Daily updates on climate change and the global economy.

Economy 15 Aug 2018 US household debt hits new record

“Gradually rising interest rates have yet to dent Americans’ appetite for borrowing, with the total stock of new debt climbing to $13.3 trillion in the second quarter, continuing a gradual rise in household borrowing over the past four years.

“Debts rose by $82 billion in the second quarter, driven by rising mortgage, credit-card and auto-loan balances, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit.”


What could possibly go wrong?

“The U.S. stock market could soon lay claim to being in the longest bull run in modern history, and it is more likely to power on than fizzle as it heads toward its golden years.”


“…the biggest concern is that aggregate debt levels in relation to global GDP have continued to grow… Because that was the problem that ignited the 2008 financial crisis, and the scope to respond is much more limited now than it was then. From both the monetary policy and the fiscal perspective, the room for manoeuvre is much smaller… Compared with a year ago, the situation, looking ahead, is more worrisome.”


“The escalating political dispute between the United States and Turkey, along with the sharp drop in the value of the Turkish currency, the lira, have captured front-page headlines in recent days. The political dispute threatens to realign major alliances while the drop in the lira threatens to undermine the global economy if it continues.”


“Sharp declines in the Turkish lira, Indian rupee and other currencies have raised the prospect of a self-reinforcing flight from riskier emerging markets.”


“Turkey has sharply raised tariffs on US imports, including passenger cars, alcohol and tobacco. A decree signed by President Recep Tayyip Erdogan raised the tariffs on cars to 120%, on alcoholic drinks to 140% and on leaf tobacco to 60%. Tariffs were also increased on cosmetics, rice and coal. Turkey had previously said it would boycott US electronic products. It comes after Washington imposed punitive sanctions on Ankara.”


“The currency crisis in Turkey is being exacerbated by a skyrocketing annual inflation rate, which by some estimates, exceeds 100 percent.”


“After 40 years of economic reforms, Chinese society has amassed too many contradictions. Public dissatisfaction with the authorities is well known… the economic impact of the trade war with the United States is likely to exacerbate the crisis in Chinese society. So far, the tariffs imposed on Chinese goods have caused China’s stock and currency markets to fluctuate and public pessimism to spread… Depending on how the conflict develops, we may see large-scale business closures, a rise in unemployment and serious inflation. If the economy sinks into a recession, living standards may fall sharply.”


“China’s state planner pledged on Wednesday to keep debt levels under control even as Beijing rolls out fresh stimulus to support the stumbling economy as a trade war with the U.S. deepens.”


“A company controlled by an economic and paramilitary organisation in China’s Xinjiang region has missed the interest and principal repayment on an onshore debt market note, in the latest sign of the stresses in China’s financial system.”


“The [Iranian] regime is attempting to hold onto its power, even as the economic turmoil continues to rise. There are calls to replace members of Rouhani’s administration, especially those involved in economic issues. Others are calling for a new election or the replacement of Rouhani’s civilian-led government with a military-led one.”


“President Nicolas Maduro said Monday that some of the world’s cheapest petrol that Venezuelan drivers enjoy will soon be sold at world market prices to combat rampant smuggling. [Currently] for the price of a cup of coffee, a driver can fill the tank of a small SUV nearly 9,000 times.”


“Nicaragua’s National Assembly on Tuesday, August 14, approved a drastic cut to the national budget because of the economic impact of months of anti-government unrest.”


And some ominous signs of an overall slowdown in the global economy:

“Oil prices ended lower Tuesday for the fourth time in five sessions as investors worried that growth in global demand may soon weaken.”


“”We’re not earning anything from it any more, we have nothing,” says a rubber farmer in Ivory Coast, Africa’s top producer, where revenues from natural rubber have been slashed by global oversupply… Rubber prices are linked to that of crude because of the tyre industry, which uses a mix of natural and synthetic petroleum-based products.”


“Copper sank below $6,000, while the dollar climbed and stocks fell, as investors fret that the Turkish crisis will spill over into emerging markets, hurting demand already threatened by a U.S.-China trade war. Other metals, crude oil and gold declined too.”


Read yesterday’s ‘Economy’ thread here.

Economy 14 Aug 2018 Turkey a harbinger of EM chaos

“As European stock markets bounced from their lows late on Monday, it was tempting to write off the global ramifications of Turkey’s currency crisis… investors and analysts are starting to see the country’s crisis as a harbinger of things to come in an era in which central banks are rolling back a decade of monetary stimulus.

