Economy 8 Oct 2018 tremors in the global economy

“The International Monetary Fund (IMF) holds its annual meeting this week in earthquake-stricken Indonesia, as it shines a light on tremors in the global economy: rising protectionism, vulnerable emerging markets and record debt levels.”

“It’s been 10 years since the worst financial crisis the Great Depression tanked the world economy and wiped out $34 trillion in global equity market capitalization. Today, many investors understandably consider record high global debt levels the biggest risk of a repeat of 2008-2009… the biggest risk that many correctly point out is that it’s not just large and well capitalized blue chips that are borrowing vast amounts. It’s also shaky companies with poor balance sheets, and track records of bad capital allocation.”

“Analysis by Sky News of the paths of different recessions throughout UK and US history has found that the UK’s recovery is now comparatively weaker than the American recovery after the Wall Street Crash of 1929.”

“British businesses are the most anxious they have been about Brexit since the 2016 referendum, with more bosses reining in hiring and investment plans, a study has found. The accountancy group Deloitte has warned that worries over the long-term impact of Brexit are mounting.”

“The European Central Bank has given euro zone banks until 2022 to limit their reliance on their London operations for booking trades and loans following Britain’s exit from the European Union, the Financial Times wrote on Monday. The ECB, as the euro zone’s top banking watchdog, has long said banks will have to phase out the so-called “back-to-back” booking of EU trades in London… A spokeswoman for the ECB declined to comment.”

“The financial crisis saw almost the complete meltdown of the global financial system, requiring considerable state interventions to stave off the crisis. While recovery has picked up in Europe, the European banking system is not as robust as it may seem, warns a new report, mounting concerns that current non-performing debt levels could see another crisis unfold.”

“Last week, the populist Italian coalition produced a 2019 budget showing an increase in the deficit. That means Italy will need to borrow more money, on top of the 132% debt-to-GDP it already owes. In response, Italian borrowing costs jumped from 2.9% to 3.3%. This matters, as even a small rise in debt servicing interest rates, adds up to a lot when you owe €2 trillion. Shares in Italy’s two largest banks, UniCredit and Intesa Sanpaolo fell over 10%.”

“Italian assets slumped yet again on signs that the government’s confrontation with the European Commission over its budget won’t be resolved anytime soon. Yields on benchmark 10-year bonds rose above 3.5 percent for the first time in four years…”

“Turkish President Recep Tayyip Erdoğan reiterated on Saturday that Turkey’s economy was strong and Ankara was determined to reach its goals using its own solutions. “There is no economic crisis, only manipulative moves. We will achieve our country’s goals with our own solutions and our own programs,” Erdoğan said at the 27th Consultation and Assessment Meeting of the ruling Justice and Development (AK) Party.”

“Sudan slashed the official value of its currency against the US dollar by more than half on Sunday, the third devaluation this year in the face of a mounting economic crisis.

“The move came just weeks after President Omar al-Bashir replaced the government over its failure to curb economic woes including soaring food prices.”

“Yemen’s Oil and Mineral Ministry has denounced the looting of the country’s oil resources by Saudi Arabia, saying the move is a blatant violation of international law.

“The ministry said in a statement on Saturday that Saudi Arabia transports Yemeni oil to the Arabian Sea through a pipeline which extends from the Rub’ al Khali desert to Hadhramaut and al-Mahrah provinces south of the country.”

“In an open letter, over 50 Iranian economists warned of a collapse in the Iranian economy, stating that the severe inflation of the rial has hit a high it had never reached in the past 75 years, since World War II.”

“China’s central bank on Sunday announced a steep cut in the level of cash that banks must hold as reserves, stepping up moves to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States.”

“China stocks fall despite central bank policy easing.”

It’s the $7 trillion question hanging over Australia’s economy — property boom and correction or bubble and bust? For those warning of the latter, Ireland and its spectacular implosion during the global financial crisis offers a salutary warning of what may lie in wait Down Under. “I am concerned we could be seeing an Ireland 2.0 here within the next 12 to 18 months,” warned Martin North, the principal at Digital Finance Analytics.”

“Venezuela’s government has announced the creation of a new police force to strengthen border controls…

“…thousands of people continue to flee the country’s spiralling political and economic crises.”

“Far-right congressman Jair Bolsonaro pulled off a thumping win in the first round of Brazil’s presidential election following one of the most polarizing campaigns since the country returned to democracy three decades ago.”

“The past week may be the one that blew the lid off yields in the world’s largest bond market, with the 10-year benchmark climbing the most in almost two years Wednesday and the selling pressure showing little sign of reversing since. Traders are responding to a seemingly critical mass of evidence in favor of higher rates.”

“When bonds sell off — yields rise — it has the effect of repricing trillions of dollars of medium and long-term debt and funding right across the global economy… So the pain of Fed rate hikes is always felt somewhere in the world, because the US dollar is the global reserve currency, too, and the primary source of hard-currency funding. Which is why Deutsche Bank strategists noted this week that every Fed rate-rise cycle had ended in crisis somewhere in the world, with the global financial crisis 10 years ago the most recent.”

