Daily updates on climate change and the global economy.

Economy 29 June 2018 – global stocks tanking

Global stocks tankingGlobal stocks tanking:

“Investor money is hemorrhaging out of global stock funds at a pace not seen since just after the financial crisis exploded.

“Global equity funds have seen outflows of $12.4 billion in June, a level not seen since October 2008, according to market research firm TrimTabs. Lehman Brothers collapsed in September of that year, triggering the worst economic downturn since the Great Depression and helping fuel a bear market that would see major indexes lose more than 60 percent of their value.

“The most recent exodus, which includes exchange-traded and mutual funds, comes amid worries that the much-touted synchronized global expansion is running out of gas…”


“Chinese fund managers cut their suggested equity exposure for the next three months to a 33-month low, as most of them were on the defensive amid worries over Sino-U.S. trade war and tight liquidity conditions.”


“China’s yuan slipped to a new low on Friday and was on course for its worst month on record, as a bitter Sino-U.S. trade row threatened to rattle the world’s second-biggest economy.”


“China has announced sectors of the economy where it will ease foreign investment rules, with leaders stepping up efforts to portray the country as opening up as they prepare for a possible trade war with the United States.”


“Osram Licht AG became the latest domino to fall in President Donald Trump’s trade war, with the German supplier of headlight components warning that barriers to car imports are weakening the outlook for the automotive industry.”


“A fresh sale of Italian bonds has confirmed that last month’s political turmoil is imposing a cost on the country, as investors demand higher returns to hold its debt.”


“Oil is poised for the longest run of quarterly gains in eight years as fears over global supply disruptions overshadow OPEC’s decision to ease its historic output curbs.”


“Emerging markets are getting walloped by a surge in crude-oil prices, amplifying a downturn already under way amid a U.S. dollar that has mostly rallied in the first half of 2018.”


“A severe drought and currency crisis shook Latin America’s third-largest economy just as President Mauricio Macri sought to consolidate its incipient recovery. Economic activity fell 2.7 percent in April, the largest monthly decline since Macri took office in December 2015. Growth also declined on an annual basis for the first time in 14 months, the nation’s statistics agency reported Tuesday.”


“The Indian rupee on Thursday weakened past 69 to the dollar for the first time, slumping to an all-time low amid a spike in crude oil prices, foreign capital outflows and a widening current account deficit.”


“The U.S. economy slowed more than previously estimated in the first quarter amid the weakest performance in consumer spending in nearly five years.”


“Deutsche Bank’s US division has failed the second round of the Federal Reserve’s annual two-stage stress tests, designed to assess how well the sector could withstand another financial crisis.”


“Below-investment-grade ABS are on track this year to account for its biggest slice of the overall sector since before the financial crisis. At the same time, the riskiest CLO notes are now a larger percentage of the market than they’ve been in two years.”


Read yesterday’s ‘Economic’ thread here.

Economy June 28 2018 – China weakens

China close to panicChina 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.

Economy 27 June 2018 – global debt danger

Too much debt; too few toolsGlobal 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.”


“There may be as many as 64 million empty apartments in China. Many people buy the properties as an investment with no intention of ever moving in. Author says ghost cities show growth is driven by debt in China.”


“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.

Economy 26 June 2018 – Iran collapsing

Economic protests in Iran

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.

Economy 25 June 2018 – world debt spirals

World debt spirals:

Markets rattled“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.

Economy 20 June 2018 currencies collapse

“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.