“As the plentiful liquidity of quantitative easing begins to fade and access to the dollar tightens, investors will be less forgiving of policy mistakes by governments, shine a harsher light on borrowers who have racked up debts in the US currency and used the era of easy money to put off difficult decisions.

After ten years of monetary policy anaesthetic, the number of sceptics is growing,” said Alberto Gallo at Algebris Investments…

“With an estimated $40tn added to the debts of emerging markets in the decade since the global financial crisis, according to the Institute of International Finance (IIF), parts of EM look most vulnerable.

“Indeed in June, Argentina was forced to seek a bailout from the IMF after its economy ran aground just a year after it sold a 100-year bond. The size of their debts leave both South Africa and Brazil vulnerable, analysts say. In a day of volatile trading for EMs on Monday, the South African rand at one point plunged about 10 per cent and Brazil’s real has endured a 4 per cent drop over the past four days.

Traders are picking off nations exposed to dollar obligations,” said Peter Rosenstreich, a currency analyst at the online bank Swissquote, pointing to Chile, Mexico, Indonesia, Russia and Malaysia among those countries with high non-bank dollar debt as a percentage of GDP.

“The biggest debt mountain belongs to China. It stood at 300 per cent of GDP in the first quarter, up from 171 per cent at the end of 2008, according to the IIF, although most of that debt is held inside the country…

“As the European Central Bank reins in its bond-buying programme, investors say the confidence factor will also be critical as Italy’s populist coalition prepares to unveil a budget that some expect to be fiscally aggressive. Italian government debt was a notable laggard on Monday, with the yield on the ten-year benchmark rising 11 basis points to 3.09 per cent.

“Mr Gallo said he expected investors to view Italy by the same yardstick that the market had judged Argentina and Turkey, questioning governments that “sell people a dream, create an enemy, and pursue unsustainable policies in the process”. Italy’s deputy prime minister Luigi Di Maio told Corriere della Sera that the government “cannot be threatened” by the markets.

“Trinh Nguyen, senior economist for emerging Asia at Natixis in Hong Kong, said: “Contagion on financial markets has to do with risk-on, risk-off sentiment and it impacts the countries that depend on [foreign finance].”

“…China remains vulnerable to the escalating trade war with the US, as shown in a 16 per cent drop in its stock markets this year, and other EM are vulnerable to a slowdown in China. But even this is a secondary consideration against a background of rising US rates and a stronger dollar.

““What is really driving emerging markets is the tightening of dollar liquidity,” Ms Nguyen said.”


“A fresh plunge in the Turkish lira sent tremors through global currency markets on Monday, amid fears that the failure of Recep Tayyip Erdogan’s government to tackle its worsening financial crisis would have a domino effect on other vulnerable countries.”


“…the collapse of confidence in the lira spread to the South African rand, which fell by as much as 7 per cent against the dollar, while the Indian rupee sank to a record low against the greenback, dipping close to 70 per dollar.”


“It isn’t just sovereigns. Argentine and Turkish corporate bonds are also racing each other to the bottom. Of the 10 worst-returning dollar-denominated, emerging market corporate bonds this month, six are Turkish and four are Argentine.”


“Because the [Turkish] crisis involves private rather than public debt, the IMF could find it harder to justify a bailout. The moral hazard of using IMF funds for corporate debt issues would be substantial.”


“This turmoil is about far more than the price of onions in Istanbul. Turkey’s many troubles have wide geopolitical and strategic ramifications.”


“From a strategic or military point of view, Erdogan “looking for new friends” is even more worrying. Turkey suddenly has a lot in common with Iran, Syria, and, across the Black Sea, Russia: They are all the targets of US sanctions… The worst-case scenario is a Turkish government that cannot pay the army that controls its borders, in search of “new friends” to bail it out.”


“In response to the U.S. sanctions that came into effect last week, Iran has threatened to block access to the world’s busiest oil shipping route. There has been no indication that Iran is prepared to go through with its threats, but if it did, it would likely be catastrophic for the region, and for global energy prices.”


“Argentina took emergency steps to stabilize its currency in the wake of an emerging-market rout caused by Turkey’s crisis, jacking up its already highest-in-the-world interest rate by 5 percentage points and announcing it will sell $500 million to support the peso. Policy makers set the rate for seven-day notes at a record 45 percent and pledged to keep it at that level at least until October.”


