China weakens – the global economy’s engine of growth is stalling out, as they try to rein in credit-growth and cope with Trump’s protectionism:
“China’s expansion looks to have slowed further this month, underscoring the fragility of the world’s second-largest economy as the next wave of tariffs in the trade dispute with the U.S. approaches…”
“A leaked report from a government-backed think-tank has warned of a potential “financial panic” in the world’s second-largest economy…”
“Global stocks weakened again Thursday, with shares in Asia falling to the lowest level in nine months, as investors continue to count the cost of trade tariffs and protectionism among the world’s biggest economies. The market’s sentiment was further soured by signals that growth is starting to slow…”
“Emerging market assets sustained a fresh blow on Wednesday, with mounting concern over the escalation in the Washington-led global trade battle. JP Morgan’s emerging markets currencies barometer has fallen every day this week…”
“The next global financial crisis would be caused by higher interest rates, not trade tensions or geopolitics and political factors, said Samy Chaar, chief economist of Lombard Odier, a Switzerland-based private bank, yesterday.”
“Liquidity will be in outright contraction soon, analysts say… That whooshing sound you hear is the draining of $1.4 trillion worth of global liquidity.”
“We’re hitting the panic button here… globally inflated debt is threatening to go ‘Boom’… And there is no escape route available for the GCC, Middle East region, as well. This is a growing multi-faceted international problem that will make the 2008 financial crisis look like a walk in the park, and it’s not going away.”
“Deputy Head of UNRWA’s Workers Union, Amal Batch, warned yesterday that up to 1,000 [Palestinian] employees are expected to lose their jobs due to the financial crisis hitting the international organisation, Al-Resalah newspaper reported. Batch said that the emergency programme, which includes food assistance, temporary work opportunities and others, is at stake due to the financial crisis.”
“Lebanese President Michel Aoun said the Syrian war and regional turmoil were forcing his country to pay more than it can afford.”
“On Wednesday, the government spokesman, Mohammad Baqer Nobakht called on diaspora Iranians to “bring their money to Iran” and urged all Iranians to invest their cash and gold into the economy.”
“Venezuelan President Nicolás Maduro has called Mike Pence a “poisonous viper” after the US vice-president met Venezuelan migrants in Brazil… Earlier this week the EU imposed sanctions on 11 Venezuelan officials following elections in May which the EU said were neither free nor fair.”
“”While the direct macroeconomic impact of the existing measures will likely be small for now, further escalation may hurt growth by impacting confidence or tightening financial conditions.” Escalating trade disputes, which lead to more tariffs or even other measures tied to trade, are “a real possibility,” Sløk wrote.”
“Hurricane Maria exacerbated problems for Puerto Rico’s already-struggling real estate market — creating opportunities and pitfalls alike for would-be home buyers… In the town of Humacao, the median home price fell from $250,000 in 2016 to just $97,250 as of March. A similar situation can be seen in other popular parts of the territory, including the capital of San Juan, where prices have dropped nearly 50% over the past two years.”
“Britain’s chief financial watchdog has warned that contracts worth trillions of pounds between UK and European Union banks remain at risk of collapse following Brexit, after Brussels’ failure to implement protective legislation.”
“The number of homeless children and older people in temporary accommodation [in the UK] has reached the highest level since the global financial crisis in 2007, government figures show.”
“Italian debt sales are at their lowest levels since the height of the eurozone crisis six years ago, as the lingering political tensions weigh on investor sentiment.”
Read yesterdays’ ‘Economic’ thread here.
Global debt danger:
“Anyone doubting that there is a material risk that that the next global economic recession will be of the more severe than normal variety has not been paying attention to the massive build up in global debt levels over the past decade.
“Nor have they been paying attention to the unusually low interest rates at which all too much of this debt has been issued.
“That experience should have taught us that it is precisely this combination of high debt and credit risk mispricing that has the potential to cause real financial market strain when credit eventually reprices to historically more normal levels…
“If such a repricing were indeed to occur, we would, in Warren Buffet’s phrase, find out which of the financial institutions had been swimming naked by having over-lent to corporations of dubious quality at interest rates that were far too low to compensate them for default risk.
