a time — say, a decade ago — equity and debt investors classified countries into two buckets. There were ‘emerging markets’ countries, where investors often had to price in political risk due to fragile institutions, capricious leaders or populist swings. Then there were ‘developed’ countries, where the political institutions were presumed to be so stable that risks could be measured with spreadsheets and uncertainty was driven more by policy than the political process itself. No longer. Even before the full swing of the US presidential election exploded on to television screens this autumn, investors had started to realise that the source of political risk and instability is shifting between developed and emerging markets.”

September 29 – Financial Times (Robert Armstrong): “A dramatic gap has opened in how banks and the bond market perceive the health of corporate America, with banks setting aside billions against bad loans even while bond prices suggest a dramatic recuperation from the Covid-19 shock. US banks’ loan loss reserves have risen by $110bn since the crisis began, and are now equivalent to 2.2% of their loan portfolios, the highest level since after the financial crisis in 2012. Meanwhile, the difference in yield between US government debt and corporate bonds with the lowest investment-grade rating appears to indicate that the pandemic crisis is all but over. The spread has tightened from almost 5 percentage points in March to well under 2 points now — as narrow as it was early last year.”

October 1 – Reuters (Tom Arnold): “Large outflows from emerging market investments towards the end of September point to a big ‘risk-off’ shift brewing, Institute of International Finance economists say. Emerging markets sucked in $2.1 billion in portfolio flows in a month marked by fresh market turmoil, uncertainty arising from the U.S. election, a rejuvenated dollar and uncertainty about the recovery from the coronavirus, the IIF said — more than the $700 million seen in August. But it said high frequency outflows from emerging markets towards the end of the month were almost as big as in the 2013 ‘taper tantrum’ or during 2015 when the Chinese yuan was devalued.”

September 28 – Bloomberg (Joanna Ossinger): “Safe-haven assets seen as traditional hedges aren’t panning out as they once did, according to JPMorgan… Easy-money policies may actually be keeping investors in cash and away from other traditional buffers, strategists led by John Normand wrote… That’s because such policies create a zero-yield environment where cyclical assets might be too difficult to hedge, they said… ‘Defensive assets are delivering their weakest performance and therefore worst hedge protection of any equity sell-off in at least a decade,’ Normand said. ‘The wall of cash some hypothesize will inevitably flow into equity, credit and EM may remain very high indefinitely.’”

Global Bubble Watch:

September 26 – Associated Press (Cara Anna): “In a year of cataclysm, some world leaders at this week’s annual United Nations meeting are taking the long view, warning: If COVID-19 doesn’t kill us, climate change will. With Siberia seeing its warmest temperature on record this year and enormous chunks of ice caps in Greenland and Canada sliding into the sea, countries are acutely aware there’s no vaccine for global warming. ‘We are already seeing a version of environmental Armageddon,’ Fiji’s Prime Minister Frank Bainimarama said, citing wildfires in the western U.S. and noting that the Greenland ice chunk was larger than a number of island nations.”

October 1 – Reuters (Colby Smith): “The IMF has called for urgent action and ambitious reforms to prevent a much more pronounced debt crisis in some of the world’s poorest countries, underscoring its concerns that many emerging economies will struggle following the Covid-19 pandemic. IMF managing director Kristalina Georgieva warned there was a risk of a spate of sovereign bankruptcies unless temporary debt relief measures put in place earlier this year are extended and sovereign debt contracts and processes are overhauled. ‘No debt crisis has happened yet thanks to decisive policy actions by central banks, fiscal authorities, official bilateral creditors and international financial institutions in the early days of the pandemic,’ she wrote… ‘These actions, while essential, are fast becoming insufficient.’”

September 29 – Financial Times (Ortenca Aliaj, Kaye Wiggins, James Fontanella-Khan and Arash Massoudi): “A resurgence in mergers and acquisitions activity led to the busiest summer for blockbuster deals in three decades… The combined value of $5bn-plus deals worldwide soared to $456bn in the three months to September, figures from Refinitiv show. That makes it the busiest third quarter on record, as bankers raced to make up for a dearth of activity at the height of the coronavirus crisis. ‘The pace of the rebound in August and September somewhat surprised us,’ said Dirk Albersmeier, global co-head of M&A at JPMorgan. ‘It’s been an amazing third quarter in terms of the rebound.’”

September 27 – Financial Times (Rana Foroohar): “Two of the most important economic questions over the next few years are: how will the US-China relationship play out, and how will nations curb corporate monopoly power? The biggest global economic winners over the past three decades have been China and large corporations, research by the United Nations Conference on Trade and Development shows. As they have risen, local labour’s share of gross domestic product has fallen in the US and most parts of the world.”