“In normal times you would expect such an economic signal would drive the loonie higher. Instead, a few hours after the jobs results the Canadian dollar was down nearly half a cent.”


“America never made up the growth it lost in the 2008 global financial crisis and the recession it triggered. A decade later, U.S. households are still counting the cost. GDP remains well below what its 2007 trend would have implied and it’s unlikely the economy will ever make up that lost ground, according to research from the Federal Reserve Bank of San Francisco published Monday. The hit will cost the average American $70,000 in lifetime income, they estimate.”


“More than 1 million student loan borrowers each year go into default. Outstanding education debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion, posing a greater burden to Americans than auto or credit card debt. For many, the payments are proving unmanageable.”


“Italian Minister Claudio Borghi called for capped yield spreads on Eurozone bonds – “The situation can’t be resolved and it is going to explode” he… said, referring to the shared euro currency. His suggested remedy was a 150 basis point limit on the spread between Eurozone country’s bonds. “Either the ECB offers a guarantee or the euro will be dismantled,” he concluded.”


“Russia’s grain exports have started to show the first signs of a slowdown since quality concerns over this year’s crop pushed prices to five-year highs.”


“China’s economy is showing signs of cooling further as the U.S. prepares even tougher trade tariffs, with investment growth slowing to a record low and consumers turning more cautious about spending, data showed on Tuesday… The pace of fixed asset investment was the weakest on record going back to early 1996, according to data on Reuters Eikon… Retail sales also missed expectations.”


Read yesterday’s ‘Economy’ thread here.

Economy 13 Aug 2018 Turkey pops

Turkish lira plunges again, as do Euro and EM currencies“The Turkish lira fell almost 9% in early trading on Monday and the euro hit a one-year low as investors feared that the country’s financial crisis could spread to European markets.

“Despite defiant words by the Turkish president Recep Tayyip Erdoğan over the weekend pledging as yet unspecified action to reverse the slide, the currency slipped alarmingly against the US dollar on Monday.”


“”Just to put it in context: the amount of money borrowed by Turkey is similar to the amount of money that was borrowed by Bear Stearns-it’s about $400 billion. Bear Stearns of course had off-sheet liabilities as well, but on-sheet liabilities of $400 billion. Lehman Brothers was $600 billion, so that puts it in context. This is a big number and it’s lent from outside the system so it does have issues for financial stability, particularly in Europe and we need to make that clear.””


“Italy’s bonds led losses among euro-area sovereign debt markets as the Turkish currency turmoil fueled fears of a contagion effect across riskier assets. Yields on two-year securities climbed to the highest levels in more than a week as stocks worldwide declined following a tumble of more than 28 percent in Turkey’s lira this month. The Italian 10-year spread over German bunds hit the highest since May. Deputy Prime Minister Luigi Di Maio was reported as saying in an interview Monday that his country won’t be subject to an attack by speculators.”


“The plunge in the Turkish lira has set off a wave of selling across emerging market assets, reviving the spectre of contagion that has been the sector’s Achilles heel for decades… the South African rand and Brazilian real tumbled in its wake… “It’s the usual classic emerging markets story where people wake up, see bad news in one country and start selling everywhere,” said Bart Turtelboom, chief executive at APQ Global.”


“The rupee on Monday joined the emerging market currencies rout as the domestic unit opened at a low of 69.47 against the US dollarNSE -0.96 %. The rupee nosedived to its life-time low of 69.62…”


“In spite of President Cyril Ramaphosa’s attempts to revive the country’s struggling [South African] economy, there is a strong possibility it may slip into recession. Economists have predicted negative growth for the second quarter (April to June), which would throw the country into recession. The rand fell to its worst level against the dollar in nearly 18 months this week…”


“The Australian dollar fell to an 18-month low against the US dollar on Monday, as worries about an impending financial crisis in Turkey prompted selling in the currency with strategists warning of more downside ahead.”


“The bid-ask spread or the difference between the price bidders are willing to buy and sell the lira at, has widened beyond the gap seen at the depths of the Global Financial Crisis, following the collapse of Lehman Brothers.”


Meanwhile the trade war rumbles on:

“China is not just another front in President Donald Trump’s war on trade. Unlike Mexico, Canada, Europe and other targets of the president, China will be a source of economic conflict for years to come.”


