Daily updates on climate change and the global economy.

Economy 10 Sept 2018 no let up for emerging markets crisis

The emerging markets crisis continues apace:

“In the past six months, some of the world’s fastest-growing economies have found themselves flat on the floor, gasping for breath and, in one case, seeking help from the global financial rescue centre otherwise known as the International Monetary Fund.

“Argentina’s $50bn bailout by the Washington-based lender of last resort is the most extreme event so far, but it sits alongside the dramatic collapse of the Turkish lira, a recession in South Africa and dire economic predictions for the Philippines, Indonesia and Mexico.

“Making matters worse, the US is poised to slap tariffs as high as 25% on as much as $200bn worth of Chinese goods. If the US goes ahead, Beijing has already threatened to retaliate, which would only incense President Donald Trump further. This tit-for-tat might only end when tariffs are applied to the entire $500bn of Chinese goods imported by America each year.

“In response, the stock markets of many developing nations have slumped in value, leaving investors to ask themselves whether they are witnessing an emerging-markets meltdown akin to the Asian crisis of 1997: a panic that wrecked the finances of several hedge funds and proved to be an hors d’oeuvre before the dotcom crash of 1999 and the global financial crisis of 2008.”


“A sell-off in Chinese shares pulled Asian equities to a 14-month trough on Monday as investors braced for a potentially damaging escalation in the Sino-U.S. tariff row after U.S. President Donald Trump raised the stakes in the dispute with Beijing.”


“The economic policies being pursued by the U.S. and China could bring about a massive slowdown in global growth, according to Britain’s top former bank regulator. Economic growth in the U.S. remains robust in 2018, yet in much of the rest of the world signs of deteriorating momentum have emerged since the start of the year.”


“The rupee weakened further to hit a fresh low of 72.48 against the US currency, falling 75 paise in late morning deals Monday on rising crude oil prices, strengthening dollar and a widened current account deficit… The domestic unit witnessed intense volatility and traded between 72.07 and hit all-time low of 72.48 during morning deals.”


“Pakistan’s central bank is dangerously low on foreign currency… the country’s imports are still outpacing it’s exports. That is making it difficult to maintain foreign debt repayments.”


“The financial crisis affecting developing countries arrived in full-scale fashion in our region last week when the Indonesian economy experienced shocks reminiscent of the Asian crisis 20 years ago. With the crisis coming so close to home, it is time to contemplate what may unfold in the near future and list measures to respond to each scenario, so that we are not taken by surprise.”


“Egypt’s total foreign debt rose by 17.2 percent to 92.64 billion U.S. dollars by the end of June from 79.02 billion dollars at the same time last year, said Egyptian Prime Minister Mostafa Madbouly on Sunday. The country’s external debt marked an over 10-billion-dollar rise in three months, from 88.2 billion dollars at the end of March, the Prime Minister told Al-Watan, an independent daily newspaper.”


“President Omar al-Bashir dissolved the Sudanese government on Sunday in a bid to fix its crisis-hit economy. The announcement included a cut in the number of ministries to 21 from 31, a presidential statement said late on Sunday. The shake-up comes as Khartoum looks to cut back expenditure to tackle a severe hard currency shortage and economic downturn.”


“Hundreds of Venezuelan migrants have crossed back over the border with Brazil in the last few days after a violent incident in Boa Vista, the capital of Roraima state. Most said they were leaving because they feared for their lives after a young man was lynched, accused of killing a local man during a robbery. They were picked up by buses sent by the Venezuelan government.”


“Representative Jair Bolsonaro, one of the frontrunners in October’s presidential election, was stabbed on Thursday while on the campaign trail… Sympathy generated by it, and the likely withdrawal of Lula, who though leading in the polls, is expected to give up his own campaign bid, means that Bolsonaro will probably advance to a run-off and victory.”


“With unemployment around 9 per cent and consumer prices surging, some Argentines are again turning to barter clubs, which first emerged during the collapse nearly two decades ago. The tumbling peso has pushed up prices for fuel and, in turn, transportation costs. That has affected food prices in a country where most grains and other goods are transported in trucks. Inflation is expected to reach an annual rate of more than 40 per cent this year, the Central Bank says.”


“The Conservatives face a “catastrophic split” if Theresa May relies on Labour votes to push her Chequers plan through parliament, one of the prime minister’s most persistent critics has warned, as the conflict within the party over Brexit intensified.”