Trump Administration Watch:

September 25 – Reuters (Andy Sullivan): “U.S. President Donald Trump said… Americans might not know the winner of the November presidential election for months due to disputes over mail ballots, building on his criticism of a method that could be used by half of U.S. voters this year… ‘I like watching television and have, ‘The winner is’, right? You might not hear it for months, because this is a mess,’ he said. ‘It’s very unlikely that you’re going to hear a winner that night… I could be leading and then they’ll just keep getting ballots, and ballots, and ballots and ballots. Because now they’re saying the ballots can come in late.’”

September 28 – The Hill (Alexander Bolton): “Senators in both parties are bracing for what they fear will be a ‘chaotic’ election, heightening the stakes of next month’s Supreme Court confirmation battle. President Trump has said he wants a ninth Supreme Court justice to be confirmed so that the court is full before it potentially has to make any decisions on an election. If Trump’s nominee, Amy Coney Barrett, is confirmed, it would cement a conservative majority on the court that would include three justices nominated by the president. Polls showing a close race against Democrat Joe Biden in several battleground states have lawmakers predicting the results won’t be known immediately after Election Day, particularly with millions expected to vote via mail-in ballots given the coronavirus pandemic.”

September 30 – Reuters (Alexandra Alper): “The Trump administration has proposed including a $20 billion extension in aid for the battered airline industry in a new stimulus proposal to House Democrats worth over $1.5 trillion, White House chief of staff Mark Meadows said… ‘There’s $20 billion in the most recent proposal for the airlines that would give them a six month extension,’ Meadows told reporters…”

September 28 – Wall Street Journal (Dan Strumpf): “The Commerce Department has told U.S. computer-chip companies that they must obtain licenses before exporting certain technology to China’s largest manufacturer of semiconductors, a blow to China’s efforts to compete in advanced technology. The department laid out the requirement in a letter… The letter… says exports to Semiconductor Manufacturing International Corp. or its subsidiaries risk being used for Chinese military activities. The U.S. action threatens to cut off SMIC from equipment used to manufacture chips.”

September 30 – Reuters (Angelo Amante): “U.S. Secretary of State Mike Pompeo delivered a warning to Italy over its economic relations with China…, and described Chinese mobile telecoms technology as a threat to Italy’s national security and the privacy of its citizens. ‘The foreign minister and I had a long conversation about the United States’ concerns at the Chinese Communist Party trying to leverage its economic presence in Italy to serve its own strategic purposes,’ Pompeo told a joint news conference with Foreign Minister Luigi Di Maio.”

Federal Reserve Watch:

September 30 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials’ promises to hold interest rates very low for a long time could pose a dilemma once the pandemic is over: how to deal with the risk of asset bubbles. Those concerns flared when Dallas Fed President Robert Kaplan dissented from the central bank’s Sept. 16 decision to spell out those promises. The Fed committed to hold short-term rates near zero until inflation reaches 2% and is likely to stay somewhat above that level… ‘There are costs to keeping rates at zero for a prolonged period,’ Mr. Kaplan said… He added that he worries such a commitment ‘causes people to take more risk in that they know it’s much less likely that they’re going to be able to earn on savings.’ …’I share a lot of Rob’s concerns,’ said Boston Fed President Eric Rosengren… ‘I am worried about financial-stability aspects of this policy. I think we’re going to need to address it over the next couple of years,’ he said…”

September 28 – Wall Street Journal (James Mackintosh): “If it feels like the price of everything you buy has been soaring, that’s because it has—even as central bankers everywhere worry about the danger of deflation. The gap between everyday experience and the yearly inflation rate of 1.3% in August is massive. The price of the stuff we’re buying is rising much faster, while the stuff we’re no longer buying has been falling, but still counts for the figures. Economists will be relieved that the laws of supply and demand are still working… But for investors it hangs a veil over the outlook for perhaps the single most important issue for the markets: whether we’re headed for a future of inflation, deflation or a continuation of the past decade’s lackluster price rises.”

September 28 – Reuters (Jonnelle Marte): “While the U.S. economy has seen improvement in areas that benefit from low interest rates, such as housing, there are areas that will take longer to rebound and that will depend on the coronavirus, Cleveland Federal Reserve Bank President Loretta Mester said… ‘It’s almost like a tale of two cities,’ Mester said… ‘You have a lot of the economy now where activity is picking up, but you have a great part of the economy – travel, leisure and hospitality – where you’re not seeing a pickup. I think that’s going to continue for some time.’”