And the UK continues to fumble the ball on Brexit:

“Sterling’s decline has recently resumed, albeit gently. Perhaps the only surprising thing about that statement is its last word. Seasoned market watchers are surprised that the pound is not a lot lower, such is the utter chaos surrounding the UK’s preparations for its imminent departure from the EU.”


An additional stress for an already struggling economy:

“…the UK has experienced a slump in productivity growth since the financial crisis that shows no sign of coming to an end. The slowdown has been more acute than any other western country.”


 “U.K. house prices fell for a fifth month in a row in July, the longest stretch of declines since the financial crisis.”


“I think we’re bound for something a lot worse than a recession. We’re going to continue what we began in 2008… the central banks around the world are going to have to raise interest rates. And that’s when there’s really a disaster, because we can’t afford the higher interest rates. We can barely afford the higher interest rates we have now.”


Read the previous ‘Economy’ thread here.

Economy 10 Aug 2018 Turkey’s crisis mounts

Turkey's crisis mounts“Turkey’s banks are dangerously reliant on short-term foreign debt and risk a full-blown crisis unless drastic measures are taken to stabilize the plummeting Turkish lira.

“President Recep Tayyip Erdogan has refused to accept austerity measures or call in the International Monetary Fund to restore credibility, falling back on defiant rhetoric as the financial meltdown threatens to metastasize.

“The currency weakened to a record low of $5.57 to the dollar, crashing over 5pc on Thursday in a capitulation rout. The lira has lost 37pc since late February. It is a brutal shock for firms with $220bn (£170bn) of hard currency debt…”

“In a surreal twist, there is scarcely a word on the unfolding crisis in most of Turkey’s newspapers, a sign of the enveloping political suffocation of the media under Mr Erdogan’s authoritarian one-man rule.

“The plunging currency has left banks and large parts of the corporate sector scrambling to cover dollar debts… Foreign banks with $267bn of exposure to Turkey are starting to suffer fall-out…

“Emerging market countries were able to get away with credit booms and deficit spending when interest rates across the developed world were near zero, and G4 central banks were adding $2 trillion a year to the global financial system through quantitative easing.

“It is a different story in 2018 as the monetary tide turns. The US Federal Reserve is raising rates briskly and reversing QE, draining the pool of worldwide dollar liquidity.

“Emerging markets have racked up $7.2 trillion of dollar debt in loans, bond issues, and equivalent derivatives. Those who were swimming naked are being found out.

“Argentina and Turkey were living the furthest beyond their means on foreign funding, and were the most exposed. The question is whether Indonesia, South Africa, Lebanon, Colombia and Hungary, among others, risk the same fate as the global cost of borrowing ratchets relentlessly upwards.”


And the lira fell further overnight:

“The Turkish lira has tumbled nearly 12 per cent against the dollar as concern over Europe’s exposure to its recent fall overshadowed promises by the Turkish government to bolster the economy. The currency fell to all-time low beyond TL6 per dollar on Friday morning after sinking more than 5 per cent overnight… the lira was still down more than 35 per cent in the year to date.”


“Data from the Bank for International Settlements (BIS) showed that Spanish banks are due $83.3 billion by Turkish borrowers; French lenders are owed $38.4 billion; and banks in Italy are owed $17 billion, the FT reported. Meanwhile, the cost of insuring exposure to Turkish debt rose on Thursday to the highest level since 2009. Turkey’s five-year credit default swaps rose to 379 basis points, hitting the highest since April 2009.”


“Fluctuating bond prices playing havoc with capital levels… The ups and downs of Italian government bonds are making the country’s banks queasy. UniCredit SpA and its smaller competitors are seeing their financial resilience being eroded after government bond values declined. The country’s banks hold by far the most state debt among lenders in Europe and with yields moving in reaction to politicians’ declarations, it’s not hard to see more risk ahead.”


“The London real estate market is losing steam with sales struggling to complete. Tax changes, Brexit uncertainty, higher house prices and difficulties in getting a mortgage approved are making it increasingly hard for people to buy homes in the U.K. capital. Real estate companies have admitted that a slowdown in sales has affected their profits.”


“What is clear from Thursday’s council meeting is that the era of sticking plasters and accounting dodges is over. Northamptonshire finds itself having to make harsh, abrupt cuts on a huge scale – £70m in the next nine months alone. It will shine an unforgiving light on the plight of local government [in the UK].”