“Sweden’s ruling centre-left party is leading in preliminary results but achieved its worst ever share of the ballot in a general election, as nearly a fifth of voters backed the far-right Sweden Democrats. As the count neared completion on Monday morning, all indications are that it will be a hung parliament…”


“Italy’s economy is in such a fragile state that even a minor recession could be very dangerous, according to a former director at the International Monetary Fund (IMF). Italy’s coalition government is poised to present its 2019 budget next month, setting out its economic and financial plans for the coming year.”


“Governments and central banks may also lack the firepower to mount a response to a future crisis on the scale of 2008, having lowered interest rates and injected trillions into the economy.

“Didier Borowski, head of macroeconomic research at asset manager Amundi, argues risks are now being shouldered by investors, not banks.

““Central banks won’t act as a buyer of last resort forever, so at the end of the day investors may underestimate the level of risk to which they are ­exposed,” he says. “We are not well equipped to survive the next crisis, we’ve already used the tools for this fight – fiscal and monetary policy.””


Read the previous ‘Economy’ thread here.

Economy 7 Sept 2018 global slowdown has begun

“It’s tempting to think the global economy is riding out the trade war turmoil. Tempting, but mistaken. Look closely: The slowdown has begun.”

“One of the paradoxes of this year’s trade tensions is that in many parts of the world, it doesn’t yet feel like a crisis.

“For all the turmoil in emerging-market currencies, equity investors in major markets seem … relaxed? The milestone passed with little fanfare, but the S&P 500 index closed at a record high of 2,914.04 on August 29. The day before, India’s Nifty 50 did the same. Other indexes in developed markets are only moderately below their January peaks.

“With President Donald Trump expected to start implementing the next round of tariffs on $200 billion of Chinese goods within hours, it’s tempting to think the global economy is riding out the turmoil. Tempting, but mistaken. Look closely: The slowdown has begun.

“Take trade volumes. It’s been extraordinarily unusual for the momentum of global commerce to head anywhere but up in recent decades. The only notable occasions when the world trade monitor compiled by the CPB Netherlands Bureau for Economic Policy Analysis has turned down in a sustained way since 2000 have been on the eve of the 2001 and 2008 recessions and during the 2015 commodity slump.

“You can now add 2018 to that list, with the index coming in negative throughout the second quarter of this year…

“For a better picture of what lies ahead, have a look at the way the world’s container-shipping lines are planning for the future. Order books that ran in excess of 1,000 vessels before the 2008 financial crisis haven’t cracked one-fifth of that level since Trump came to power. If the global economy is going to ride out this latest round of tension, the merchant fleets on which trade depends aren’t seeing it.”


“Beijing has laid the ground for another round of tit-for-tat tariffs in the US-China trade war as it declared its readiness to retaliate if Washington imposes a fresh set of duties on $200bn (£155bn) of Chinese goods, which could happen as soon as this week… Beijing’s economic ministry spokesman, Gao Feng: “If the United States, regardless of opposition, adopts any new tariff measures, China will be forced to roll out necessary retaliatory measures.””


“Russia is ready to take the emergency step of buying its own rouble debt if a new wave of US sanctions threatens to upend the market. “In a very stressful scenario when we see the conditions of a market failure” both “the central bank and the government have the tools to intervene on the open market to cushion the adjustment period,” Deputy Finance Minister Vladimir Kolychev said in a Bloomberg TV interview.”


“For the third time in a year, Turkish, Russian and Iranian leaders will convene in Tehran to discuss a road map for Syria’s Idlib as well as closer economic cooperation to ward off the impact of unilateral U.S. sanctions.”


“Turkey is in the process of constructing a site for a Russian missile system despite warnings from the United States to not buy the platform, according to a source with firsthand knowledge of an intelligence report covering the subject.”


“Much has been said about the importance of a trade deal with the U.S. for the Canadian economy, as officials from both sides of the border continue to try to hash out a new agreement. But, even if a new NAFTA deal is reached, it will not prevent the Canadian economy from slowing down… Rising interest interest rates will hold consumers back from spending and make housing affordability even more costly…”


“The UK high street has posted its worst August performance for three years, in further evidence of the pressure on traditional retailers. Underlying sales at physical stores slid 2.7% last month… “With inflation continuing to bite on the weekly shop and the heatwave driving discretionary spending to bars and entertaining, there is even less disposable income heading to the high street,” said Sophie Michael, BDO’s head of retail and wholesale.”


“The Great Recession helped push student debt passed $1.5 trillion, up from about $671 billion at the beginning of 2008, according to Federal Reserve Bank of New York data. The crash, which began 10 years ago this month with the collapse of Lehman Brothers, created a perfect storm of high unemployment, stagnant wages and the declining value of American homes meant that families had fewer resources to use to pay for college.”