“Sadly, there is little that the world’s central banks can do to dial back the global credit bubble that they have created by their many years of ultra-easy monetary policy and massive balance sheet expansion.”
“The risk of a global trade war is rising. That could sink the US economy into a recession, bringing an end to the second-longest expansion in American history.”
“President Donald Trump is on the verge of escalating his trade war with China. By the end of this week, the Trump administration is expected to release details of plans to restrict Chinese investment in American businesses and block the ability of US businesses to sell some high-tech products to China.”
“Chinese stocks sunk into a bear market Tuesday, and analysts expect losses to deepen as concern over China’s economy, yuan weakness and a trade feud with the U.S. continue to rattle investors.”
“Iran’s capital has been racked by protests this week over a plunge in the value of the country’s currency, the rial. Crowds at one point shut down Tehran’s sprawling Grand Bazaar, an economic center and a place where the 1979 revolution gained footing.”
“UK Annual house price growth slowed to a five-year low in June, a closely-watched index revealed this morning.”
“France’s… consumer confidence index dropped to 97 in June from 99 in May… this was the weakest score since August 2016, when it marked the same 97.”
“The ranks of hedge fund managers expecting impending market chaos are growing. Greg Coffey, the former star manager at Moore Capital Management who started trading at his own firm this year, is comparing the turmoil in May to the end of dotcom bubble in 2000. Horseman Capital Management’s Russell Clark, one of the most bearish hedge fund managers in Europe, invoked memories of the financial crisis of 2008 in a letter to clients.”
“The S&P 500 Financials Index fell for the 12th straight day Tuesday, the longest losing streak on record. Coming into the year, many cited the tax overhaul and a rising rate environment as reasons for banks to rally. Instead, they’ve endured pressure from a flattening yield curve. The losses also come ahead of the final phase of the Federal Reserve’s annual stress tests and waning consumer confidence.”
Read yesterday’s ‘Economy’ thread here.
Iran collapsing under the weight of inadequate oil prices, impending US sanctions, water scarcity et al:
“Since last December’s nationwide protests, the authorities in Tehran have been warning Iranians against staging demonstrations that could turn Iran into “another Syria.” Events of the past few weeks, however, showed a different danger looming for Iran, that of becoming “another Venezuela”.
“A stormy session of the Iran Chamber of Commerce and Industries in Tehran on Sunday put the focus on fears of economic meltdown accelerated by threat of tougher sanctions coming from Washington in August…”
“The price gap between Bahrain’s U.S. dollar conventional and Islamic bonds has widened to record levels, indicating a sharp disagreement between global investors and regional institutions over the country’s ability to avoid a funding crunch.”
“Tunisia reached a $2.8 billion loan deal with the IMF last year but agreed-upon reforms have failed to take shape. As in Jordan, Tunisia has faced public outcry when attempting to implement IMF-backed measures. Tensions escalated in January after the implementation of the government’s 2018 budget…”
“The Canadian dollar has dropped roughly 6% against the US dollar this year on the back of a widening divergence in short-term interest rates and economic growth trends. The headline GDP growth rate in Canada has already decelerated for three consecutive quarters.”
““People didn’t have the money to go out … Here in Rio state we have lots of civil servants, and they weren’t paying the civil servants. So how is someone going to go out to consume culture? “It’s sad. The other day I was passing through Lapa … and I couldn’t believe it … It was empty: five years ago it would never have been like that.””
“The value of private equity exits in the UK plunged by more than 55 per cent in the first half of the year, new figures show.”
““There is no Brexit dividend for our industry,” Michael Hawes, chief executive of the Society of Motor Manufacturers and Traders, said.”
“German business confidence dipped again in June, a closely watched survey said Monday, as fears of a damaging transatlantic trade war and political infighting darken the economic outlook.”
“The gloom is deepening for Chinese stocks. The benchmark Shanghai Composite slid into bear market territory on Tuesday, closing more than 20% below its recent high in January. The index fell 0.5% on the day.”