“The European Central Bank has warned that US tariffs are in danger of reaching their highest levels for half a century as its concerns mount about the impact of Donald Trump’s trade policy on eurozone growth. The ECB said in its latest monthly bulletin on Thursday that “downside risks to the global economy have intensified” after the introduction of protectionist measures by the US and China last month and the threat of further retaliation.”


“The EU has caved in to demands to buy more US gas in a bid to cool trade tensions with the world’s largest economy… The plans to purchase more US gas were unveiled ahead of crunch trade talks set to take place on August 20. The summit is aimed at halting the escalation of tit-for-tat tariffs on billions of imports imposed by the US and EU in recent months.”


“A trade war may not be China’s biggest problem. Analysts are cautioning against the country’s use of wealth-management products, or groups of financial instruments that are sold as one high-yield investment. Takahide Kiuchi, an economist at Nomura, thinks they may even pose risks that mirror those that led up to the Great Recession.

“”The situation revolving around these [wealth-management products] is similar to the residential mortgage-backed securities problem in the US that eventually triggered the collapse of Lehman Brothers and the global financial crisis,” Kiuchi said.”


“Watch Out for China’s Slowing Car Sales – The world’s largest car market is deflating. China’s homegrown auto makers will likely move into the slow lane, too. China’s car sales fell 5.5% year-over-year in July, the second consecutive month of decline, according to China Passenger Car Association.”


“Hong Kong’s top banks are hiking an important mortgage rate, piling pressure on borrowers and raising the risk of a slowdown in one of the world’s most expensive property markets. Home prices in Hong Kong have surged nearly three-fold since 2008, propelled by a supply shortage, cheap financing and big flows of money from Chinese investors.”


“The Philippine central bank on Thursday made its biggest rate hike in 10 years, raising key interest rates by 50 basis points, leaving door open for further policy tightening to fight high inflation despite economic growth losing steam.”


“The corruption scandal that broke in Argentina last week could be a political godsend for President Mauricio Macri — and an economic nightmare for the country.

“A federal judge is probing hundreds of alleged bribes paid by construction companies, energy suppliers and electricity generators to members of the former government of Cristina Fernandez de Kirchner. While the accusations may derail Fernandez’s hopes of a comeback, aiding Macri, they could also halt investment in a country already threatened with recession after a collapse in the peso.”


“Ecuador has declared a state of emergency in three northern states after a large influx of migrants from crisis-ridden Venezuela entered the country via Colombia.”


“…right now, the debt market is broadcasting a dangerous message: Investors, desperate for debt instruments that pay high interest, have been overpaying for riskier and riskier obligations. University endowments, pension funds, mutual funds and hedge funds have been pouring money into the bond market with little concern that bonds can be every bit as dangerous to own as stocks…

“…trillions of dollars in invested capital could be lost. If that happens, as it did after September 2008, access to credit for most borrowers could dry up, setting off yet another potentially devastating economic crisis.”


“The price of copper has continued to plummet – a worrying sign for the global economy. Over the past year it slumped by 18% from highs of more than $7,300 per tonne to around $6,100.”


Read yesterday’s ‘Economy’ thread here.

Economy 9 Aug 2018 Brexit no-deal looming

SUCH a safe pair of hands. What could possibly go wrong?!

“U.K. Prime Minister Theresa May is stepping up the government’s preparations in case Brexit negotiations break down and the country crashes out of the European Union without a deal.

“May is planning a top-level meeting of her cabinet ministers early in September specifically to discuss how to ready the U.K. for a no-deal Brexit, according to people familiar with the matter.

“Separately, a working group of senior government officials is being convened to devise ways to keep the Irish border free of customs checks and police even if there’s no withdrawal agreement, one of the people said.

““Our negotiations on our future relationship have reached an impasse,” May told Tory party members in a letter on Wednesday…”


“The pound has fallen to its lowest level in almost a year amid continuing concerns that the UK will leave the European Union without a deal. Sterling slid 0.4% to $1.2894 at around midday – its lowest level since 31 August 2017. The currency also hit a new low for the year against the euro, trading at €1.1135.”


“Brexit has slowed London’s population growth to the lowest rate for more than a decade and caused a risk of “significant damage” to the capital’s economy, a report warned today… The warning came as two major businesses appealed for more action to reduce the harm to trade from a “bad” Brexit. Pharmaceuticals giant AstraZeneca said patients could miss out on vital medicines unless it made preparations for a no-deal exit from the EU.”