“Expect more short-term pain, investors said, after emerging-market stocks tipped into a bear market. The MSCI Emerging Market Index closed down 0.3% in New York on Thursday. That took its decline from a high of 26 January to just over 20%, the threshold for a bear market… Emerging-market assets are under pressure from a stronger dollar and rising US interest rates, as well as American protectionism. Contagion concern has come to the fore in recent weeks as the most vulnerable developing economies — Argentina and Turkey — fell into crises.”


“Construction companies say they can’t afford credit under President Mauricio Macri’s financial plan, which has raised interest rates to 60 percent. Argentina’s construction sector could be forced to shed some 40,000 jobs in the next few months because sky high-interest rates are making it difficult for businesses to finance projects, experts warn.”


“Jair Bolsonaro, the far-right candidate who is leading the polls in Brazil’s presidential race, is in a serious condition but out of danger after being stabbed while campaigning just a month before the election.”


“The [Philippine] peso extended its slump Thursday, hitting the lowest level in nearly 13 years at 53.80 against the US dollar, in line with the fall of other Asian currencies and following reports that inflation rate accelerated to a nine-year peak. The peso shed P0.25 Thursday to close at 53.80 from 53.55 a dollar Wednesday. It was the local currency’s weakest finish in almost 13 years.”


Australia’s dollar is finding itself in unusual company these days, getting sold along with former emerging-market darlings such as the Indonesian rupiah and Indian rupee. “As a rout grips developing markets, the Aussie – viewed as a barometer for global risk appetite – is also bearing the brunt of investor angst.”


Read yesterday’s ‘Economy’ thread here.

Economy 6 Sept 2018 US stock market vulnerable to catastrophe

As the Fed continues to tighten the US stock market bubble becomes vulnerable to a catastrophic collapse:

“Despite the volatility and brief correction earlier this year, the U.S. stock market is back to making record highs in the past couple weeks. To many observers, this market now seems downright bulletproof as it keeps going higher and higher as it has for nearly a decade in direct defiance of the naysayers’ warnings.

“Unfortunately, this unusual market strength is not evidence of a strong, organic economy, but of an extremely unhealthy, artificial bubble economy that will end in a crisis that will be even worse than we experienced in 2008.

“The reason for America’s stock market and economic bubbles is quite simple: ultra-cheap credit/ultra-low interest rates…

“Low interest rates/low bond yields have enabled a corporate borrowing spree in which total outstanding nonfinancial U.S. corporate debt surged by over $2.5 trillion, or 40% from its peak in 2008. The recent borrowing boom caused total outstanding U.S. corporate debt to rise to over 45% of GDP, which is even worse than the level reached during the past several credit cycles.

“U.S. corporations have been using much of their borrowed capital to buy back their own stock, increase dividends, and fund mergers and acquisitions – activities that are known for boosting stock prices and executive bonuses. Unfortunately, U.S. corporations have been focusing on these activities that reward shareholders in the short-term, while neglecting longer-term business investments – hubristic behavior that is typical during a bubble…

“In a bubble, the stock market becomes overpriced relative to its underlying fundamentals such as earnings, revenues, assets, book value, etc. The current bubble cycle is no different: the U.S. stock market is as overvalued as it was at major generational peaks. According to the cyclically-adjusted price-to-earnings ratio (a smoothed price-to-earnings ratio), the U.S. stock market is more overvalued than it was in 1929, right before the stock market crash and Great Depression…

“To keep it simple, the current U.S. stock market bubble will pop due to the ending of the conditions that created it in the first place: cheap credit/loose monetary conditions…

“The Fed claims to be able to engineer a “soft landing,” but that virtually never happens in reality. It’s even less likely to happen in this current bubble cycle because of how long it has gone on and how distorted the financial markets and economy have become due to ultra-cheap credit conditions.

“History has proven time and time again that market meddling by central banks leads to massive market distortions and eventual crises. As a society, we have not learned the lessons that we were supposed to learn from 1999 and 2008, therefore we are doomed to repeat them.”


“A new study from Northwestern Mutual has found that many Americans are sinking in debt, and don’t expect to climb out of it any time soon; the study found that more than one in 10 Americans say they will be in debt for the rest of their lives. The reality, however, may be bleaker.”


“Emerging Market economies are in serious trouble. Increased US borrowing, which is helping the US economy and its stock market for now, is hurting many other countries’ currencies. Current EM problems can indeed merge into a much larger global debt crisis, just like the subprime crisis became a global financial crisis.”