U.S. Bubble Watch:

October 2 – CNBC (Jeff Cox): “Nonfarm payroll rose by a lower than expected 661,000 in September and the unemployment rate was 7.9%… Economists surveyed by Dow Jones had been expecting a payrolls gain of 800,000 and the unemployment rate to fall to 8.2% from 8.4% in August. The payrolls miss was due largely to a drop in government hiring as at-home schooling continued and Census jobs fell.”

October 1 – Wall Street Journal (Shane Shifflett): “The coronavirus brought an end to the longest economic expansion in U.S. history. That wasn’t the only problem. When the U.S. barreled into the deep downturn that followed, it was laden with debt. Why does this matter? Economies carrying a lot of debt generally have weaker recoveries. Businesses and consumers focus on cutting their liabilities during downturns rather than spending cash—and spending is what an economy needs to rebound. All told, the borrowing spurred by years of low interest rates adds up to $64 trillion in consumer, business and government debt. How much is that? It’s more than triple the country’s gross domestic product.”

September 29 – Reuters (Lucia Mutikani): “The United States’ trade deficit in goods widened in August, with imports rising as businesses rebuild inventories which were depleted when the COVID-19 pandemic upended the flow of goods. The …goods trade gap increased 3.5% to $82.9 billion last month. Imports of goods rose 3.1% to $201.3 billion, eclipsing a 2.8% increase in goods exports to $118.3 billion.”

September 28 – Associated Press (Christopher Rugaber): “The solid growth that the United States enjoyed before the viral pandemic paralyzed the economy this spring failed to reduce racial disparities in Americans’ income and wealth from 2016 through 2019, according to a Federal Reserve report… Though Black and Hispanic households reported sharper gains in wealth than white households did, those increases weren’t enough to noticeably narrow the racial gaps. The typical white family possessed eight times the wealth of Black families and five times the wealth of Hispanic families in 2019, the Fed said.”

October 1 – Reuters (David Henry): “As big U.S. commercial banks close their books on the third quarter, analysts expect them to report a 30% to 60% plunge in profits on the year-ago period due to the pandemic-induced recession and near record low interest rates.”

October 2 – Bloomberg (Benjamin Stupples): “The penthouse at 15 Central Park West has everything you’d expect for an $88 million property: 6,744-square-feet of space, a wraparound terrace and killer views of Manhattan. Since June, the apartment owned by the family of Russian billionaire Dmitry Rybolovlev has an added feature available just for the super rich: a $42.5 million mortgage from JPMorgan… With a 2.9% interest rate, payments are about $177,000 a month. Rybolovlev… bought the apartment from Sandy Weill about a decade ago for his daughter Ekaterina. The family tried to sell it a few years later as prices for ultra-expensive properties in the city had started to slip. Instead they choose to leverage the asset. While the super-sized mortgage is one of the biggest arranged in recent months, it’s far from the only one. Lenders are increasingly providing credit to their most valuable clients after central banks slashed interest rates to protect the economy from the effects of the Covid-19 pandemic.”

October 1 – Reuters (Karen Pierog): “A trio of Democrat-run U.S. states could go deeper into debt with billions of dollars in new issuance to plug holes in their coronavirus-hit budgets, if a new round of federal aid fails to materialize this year. With revenue dropping due to the fallout from the pandemic, New York already sold $4.5 billion of short-term notes out of an $8 billion authorization, while New Jersey gave final approval this week to $4.5 billion of debt, and Illinois lawmakers earlier this year agreed to issue up to $5 billion of bonds.”

October 2 – Bloomberg (Danielle Moran and Martin Z Braun): “New York City and state both had their credit ratings lowered Thursday by Moody’s…, which said the impact from the coronavirus on the most populous U.S. city — the core of the state’s economic engine — is among the most severe in the nation. In a pair of downgrades announced within an hour of each other Thursday, Moody’s dropped both the city and state by one notch to Aa2, the third-highest investment grade rating, and warned of a long return to normal as the region tries to rebound from the pandemic.”

September 30 – CNBC (Diana Olick): “Despite another interest rate drop, demand for refinancing and purchasing mortgages fell last week, with total mortgage application volume down 4.8% from the previous week… Mortgage applications to purchase a home fell 2% for the week and were 22% higher than a ago.”

October 1 – CNBC (Jeff Cox): “First-time claims for unemployment insurance totaled 837,000 last week, …as the jobs market continues its plodding recovery from the coronavirus pandemic… Continuing claims provided some better news, with those collecting benefits for at least two weeks falling by 980,000 to 11.77 million. The continuing claims number runs a week behind.”

