“When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question.
“Typical estimates, for example those embodied in the International Monetary Fund’s assessments of country risk, suggest an economic slowdown in China will hurt everyone. But the acute pain, according to the IMF, will be more regionally concentrated and confined than would be the case for a deep recession in the United States. Unfortunately, this might be wishful thinking.
“First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse…
“Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. A Chinese recession could again make the situation worse…
“A recession in China, amplified by a financial crisis, would constitute the third leg of the debt super-cycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.”
“Investors are bracing for more debt defaults among China’s cash-squeezed real estate developers as funding costs surge and refinancing pressure intensifies. Borrowing costs in dollars for China’s high-yield issuers, most of whom are property developers, almost doubled this year to 11.2pc, the highest in about four years, ICE BofAML indexes show. To make things worse, the sector faces a record $18bn bond maturities in both onshore and offshore markets in the first quarter of 2019.
“That number is expected to double if investors demand early repayment on some of these notes, according to Bloomberg-compiled data.”
“The worldwide tablet market declined 8.6% during the third quarter of 2018, as demand for slate and detachable devices slumped. According to preliminary data from IDC, global shipments fell to 36.4 million during the quarter, with slate tablets accounting for the majority of the market with 31.6 million units, down 7.9% from the previous year. Detachable tablets also declined, down 13.1% from the previous year…”
“Japan’s core machinery orders tumbled by the most on record in September after a severe earthquake and typhoons disrupted business activity, with economists now also worried about a fall in overseas orders. The 18.3 percent slump in machinery orders far outpaced the median market estimate for a 10.0 percent decline… Japan’s economy is forecast to contract in July-September, and the machinery orders slump suggests any rebound in the following quarters is likely to be weak.”
“Turkey and Argentina will undergo sharp contractions in the coming quarters as economic growth decelerates across advanced and emerging market economies, Moody’s Investors Service said in a report Thursday. As monetary tightening in major economies and geopolitical trade disputes continue to undermine investment globally, Moody’s is taking an increasingly dim view of the growth prospects of emerging markets…”
“The UK property market is at its weakest for six years, with prices flat or falling across half the country according to Britain’s official surveyors body, with reports that sales are “in limbo” until a Brexit deal emerges. The Royal Institution of Chartered Surveyors (Rics) said its monthly survey of members found “the weakest reading since September 2012” in October, with prices falling in London, the south-east, south-west and East Anglia.”
“The president debased the US public accounts with a Peronist fiscal policy of staggering irresponsibility in order to keep control of Congress – or rather to buy Congress with $US1.5 trillion ($2.1 trillion) of future public debt, might be a better description… The sugar rush of stimulus so late in the economic cycle is already starting to fade. Over the course of 2019 the Faustian pact will progressively close in on Mr Trump, and on the credit-rating of the US Treasury. Morgan Stanley said it will turn ineluctably into “fiscal drag” as the months pass without more handouts to feed the monster.”
“The Federal Reserve opened its two-day policy meeting on Wednesday, with central bankers widely expected to hold their fire but likely to signal a December rate hike… a decade of job creation and falling unemployment are at last pushing up pay and raising the odds of faster inflation. That puts the Fed on pace to continue raising rates, with a fourth increase expected this year and three more in 2019.”
““One of our primary concerns is a sharper-than-expected growth slowdown in China. We believe this will result in a material slowdown to developing economies, which may also may weigh on global growth in 2019.
“We have also lowered our 2018, as well as 2019, growth forecasts for the Eurozone. GDP, sentiment and economic activity data have been softer than expected.”
“Central banks enable debt because they think it will generate economic growth. Sometimes it does. The problem is they create debt with little regard for how it will be used.
“That’s how we get artificial booms and subsequent busts. We are told not to worry about absolute debt levels so long as the economy is growing in line with them. That makes sense. A country with a larger GDP can carry more debt. But that is increasingly not what is happening…
“…centuries of history show that every prior debt run-up eventually took its toll on the economy. There is always a Day of Reckoning.
“In the last year, the world’s largest economies are generating debt 10X faster than economic growth.
“I am trying to imagine a scenario where this ends in something less than chaos and crisis. The best I can conceive is a decade-long (and possibly more) stagnation while the debt gets liquidated.
“But realistically, that won’t happen because debtors won’t let it. The rational course would be to delay the inevitable as long as possible. Yet in the U.S. we’re rushing it.”
“The world is more fragile today than it was in 2007. That’s the opinion of former derivatives trader Nassim Taleb, whose bestseller, The Black Swan, is about how people make sense of unexpected events, especially in financial markets. True to form, he made a whole lot of money after predicting the global financial crisis more than a decade ago.