“Italy on Wednesday cut its forecasts for both economic growth and its public finances this year and next year, potentially lining it up for a clash with Brussels.”


“Turkey’s central bank must raise interest rates by more than 500 basis points if it’s serious about stemming a deepening economic crisis, according to Investec Asset Management. “They need to properly tighten the screws” and raise the policy rate to at least 23 percent…””


Trump throwing his weight around:

“United Nations agency helping Palestinian refugees is facing a severe financial shortfall. Jordan warns of “catastrophic” impact on the lives of millions of refugees in the region. UNRWA has faced a cash crisis since the United States, long its biggest donor, slashed funding to the agency, providing just $60 million of a promised $365 million this year. US President Donald Trump withheld the aid after questioning its value and saying Washington would only provide more assistance if the Palestinians agreed to renew peace talks with Israel.”


“It is still nearly three months until U.S. sanctions on Iran’s oil exports snap back into force, but they are already having a big impact on the Persian Gulf country’s trade. The nation’s outflow has fallen, and Iran is having to rely more on its own fleet of tankers to carry oil to its customers, according to ship-tracking data compiled by Bloomberg.”


“A shipment of soybeans worth more than $20m (£15.5m) has been bobbing aimlessly in the Pacific Ocean for a month, a casualty of the escalating trade war between China and the US. Lingering uncertainty over the cargo’s fate offered a timely reminder of the fallout from a dispute that intensified on Wednesday, as the US president, Donald Trump, unveiled a second round of tariffs on $16bn of Chinese goods, prompting Beijing to respond in kind.”


“Sydney property investors have been dealt another blow on top of their current struggles to get financing from banks — the average rate of return on investment properties has shrank to the lowest level since the GFC.”


“Disappointing manufacturing production figures for June yesterday raised a red flag that the [South African] economy might fall into recession, with analysts saying mining data next week will give guidance to the rocky road ahead.”


“Applications for refinances [in the US] fell to the lowest level since December 2000 as mortgage rates remained more or less flat.”


“The Trump administration moved on Wednesday to drastically shrink a government agency tasked with identifying looming financial risks, notifying around 40 staff members they would be laid off, according to a person familiar with the changes.

“The employees at the Office of Financial Research (OFR) were formally told on Wednesday they will lose their jobs as part of a broader reorganization of the agency that was created in the wake of the 2007-2009 global financial crisis, the source said.”


“Data for global air freight markets showed that demand rose 2.7 percent year on year in June, continuing a slowdown for air cargo, the International Air Transport Association (IATA) said Wednesday. The growth slowdown began earlier in 2018… “While air cargo is somewhat insulated from the current round of rising tariff barriers, an escalation of trade tension resulting in a ‘reshoring’ of production and consolidation of global supply chains would change the outlook significantly for the worse.””


Read yesterday’s ‘Economy’ thread here.

Economy 8 Aug 2018 fault lines in global economy

Fault lines appearing in the global economy“Markets often fail to predict major market-moving events even though in retrospect, they should have been obvious to anticipate. A prime example of such a failure was the 2008 global market bust, which followed the extraordinary U.S. housing and credit market bubble.

“An earlier example was the world equity market panic in late July 1914 that followed the outbreak of World War I and that occasioned the closing for a few months of both the New York and London Stock Exchanges. As historian Niall Ferguson reminds us, on the eve of World War I, markets remained buoyant even though all the signs were long since pointing in the direction of the world sleepwalking toward a catastrophic war.

“One has to wonder whether something similar might not be happening today. At a time that the world’s major central banks are winding down their many years of ultra-easy monetary policies, global asset and credit markets remain very buoyant. They remain so even though a number of important fault lines in the global economy have appeared in plain sight, which could cause major financial market turbulence within the next 12 months…

“Among the more dangerous of these fault lines is Italy… The danger that Italy might trigger a new round of the European sovereign debt crisis stems not simply from the likelihood that its very high public debt level and its very troubled banking system could soon be exposed as the European Central Bank ends its bond -buying program later this year…

“An economic fault line closer to home for the United States is that of Brazil, the world’s eighth-largest economy with a public debt of $1.5 trillion. One reason for thinking that Brazil could come under severe market pressure in a less benign global liquidity environment is that, with a budget deficit of 8 percent of GDP, a public debt of almost 80 percent of GDP, and a very feeble economy, its public finances are on a clearly unsustainable path…

“Perhaps more troubling yet than the shaky economic prospects for Italy and Brazil are those for China, the world’s second-largest economy and the world’s major international commodity consumer. A significant Chinese economic slowdown would come at an especially inopportune time for the emerging market economies, which already are being hit by a sharp reversal of capital flows back to the United States in the wake of the Federal Reserve’s monetary policy tightening.