October 1 – Reuters (Lucia Mutikani): “U.S. employers announced another 118,804 job cuts in September, with bars, restaurants, hotels and amusement parks leading the pack amid sluggish demand several months after the COVID-19 pandemic struck the nation. The layoffs reported by… Challenger, Gray & Christmas… were up 2.6% from August and boosted total job cuts so far this year to a record 2.082 million. The previous all-time annual high was 1.957 million in 2001.”

September 30 – CNBC (Leslie Josephs): “The terms of billions in federal airline aid expire early Thursday, setting the stage for more than 30,000 job cuts. Airline executives including the CEOs of American, United, Southwest and JetBlue have been making last-ditch attempts in Washington to persuade lawmakers and Trump officials to provide additional aid as the job cuts are set to begin Thursday.”

September 29 – CNBC (Sarah Whitten): “Prolonged closures at Disney’s California-based theme parks and limited attendance at its open parks has forced the company to lay off 28,000 employees across its parks, experiences and consumer products division, the company said. In a memo sent to employees…, Josh D’Amaro, head of parks at Disney, detailed several ‘difficult decisions’ the company has had to make in the wake of the coronavirus pandemic, including ending its furlough of thousands of employees.”

September 29 – MarketWatch (Ciara Linnane): “The U.S. initial public offering market is expected to see 11 deals and two direct listings this week, adding fuel to what will be the biggest third quarter since the dot.com era… The IPO market is ending the busiest third quarter for deals since 2000, with 81 IPOs expected to raise $28.5 billion…”

September 30 – Bloomberg (Vildana Hajric): “SPACs, direct listings, traditional IPOs. No matter how companies have made the switch from private to public markets, they’ve been met with exuberance. The market for newly minted stocks has exploded this year, with U.S. initial public offerings raising more than $80 billion so far, surpassing prior highs from the dot-com era, according to Bespoke Investment Group. An exchange-traded fund of recently listed companies has surged 67%, far outpacing the broader market. And the third-quarter deal count has been the busiest since 2000, according to Renaissance Capital.”

September 29 – Wall Street Journal (Aisha Al-Muslim): “Retail store closings in the U.S. reached a record in the first half of 2020 and the year is on pace for record bankruptcies and liquidations as the Covid-19 pandemic accelerates industry changes… This year’s collapse in American retail could overtake that of 2010, when 48 retailers filed for bankruptcy in the wake of the 2007-09 recession, according to… BDO USA LLP. Including filings through mid-August, BDO said 29 retailers have sought bankruptcy protection in 2020, surpassing the 22 such filings recorded last year.”

October 1 – Financial Times (Joshua Chaffin): “As many as half of New York City’s restaurants could close permanently over the next year due to the coronavirus pandemic, eliminating up to 159,000 jobs, according to an audit issued by the state comptroller. The report offers a dire assessment of an industry that has been especially hard hit by the pandemic but whose precise financial condition has been difficult to pinpoint. Based on credit card transactions and other data, the report concluded that about a third of the city’s restaurants and half of its bars that were open before the pandemic have shut their doors.”

September 29 – Wall Street Journal (Peter Grant and Emma Tucker): “Manhattan office employees are returning to work at a much slower pace than those in most other major U.S. cities, raising the risk that New York faces a more protracted and painful recovery from the coronavirus pandemic… Wall Street bankers have been trickling back to their glass towers, while real-estate firms have tried to set an example by encouraging staff to return in force. But most of the city’s lawyers, media and publishing employees, tech industry workers and others have stayed away, real-estate brokers say. Overall, about 10% of Manhattan office workers were back as of Sept. 18, according to CBRE Group Inc…”

October 1 – Bloomberg (Natalie Wong): “Office space is flooding the market in Manhattan, as companies look to cut costs during the pandemic. Tenants put 2.5 million square feet up for sublease in the third quarter, more than double the space a year earlier and the biggest quarterly increase since the end of 2008, according to… Savills. Manhattan offices, which emptied out when the pandemic hit in March, are still largely vacant. And with workers staying home, employers in New York are rethinking how much space they need. The sublease space added in the third quarter brought the supply to 16.1 million square feet, just 200,000 shy of the high from 2009, when the financial crisis battered New York City.”

October 1 – CNBC (Jessica Bursztynsky): “Rent prices continued to plunge across the U.S. last month, with San Francisco leading the decline, according to… Zumper… The median rent for a one-bedroom apartment in San Francisco dropped more than 20% from a year ago, to $2,830… That’s the largest decline the company has recorded. Month-to-month, the price of a median one-bedroom in the city dropped nearly 7%… Zumper CEO Anthemos Georgiades pointed toward a flood of supply in the market.”