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Economy 5 Oct 2018 dangerously imbalanced global economy

Dangerous imbalance now in the global economy between the US economy and the rest of the world:

“Mounting concern about the inflationary impact of falling US unemployment has sent tremors through global financial markets amid fears that the long post-financial crisis rally in asset prices is nearing its end.

“The effective interest rate on 10-year benchmark US bonds reached their highest level for seven years after the latest snapshot of the American labour market showed fewer workers claiming jobless benefits.

“Shares on Wall Street fell sharply as investors predicted that the monthly official payroll report out on Friday would show that the drop in unemployment was leading to pressure for higher wages…

“Asian markets followed suit on Friday with Tokyo, Hong Kong and Seoul all in the red. Although the US dollar took a pause ahead of the payroll numbers, currencies in Asia Pacific were under pressure again against the greenback. The Australian dollar hit a 32-month low of US70.59c… The Indian rupee fell to an all-time low against the dollar on Thursday morning of 73.77, while in Indonesia – host for next week’s annual meeting of the International Monetary Fund – the rupiah plunged to a 20-year low.

“The Federal Reserve has already raised interest rates eight times in the past three years in order to head off the threat of higher inflation, but its chairman, Jerome Powell, said on Thursday the economy could expand for “quite some time”.

“Markets saw Powell’s remark as a strong hint that further policy tightening was in prospect, with the threat of tougher action from the Fed having a marked impact on emerging markets, which borrowed heavily in dollars when interest rates were at rock-bottom levels in the years after the crisis.

““A simple dynamic is playing out in the global economy right now – the US is booming, while most of the rest of the world slows or even stagnates,” said HSBC economist Kevin Logan.

““A Federal Reserve that is raising rates to prevent the US economy from overheating is constraining the policy options of countries where financial conditions are tightening and trade tensions intensifying.”

“Investors now see an 80% chance of a Fed hike in December and have revised upwards their expectations for how high rates may eventually go.

“Yields on 10-year Treasury debt were at 3.232% on Thursday, a fresh increase after Wednesday saw the steepest daily increase since the US presidential election in November 2016.”

“Across the U.S., companies are hitting the panic button. The Trump administration has levied 10 percent tariffs on $200 billion of Chinese goods, a charge that is expected to rise to 25 percent by 2019… Against that backdrop, it’s becoming clear that many companies are rushing to secure products and materials before prices rise regardless of current demand. You could say they are in panic-buying mode. The upside is that this behavior bolsters economic growth in the short term. The downside is that there is likely to be a nasty hangover.”

“With a staggering $1.5tn in outstanding student loans, the United States faces a crisis that has rippled throughout the economy – and is getting worse.

“Nearly two-thirds of 2017 college graduates need to pay back student loans, according to the California-based Institute for College Access and Success, and about 9 million have defaulted .”

“Alaska’s economy has been in recession for three years now… The state has lost so much ground — between 12,000 and 13,000 jobs — that it’s going to take a while to get back to where Alaska was in 2015. And even though job losses are letting up, they’re still happening. Parts of the economy, like the retail sector, are struggling.”

“The tough economic work may only just be starting for Justin Trudeau after Canada struck a last-minute deal to be included in the new NAFTA. Wages are barely keeping up with the cost of living, business executives complain they can’t compete and households are carrying record levels of debt that will weigh down the expansion.”

“Experts use the word “recession” for “a state of decrease in economic activity over a period of time,” but for the Nicaraguans that suffer its effects, it’s nothing less than a disaster that depresses their businesses, cuts their income and puts the welfare of their families at risk.”

“When Danielis Diaz stopped receiving HIV/AIDS drugs four months ago, she had a life or death choice – stay home and become another lifeless casualty of Venezuela’s crumbling health system, or flee to Colombia. Today, the 32-year-old transgender woman is about to restart her free antiretroviral medication at the Censurados Foundation, a non-profit HIV/AIDS rights group that runs a clinic out of a garage in Colombia’s border city of Cucuta.”

“To call him Latin America’s Donald Trump, as some have, is much too kind. Mr Bolsonaro is a misogynist and homophobe whose views on indigenous communities and the environment are every bit as grim. He praises torturers and the military dictatorship that ran Brazil from 1964 to 1985. He recently called for political opponents to be shot. His bigotry is portrayed as “honesty”…Brazil is struggling to recover from its worst ever recession.”

“Brazilian automakers are facing the prospect of a sharp drop in exports this year as a crisis in neighboring Argentina hampers the prospects of car sales abroad, the national automakers’ association said on Thursday… Anfavea, as the association is known, said auto exports will now drop 8.6 percent this year to a total of 700,000 units. The estimate represented a significant revision…”

“Uganda became the first major sub-Saharan African economy to increase interest rates this year to counter inflation pressures caused by weakening currency and rising oil prices. The Monetary Policy Committee in the east African nation increased the benchmark rate to 10 percent from 9 percent… The U.S. Federal Reserve has raised rates three times this year. That added to pressure on emerging-market assets and currencies that’s already taken a knock from the trade war between the U.S. and China and the recent turmoil in Turkey.”

“Turkey’s lira weakened more than one percent on Thursday, a day after data showed that annual inflation had hit nearly 25 percent in September, vastly exceeding expectations, and as the dollar held at a six-week high…

“Turkey’s lira has lost around 40 percent of its value this year on concerns about the central bank’s ability to rein in double-digit inflation.”