“Chinese stocks are is in a bear market. Turkey’s currency has collapsed. South Africa has stumbled into a recession. Not even an IMF bailout has stemmed the bleeding in Argentina… The trouble could spread, infecting other emerging markets or even Wall Street. That’s what happened two decades ago during the Asian financial crisis. “There is a fear of contagion, similar to 1997-1998,” said Michael Arone, chief investment strategist at State Street Global Advisors.

“That has already started to happen.”


“For stocks, it’s 222 days. For currencies, 155 days. For local government bonds, 240 days. This year’s rout in emerging markets has lasted so long that it’s taken even the most ardent bears by surprise. Not one of the seven biggest selloffs since the financial crisis — including the so-called taper tantrum — inflicted such pain for so long on the developing world.”


“Investor anxiety about a missed debt payment by one of the world’s largest developing nations is jacking up the cost of credit-default swaps from the “BATS” — Brazil, Argentina, Turkey and South Africa — to multi-year highs. Analysts are taking note. Turkey and Argentina have “substantial” medium-term default risks…”


“Investors are sticking to the long-term investing mantra and know that emerging markets will go through periods of volatility, or the worst is yet to come. Because investors have not bailed on emerging markets positions — and it has been a popular trade this year, second only to the iShares Core MSCI EAFE ETF (IEFA) among all ETFs, with $10.7 billion in new assets — the exodus could still be in the making.”


“Asian shares skidded for a sixth straight session on Thursday, oil slipped and safe-haven gold gained with investor confidence shaken by turmoil in emerging markets and jitters over a potentially severe escalation in the U.S.-China trade war.”


“The U.S. trade deficit rose to a five-month high in July, with the politically sensitive gap with China hitting a record high, which economists said could embolden the Trump administration to aggressively pursue its “America First” agenda.”


“The government’s moves to improve investor confidence come as the Chinese stock market has recorded the worst performance of any major financial market so far this year, and as fears grow that the US will escalate trade tensions further by imposing tariffs on an additional $200 billion of Chinese imports as early as this week.”


“Argentina is in an economic freefall… Walmart announced this past week that it was closing 13 stores in the Buenos Aires metropolitan area, including its flagship store at DOT, which was shuttered within a day. There weren’t any employees at the store on Wednesday.”


“Inflation in Venezuela broke the 200 per cent barrier for a single month in August, bringing it to 200,000 per cent over the last year, the sidelined opposition-controlled parliament said on Wednesday (Sept 5)… It means prices have increased by almost 35,000 per cent since the start of the year and 200,000 per cent since August 31, 2017.”


“Growth in Saudi Arabia’ non-oil private sector has slowed to its lowest rate on record so far in 2018, according to the latest Emirates NBD Purchasing Managers’ Index (PMI). While the growth of the private sector rose in the last three months compared to the first five months of 2018, it is the slowest on record for the first eight months of any year since the survey started.”


“The Indian rupee has fallen to an all-time low against the dollar.. The rupee fell to 71.785 per dollar on Wednesday, although it recovered somewhat to trade at 71.915 to the dollar in early Thursday trading.”


“Currency crises in Brazil and Argentina, economic turmoil in Turkey and a trade-war scare in Asia have rocked European equities, as some of the region’s biggest companies have significant exposure to these regions. The 30-day correlation between MSCI Europe and MSCI Emerging Markets has risen to 0.8, the highest in almost seven months, and up from 0.1 seen in June.”


“Average UK advertised salaries have dropped month-on-month for the third consecutive month, as employers show signs of concern over the impact of a no-deal Brexit, according to Adzuna… In line with signs of salary stagnation, UK vacancy counts have also seen a slide in recent times, with a drop of 7.2% in full time advertised jobs between August 2017 and August 2018.”


“The European Commission — the executive arm of the EU — requires government spending to not exceed 3 percent of a member country’s gross domestic product (GDP). But there have been confusing and conflicting messages from Italy’s leaders over whether they will stick within these budget parameters or not… Italy has already had a warning shot from ratings agency Fitch which cut the outlook on Italy’s debt rating on Friday to “negative” from “stable,” citing concerns about the government’s “new and untested nature” and its pledges to increase spending.”


Read yesterday’s ‘Economy’ thread here.

Economy 4 Sept 2018 fears grow of global crisis

“Ten years after the worst financial panic since the 1930s, growing debt burdens in key developing economies are fueling fears of a new financial crisis that could spread far beyond the disruption sweeping Turkey.

“The loss of investor confidence in the Turkish lira, which has surrendered more than 40 per cent of its value this year, is only a preview of debt problems that could engulf countries such as Brazil, South Africa, Russia and Indonesia, some economists say.