October 2 – Wall Street Journal (Collin Eaton): “It’s been a bad few years for investors in shale companies, but a pretty good few years for shale company CEOs. The leaders of U.S. shale companies received some of the largest executive pay increases in corporate America, even as their shareholders lost billions of dollars… The median pay for chief executives of large U.S. oil and gas drillers rose for four straight years, hitting $13 million in 2019. That was up from about $9.9 million in 2015, a stretch when the companies’ median total returns to shareholders fell 35%, according to the WSJ analysis of executive compensation data…”

October 1 – Wall Street Journal (Jesse Newman and Donald Morrison): “For the first time in its 46-year history, Alexander Eisele’s Napa Valley vineyard won’t turn the grapes it grows into wine this fall. Mr. Eisele’s scorched and smoke-damaged grapes are part of the toll from the record start to wildfire season this year in the American West. More than 7.4 million acres have burned and 40 people have died. Many agricultural businesses have been affected as well, particularly vineyards in Northern California and Oregon that produce some of the premier wines in a U.S. industry whose worth analysts put at a little more than $70 billion. ‘Losing the entire year for a family operation, it’s devastating,’ said Mr. Eisele, who evacuated on Monday due to wildfire threat for the second time in a month.”

Fixed Income Watch:

September 29 – Bloomberg (Max Reyes and Fabian Graber): “U.S. investment-grade bond issuance toppled another monthly record, fueled by a rush among blue-chip companies to take advantage of cheap borrowing costs in the final weeks before election night. Best Buy Co. Inc. and medical products provider Danaher Corp. were among 10 companies that… pushed the total volume above $162 billion, beyond the previous record of $158 billion set in 2019. That makes September the sixth out of the last seven months that saw all-time highs, leaving July as the sole exception.”

September 27 – Financial Times (Joe Rennison): “In the midst of the worst market sell-off in a decade, as the spread of coronavirus sent asset prices tumbling, capital markets shut down. Just as they needed it most, companies were locked out of a crucial source of funding… Then, on March 23, the Federal Reserve stepped in… The intervention helped to bring down corporate borrowing costs, which had spiralled to a 10-year high for investment grade companies during the coronavirus-induced sell-off in March. This led to the fastest pace of fundraising on record, with the total number of US corporate bonds sold so far this year topping $2tn, an annual threshold that had previously never been breached — and there is still a full quarter of the year left. So where now for corporations and investors ? ‘All issuers were, and some still are, fighting for their life,’ says Robert Tipp, chief investment strategist at PGIM… ‘It really behoves corporate managers to go and borrow to make sure they survive. If things turn out to be better than expected or there are just other opportunities out there for strategic acquisitions, having that money is going to be easy for them to justify.”

September 27 – Reuters (David Randall): “The economic effects of the coronavirus are battering the U.S. commercial-backed securities market, raising the question of the value of hotels, malls, and other buildings that act as collateral for mortgages, according to a report in the Financial Times… Wells Fargo estimates that U.S. properties that have gotten into trouble are being written down by 27% on average… Declining appraisal values could hammer portfolio managers that have moved into the commercial mortgage-backed securities market in search for yield at a time when the Federal Reserve has indicated that it will keep benchmark yields near zero until 2023 at the earliest.”

October 1 – Reuters (Jessica Resnick-Ault and Arathy Nair): “Oasis Petroleum Inc and Lonestar Resources US Inc’s bankruptcy filings are the latest in a slew of restructurings that put oil-and-gas producers on track for their biggest year of bankruptcies since the 2016 shale downturn. Thirty-six producers with $51 billion in debt filed for bankruptcy protection in the first eight months of the year, according to… Haynes and Boone. The coronavirus pandemic crushed fuel demand and left debt-laden producers without access to credit. The number of companies filing still lags 2016, when 70 companies filed for bankruptcy. However, those firms were generally smaller and left a total of $56 billion in debt.”

September 28 – Wall Street Journal (Jon Sindreu): “Aviation’s worst crisis in decades is almost eight months old. For aircraft investors, especially those that bought complex products, it could be just the beginning. Investors who piled into plane-backed securities during the long travel boom have so far been spared some of the pain, as leasing firms and investment vehicles have tapped security deposits and overdraft facilities to keep payments going. But airlines have missed out on their important summer season and face the winter with hundreds of jets they don’t need and can’t afford. A new wave of payment deferrals seems likely. This may explain a pickup in acrimony in the $150 billion aircraft-finance market.”