“The slide in the yuan exchange rate over recent days comes as global investors start to vote with their feet, no longer viewing China as a “safe haven” impervious to trouble sweeping other emerging markets… The China currency scare two years ago ended when the Yellen Fed came to the rescue and suspended its tightening cycle, buying precious time for the Chinese authorities to restore control and launch a fresh mini-boom. The circumstances are entirely different today. The US is closer to overheating. The Powell Fed is more hawkish. The Trump Treasury will not lift a finger to help this time.”
“The Wisconsin-based motorcycle firm announced on Monday it would shift production of motorcycles intended for European consumers out of the United States, hoping to avoid European Union retaliatory tariffs. Those were applied last week in response to Trump’s own tariffs on steel and aluminum. For motorcycles, the European bloc raised its 6% tariff to 31%. That will make each bike about $2,200 more expensive to export, Harley-Davidson said.”
Read yesterday’s thread here.
World debt spirals:
“World debt ratios have spiralled to record levels during the era of super-easy money and markets are showing telltale signs of late-cycle excess, leaving the international financial system acutely vulnerable to a jump in borrowing costs.
“Any reversal in our fortunes could be “quick and sharp”, says the Bank for International Settlements, the global watchdog based in Switzerland and the scourge of dissolute practice…
“Governments are running low on monetary and fiscal ammunition needed to fight fresh shocks or to cope with recession… The rising US dollar threatens to set off a sudden liquidity squeeze and a rash of capital flight from emerging markets, now 60 per cent of the global economy and big enough to engulf the old world if unfolding events are mishandled.
“Banks have higher capital ratios and are safer than in 2007 but the risk has rotated to pension funds, insurers and asset managers overseeing $US160 trillion ($215 trillion) of global wealth – including $US45 trillion of shadow banking – now clustered in “crowded trades” with narrow exits. Any one of these scenarios could trigger a crisis. They might well combine.
“Global debt has risen from 179 per cent of GDP on the eve of the Lehman crisis to 217 per cent as emerging markets are sucked into the leverage sump…
“The emerging market debt ratio as a whole has jumped by 63 percentage points in a decade. There are already signs that the financial cycle is turning in several of these countries, including China. A long hangover awaits…
“World asset markets are already stretched. The BIS said credit spreads were “at or below” levels last seen just before the global financial crisis. The reality is that governments have little left in the arsenal if a recession were to hit soon. The BIS has long argued that central banks boxed themselves into a corner during the era of inflation targeting, letting asset booms run unchecked but then intervening massively to prevent the bust…”
“Bank for International Settlements (BIS) said there were already signs that “the ratcheting up of rhetoric” was weighing on investment. It comes as Donald Trump steps up hostility with some of the US’s key trading partners and allies, raising fears of a full-blown trade war.”
“President Donald Trump issued a stark warning to the United States’ trading partners on Sunday, calling on global economies to end to all protectionist barriers, or face a new round of retaliatory measures.”
“U.S. President Donald Trump’s talk of 25% tariffs on cars has Japan’s government and automakers scrambling to avoid a potential $21 billion blow, with little diplomatic leverage or room to shift highly globalized production networks to America.”
“China and the European Union vowed to oppose trade protectionism and unilateralism, saying those actions could push the world into recession in an apparent rebuke to the U.S.”
“A slew of negative factors — from the trade war with the U.S. to the risk of a credit crunch — has weighed on China’s financial markets in recent weeks. The Shanghai stock index is on the brink of a bear market after tumbling almost 20 percent from its recent high, while the speed of the yuan’s descent is blindsiding analysts.”
“China’s central bank said on Sunday it would cut the amount of cash that some banks must hold as reserves by 50 basis points (bps), releasing $108 billion in liquidity, to accelerate the pace of debt-for-equity swaps and spur lending to smaller firms.”
By some estimates, [real estate] accounts (directly and indirectly) for as much as 30 percent of [China’s] gross domestic product… Despite reforms in recent years, there’s little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings Ltd., rose 31 percent to nearly $202 per square foot. That’s 38 percent higher than the median price per square foot in the U.S., where per-capita income is more than 700 percent higher than in China.”
“At a central bank conference in Portugal this week, the US Federal Reserve chairman said the case remains strong for more US rate increases – which means trouble ahead for those countries borrowing in dollars.”