“…the danger of a financial contagion that could hit Americans by crushing US exports and sending the stock market plunging should be taken more seriously in light of a massive increase in global debt since the 2008 downturn…

“Total debt is a whopping $US169 trillion ($234 trillion), up from $US97 trillion on the eve of the Great Recession, according to the McKinsey Global Institute…

“While previous debt crises involved US households and, later, profligate European governments such as Greece, this time the concern centers on companies in emerging markets that borrowed heavily in dollars and euros.

“In Turkey, for example, companies and banks borrowed in recent years to finance bridges, hospitals, power plants and even a mammoth port development for cruise ships.

“Foreign investors, particularly European banks, lent freely in search of the higher returns these markets offered at a time when the US Federal Reserve and European Central Bank were keeping interest rates low.

“”We were supposed to correct a debt bubble,” said David Rosenberg, chief economist at Gluskin Sheff, a wealth-management firm. “What we did instead was create more debt…

“”We’ve depended on emerging markets to bring up global growth, some of it due to a credit boom… This is going to take a bite out of growth, which will affect the US, Europe and the entire world economy.””


“Argentine President Mauricio Macri announced steep spending cuts and new taxes on exports Monday in an effort to restore investor confidence, following a disastrous week that saw the peso lose 20% of its value against the dollar.. The Argentine government is taking drastic steps, including raising interest rates to 60%…”


“[Brazil’s] currency is one of the weakest against the dollar this year. And its second-quarter GDP grew a paltry 0.2%. With unemployment still over 12%, economic stagnation does not bode well for a turnaround story in Brazil… Brazilians go to the polls in October. There is no clear front-runner. The leader in the polls, Jair Bolsonaro, has yet to crack his baseline 20% support level. Political risk and a lackluster economy will continue pressuring the Brazilian real and the stock market.”


“With GDP figures for the second quarter of 2018 set for release on Tuesday, there have been some whispers that another recession is on the horizon for South Africa. Another R-word – “Ramaphoria” – has completely disappeared over the last few months, as the harsh realities of liberating the South African economy has tempered all early hopes of a quick turnaround post-Zuma.”


“The Turkish financial crisis has received extensive media attention as the Lira has plunged and harsh words exchanged between Presidents Erdogan and Trump… In reality, Egypt’s debt crisis is substantially worse than Turkey’s… Egypt’s crushing debt burden is reflected by the high cost of servicing it. In 2017 interest payments absorbed some 31 percent of the budget. They are on track in 2018 to consume over 35 percent, at which time debt servicing will be eating up “almost 55 percent of all government revenues.”


“Rise in global oil prices and contagion risks from emerging markets pushed the rupee to a fresh all time low that ended 71.21 against the dollar, as compared to the previous close of 70.00 on Friday. The currency depreciated 21 paise or 30% on Monday as compared to it’s previous close. The yield on 10-year benchmark bond also closed above 8%, for the first time in almost four years.”


“What is scary about this impending new currency crisis is that it could also precipitate a debt crisis, especially in Asian and other emerging markets and particularly in the corporate sector. Dollar or other foreign currency-denominated debt becomes harder to service in terms of local currency earnings once those currencies start to slide.

“What is happening now in corporate debt markets, mainly in emerging economies, should be worrying people much more than it is. Why? For one, corporate debt in emerging and developing economies now significantly exceeds levels before the 2008 global financial crisis.”


“Indonesia’s central bank is intensifying its fight to protect the nation’s currency and bonds with a slew of measures that includes more hedging tools… The rupiah has been hit by continued selling of Indonesian assets by foreign investors spurred by rising US interest rates and fears of contagion from market turmoil in Turkey and Argentina.”


“IMF Chief Economist Maurice Obstfeld warned that “the risk that current trade tensions escalate further… is the greatest near-term threat to global growth.” And the most powerful central bank in the world, the US Federal Reserve, echoed that warning almost word for word: “an escalation in international trade disputes was a potentially consequential downside risk for real activity.” …[Trump’s aggressive campaign against Beijing could enter a new phase this week, with another $200 billion in Chinese goods in the crosshairs.”


“Factories in China’s largest regional economy didn’t do well last month, raising questions about the resilience of the nation as it digs in for a prolonged trade battle with the U.S. The manufacturing purchasing managers index for the southern Guangdong province dropped to 49.3 in August, according to the local government’s Economic & Information Commission… Guangdong, boasts an economy as large as Australia’s, is a major manufacturing hub and accounts for almost a third of China’s exports. It’s also home to some of the nation’s largest corporations including Tencent Holdings Ltd and Huawei Technologies Co.”