China Watch:

September 29 – Bloomberg: “China’s central bank is seeking to normalize monetary policy as the ‘economy recovers steadily,’ in another sign that the country’s policy makers are gradually pulling back from the stimulus measures enacted amid the Covid-19 pandemic. The People’s Bank of China will make monetary policy more precise and targeted, it said… The PBOC called on banks to make full use of structured monetary tools to increase the ‘directness’ of its policies and vowed to achieve a long-term balance between stabilizing growth and preventing risks.”

September 30 – Bloomberg (Alessandra Migliaccio, Chiara Albanese and John Follain): “Italy’s market crisis may have subsided, but the debt worries that caused it will haunt Europe for a while yet. That’s the bleak outlook that Finance Minister Roberto Gualtieri will reveal this week when he unveils budget targets that are likely to show his ambitions to fix the region’s third-biggest economy after its coronavirus calamity remain limited for now. Even with European Central Bank support to help keep a lid on its borrowing, and 209 billion euros ($245bn) of European Union aid due to start flowing its way, Italy will struggle to bring its debt-to-gross domestic product ratio down. It will jump to 158% of output this year on the back of a dramatic spending increase spurred by the coronavirus outbreak…”

September 27 – Bloomberg: “China’s economic rebound showed signs of plateauing in September, weighed down by lackluster home and car sales, a weaker stock market and worsening business confidence. That’s the assessment from the earliest available indicators, which showed China’s recovery is losing pace. The aggregate index combining eight indicators tracked by Bloomberg this month slipped into contraction, compared to accelerated expansion in August.”

September 28 – Reuters (Kevin Yao): “China will need a plethora of reforms if it is to make a new economic strategy that relies mainly on domestic consumption work, advisers to the Chinese cabinet said… To rely mainly on domestic circulation, we indeed face a very arduous task,’ Yao Jingyuan, the former chief economist for the country’s National Bureau of Statistics, told a briefing.”

September 28 – Financial Times (Tom Mitchell in Singapore and Xinning Liu): “Senior Chinese Communist party officials have been sending an ominous message to private sector entrepreneurs in recent weeks. In a series of policy announcements and meetings, they have emphasised that private companies have an important role to play in ‘United Front work’ — a euphemism for efforts aimed at ensuring that non-party organisations and entities support the party’s top policy objectives as well as its iron grip on power. The officials added that they wanted to assemble a ‘team of representatives’ from the private sector. They would be recruited either as party members or to join formal advisory bodies, with a particular focus on younger entrepreneurs in strategically important technology sectors.”

September 28 – Bloomberg (Shuli Ren): “China doesn’t care about its bottom 60%. The country seems to have bounced back from the Covid-19 slowdown. Exports are growing by double digits, and retail sales, which had been lagging for months, are back to pre-virus levels. With daily life mostly back to normal, the country seems to be humming again. But poorer households are still struggling. The rebound Beijing engineered is K-shaped, exacerbating widening income inequality, which was already a problem before the pandemic. Most households in the bottom 60%, or those earning less than 100,000 yuan ($14,650) a year, said their wealth declined in the first half of 2020, the China Household Finance Survey finds. Those earning more than 300,000 yuan a year reported net gains.”

September 29 – Bloomberg: “China’s top financial officials are evaluating the risks posed by China Evergrande Group… The Chinese cabinet and its financial stability committee, chaired by Vice Premier Liu He, have discussed Evergrande without making any decisions on whether to intervene, the people said. Some regulators are considering options to support the developer, such as directing state-owned companies to take stakes in Evergrande… The discussions underscore the degree to which Evergrande’s debt challenges have alarmed senior government officials. The property behemoth… has a complex web of liabilities that includes $88 billion owed to banks, shadow lenders and individual investors across the country. Evergrande has also borrowed $35 billion from bondholders around the world and received down payments on yet-to-be-completed properties from more than 2 million homebuyers.”

September 27 – Bloomberg (Shuli Ren): “For years, investors happily bought into the dollar bonds of Chinese real-estate developers, betting that the biggest and most aggressive would become too big to fail. Even during the global markets selloff in March, private bankers told their wealthy clients not to worry. In the worst case, they could just hold those notes until maturity, and enjoy the juicy coupon payments. China Evergrande Group’s recent tumble is a wake-up call. Beijing’s latest policy shifts show it is confident that killing a dragon or two won’t cause a wildfire.”