“…the Trump administration would be making a grave mistake in thinking that present global market buoyancy is a sign that all is well in the world economy. Rather, it would seem that the administration should be now taking advantage of the present market calm to plan how it might respond to a global economic crisis…”


“An otherwise healthy economic backdrop has been overshadowed by extreme moves that are haunting cross-asset investors. From Italian government obligations to commodity markets and even tech shares, illiquidity fears are rising. It’s especially a concern in high-yield credit, where investors holding cash bonds can face steep penalties if they rush for the exit.”


“The United States will impose a 25% tariff on another $16 billion worth of Chinese goods starting August 23, US Trade Representative Robert Lighthizer announced Tuesday.”


“Amid the trade war with the US, China has reported a current account deficit of $28.3 billion in the first half of 2018—a first in 20 years for the world’s second largest economy. China also recorded its first quarterly current account deficit in nearly 17 years this year, ending its dream run of accumulating trade surplus as top exporter for years.”


“A.P. Moeller-Maersk A/S, the world’s biggest cargo carrier, warned Tuesday its earnings would be weaker than expected this year due to rising fuel prices, soft freight rates and escalating trade tensions. Maersk… moves about 18% of all containers and is considered a barometer of global trade…”


“German industry may be feeling the pain from the trade war as its output fell more sharply than expected last month.”


“Two-thirds of manufacturers fear the UK will enter recession in the next year, a survey has found. Uncertainty around Brexit and the effects of international trade wars are also negatively affecting manufacturers’ confidence, said Lloyds Bank’s commercial wing after surveying more than 200 British companies.”


“Increases in life expectancy in the UK have stalled and the slowdown is one of the biggest among 20 of the world’s leading economies, ONS data shows… There was also a slowdown in other countries across Europe and Australia.”


“Turkey is facing mounting pressure to announce an emergency rise in interest rates as rampant inflation, a plunging currency and American sanctions pushes one of the world’s key emerging market countries to the brink of crisis. Analysts said Turkey’s central bank would have no choice but to increase borrowing costs aggressively in the coming days to stem the fall in the lira, which is down by almost a third against the US dollar in the past 12 months and hit a record low this week.”


“A further drop in the Turkish lira to 7.1 versus the dollar could largely erode the country’s banks’ excess capital, investment bank Goldman Sachs has warned.”


“The Central Bank Egypt (CBE) has announced that the foreign debt rose to $88.2 billion from $73.9 billion in Q3 2017-2018 fiscal year, compared to same period last year, reported Reuters.”


“Pakistan is sliding into a financial crisis and the new government led by Imran Khan will have a battle on its hands to turn around an ailing economy mired in debt. Khan’s Pakistan Tehrik-e-Insaaf (PTI) party, which is set to be sworn in the middle of the month, faces harrowing economic challenges of fast depleting reserves and bridging a whopping trade deficit.”


“Recession in Brunei caused by shrinking oil prices began to hurt expatriate workers including from Bangladesh.”


“…an analyst, Egie Akpata, told The Guardian that the confidence [of foreign investors] had been low for long due to economic issues, stressing that the current political stand-off could only worsen it. Meanwhile, in another round of intervention, the Central Bank of Nigeria (CBN) has injected $210million into the inter-bank foreign exchange market to ensure the availability of forex and also meet customers’ requests in various segments.”


“Brazil is the world’s eighth-largest economy. With a public debt of more than $1.5 trillion, a Brazilian debt crisis has the potential to cause real waves in the global financial system. The IMF underlines that in the best of circumstances, Brazil’s public debt is on a dangerous path… With a massive corruption scandal at Petrobras, the state oil company, having tarnished almost the entirety of Brazil’s political class, Brazilian populism is on the march, and political divisions have increased in the country.”


Read yesterday’s ‘Economy’ thread here.