“By the end of last year China’s share of global debt had tripled since the 2009 global recession, a period in which the country unleashed a credit boom to sustain rapid growth, according to estimates by Standard Chartered Plc… “China remains our biggest concern in terms of leverage,” Mann and his colleagues wrote.”


“Euro-area manufacturers saw order growth decelerate to the weakest pace in two years after renewed concerns over trade prospects hit confidence… “The business mood has become more unsettled during the summer,” said Chris Williamson, chief business economist at IHS Markit. Risks of new tariffs are hurting sentiment, and “the expansion is looking increasingly uneven.””


“Italy’s economy has stalled abruptly over the summer and the industrial sector is on the cusp of outright recession, threatening to drive the country’s knife-edge debt dynamics into dangerous territory. The sudden slowdown comes as mounting political alarm pushes risk spreads on 10-year Italian debt to a five-year high of 290, a sign that capital outflows are picking up again.”


“Britain’s manufacturers face a difficult autumn as the Brexit deadline looms and Donald Trump’s trade sanctions hit exports, according to figures for the sector in August. A survey of manufacturers has found that growth slowed last month to its lowest level since July 2016, dragged down by a shock fall in exports. The figures indicate that the sector, which suffered a fall in output during the first two quarters of the year, could remain in recession for the rest of 2018.”


Read yesterday’s ‘Economy’ thread here.

Economy 3rd Sept 2018 emerging market turmoil

“After just a brief respite, the turmoil in emerging market currencies has resumed. What began in Argentina and Turkey has snowballed into broader collapse in confidence that has policy makers in Indonesia, India, South Africa, and Brazil scrambling to protect their economies.

“Left unchecked, more nations could get wrapped up in the declines, threatening their country’s and the world’s economic growth.

“The Turkish lira, which has been relentlessly setting new all-time lows, proved to be the “canary in the coal mine” for troubles across emerging markets, according to strategists at BNY Mellon. Traders worry about countries with large current account deficits and a large stock of dollar-denominated debt in a world with rising interest rates and a stronger dollar, according to the bank.”

[We have to wonder how bad this could get if the Fed pushes on with further interest rate hikes this year]


“One of the bond market’s biggest investors has seen its flagship funds battered by the turmoil in emerging markets unleashed by Argentina’s spiralling financial crisis. Losses at Franklin Templeton, the US investment group, have underlined how the crisis has wrongfooted many of the market’s best-known names…”


“Fears and doubts continue to swirl in Brazil days after President Michel Temer put the army in charge of highways and the Venezuelan border as his government grapples with an escalating migrant crisis and rising tensions. Tens of thousands of Venezuelans fleeing a collapsing economy, hunger and skyrocketing inflation have entered the country.”


“Turkey raised natural gas prices on Saturday by as much as 14% , two sources said, while the energy regulator announced a similar increase in electricity costs as a deepening currency crisis stokes inflation. The lira has fallen 42% against the dollar this year…”


“Indonesia’s currency continued its weakening trend on Monday, hitting its lowest against the dollar in two decades and prompting the country’s central bank to intervene in the market. The Indonesian rupiah weakened 0.4 per cent to 14,777 per dollar, its lowest since the Asian financial crisis in 1998, according to Reuters data.”


“The financial results of Chinese developers this earnings season have been roundly impressive, but there is one metric that should give investors pause: Firms’ ability to service their debt is the weakest in three years. Cash-to-short-term debt levels at more than 80 publicly traded real estate companies tracked by Bloomberg were 133 per cent on average in the first half, the worst since the first six months of 2015.”


“Growth in output at Chinese factories slumped last month to its lowest level in more than a year, according to data published Monday. The latest evidence of weakness in the world’s second largest economy comes in the midst of China’s trade war with the United States. [China] it has begun to slow down this year, and signs of further weakness are spreading.”


“The Chinese stock market is in the crosshairs of concern over the clash on trade between Beijing and Washington, as well as signs the Chinese consumer is slowing. The CSI 300 index, a gauge of the biggest companies on the Shanghai and Shenzhen exchanges, dropped as much as 1.3 per cent and is now down 18 per cent this year.”


“Manufacturing activity in major Asian economies took a hit from weak export orders in August, a sign firms are starting to feel the pinch from intensifying trade friction between the United States and China that many fear could derail global growth. Surveys of purchasing managers released on Monday showed persistent pressure on key exporting destinations China, Japan and South Korea.”