“I see an emerging market meltdown is happening in real-time…”
“Trade finance has been stagnant globally for some time, especially after the 2008 financial crisis.”
“”Clouds are gathering over the German economy,” whose industrial engine “began sputtering at the start of the year,” said Ifo macroeconomics chief, Timo Wollmershaeuser. Growth slowed to 0.3% between January and March, half the rate recorded in the previous quarter.”
“After rallying a bit in 2009, [Deutsche Bank’s stocks] recently hit a substantial new low of $11.00… That’s down 91.5% from its all-time high. This, again, only topped a by a few large banks in Italy. It’s a clear sign of trouble for Germany’s flagship bank, and will almost certainly go under in the coming years if it’s performing this badly now.”
“Lenders use repurchase agreements — known as repos — to massage down their assets as reporting dates approach, typically as quarters end, the Bank for International Settlements said in its Annual Economic Report. The practice boosts leverage ratios — the ratio between capital and so-called leverage exposures — allowing banks to report them as being in line with regulatory requirements, it said.
“In reality, this hard-fought agreement is unlikely to restore Greece’s debt to sustainable levels in the long term – nor does it demonstrate anything like a meaningful commitment to European solidarity. On the contrary: The creditors’ rejection of a formal debt write-down means that Greece’s total debt load remains stuck at a staggering 180 percent of GDP, with the agreed extension of loan maturities merely pushing the problem further down the road.”
Read the previous ‘Economy’ thread here.
“Over the past few weeks, half a dozen countries around the world have seen their currencies collapse in the worst sell-off in more than 5 years.
“The big picture: Since the global financial crisis in 2008, many “emerging markets” (countries in the middle of the global pack in per capita GDP) saw huge growth because of a few important things: the European and U.S. central banks were practically giving away free money, which many investors threw into fast-growing (riskier) economies; global trade was humming along, helping lower-wage countries that export manufactured goods; and oil prices were generally low, a problem for petro-states but a good deal for most other countries which import the stuff. Now, all of those things are changing.
“The US is raising interest rates, which means investors are pulling money out of emerging markets; trade wars loom, making people uncertain about what they can export, to whom, and at what price; and oil prices are on the rise. All of this is creating trouble for emerging markets whose social and political vulnerabilities have been papered over by favorable external winds.”
“For the rand, Ramaphoria is over. The currency slumped as much as 2% against the dollar on Tuesday to its weakest level in more than six months — when Jacob Zuma was still president. It has unwound all the gains it made after Cyril Ramaphosa took over as ANC leader in December.”
“The Brazilian central bank is likely to hold interest rates at an all-time low on Wednesday despite a currency sell-off, though it may take a more hawkish tone in its policy statement.”
“Emerging markets are struggling to keep pace with rising global interest rates and heightened trade tensions, which are creating more uncertainty in the world, Indonesian Finance Minister Sri Mulyani Indrawati said… “That can create an environment for the global economy to have a downside risk.””
“…while [Indonesia] boasts some of the last great swaths of tropical rainforest anywhere in the world, it has also been razing them at rates exceeding the deforestation of the Brazilian Amazon. Similarly, Indonesia has some of the richest marine fishing areas of any country, yet trails only China in the amount of plastic waste that it dumps into the ocean. And though it spans an area a fifth of the United States, much of its economic activity and more than half its population is concentrated in a single island the size of North Carolina.”
“Capital Economics on June 18 revised its Turkey forecasts, noting that the sharp slowdown expected in the country now seems to be materialising.”
“”The crisis hit the area [the suburbs of Piraeus, Greece] so hard that no one throws out food any more,” he tells Al Jazeera. “That’s why you don’t even see people digging in dumpsters here.””
[Italy’s] size, along with the political havoc created by the recent formation of a populist-led government, have added to the risk, Lloyd Blankfein, CEO of Goldman Sachs, said Tuesday in an interview at the Economic Club of New York. In their first two weeks in power, Italy’s new leaders sparked a dispute with France over immigration and threatened to scupper a landmark European Union trade pact with Canada.”
“The trade dispute between the US and China escalated on Tuesday, with a senior Trump official accusing China of “theft” and Beijing accusing the US of blackmail. The news roiled global stock markets as investors feared that escalating tensions could trigger an international trade war.”