“Speaking with Bloomberg’s Erik Schatzker last week, Taleb said the reason why he has reservations about today’s economy is that it suffers from the “same disease” as before. The meltdown in 2007 was a “crisis of debt,” and if anything, the problem has only worsened.
“Indeed, debt is on the rise. By the end of the first quarter, the total amount the world owes climbed to a record $247 trillion, according to the Institute of International Finance (IIF). That’s up almost $150 trillion over the past 15 years.
“A lot of this debt, Taleb said, may have moved to different places since the financial crisis—it’s shifted from housing to governments and corporate balance sheets—but the debt “is still there.” Student loan debt in the U.S., for example, stands at about $1.5 trillion today, or nearly $33,000 per borrower. After mortgages, student debt is now the largest form of debt in the U.S.”
“The world’s major economies that entered 2018 accelerating in sync risk entering 2019 decelerating in sync. The shift is being led by China, where the economy’s weakest performance since 2009 is set to worsen unless a peace can be struck in the trade war with the U.S. Factory readings from Asia already show a fallout, with Taiwan, Thailand and Malaysia slipping into contraction territory.”
Beijing cannot risk China’s corporate powder keg blowing up. Neither can the global economy… Even China’s banking regulator has described the situation as “grim and complicated”, a sombre tone from a country often accused of being overly optimistic about the health of its economy. The world’s second-largest economy has been fuelled by eye-watering levels of corporate debt and it needed to sacrifice some of that growth to rein in a ballooning credit bubble.”
“China’s leaders have spent years convincing the world that they’re ready to handle a slower growing, more volatile economy. But President Donald Trump’s trade war against the country is adding an unexpected, so-far uncontrollable level of difficulty for policymakers and uncertainty to the global financial community. That may set China’s economy up for the worst kind of crisis it could ever face — a crisis of faith.”
“Iran greeted the re-imposition of U.S. sanctions on Monday with air defense drills and an acknowledgement from President Hassan Rouhani the nation faces a “war situation,” raising Mideast tensions as America’s maximalist approach to the Islamic republic takes hold.”
“A political crisis in Sri Lanka, where two prime ministers are fighting for power, is scaring away tourists and raising questions over foreign aid, ringing alarm bells for the economy as the currency slumps to record lows… Amidst warnings from politicians of a “bloodbath” if the dispute escalates, tourists are cancelling hotel bookings just as Sri Lankan beaches and major sites like the Temple of the Tooth prepare for peak season.”
“Confidence among UK businesses has fallen to its lowest level since 2008 amid a lack of progress in Brexit negotiations, according to new figures published today. The Institute of Chartered Accountants in England and Wales’ (ICAEW’s) Business Confidence Monitor index showed a sharp fall in confidence since last quarter from -0.2 to -12.3, lower than after both the 2016 referendum and last year’s general election.”
“While the Greek government waits for the latest developments on both the Macedonian front and its war of words with Turkey, the fallout from the economic crisis persistently presents more disturbing domestic problems… On the other, the long-term effects of the austerity programmes over the past eight years are so deep-rooted that poverty as a way of life (“queueing for a living”) is the real prospect for a huge percentage of the population.”
“If the recommendation to start a so-called excessive deficit procedure (EDP) is approved by the Council of the EU in December, Italy could face large fines ahead of next year’s European Parliament election.
“That would dramatically escalate the showdown over the budget between Brussels and the populist government in Rome.”
“At one point the president bizarrely told his audience that in an age of elites they are the “super-elite”. They weren’t quite sure what he meant. “We are the voice for every citizen who has ever been overlooked, neglected, ignored,” he proclaimed.”
“Investors are bracing for more debt defaults among China’s cash-squeezed real estate developers as funding costs surge and refinancing pressure intensifies.
“Borrowing costs in dollars for China’s high-yield issuers, most of whom are property developers, almost doubled this year to 11.2 percent, the highest in about four years, ICE BofAML indexes show. To make things worse, the sector faces a record $18 billion bond maturities in both onshore and offshore markets in the first quarter of 2019. That number is expected to double if investors demand early repayment on some of these notes, according to Bloomberg-compiled data.
“China’s property developers have been caught in the storm of a funding crunch facing the nation’s private sector due to a two-year long clampdown on shadow financing. Although authorities have rolled out measures to ease funding for non-state firms, the existing property control policies won’t loosen, the official Xinhua New Agency said in a commentary last week. At least four property-related firms defaulted on notes this year…
“Chinese home price gains slowed in September for the first time in half a year, adding to signs of a residential property market slowdown triggered by the government’s housing curbs. S&P Global Ratings expects more failures in the sector in the coming year….