“The 32 branches of the Bank of Japan, the country’s central bank, have embarked on an emergency survey of companies in each district to grasp the impact of the intensifying trade war on exports and supply chains. The memories of the 2008 financial crisis remain vivid among Japan’s central bankers. Japanese companies are especially vulnerable to a slump in trade, with many shipping materials and industrial equipment throughout the world.”


“Theresa May has insisted she will not be forced into watering down her Brexit plan during negotiations with the EU. Writing in the Sunday Telegraph, the prime minister says she will “not be pushed” into compromises on her Chequers agreement that are not in the “national interest”… Mrs May also warns she will not “give in” to those calling for a second referendum on the withdrawal agreement.”


“Italy’s new anti-establishment government sent contradictory signals to financial markets on Sunday (2 September) amid increasing concern Rome could breach EU spending limits as it comes under pressure to fulfil its anti-austerity electoral promises. With Italy’s debt currently standing at a whopping 132% of output, financial markets appear to be increasingly nervous about the ability of the new populist government to get its finances under control.”


“…work experience is hard to come by in a country [Greece] where four out of 10 young people are unemployed and where the economy is still in a shambles after nearly a decade of financial trauma, austerity measures, tax hikes, pension cuts and massive bailout packages.”


“”It’s as if the financial crisis never happened and the lessons from it are ancient history,” says Jonathan Rochford, portfolio manager at credit manager Narrow Road Capital.

“Amid fervent demand from lenders… below investment grade loans have been stripped of their basic investor protections, like covenants, in recent years. Investors have piled into these risky but lucrative high-yield loans to obtain higher returns… cov-lite loans now make up around 80 per cent of new issuance in the booming leveraged loan market…

“Taxi ride service Uber tapped the market in March, French telecoms giant Altice has built an eye-watering mountain of debt from junk bonds and loans, while Blackstone will reportedly market the US$8bn in risky loans it needs to fund its acquisition of a 55 per cent stake in Reuters’s financial and risk division next week.

“American Airlines, Four Seasons and Dell are other household brands to rely on leveraged loans. Doumar is far from being alone in fearing the explosive growth of this market. The credit ratings agencies, accused of being asleep at the wheel in the run-up to the crisis, are now among the first to sound the alarm.”


Read the previous ‘Economy’ thread here.

Economy 31 Aug 2018 Argentina’s currency collapses

Argentina’s currency has all but collapsed as the emerging markets crisis gathers steam:

“Argentina is struggling to cope with yet another financial crisis. 

“Investors are increasingly concerned Latin America’s third-largest economy could soon default as it struggles to repay heavy government borrowing. This comes after Argentina’s government unexpectedly asked for the early release of a $50 billion loan from the International Monetary Fund (IMF) on Wednesday.

“The Argentine peso crashed to record lows on the news. It saw steep losses in the previous session and collapsed another 15 percent to hit 39 pesos against the U.S. dollar on Thursday morning.

“The peso is down more than 45 percent against the greenback this year, exacerbating pre-existing fears over the country’s weakening economy while inflation is running at 25.4 percent this year.

“On Thursday, the central bank said it was increasing the amount of reserves that banks have to hold, in a bid to tighten fiscal policy and shore up the currency. It hiked rates by 15 percentage points to 60 percent from 45 percent and promised not to lower them at least until December.”


“Turkey’s currency plunged on Thursday following a report suggesting that the deputy governor of its central bank would resign. The lira was down 5% to 6.7719 against the dollar at 8:45 a.m. ET. It has lost more than one-third of its value this month…”


“Recently, Iranians have been flooding local banks to acquire dollars so much that exchanges have been forced to shut their doors to prevent long and chaotic lines. The problem for the Iranian government is mounting as average citizens fed up with both a weak economy and a plunging currency have taken to the streets in several cities across the country in protest.”


“The Indian rupee breached the 71 mark for the first time in the morning trade Friday. It has opened at a fresh record low of 70.95 per dollar versus previous close 70.74.”


“Indonesia’s rupiah slid to a two-decade low, spurring intervention from the central bank as the meltdown in Argentina and Turkey raises scrutiny on emerging markets with current account deficits. The rupiah fell to 14,750 per dollar, the weakest level since the 1998 Asian financial crisis…”


“The world-beating slump on Chinese equity markets may have more room to run, if the number of companies with stock prices below either their 200-day moving averages or book values is anything to go by. Of the 1,478 stocks on the benchmark Shanghai Composite Index, 93.3 per cent have fallen below their average prices for the past 200 days, according to Bloomberg data… At the same time, the number of stocks with prices below book values indicates that there is more gloom to come.”