“Thousands of demonstrators chanted slogans condemning the ousted president Mansour Hadi and the Saudi-backed aggressors, and blamed them for worsening economic conditions in the country…

“The economic and living conditions are deteriorating sharply, as prices continue to rise, following the rapid collapse of the national currency because of an ongoing blockade against the country.”

“Consumer prices in the Philippines rose at the fastest pace in more than nine years in September, with central bank Deputy Governor Diwa Guinigundo pledging a “strong tightening bias.” Inflation accelerated to 6.7 percent from 6.4 percent in August, the Philippine Statistics Authority said in Manila on Friday… On top of that, a more than 8 percent slump in the currency this year is adding to the inflationary pressure.”

“J.P. Morgan is getting less optimistic about the trade conflict between the U.S. and China. The firm lowered its rating for Chinese equities to neutral from overweight, predicting the escalating trade war between the countries will affect China’s economy next year. “A full-blown trade war becomes our new base case scenario for 2019,” emerging market strategist Pedro Martins Junior said in a note to clients Wednesday. “There is no clear sign of mitigating confrontation between China and the US in the near term.””

“A reliable leading indicator for the world’s least affordable housing market is sending a sell signal for the first time in three years. Losses in the Hang Seng Properties Index on Thursday left the gauge of Hong Kong real estate stocks trading as much as 20 percent below its peak in January. Declines of that magnitude from major highs have preceded the last four downturns in Hong Kong home prices, data compiled by Bloomberg show.”

“Four out of five of the UK’s leading retail chairman have stated that they aren’t ready for Brexit as pessimism in the sector skyrockets.

“According to Korn Ferry’s 2018 Retail Chairmen Survey, which quantifies the views of 34 leading retail chairman employing more than 1.45 million people, pessimism about the future of retail has hit its highest level since 2012 at the peak of the recession.”

“The controversial budget plans of Italy’s populist government are hanging on an economic premise that looks too optimistic. A week after releasing an initial deficit target, the coalition finally unveiled the figures underpinning that aim. It sees growth of 1.5 percent in 2019, followed by 1.6 percent and 1.4 percent in subsequent years. By comparison, the median in Bloomberg’s latest survey is for expansion of no more 1.2 percent.”

“Italian banks have been restructuring in recent years, raising capital to fund disposals of bad debt and cutting costs. But loan losses and negative interest rates hurt earnings and mean returns do not cover their cost of equity. Market stress is meanwhile driving up the cost of funding.”

“Crude oil prices continue to climb.. Recent price moves bear a strong resemblance to previous price spikes in 2007-2008 and 2010-2012… Prices in Indian rupees are already at the same level that they peaked in 2008 and on the way to the record set in 2013… Only the strength of the dollar against other currencies is masking how high prices have become in oil-consuming countries outside the US…

“The oil market has become locked in an upward price trend… Hedge funds and other money managers have accumulated bullish long positions betting on a further rise in prices amounting to almost 1.2 billion barrels of oil.”

“The jump in interest rates on Thursday may be just the beginning, Jim Grant, editor of a closely followed market newsletter, told CNBC… Grant, a frequent critic of the Federal Reserve, blamed central banks for a “huge distortion” of interest rates because they pushed them down for the better part of 10 years. He thinks that will have consequences for the economy because people have borrowed at false prices.”

So, to recap, we have:

*Rising interest rates in the US causing other currencies to weaken relative to the $ and forcing other nations to raise their rates

*Demand-destroyingly high oil prices

*Unprecedented levels of global debt

*Stocks and property priced hopelessly unrealistically on the back of ten years’ artificial central bank stimulus

*Ever-worsening energy and resource constraints; climate change; loss of biodiversity; destruction of the environment etc. all acting as ‘axial stressors’ on the financial system

*The rise of protectionist trade policies and a world of increasingly fractious and polarised politics.

Literally all the ingredients are in place for GFC 2.0. We’re just waiting for the proximate catalyst to make itself known now…

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Economy 4 Oct 2018 IMF sounds the alarm on global economy

The IMF joins the UN, the Bank of International Settlements and, er, Gordon Brown, in sounding the alarm on the global economy. A blind man could see this coming:

“The world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reforms needed to protect the system from reckless behaviour, the International Monetary Fund has warned.

“With global debt levels well above those at the time of the last crash in 2008, the risk remains that unregulated parts of the financial system could trigger a global panic, the Washington-based lender of last resort said…

“A dramatic rise in lending by the so-called shadow banks in China and the failure to impose tough restrictions on insurance companies and asset managers, which handle trillions of dollars of funds, are highlighted by the IMF as causes for concern.

“The growth of global banks such as JP Morgan and the Industrial and Commercial Bank of China to a scale beyond that seen in 2008, leading to fears that they remain “too big fail”, also registers on the IMF’s radar.

“The warning from the IMF Global Financial Stability report echoes similar concerns that complacency among regulators and a backlash against international agreements, especially from Donald Trump’s US administration, has undermined efforts to prepare for another downturn.