“”We could see more defaults among Chinese property developers next year as dollar funding costs are now at record high for even some of the big names amidst large amount of bonds coming due, while sales outlook are not that promising with consumer sentiment deteriorating,” Christopher Lee, managing director of corporate ratings at S&P, said in an interview.”
“Business activity in China expanded at the slowest pace for over two years at the start of the fourth quarter, according to the latest Caixin PMI data. October saw the export-led slowdown spread beyond manufacturing to the service sector. “Softer demand conditions hint at the risk of a further slowdown in the coming months.”
“Small and midsize manufacturing firms in South Korea have suffered the sharpest drop in output in nine years in 2018 due mainly to a slump in the country’s automaking and shipbuilding sectors, government data showed Monday. Production by smaller manufacturers with fewer than 300 employees shrank 4.3 percent on-year in the first nine months of 2018…”
“Iranians are bracing for the full force of US sanctions due to hit on Monday as the Trump administration reimposes an embargo on oil…
“Iran has remained defiant, saying it is confident it can weather the impacts, and that the US will fail to bring down Iranian oil imports to zero. But ordinary people, wary of the fluctuations of the currency and the rising prices of goods, are anxious.”
“Tunisian woes can be traced back to the country’s economic problems, amongst other things… For many Tunisians, however, the post-revolutionary period has not brought the economic benefits they were promised or expected… with the Tunisian government still heavily subsidising basics such as milk and oil against a backdrop of a worsening economic situation has resulted in these products being sold on the black market…”
“While the UK’s chaotic withdrawal has become a dreary process to be managed, the EU is being dealt hammer blows from elsewhere – from crises that really could make or break the bloc – Foremost on the list of problem zones right now is Italy. “Nothing and nobody, no big or small letter will make us backtrack,” the country’s deputy prime minister, Matteo Salvini, and leader of the far-right League, told his followers in a Facebook video made in his office in Rome on Friday. “Italy will no longer be a slave and will no longer kneel down.””
“Companies are finding it harder to issue new debt, as the volatility battering global stocks adds to existing concerns in credit markets.
“Corporate bond prices have declined throughout the year and October’s global market rout triggered massive outflows from credit funds.
“U.S. investment-grade issuance slipped 34% from September, according to data-provider Dealogic, while high-yield issuance was down 50% from October last year. Even before October’s selloff, American companies had been raising less money. By the end of September, total investment-grade issuance in 2018 was down 12% compared with the first nine months of last year, and high-yield issuance had fallen by almost a third.
“The value of new investment-grade corporate bonds in Europe was 75% lower in October than in September and down 40% from October 2017. High-yield issuance slumped 82% from a year ago.
“Investors pulled $3.1 billion from investment-grade corporate-bond funds last week, according to Bank of America Merrill Lynch, bringing outflows over the past two months to a record $25.2 billion. High-yield funds have also seen big withdrawals…
“Credit markets had …benefited from a decade of monetary stimulus that is now being withdrawn. The European Central Bank is set to end its bond-buying program and the Federal Reserve is raising interest rates and winding down its balance sheet.”
“Asian stocks surged Friday on optimism about a potential ceasefire in the trade war between the United States and China… The gains started after US President Donald Trump on Thursday talked up the prospects of a deal on trade with Beijing after speaking with Chinese leader Xi Jinping by phone… Analysts are highly skeptical that China will agree to major changes that would address the US concerns — especially at such short notice… Investors may be letting their hopes get the better of them, according to some market watchers.”
“India’s Department of Economic Affairs (DEA) fears significant default from large non-banking finance companies (NBFC) and housing finance companies in the next six weeks if no additional liquidity support is provided to these firms, business news website MoneyControl said on Friday. The DEA, in a letter to the Ministry of Corporate Affairs, described the financial situation as “still fragile” when discussing the financial stability impact of the Infrastructure Leasing and Financial Service Ltd’s (IL&FS) default, the website said.”
“Iran is bracing for the restoration of U.S. sanctions on its vital oil industry next week, as it grapples with an economic crisis that has sparked sporadic protests over rising prices, corruption and unemployment. The oil sanctions, set to take effect on Monday, will target the country’s largest source of revenue in the most punishing action taken since the Trump administration withdrew from the 2015 nuclear agreement in May, and will also affect Iranian shipping and financial transactions.”