“China’s private equity industry is cooling, with fundraising on course for one of its worst years since the global financial crisis and returns under pressure, hurt by tighter domestic liquidity following Beijing’s war on debt and Sino-U.S. trade tensions.”


“South Korea’s central bank on Friday left its benchmark interest rate unchanged for the ninth consecutive month amid the worsening of recent economic indicators. Bank of Korea Governor Lee Ju-yeol and six other policy board members decided to freeze the policy rate at 1.50 percent. The BOK refrained from altering the rate since it raised its target rate to the current level from an all-time low of 1.25 percent in November last year.”


“Japan’s factory output fell for a third straight month in July due to slowing exports of cars and steel and flooding that disrupted production, compounded by global trade tensions that cloud the export-reliant economy’s outlook… Factory output has levelled off in recent months due in part to a slowdown in exports. Natural disasters, including early July’s heavy rains and flooding in western Japan, temporarily halted production at some companies such as carmakers.”


“As Canada’s yield curve sits on the cusp of inverting for the first time in more than a decade, the nation’s central bank believes there’s little cause for alarm. The world’s largest money manager isn’t so sure. Bank of Canada Governor Stephen Poloz says overwhelming demand for long-dated bonds is distorting the curve’s recession signaling mechanism. Yet BlackRock Inc. says banks will become increasingly reluctant to lend as Canada’s term structure turns negative.”


“In addition, if the artificial boom ends when interest rates are no longer artificially depressed, then it stands to reason that the structure of interest rates will also revert to its natural state… the next U.S. recession may prove unusually severe by historical standards… Approximately one year ago… then Federal Reserve Chair Janet Yellen believed the next recession-driven financial crisis may be averted for at least a generation or so… You know nothing, Janet Yellen. Winter is coming.”


“Ireland’s famous green pastures and cool climate are a perfect environment for grazing dairy cattle — but not this year. The sweltering summer turned lush fields brown and led to shortages of fodder for the country’s millions of cows. Months of drought and heat have also caused problems across the European Union, the top milk exporter. Farmers from Ireland to Germany have had to cull herds or stop milking months early.”


“An increasingly likely disorderly exit of the United Kingdom from the European Union could lead to a new financial crisis in Europe, German finance minister Olaf Scholz warned on Thursday. Speaking during the ongoing “Handelsblatt” banking conference in Frankfurt, Scholz cautioned that it was still “difficult to say whether (a post-Brexit agreement) can be reached” before London crashes out of the bloc on March 29 2019. As a consequence, the minister recommended to business leaders to make the necessary preparations for a “disorderly Brexit” until it was too late.”


“Foreigners’ net holdings of British government debt fell by a record amount last month, a move partly driven by a large volume of maturing bonds but one which also revived concerns about the effect of Brexit on investor appetite… Bank of England data released on Thursday showed a net 17.153 billion pound drop in foreigners’ holdings in July, the largest since records began in 1982…”


“Consumer borrowing growth slowed sharply in July as Britons tightened their belts and lenders became more cautious. The annual pace of credit growth dropped to 8.5 per cent, the lowest level since November 2015, according to Bank of England data published on Thursday… The Bank of England would likely welcome the slowdown in consumer credit growth as it was concerned about “pockets of risk” but would not want to see unsecured lending dry up.”


“The UK housing market has slowed to its weakest in five years as fewer mortgages have been given to buyers so far this year than at any point since 2013, when banks and the market were still recovering from the financial crisis.”


“European Union Commissioner Guenther Oettinger chided Italy on Friday about its high debt levels – the second in Europe behind Greece – and warned that market confidence could be eroded if Europe raised its overall debt… Oettinger said he took seriously Italy’s threat to veto the EU’s seven-year budget plan if the bloc does not share the burden of migrant arrivals. However, he said Italy had obligated itself as a member of the EU to make its budget payments and also benefited from the bloc’s outlays.”


“The escalating trade war between the U.S. and China could lead to a “global economic crisis,” according to George Yeo, a former Singapore foreign and trade minister. “It’s not good for us in the near term if it leads to a global economic crisis, which may well happen,” Yeo said. “I mean we’ve just had Trump threatening to leave the WTO if it doesn’t change in the U.S. favor,” he added. “So all this is causing a lot of anxiety all around.””


“Summer holidays are almost over, but trade wars are just heating up. This doesn’t mean anything good for global exports, according to research by Bloomberg Economics. Examining the weighted average of growth in cargo volume at nine of the world’s busiest ports suggests a marked slowdown.”


Read yesterday’s ‘Economy’ thread here.