September 30 – Bloomberg: “China Evergrande Group’s stock and local bonds soared after the developer took a major step toward avoiding a cash crunch that had threatened to roil the nation’s $50 trillion financial system and reverberate across global markets. After a turbulent few days during which banks, bondholders and senior government officials became increasingly alarmed about Evergrande’s financial health, the world’s most indebted developer said late Tuesday it reached an agreement with a group of strategic investors to avoid repayments that would have placed a sizable strain on the junk-rated company’s balance sheet.”

September 27 – Wall Street Journal (Quentin Webb and Jing Yang): “China’s most ambitious and fastest-growing companies once flocked to U.S. markets to raise money. Now rising U.S. hostility and the increased attractions of listing closer to home are tipping the scales toward Hong Kong and Shanghai. Since November, eight Chinese companies that originally went public on the New York Stock Exchange or the Nasdaq Stock Market have added listings in Hong Kong, raising a total of $25.6 billion, according to Refinitiv.”

September 28 – Bloomberg (Apple Lam): “Taiwanese banks’ contributions to offshore loans for mainland Chinese firms fell to their lowest levels in at least 10 years as lenders turn increasingly anxious to limit their credit exposure to the economic fallout of the pandemic and rising political tensions.”

October 1 – Bloomberg (Kari Lindberg and Eric Lam): “Hours after Hong Kong leader Carrie Lam declared that stability had returned to the city, police in riot gear flooded the streets Thursday, checking IDs and backpacks and confronting passers-by in an effort to quash any protest activity on the National Day holiday. With about 70 arrests and few crowds, the day was a marked departure from the mass demonstrations that paralyzed the Asian financial hub a year ago… ‘Stability has been restored to society while national security has been safeguarded,’ Lam said…”

Central Bank Watch:

September 29 – Bloomberg (Ranjeetha Pakiam and Elena Mazneva): “Gold buying by central banks, an important driver of bullion’s advance in recent years, is forecast to pick up in 2021 after a slowdown this year. Citigroup Inc. sees demand from the official sector rising to about 450 tons after a drop to 375 tons this year, which would be the lowest in a decade. HSBC Securities (USA) Inc. expects a slight up-tick to 400 tons from an estimated 390 tons in 2020, potentially the second-lowest amount in 10 years.”

September 30 – Bloomberg (Alexander Weber and Piotr Skolimowski): “European Central Bank President Christine Lagarde said it’s worth examining a Federal Reserve-style strategy that allows inflation to temporarily rise above the institution’s target. A policy of committing to make up for low inflation after missing the goal for a while ‘could be examined’ as part of the institution’s strategic review, Lagarde said… ‘If credible, such a strategy can strengthen the capacity of monetary policy to stabilize the economy when faced with the lower bound… This is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates.’”

September 30 – Bloomberg (Catherine Bosley): “The Swiss National Bank spent 90 billion francs ($98bn) on interventions in the first half of 2020, the most in years, amid a market rout in the early days of the coronavirus pandemic. The SNB was forced to step up its battle against the strong franc as investors drove the haven currency to the strongest level in five years against the euro. The activity means it spent more in just six months than in the previous three years combined.”

September 27 – Reuters (David Randall): “The Bank of England’s investigation into whether negative rates might help the British economy through its current downturn has found ‘encouraging’ evidence, policymaker Silvana Tenreyro said in an interview…”

EM Watch:

September 27 – Financial Times (Jonathan Wheatley): “Investors’ appetite for emerging market debt, driven by low global interest rates, has averted a fiscal catastrophe in developing countries reeling under the shock of coronavirus. But by attempting to borrow their way out of trouble, governments are storing up bigger problems for the future, analysts warn. In the panic that gripped markets when the pandemic struck in March, many feared emerging markets would be plunged into a debt crisis like the ones that battered them in the late 20th century. Rather than debt default, however, there has been new borrowing. Since April 1, developing countries have raised more than $100bn on international bond markets.”

September 28 – Bloomberg (Netty Ismail, Karl Lester M. Yap and Sydney Maki): “Emerging markets are heading toward the end of the third quarter with more reasons to be cautious than optimistic. Developing-nation stocks, currencies and bonds had their worst week in the five days through Friday since the coronavirus pandemic rocked global markets in March. The gap between implied volatility in emerging-market currencies and their Group-of-Seven peers is at the widest since June amid concerns over renewed lockdown measures and delays to further U.S. fiscal stimulus. Emerging-market exchange-traded funds suffered the biggest weekly outflow since early July as assets tumbled.”