“[China] could stop honoring US intellectual property rights. “This would be hugely costly to US corporations, especially if they began to export items, like prescription drugs, to the rest of the world,” writes Baker. “This would likely violate WTO rules, but I suspect China will care about violating WTO rules as much as Trump does.” That is, not much.”
“…even with many central banks now on the path to more normal policy settings, [Larry] Summers said interest rates are unlikely to return to historically normal levels before the next recession. That means they’ll be unable to respond with the level of force necessary to effectively address the slump.”
“Big banks are skirting the rules on the sale of the complex financial instruments that helped bring about the 2008 financial crisis, by exploiting a loophole in federal banking regulations, a new report says. The loophole could leave Wall Street exposed to big losses, potentially requiring taxpayers to once again bail out the biggest banks.”
Read yesterday’s ‘Economy’ thread here.
“President Donald Trump threatened to escalate the trade fight with China into an all-out trade war on Monday, promising to impose massive tariffs on Chinese goods unless Beijing reverses course on its own trade actions.
“Trump directed the US Trade Representative’s office to begin drawing up a list of $200 billion worth of Chinese goods to hit with a 10% tariff, dwarfing the size of previous trade actions against China.
“”Therefore, today, I directed the United States Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10 percent,” Trump said. “After the legal process is complete, these tariffs will go into effect if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced.””
“U.S. stocks are hurting Monday, but emerging markets continue to bear the brunt of global uncertainty as a new trading week begins… A strengthening U.S. dollar also means emerging markets will have to spend more money to handle dollar-denominated debt.”
“The Buenos Aires stock exchange plummeted more than 8.0 per cent on Monday, pulled down by sharp declines in energy and bank shares amid market volatility as Argentina seeks support from the IMF.”
“South Africa’s rand fell to 6-1/2 month lows early on Tuesday as US President Donald Trump threatened new tariffs in an escalating tit-for-tat trade war with China, hitting sentiment in emerging markets.”
“Manila, Philippines — Renewed fears of a possible trade war between the US and China again took its toll on the local financial market as foreign exchange and stock trading succumbed to new lows yesterday.”
“A 200 basis-point increase in interest rates could spark a sharp rise in the proportion of emerging market corporate debt issues at risk of default, with Brazilian and Indian firms most vulnerable, a report from McKinsey Global Institute showed.”
“The Canadian dollar weakened to a nearly one-year low against its U.S. counterpart on Monday… as global trade tensions weighed on stocks and investors worried about Canada’s trade feud with the United States.”
“The Shanghai Composite Index slid almost 5 percent after U.S. President Donald Trump threatened to slap tariffs on another $200 billion in Chinese imports. Beijing said it would take “strong” countermeasures if new levies are issued.”
“The Chinese authorities have orchestrated an arms-length rescue for the giant aviation and investment group HNA, heading off a fresh liquidity crunch for one of the world’s biggest debtors. The move came as the People’s Bank of China announced that it was setting up a special “financial risk tracking unit” to monitor local and international conditions after a surge in the number of corporate defaults in the country.”
“Foreign governments pulled back their purchases of longer-term U.S. debt as trade tensions escalated around the world.”
“The cost of insuring Bahrain’s sovereign debt against default is at an historical high, amid continuing concerns over the country’s ability to tap international markets to stave off a potential financial crisis.”
“An elephant at a zoo in Venezuela is believed to have starved to death after years of not being fed properly. Photos of a gaunt Ruperta have been released as she was confirmed dead aged 48 after collapsing at Caracas zoo. The elephant has become a symbol of Venezuela’s deepening economic woes.”
“A growing number of US hedge funds specialising in distressed debt are raising money in anticipation that the next economic downturn will punish companies that have borrowed record amounts since the financial crisis.”
“Recently, Fasanara Capital, a London-based asset management fund, predicted a full-on crash ahead, citing increasing frequency of value-at-risk shocks — or swift market corrections — as an indication of fragility for global markets… The fund was not alone in pointing out that today’s stock market is the most overvalued on record — more so than in 1929, 2000 and 2007.”
Read yesterday’s ‘Economy’ thread here.