“The former UK prime minister Gordon Brown said last month that the world economy was “sleepwalking into a future crisis,” and risks were not being tackled now “we are in a leaderless world”.”

“The total number of global equity issuances fell sharply from 1,344 in Q2 2018 and 1,288 in Q3 2017 to just 1,129 in Q3 2018. Like we mentioned earlier, this trend can be attributed partially to the fact that the third quarter is seasonally slow period. However, there was a noticeable weakness in global equity markets over the most recent quarter due to growing fears of a trade war.”

“One has to be surprised at the equanimity of both U.S. policymakers and world financial markets about the deepening Italian economic crisis. This is particularly the case considering that, unlike Greece, Italy is too big an economy to fail for the euro to survive and too big and costly an economy for its European partners to save… Italy has the world’s third-largest sovereign debt market with more than $2.5 trillion in outstanding government debt.”

“Perhaps the clearest indicator of the rising fear about Italy is the yield on the country’s benchmark 10-year government bond. Yields reflect the surety with which investors think they will get their money back, and they tend to move in tandem with the stability of a country’s economic and political situation…

“Italian bond yields have jumped more than 20% in just over a week.”

“Greek banking shares are down sharply amid investor fears over lenders’ needs to reduce their large stock of bad loans resulting from the financial crisis.

“The index of bank stocks was down 10 percent in Athens on Wednesday. Piraeus Bank led the losses, at about 27 percent….”

“Just as Iceland looks back at a decade of recovery since its financial and economic collapse, the north Atlantic island is once again grappling with an existential challenge for one of its key industries. Tourism and the foreign cash it provides was instrumental in digging the 340,000-person nation out of its deep hole. Now, the industry is cooling fast and problems are mounting for its airlines after years of rapid expansion. Rewind to 10 years ago, and a similar tale could be told about the nation’s banks.”

“Primera Air, a Denmark-based airline owned by Icelandic businessman Andri Már Ingólfsson, has filed for bankruptcy and ceased operating, RÚV reports. Arion Banki has lost the equivalent of millions of US dollars in the venture. The sudden collapse on Monday left passengers stranded on both sides of the Atlantic…”

“The chief executive of the partly taxpayer-owned Royal Bank of Scotland has said a no-deal Brexit could lead to recession. Ross McEwan, appointed CEO in October 2013, told the BBC any dip in growth would affect the bank’s profits and share price.

“UK Government Investments holds a 62.4% of RBS shares after the 2008 bailout and subsequent disposals.”

“Tesco has warned that opportunities to stockpile food in order to prepare for a no-deal Brexit are “very, very limited”.

“Chief executive Dave Lewis said that ensuring supplies of food remain uninterrupted was the “single biggest challenge” facing supermarkets as the UK prepares to leave the EU.”

“New car sales crashed by 20 per cent last month, the worst performance for the British motor trade since the collapse of Lehman Brothers bank, the financial crisis and the dislocation of the world economy ten years ago.

“It means that car sales this year in the UK are now running much lower than expected…”

“Major auto makers, with the exception of Fiat Chrysler, posted lower U.S. sales last month behind the ongoing slump in the car market and softer retail demand, even amid elevated incentive levels…

“…signaling an anticipated second-half slowdown continued in September.”

“Brazilians headed to the polls this weekend are finding it tougher to afford the basics than they have in years. Nearly one in three (32%) say they did not have enough money to afford food they needed in the past year, while a quarter (25%) say they lacked enough money for shelter.

“Both figures are about twice as high as they were before the 2014 election and the subsequent recession.”

“Pakistan’s economy is in deep financial crisis and exploring bailout package from the International Monetary Fund (IMF). Pakistan is also seeking investment from friendly countries to reduce debt which includes China and Saudi Arabia.

“Islamabad needs to arrange a whopping $20 billion instantly to avoid a major financial crisis.”

“India is facing an “economic crisis” due to its huge oil imports, two local TV channels cited Transport Minister Nitin Gadkari as saying on Thursday, ahead of a meeting of key ministers to discuss the falling rupee and the nation’s widening trade deficit. India, the world’s third biggest oil importer, depends on overseas markets to meet 80 percent of its oil needs.”

“The financial squeeze on India’s farmers is set to worsen because of record high fuel prices and surging costs of fertilisers, posing a challenge to Indian Prime Minister Narendra Modi in an election that must be held by May.”

Great picture from Quartz.

“India’s housing market has struggled for growth in recent years and if the central bank raises interest rates this week, there could be a further slowdown in the sector, experts told CNBC.

“A rate hike would “definitely have a negative impact” on the housing market outlook, Ramesh Nair, CEO and country head at real estate services firm JLL India, told CNBC.”

““Global trade outlook continues to look challenging as China-US trade tension shows no sign of easing. Hong Kong – as a major entrepôt for mainland China – is another indicator for broader regional trade and a more sensitive indicator as well,” HSBC said in a recent research note…

“China’s housing market is expected to slow throughout early 2019.”

“China is planning to sell $3 billion in U.S. dollar bonds this month, wooing foreign investors at a time of heightened trade tensions with the U.S. and turbulence in its own stock market. If successful, it would be the country’s second dollar-bond sale in a year… The offering is coming at a delicate time for the world’s second-largest economy. China’s gross domestic product growth is slowing, and the pace of investment in factories and public-works projects has cooled this year.”