September 30 – Bloomberg (Mario Sergio Lima): “Brazil’s public debt reached a record in August as the government increases spending to fight the impact of the coronavirus pandemic. The country’s gross debt rose to 88.8% of gross domestic product last month, the highest ever… The primary budget deficit, which excludes interest payments, reached 611.3 billion reais ($108.2bn) in a 12-month period, or 8.5% of GDP.”

Europe Watch:

September 27 – Financial Times (Sam Fleming and Mehreen Khan): “More than two months after their triumphant recovery fund deal, EU leaders are growing increasingly nervous about getting it over the line. For weeks, the bloc’s council of ministers and parliament have been at loggerheads over details of the massive pandemic-era budget package. Talks last week descended into public recriminations. The German EU presidency has urged MEPs to quit stalling, while MEPs accused the council of blackmailing them.”

September 30 – Bloomberg (Alessandra Migliaccio, Chiara Albanese and John Follain): “Italy’s market crisis may have subsided, but the debt worries that caused it will haunt Europe for a while yet. That’s the bleak outlook that Finance Minister Roberto Gualtieri will reveal this week when he unveils budget targets that are likely to show his ambitions to fix the region’s third-biggest economy after its coronavirus calamity remain limited for now. Even with European Central Bank support to help keep a lid on its borrowing, and 209 billion euros ($245bn) of European Union aid due to start flowing its way, Italy will struggle to bring its debt-to-gross domestic product ratio down. It will jump to 158% of output this year on the back of a dramatic spending increase spurred by the coronavirus outbreak…”

October 1 – Associated Press (David McHugh and Helena Alves): “Unemployment rose for a fifth straight month in Europe in August and is expected to grow further amid concern that extensive government support programs won’t be able keep many businesses hit by coronavirus restrictions afloat forever. The jobless rate increased to 8.1% in the 19 countries that use the euro currency, from 8.0% in July… The number of people out of work rose by 251,000 during the month to 13.2 million.”

Leveraged Speculation Watch:

September 29 – Wall Street Journal (Caitlin Ostroff): “This year’s decline in the U.S. dollar is drawing investors back into a practice that they had eschewed for some years: Borrowing the greenback to buy riskier assets in what is known as a carry trade. A number of investors are pursuing higher returns by buying overseas assets… The dollar is being used to fund such trades after a drop in U.S. interest rates this year made it less attractive for investors to hold dollar-denominated assets. With the Fed pledging to keep U.S. rates near zero for the foreseeable future, it may stay that way for a while.”

September 29 – Bloomberg (John Ainger): “Hedge funds that have racked up the largest bets against the dollar in almost three years may be running headlong into a short squeeze. With markets on edge over resurgent coronavirus cases and a contentious U.S. presidential election, predictions of the currency’s demise as the world’s number one haven appear premature. Investors went into the greenback’s strongest rally since April last week expecting losses against all-but-one of the Group-of-10 currencies, the first time that’s happened since 2013, according to ING Groep NV.”

Geopolitical Watch:

September 28 – Reuters (Yew Lun Tian): “China began five military exercises simultaneously along different parts of its coast on Monday, the second time in two months it will have such concurrent drills against a backdrop of rising regional tension. Two of the exercises are being held near the Paracel Islands in the disputed South China Sea, one in the East China Sea, and one in further north in the Bohai Sea… In the southern part of the Yellow Sea, drills including live-fire exercises will be held from Monday to Wednesday…”

September 30 – Financial Times (Kathrin Hille and Katrina Manson): “Weng Hui-ping wanted to sleep in on her day off. But the Taipei yoga teacher was woken up at 7am on Monday morning by aircraft screaming overhead. ‘I thought, are the Chinese communists here? My house is not close to the airport, it sounded like fighters,’ she said. Taiwan’s defence ministry had a simple explanation: some of its jet fighters and helicopters were practising for Taiwan’s National Day on October 10. ‘Don’t you worry!’ the ministry said… But preparations for celebratory flights are not the main reason the country’s air force have been exceptionally busy. China has sharply increased military manoeuvres close to Taiwan’s borders this month, with Taipei forced to scramble fighters almost every day during the past two weeks. Taiwanese and US officials say it is the worst escalation of military activity in more than two decades.”

September 30 – Reuters (Nvard Hovhannisyan and Nailia Bagirova): “NATO allies France and Turkey traded angry recriminations… as international tensions mounted over the fiercest clashes between Azerbaijan and ethnic Armenian forces since the mid-1990s. On the fourth day of fighting, Azerbaijan and the ethnic Armenian enclave of Nagorno-Karabakh accused each other of shelling along the line of contact that divides them in the volatile, mountainous South Caucasus.”