Weekly Commentary: Regime Change

For the week, the VIX declined three points to 20.37. The S&P500 was basically unchanged. The Nasdaq100 increased 0.4%. The KBW Bank Index added 0.2%. Germany’s DAX increased 0.3%, and France’s CAC40 added 0.2%. The UK’s FTSE100 slipped 0.1%. Japan’s Nikkei 225 ended the week 2.5% lower. Bitcoin fell 2.6%. Investment Grade CDS was little changed at 57.7 bps, with Investment Grade spreads three narrower. High Yield CDS declined six to 364 bps, while spreads narrowed 20 bps. By the look of most of the week’s changes, it was all quiet on the western front. deposit photos

 August 5 – Reuters (Saqib Iqbal Ahmed): “Wall Street’s most-watched gauge of investor anxiety logged its largest ever intraday jump on Monday and closed at its highest since October 2020, as traders scrambled to hedge against market volatility during a global selloff fueled by U.S. recession fears. The Cboe Volatility Index jumped to a high of 65.73 before the market open, up about 42 points from its close on Friday. The index pared gains and closed at 38.57, its highest close in nearly four years… The surge in the VIX, which measures investor demand for protection against stock swings, dwarfed moves in the volatility index that took place during past bouts of intense selling – including the Covid-related massive selloff in March 2020, when the S&P 500 sank more than 10% in a single day.”

At Monday’s intraday lows, the S&P500 was down 4.3%, the Nasdaq100 5.5%, the KBW Bank Index 5.0%, Germany’s DAX Index 3.6%, France’s CAC40 3.1%, UK FTSE100 3.2%, and Japan’s Nikkei 225 Index 13.2%. Bitcoin was 13.8% lower at Monday’s low and traded within a 16% range throughout the week.

At Monday’s intraday highs, Investment Grade CDS was up 7.6 to 66.9 bps – with a three-session spike of 14 bps – the largest increase since the March ’23 banking crisis. High Yield CDS surged 33 to 403 bps at Monday’s highs, pushing the three-session gain to 72 bps (also most since the banking crisis).

During peak Monday panic, the market was pricing a 3.85% December policy rate, down an incredible 79 bps in four sessions. At rate lows, market pricing implied 148 bps of rate reduction by year-end. Two-year Treasury yields sank as low as 3.65% in Monday trading, down 40 bps to a 15-month low. At lows, two-year yields were down 71 bps in four sessions. Panic buying.

August 6 – Bloomberg (Ruth Carson, Lu Wang, Vildana Hajric, and Bailey Lipschultz): “The numbers flashing on trading screens on Monday were shocking even to market veterans. In Tokyo, the Nikkei was down 12%. In Seoul, the Kospi sank 9%. And when the opening bell rang in New York, the Nasdaq plunged 6% in seconds. Cryptocurrencies sank; the VIX, a gauge of stock market volatility, skyrocketed; and investors piled into Treasury bonds, the safest asset of them all. Whether Monday’s wild gyrations mark the final bang of a global selloff that started to build last week or signal the beginning of a protracted slump is impossible to know. On Tuesday, some of the worst-hit markets rebounded, with the Nikkei jumping more than 10% and US stock indexes posting 1% gains.”

The dollar/yen traded down to a low of 141.70 Monday – capping off a stunning four-session drop from the July 30th high of 155.22. Dollar/yen was back to almost 148 early Wednesday on Bank of Japan crisis management.

August 7 – Reuters (Leika Kihara): “The Bank of Japan’s influential deputy governor said on Wednesday the central bank will not hike interest rates when markets are unstable, playing down the chance of a near-term hike in borrowing costs. The remarks by Shinichi Uchida, which contrasted with Governor Kazuo Ueda’s hawkish comments made last week when the BOJ unexpectedly raised interest rates, boosted Japan’s Nikkei share average and sent the yen sharply lower. Uchida said the intense market volatility in the past week could ‘obviously’ change the BOJ’s rate hike path if it affects the central bank’s economic and price projections… ‘As we’re seeing sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for the time being,’ Uchida said in a speech… ‘Personally, I see more factors popping up that require us being cautious about raising interest rates,’ Uchida… told a news conference after the speech… ‘We won’t raise interest rates when financial markets are unstable,’ he said in the speech.”