“Australia’s housing slump has increased the possibility of debt downgrades for the country’s big banks, according to a report from Pacific Investment Management Co. “We have grown more cautious with the external credits of Australian banks,’’ according to a note to clients from Pimco that was written by analysts and portfolio managers including Taosha Wang. “The probability of a market-moving agency downgrade that causes major banks to lose their AA- rating for the first time in history is now higher than before.’’”

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Economy 3 Oct 2018 EU on the rocks

“The Italian deputy prime minister, Matteo Salvini, has threatened to sue Jean-Claude Juncker for damages, accusing the EU president of pushing up Rome’s cost of borrowing by likening Italy to Greece.

“Salvini, who is also Italy’s interior minister and leader of the far-right League party, was speaking after Juncker’s comments helped send the yield on Italian benchmark bonds to a four-and-a-half year high of 3.4%, while shares in Italian banks plunged.

“He said: “The European commission president Juncker, by equating Italy with Greece, sends the spread [gap] crazy. He could have spared us that.”

“Salvini added: “He should drink two glasses of water before opening his mouth, and stop spreading non-existent threats. Or we’ll ask him for damages.”

“Juncker said earlier this week that the Italian governing coalition’s pledge to press ahead with a budget deficit that will breach European Union rules threatens the euro’s existence.

“Salvini said Brussels was exaggerating the impact of Rome pushing ahead with its planned 2.4% budget shortfall for at least the next three years.

“He said the rising cost of financing Italy’s debts was the fault of EU officials who had spooked investors and increased the gap, also known as spread, between Italian and German borrowing costs.””

The Italian deputy prime minister, Matteo Salvini, has threatened to sue Jean-Claude Juncker for damages, accusing the EU president of pushing up Rome’s cost of borrowing by likening Italy to Greece.

Salvini, who is also Italy’s interior minister and leader of the far-right League party, was speaking after Juncker’s comments helped send the yield on Italian benchmark bonds to a four-and-a-half year high of 3.4%, while shares in Italian banks plunged.

He said: “The European commission president Juncker, by equating Italy with Greece, sends the spread [gap] crazy. He could have spared us that.”

“Leaders of the medieval enclave of San Marino are preparing to ask the International Monetary Fund for a €250m (£222m) loan to bolster its banks, still weighed down by bad debts 10 years after the global financial crisis.

“The microstate, which is landlocked within central Italy, has struggled to recover from the effects of the 2008 crisis…”

“The money laundering scandal engulfing Danske Bank A/S has Denmark’s political establishment on edge.

“After living through the crisis of 2008, and the populist wave that followed, some of Denmark’s most prominent political figures say it’s now imperative that voters aren’t left with the same sense of indignation that they felt roughly a decade ago.”

“In handing down his interim report last week at the financial services royal commission, the Honourable Kenneth Hayne was damning in his criticism of the behaviour of Australian bankers.

“It wasn’t a lack of laws, guidelines or codes of conduct that led to the richest banks stealing from the poorest Australians, the commissioner argued, it was simply greed.”

“But even the cheapest [Manhattan] homes are now struggling to sell, according to a report released Tuesday by Douglas Elliman Real Estate. It found that the number of sales fell for a fourth straight quarter, by 11%, during the July-September period on a year-over-year basis. The lower end of the market is starting to soften too in an indication that a reset is taking place, according to the author of the report, Jonathan Miller, the CEO of the real-estate appraiser Miller Samuel.”

“Past 2020, “it’s really going to hit the fan,” Caranci said. “At that point you have high level of indebtedness combined with income stress happening simultaneously.

“So we are definitely not out of the woods.” The next recession for Canada will be different than the previous because it will be “a household led recession,” Caranci said.”

“Although Nicaragua’s Central Bank has not yet publicly acknowledged it, the country will fall formally in recession as of today, October first, when two consecutive quarters are completed without the Gross Domestic Product (GDP) showing signs of growth.”

“For years, Venezuela has been in the headlines for its economic woes, including chronic shortages of food and medicine. Inflation may hit the one million per cent mark this year and 2.3 million people have fled the country, becoming economic refugees.

“The government of Nicolas Maduro has responded with a raft of policies – some of them very unorthodox – to try to deal with what is arguably the worst economic crisis of the decade.”

“”It (the polarisation) worries me a lot … there is much radicalism going on and it is something very sick,” Analice Moreira, a market stall holder, said. “I ask God to change this, because the country is broken and I’m afraid,” the 56-year-old added. Rising crime rates, a faltering economy and several high-level corruption scandals have unsettled Brazil in recent years.”

“Economists predicted inflation in Argentina would reach 44.8 percent by the end of 2018, compared to an expected 40.3 percent estimated last month, a central bank poll showed on Tuesday.

“Economists also expect Argentina’s gross domestic product to contract 2.5 percent by the end of 2018 compared with a previous estimate of a contraction of 1.9 percent last month, the monthly poll said.”

“Risks to Zambia’s inflation have heightened as the copper producer effects a long overdue fuel price hike effective midnight of 02 October… The kwacha has lost 22% in value year to date as dollar demand soared in light of negative sentiment and a strong dollar environment. The rise in pump prices is expected to cause a spiral cost push effect that will push inflation higher.”