“JPMorgan Chase & Co. CEO Jamie Dimon said Europe could be the source of a potential financial crisis, specifically pointing to sovereign debt as a eurozone trouble spot. The “long-term health of Europe is important for the whole world,” Dimon told German newspaper Handelsblatt in an interview published Thursday. Dimon said a number of problems emanating out of Europe could morph into more severe headaches and fracture the continent’s seemingly tenuous bond.”
“The number of UK households already in debt to their energy supplier before winter begins has grown by more than 300,000 in the past year, according to research, with a total of nearly £400m owed to power companies.
“Consumers have been hit by two years of price hikes as wholesale costs have gone up, with some of the big six suppliers putting up tariffs twice this year.”
“British factories suffered their worst month since just after 2016’s Brexit vote in October, due to concerns about the country’s approaching departure from the European Union and increased global trade tensions, a survey showed…
“The reading was weaker than all the forecasts in a Reuters poll of economists. New order books and employment contracted for the first time since July 2016.”
“Despite Morneau’s latest assurances, Canada may be at the front end of another downward 1970s-1990s deficit cycle, which starts with deficit spending during a period of economic growth (like we’ve seen with the current government). The government then relies on continual economic growth to try to balance the budget. Then, when the inevitable recession arrives, federal finances are thrown back into deep deficits…. federal finances spiral out of control.”
“U.S. car sales, which dropped 2 percent last year from a record high of 17.55 million in 2016, are expected to fall further in 2018, hurt by rising interest rates and the return of more late-model used cars to dealer lots…
“Earlier this year, No. 1 U.S. automaker General Motors Co switched to reporting sales quarterly instead of monthly.”
“The economic impact of the intensifying trade war between Washington and Beijing appeared to deepen last month with factory activity and export orders weakening across Asia, but analysts warned the worst was yet to come.
“In a sign conditions for exporters and factories were deteriorating, manufacturing surveys showed marginal growth in China, a slowdown in South Korea and Indonesia and a contraction in activity in Malaysia and Taiwan.
“Those figures follow weaker-than-expected industrial production data from Japan and South Korea on Wednesday, with output in the latter shrinking the most in over 1-1/2 years.
“Worryingly, the prospects for higher U.S. rates could feed back more market pain for the region’s externally vulnerable economies — Indonesia, India and the Philippines, which have already been forced to raise rates to mitigate a sell-off in currencies, stocks and bonds.
““You have a tightening of monetary conditions around the world, a slowdown in Chinese demand, and financial market turmoil that affects sentiment and investment decisions,” said Aidan Yao, senior Asia EM economist at AXA Investment Managers.
“Yao said many orders from abroad are still frontloaded in anticipation of yet more tariffs and the impact is still mostly indirect, through the business confidence channel.
““The real economic shock is yet to come,” he said…”
“China’s leadership signaled that further stimulus measures are being planned, as disappointing economic data showed that the current piecemeal approach isn’t working.
“The nation’s economic situation is changing, downward pressure is increasing, and the government needs to take timely steps to counter this, according to a statement from a Politburo meeting Wednesday chaired by President Xi Jinping.”
“The tension in India mirrors central bank fights playing out in countries as varied as the U.S. and Turkey, and is unlikely to go away soon. Modi faces reelection next year, and he wants banks to dole out loans quickly to keep the world’s fastest growing major economy firing. Wary of already high bad debts, emerging market strains that are pressuring the rupee and threatening to add to inflation, central bank Governor Urjit Patel has other priorities.”
“Months after the summer selloff, with only two months left in the year, major emerging markets currencies are still struggling with idiosyncratic economic and political issues, as well as worries about global growth.
“Emerging economies are often heavily reliant on exports, leaving them exposed to global demand swings, much of which is in turn increasingly reliant on the health of China’s economy.”
“Fitch Ratings changed its outlook on Mexico’s long-term foreign-currency debt issues Wednesday from “stable” to “negative,” citing the potential policies of President-elect Andres Manuel Lopez Obrador.
“The leftist Lopez Obrador has tried to smooth anxieties in the business community, but upset many on Monday by cancelling a partly built, $13 billion new airport on the outskirts of Mexico City.”
“The IMF officially increased the size of a standby financing agreement for Argentina to $56.3 billion on Friday, up from an originally agreed upon $50 billion in June. The extra money comes with tougher fiscal measures.
“The IMF says that in order to get the payout, the government needs to make deeper spending cuts and—in typical IMF fashion—increase taxes to bring Argentina’s primary fiscal deficit…”
“It’s not just Italian lenders that should be worried about Europe’s toughest-ever bank test: German firms will also feel the pain.