August 7 – Bloomberg (Toru Fujioka and Yoshiaki Nohara): “Bank of Japan Deputy Governor Shinichi Uchida sent a strong dovish signal in the wake of historic financial market volatility… The yen weakened by more than 2% against the dollar, bond futures spiked higher and stocks rebounded immediately after his comments… ‘I believe that the bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile,’ Uchida said… Uchida sought to dispel any notions his views might differ from the governor’s. ‘It’s not that there is a difference between the governor and me but rather that the situation has changed… There is extreme volatility taking place in financial markets, so we need to be more cautious if that’s included as part of our policy reaction function.’”

Crisis dynamics triggered a policy response, a familiar scenario. That it was the Bank of Japan quelling global crisis dynamics was highly unusual. It was an embarrassing about-face. A week earlier, Governor Ueda had sped up policy normalization, a hawkish shift compelled by the sickly yen. Now, the spiking yen, unwind of the yen “carry trades”, and global market upheaval forced a hasty retreat.

Astonishing what a move to a 25 bps interest rate can unleash after decades of ultra-loose policy. The BOJ in September 1995 cut rates from 1% to 0.5%. Rates haven’t been above 50 bps since. In March 2016 began the eight-year experiment with a negative (0.1%) rate. This crazy experiment “officially” failed this week.

“Volatility Pros Say Record VIX Surge on Monday Was a Head Fake.” “UBS Wealth CIO Says Wall Street’s Fear Gauge Flashing Buy Sign.” “Despite Recession Panic, the VIX Indicates It’s Time to Buy.” “S&P 500 is a Buy Whenever the VIX is Above This Number: RBC.” “The VIX Just Did Something It Hasn’t Done Since 2008. Here’s Why This Could Be a Buying Opportunity for Stocks.”

Was Monday’s VIX spike the typical obvious signal (buy the dip, don’t be one) – or might it have flashed something quite different? The post-VIX spike stock rally was business as usual. The panic buyers of market protection saw the value of their hedges sink rapidly into the end of the week. And with option expiration next Friday, it would not be a stunning development to see a lot of put options expire worthless (again).

No matter what the market does next week, or over several weeks, I believe the long bullish cycle is in jeopardy. Global Bubbles are in trouble everywhere. And it’s not unreasonable to presume the great equities bull market concluded fittingly with a mania and blowoff. We’ll look back to July as peak speculative melt-up.

August 7 – Financial Times (Steve Johnson and Will Schmitt): “Investors poured record sums into exchange traded funds in July, highlighting the exuberance that gripped global financial markets… Net inflows into ETFs globally hit $195bn in July, according to… BlackRock, totally eclipsing the monthly record of $169bn in December 2023. About $124bn of that flowed into US-listed ETFs, the second-highest amount on record behind December’s $129bn. The buying frenzy was wide ranging, with fixed income ETFs attracting a record $60.5bn, equity funds sucking in $127bn — their best month since December — and gold ETFs grabbing $3.2bn, the highest figure since March 2022. Active ETFs in the US once again set a record for new investments with $27.9bn after previously setting high water marks in January, March and December…”

I see July’s record ETF flows indicative of peak speculation – in ETFs, stocks, corporate Credit, and leveraged speculation more generally. Dollar/yen at 162 on July 10th is emblematic of peak yen “carry trade.” And U.S. high yield spreads (to Treasuries) at a near multi-year low 297 bps on July 23rd – in the face of weakening economic fundamentals – I’ll cite as evidence of peak corporate “carry trade” enthusiasm.

I don’t see Monday as some run of the mill “volmageddon” bull market hiccup soon forgotten. Not erupting so soon after manic speculation across markets. Markets Monday were flashing crash potential. At Monday’s close, Japan’s Nikkei 225 Index had collapsed 20% in three sessions, with the TOPIX-Banks Index down 26.5%.

August 9 – Bloomberg (Anya Andrianova, Carter Johnson and Mia Glass): “Speculative traders sharply pulled back on bets for a weaker yen amid wild swings in the Japanese currency and a vicious market selloff… Hedge funds cut their wagers against the yen by 49,336 contracts to 20,243 in the week ended Aug. 6, CFTC data… show. That’s the fifth-largest boost to trader sentiment in data going back to 2006… ‘The recent move in the yen has caused a significant unwinding of carry trades,’ said Yuya Yokota, a foreign-exchange trader at Mitsubishi UFJ Trust and Banking Corp… Strategists at Morgan Stanley estimated that some 60% of yen-funding carry trades have been unwound in recent weeks — while acknowledging a large margin of error in that figure. JPMorgan…, meanwhile, said about three-quarters of the global carry trade has been removed.”