“Bahati explained that the increase in public debt reflects the increased government budget priorities which he said have necessitated an increase in the level of government debt since Uganda’s tax revenue efforts have remained stagnate. “It has left no option for government to finance its programme in order to achieve its objectives as set out in the national development plans and the NRM manifesto other than by debt.””

“Interestingly, as analysts have pointed out, a slump in oil prices usually tends to trigger a crisis in the banking industry in these parts. For instance, in the wake of the 1998 oil slump, 28 banks went under. Also, following a sharp drop in the price of oil in 2009, the Nigerian economy, which depends on oil exports for over 90 per cent of government revenue, was severely impacted, resulting in a crisis that led to 10 banks collapsing and CBN intervening in a major way to restore stability to the industry.

“Similarly, on September 21 this year, CBN at a joint press conference with the Nigeria Deposit Insurance Corporation (NDIC) announced the revocation of Skye bank’s operating license as well as the establishment of a bridge bank, known as Polaris Bank, to immediately assume the assets and liabilities of the then ailing lender.”

“The International Monetary Fund (IMF) has called for further monetary tightening by Tunisia to tackle the North African country’s record levels of inflation. Tunisia’s inflation rate stabilized at 7.5 percent in August, unchanged from July, after hitting 7.8 percent in June.”

“Turkey’s rate of inflation surged to nearly 25 per cent last month as the crisis engulfing the country’s currency hit consumers with huge increases in prices… Turkey’s lira has lost 40 per cent of its value so far this year amid the dispute, and now shoppers are feeling the effect, according to data from the Turkish Statistical Institute.”

“An increase of 44.4% was registered in the Producer Price Index in the Iranian month of Shahrivar (Aug. 23-Sept. 22) compared with the similar month of last year, the latest report of the Central Bank of Iran announced. The PPI (using Iranian year to March 2017 as the base year for the first time) stood at 157.8 in Shahrivar, indicating a 9.4% rise compared with the previous month.”

“Philippine annual inflation rate likely continued to climb in September, keeping the pressure on the central bank to raise interest rates further to prevent consumer prices from spiralling out of control. The consumer price index in September was seen to have risen by 6.8 per cent, a Reuters poll of 12 economists showed, faster than the 6.4 per cent increase reported in August, due to rising global oil prices…”

“South Korean money market funds (MMFs) have suffered huge capital outflow due to growing worries over a financial crisis in Turkey, data showed Wednesday. The MMFs had a combined 91.27 trillion won (US$81.5 billion) under their management as of Friday, the lowest since January 5, 2015, according to the data from the Korea Financial Investment Association.”

As a global trade hub, Singapore is a canary in the coalmine:

“The private sector in Singapore slipped into contraction in September, the latest survey from Nikkei revealed on Wednesday with a PMI score of 49.6. That’s down from 51.1 in August, and it falls beneath the boom-or-bust line of 50 that separates expansion from contraction. Individually, there were sharp declines in both output and new orders – while export sales also tumbled further.”

“Directors and top executives of Infrastructure Leasing and Financial Services Ltd (IL&FS) desperately pleaded with government officials and the central bank for an urgent bailout just days before the centre moved in to seize control of the debt-laden financier, two people with direct knowledge of the matter said. “We are in dire straits… please help us,” Hari Sankaran (the ousted vice chairman and managing director of IL&FS) told finance ministry officials as recently as 10 days ago…”

“Risk premiums on U.S. junk-rated bonds have tumbled to the lowest level since the start of the global financial crisis, in a move that signals to some that markets are in the late stages of a long bull run. A dearth of fresh supply, as well as continued investor inflows and rising U.S. government-debt yields, helped push the yield spread on sub-investment grade U.S. bonds over benchmark Treasuries to 3.09 percentage points Monday — the lowest since July 2007.”

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Economy 2 Oct 2018 global factory activity plunges

“Factory activity plunged from Asia to Europe in September, reflecting how few countries are left unaffected by a U.S.-led shake-up of international trade policies.

“Chinese manufacturers said output took a hit amid the worst contraction in export orders since 2016, leading similar trends across Taiwan, Vietnam, and Indonesia. Confidence continued to plummet at Japanese firms, while euro-area factory output struggled as companies voiced concerns over global protectionism.”

“Worldwide manufacturers reported the first fall in global export orders for over two years in September, according to the latest PMI surveys. “The slowdown in trade acted as a further drag on factory output, order book growth and hiring.”

“Christine Lagarde used a speech in Washington on Monday to drop the broadest possible hint that the IMF would cut its global growth forecast when it unveils its latest health check on the world economy next week.”

“Corporate and emerging market bond sales fell in the third quarter due to rising borrowing costs and trade tensions, while volatility crimped fund managers’ emerging debt appetite.”

“Indonesia’s rupiah weakened past 15,000 per dollar for the first time in 20 years amid a souring of sentiment toward emerging-nation assets and as oil prices jumped.

“The currency has tumbled almost 10 percent this year as rising U.S. interest rates have boosted the dollar… Crude prices have almost tripled since February 2016, putting pressure on the oil-importing nation.”