“Deutsche Bank AG will be particularly hard hit because of the more severe stress scenario applied to German lenders, according to two people familiar with the matter, who asked not to be named because the results haven’t been published.”
“October was a rough ride for U.S. stocks, which despite regaining a portion of the month’s losses Wednesday ended as one of the worst months since the financial crisis.
“The S&P 500 lost $1.91 trillion in October, according to S&P Dow Jones Indices analyst Howard Silverblatt. Losses were spread widely across industry sectors. October was the worst month for the S&P 500 since September 2011.”
“We need a long warning because we are unprepared for a recession. Monetary policy is the fast and effective method to fight a recession. But with rates so low, that cannot help much. Fiscal policy is the second big tool. Trump’s tax cuts… will make that more difficult to use.
“My best guess: it won’t be pretty. My advice: expect the unexpected.”
“Economic growth in the eurozone has fallen to its slowest pace in more than four years, and Italy is not growing at all, according to figures released Tuesday. The snapshot is likely to sharpen political divisions in the European Union and make the region more vulnerable to the forces rattling financial markets.
“The eurozone grew 0.2 percent from July through September compared with the previous quarter, according to the European Union statistics agency. Separately, Italy’s government statistics office said growth during the third quarter was zero as manufacturing slumped.
“Both numbers were unexpectedly poor. Eurozone growth in the quarter was only half as fast as it had been in the previous three-month period, and the rate of growth has fallen each of the last three quarters.
“Italy’s stagnation is likely to heighten the dispute between the populist government in Rome and officials in Brussels. The European Commission has said that Italy’s proposed budget — full of debt-financed welfare programs — flouts spending limits that countries in the European Union are supposed to observe.”
“Italian bonds dropped as disappointing economic growth and a tepid debt sale damped investor enthusiasm. The securities snapped a three-day rally after the nation’s growth stagnated in the third quarter and sale prices for 10-year debt at the Treasury auction were below market levels. The weaker average sale price reflected fragile investor sentiment after rating agencies cut their view on the sovereign’s outlook.”
“Britain’s economy will suffer rising unemployment and falling household incomes that would trigger a recession should Theresa May fail to secure a deal to prevent the UK crashing out of the European Union next year, according to analysis by the global rating agency Standard & Poor’s.
“Property prices would slump and inflation would spike to more than 5%…”
“IL&FS Transportation Network, an entity of the crippled IL&FS group, Tuesday said it has again defaulted on interest payments on six of its NCDs. The company in a regulatory filing said all the payments were due between October 29 and 30, 2018…
“IL&FS and its subsidiaries have defaulted on several debt repayments recently due to a liquidity crisis.”
“The Chinese economy has revealed fresh signs of the pressure of a trade war with the US and a wider slowdown at home as manufacturing activity fell and the yuan was fixed at a new 10-year low to the dollar.
“China’s manufacturing sector barely expanded in October as both domestic and external demand ebbed, according to a closely watched metric released on Wednesday.”
“Japan’s Industrial Output lagged in October as frictions from the US-China trade war continue to spill over into neighboring countries. The 1.1 percent decline in output was more than the median estimate for a 0.3 percent decline and follows a 0.2 percent increase in the previous month… Economists have expressed concern that high inventories of electronic parts are a sign of weak demand, which could cause manufacturers of such goods to cut future production.”
“Beef is making a rarer appearance at the dinner tables of middle-class families as Argentina spirals deeper into economic turmoil, a Reuters review of meat industry data and interviews with consumers, butchers and ranchers has found. It’s one of the clearest signs of how far Argentines have seen their purchasing power slashed by inflation, which is expected to surpass 44 percent by year’s end, according to the latest central bank poll.”
“Crude oil prices have gone up high enough to begin hurting demand for the commodity, the chief of the International Energy Agency, Fatih Birol, said… Birol noted the adverse effect of higher oil prices on large emerging economies in particular, including India and Indonesia, saying, “Many countries’ current account deficits have been affected by high oil prices.” The negative effect has been compounded by a slide in local currencies as well, a development that can also be at least partially traced back to higher oil prices and their effect on current account deficits.”
“Leveraged loans are coming under increasing fire from international regulators who are warning that loosening lender protections mark a huge deterioration in corporate lending that could pose a systemic risk to the banking sector. Janet Yellen, the former chair of the US Federal Reserve, has joined a growing chorus of regulators who are highlighting leveraged loans as a possible source of a wave of bankruptcies as the next downturn draws closer.”
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