“As of today beleaguered infrastructure finance company Infrastructure Leasing & Financial Services Ltd. has a new board. Six members, including two bankers, a former regulator, two veteran bureaucrats and a corporate leader, who closely witnessed a similar rescue not ten years ago… A statement from the Finance Ministry pulls no punches when outlining what went wrong at IL&FS.”

“The Consumer Price Index (CPI) inflation general increased by 5.1% on year-on-year basis in September 2018 as compared to an increase of 5.8% in the previous month and 3.9% in September 2017, Pakistan Bureau of Statistics (PBS) reported on Monday.”

“The number of Turkey companies who applied for bankruptcy protection due to market volatility amid the country’s financial crisis has exceeded 3000, according to Sözcü newspaper columnist Nedim Türkmen… Türkmen stressed that the number of applications for bankruptcy protection which have been responded to has surpassed 3000 while the number of companies awaiting a response on their application and preparing to apply is between 5000-7000.”

“After shying away from the international financial market, Egypt may well be forced by heavy funding needs to tap it just as turbulence pushes up rates, threatening to undermine its deficit-cutting ambitions. The country, which has borrowed heavily from abroad since it drew up an economic reform program with the IMF in 2016, faces a tough foreign repayments schedule over the next two years as well as a rising bill from relentlessly more expensive oil imports.”

“For economic watchers, Central Bank of Nigeria’s [recession] warnings are not coming as a surprise considering that the issue of economic contractions, when juxtaposed against the nation’s N22.4 trillion debt stock and shrinking reserves, show clearly that Nigeria is in dire straits. Worse still, the passage and full implementation of annual budgets have constantly been immersed in the dirty waters of politics at the expense of the economy.”

“South Africa may be driven to the International Monetary Fund if its rising debt goes unchecked without the buffer of savings or new sources of tax revenue, the country’s National Planning Commission said. Debt is increasing against a backdrop of weak economic growth and higher joblessness, a diminishing global-market presence and weakening investments.”

“Nearly two million people have fled Venezuela’s economic and political crisis since 2015, according to the UN which called for a “non-political” response to an exodus that is straining regional resources. “Some 5,000 people are now leaving Venezuela daily – the largest population movement in Latin America’s recent history,” UN refugee agency (UNHCR) chief Filippo Grandi told the organisation’s executive committee on Monday.”

“Italian Finance Minister Giovanni Tria’s effort to promote his government’s new fiscal strategy ended in failure on Monday, with the head of the European Commission warning of a Greek-style crisis and the nation’s bonds dropping to their weakest level in more than four years.”

“The eurozone economy may face a sharper-than-expected slowdown, key economic indicators suggest, after Italian populists roiled markets by pushing ahead with a wallet-busting budget. Movements in money supply, a key indicator for future GDP growth, have raised concerns about the economic outlook for the bloc.”

“EU citizens will no longer be given priority to live and work in Britain, in a radical overhaul of immigration policy after Brexit which Theresa May said “ends freedom of movement once and for all”… The announcement of the tough new system comes before a speech by the former foreign secretary Boris Johnson, a harsh critic of the prime minister’s Brexit plans, which had been expected to dominate the third day of the Conservative party’s conference in Birmingham.”

“House prices in London have fallen for the fifth quarter in a row as high prices, stamp duty changes and Brexit uncertainty put off buyers. The average price of a home in the capital fell by 0.7% in the third quarter, compared with the same period last year, to £468,544, according to Nationwide. It followed a 1.9% drop in prices in the second quarter.”

“House prices dropped by their largest monthly fall since the global financial crisis in September, as a new report warns the amount home buyers can borrow could be slashed by a third if banks are forced to tighten their lending standards after the royal commission. Figures released on Monday showed the major capital cities have not had the usual spring bounce, with Sydney house prices down 6.1 per cent from the same time last year…”

“There is nothing normal or natural about the recovery in the US and world economies. Everything that has happened, all the recovery and growth, has been done with a decade’s worth of free money.

“This situation is abnormal, unnatural and without precedent in at least 5000 years.”

“Our research strongly indicates long term US interest rates are at a secular decision point, one that is likely to eventually be resolved by significantly – if not surprisingly — higher borrowing costs over the next one to several quarters.”

“Oil jumped to the highest level in nearly four years as a slowdown in American drilling added to concern over supply losses from Iran and Venezuela… “The supply situation looks fragile indeed,” said Norbert Ruecker, head of macro and commodity research at Julius Baer Group Ltd. in Zurich.”

Divided we fall… Unsurprisingly, political polarisation has been worsening in the US since the peaking of US conventional crude production in the early seventies:

“Party polarization is even worse than most people think, according to a new Michigan State University study.

“And neither party can shoulder the blame, as it doesn’t matter which party is in charge, said Zachary Neal, associate professor of psychology and global urban studies.

““What I’ve found is that polarization has been steadily getting worse since the early 1970s,” he said. “Today, we’ve hit the ceiling on polarization. At these levels, it will be difficult to make any progress on social or economic policies.””

Read yesterday’s ‘Economy’ thread here. And you could always sling me a few bob via my Patreon page

Economy 1 Oct 2018 China slowdown worsens

“Beijing will likely take steps to mitigate the impact of the trade war with the U.S. as recent economic indicators from China point to a slowdown, an economist said on Monday.

“”We were calling for some slowdown, but the degree is much more than what we expected,” said Jeff Ng, chief economist for Asia at Continuum Economics, a research firm.”

“Even if trade tensions between the U.S. and China can quickly be ironed out, Asia is stuck with a much deeper problem: The trade boom of years past may be hard to replicate in years to come.

“If anything, the sputtering export engine will continuously lose torque.”

“Billionaire investor Stanley Druckenmiller warned that dollar-denominated borrowing by emerging markets, like Turkey, Argentina and others, meant they already are facing “a shrinkage of liquidity” as the US central bank raises interest rates.”

“The Philippines’ outstanding debt hit record high of 7.104 trillion pesos (131.498 billion U.S. dollars) in the first eight months of 2018 on the back of high foreign borrowings amid the issuance of yen-dominated debt bonds.”

“Emerging Asia economies that were already under stress amid a Federal Reserve policy-tightening cycle, stronger dollar and global trade tensions are bracing once again for a resurgence in inflation pressures as oil and gas prices tick higher.”

India’s Lehman Bros moment?

“IInfrastructure Leasing & Financial Services (IL&FS) has again defaulted on repaying loans — this time the amount in question is about Rs 2.7 billion — even as it received the shareholders’ nod to raise up to Rs 150 billion through debentures [India].”

“Pakistan raised its key rate to the highest in three years, making it Asia’s most aggressive interest-rate hiker this year as the country’s finances continue to dwindle. The target policy rate was raised for the third straight meeting to 8.5 percent from 7.5 percent, the State Bank of Pakistan said in a statement on Saturday.”

“Turkish manufacturing activity hit its lowest level in nine years in September, contracting for the sixth consecutive month, as output and new orders slowed on the back of a currency crisis, a business survey showed on Monday.”

“Increased uptake of commercial loans may plunge the country into a debt crisis, a parliamentary advisory team has warned. The Budget Office, a professional unit within the National Assembly which advises legislators on financial, budgetary and economic matters, is worried the contraction of expensive loans will put pressure on Kenya’s dollar reserves.”

“The President and Chairman of Groupe Ndoum, Dr. Papa Kwesi Ndoum, has called on Ghanaians to have confidence in the country’s financial sector… His comments come at a time when there is a seeming loss of confidence in Ghana’s financial institutions due to the challenges some are presently facing. Seven local banks have collapsed within the last one year, as government moved to sanitize the sector.”

“Timdi, 33, and Douglas are among thousands of African migrants who, after failing to reach Europe in search of a better life, have been flown home from North Africa by the International Organization for Migration (IOM), with funding from the European Union… seven to 10 months after going home to Cameroon, returning migrants interviewed by the Thomson Reuters Foundation are struggling to get their lives back on track. Many are battling alone the trauma of the torture, sexual violence and slavery they endured in Libya.”

“It would be an understatement to say that the Argentine economy finds itself once again in very serious trouble despite record International Monetary Fund (IMF) support. In the three months since announcing a $50 billion IMF stabilization program in June 2018, the Argentine peso has managed to lose around a further third of its value. This has contributed to a renewed spike in inflation to over 40 percent and to ever-increasing signs that the Argentine economy is yet again succumbing to a serious economic recession.”

“Hundreds of thousands of Brazilians rallied for and against controversial front-runner Jair Bolsonaro ahead of next week’s presidential elections, in what some analysts called a worrying sign of society’s deep divisions. Much of the country is now polarized between the corruption-racked leftist Workers’ Party and former army captain Mr. Bolsonaro, who is known for his offensive comments about women and gay people.”

“Jair Bolsonaro, Brazil’s firebrand right-wing presidential candidate, said on Friday that he would not accept the outcome of next month’s election if he loses, as polls suggest he will. “From what I see in the streets, I won’t accept any result that is not my election,” the populist politician told Brazilian broadcaster TV Band.”

“Let there be no doubt, the budget that the Italian government is about to pass is a remarkable act of economic self-harm. It could take a long time to repair… Italy’s public debt stands at more than 130 percent of GDP — the largest in the euro zone after Greece. For the past few years, Italy has benefited from ultra-low interest rates thanks to the European Central Bank’s quantitative easing. The ECB is now pulling back from net purchases…”

“Italy’s powerful deputy prime minister Matteo Salvini said Saturday “I do not care” if the European Commission rejects a budget plan that would worsen Rome’s already mammoth debt burden. “No one in Brussels can tell me it is not time,” the head of the far-right League party told a meeting in the Italian capital. “If Brussels says I cannot do it, I do not care, I will do it anyway,” the outspoken leader vowed.”

“Uncertainties over Brexit are causing business activity and optimism levels in the financial industry to fall sharply. A survey of 100 leading financial firms found a “widespread” deterioration in sentiment, with investment managers reporting a “striking loss of momentum” since the start of the year. Profits tumbled in several sectors, with investment managers reporting the steepest drop since the financial crisis…”

Read the previous ‘Economy’ thread here. And why not donate via my Patreon Page? Couldn’t hurt…