So, the Bank of Japan pushes borrowing rates negative for eight years – with rates barely positive for decades – and resulting “carry trade” leveraged speculation is significantly unwound in a couple weeks? I can’t see it. Sure, there has been a huge unwind of liquid currency positions – and undoubtedly aggressive hedging of currency exposures. But what about the other side of the trade – all the higher yielding instruments around the world bought on leverage? I seriously question whether most EM bond and currency markets have sufficient liquidity to accommodate an aggressive deleveraging and “hot money” exodus.

More likely, the backdrop for global leveraged speculation has entered a so-called “New Regime.” There’s problematic leverage now overhanging markets virtually everywhere. Global derivatives markets may be off and running, but true deleveraging has barely got off the sofa.

On October 13th, 1989, the deal to finance the $7 billion leveraged buyout of UAL (United Airlines) collapsed. The S&P500 sank 6.1% on the “Friday the 13th Mini-Crash.” It didn’t matter that the S&P500 recovered 4.1% over the following three sessions. The damage was done; Regime Change. The UAL deal collapse sparked upheaval in the junk bond market. Four months later, Drexel Burnham Lambert collapsed. Indeed, October 13th marked a critical juncture for “decade of greed” high-risk speculative finance – junk bonds, leveraged buyouts, M&A, risky commercial real estate lending – a fledgling Bubble stoked to systemic excess by the Greenspan Fed’s response to the 1987 stock market crash. The Bubble began to deflate. By the next year, the economy was sinking into recession, and the banking system faced serious problems.

Other Regime Changes came to mind this week. On July 2, 1997, Thailand lost its battle to maintain the baht’s peg to the dollar. The newly floated currency quickly sank 20%. Soon, so-called “Asian Tiger” currencies were all suspect. The consequences of de-risking/deleveraging contagion were devastating for the likes of Indonesia, Malaysia, South Korea, and the Philippines. Currency and bond market collapses triggered Credit contractions and economic depressions. The fledgling “Asian Tiger” Bubbles, stoked to perilous excess after the Mexico bailout, collapsed catastrophically.

The March 2008 Bear Stearns collapse also comes to mind. Six months later, the Treasury put Fannie Mae and Freddie Mac into conservatorship, and the following week Lehman Brothers, having lost access to repo borrowings, failed and – as they say, “the rest is history.”

Back to Monday’s VIX action. We are told not to read much into the spike to 66 because of illiquidity issues in some instruments used to calculate the VIX price. Fair enough. Yet the story from Monday is how quickly the entire spectrum of markets – stocks, Treasuries, corporate bonds, munis, currencies, and the derivatives complex – can dislocate into illiquidity.

Monday looked like a Regime Change day. Momentous latent risks were revealed. While it ended up not unfolding, there was palpable market fear of global de-risking/deleveraging being transmitted to the highly levered U.S. Credit system. There are enormous domestic “carry trades,” where speculators have shorted Treasury and agency debt and used the proceeds to lever in higher-yielding corporate credit (bonds, private credit, leveraged loans, structured finance, etc.). An unwind of these types of trades would spark panic buying and a collapse in Treasury yields.

And when markets begin to dislocate – panic Treasury purchases, spreads blowing out, deleveraging, and illiquidity – I suspect concern turns to the stability of the massive “basis trade” (levered long cash Treasury bonds against shorts in Treasury futures). There is enormous leverage in various perceived stable “basis trades” – where both sides of the trade are highly correlated and quite stable – such as Treasury cash bonds versus Treasury futures. Playing these types of spreads is basically free money – unless something goes really haywire.

If the unwind in the yen “carry trade” marks a Regime Change in global levered speculative finance, these highly levered “basis trades” should be increasingly suspect. When markets turn illiquid and start to go haywire, as they did Monday, the fear is that things could go really haywire – crash type haywire – if these powerful “basis trade” operators find themselves in trouble. Such concerns would provoke a mad dash to the safety of Treasury bonds, which would trigger stress and dislocation in myriad trades that are short Treasuries.

The unwind of such “carry trades” would weigh heavily on general market liquidity – placing other levered trades – including “basis trades” – in jeopardy. And that these “basis trade” players borrow aggressively in the money markets creates vulnerability to a Lehman Brothers type scenario. I don’t want to get too far ahead of myself. But, then again, Regime Changes can unfold abruptly.

August 7 – Bloomberg (Lisa Du and Ruth Carson): “In less than a week, Japan has completely upended the world’s expectations for its markets and economy. The country was the darling of the financial world for over a year. Its weak currency pushed the stock market to record highs and rekindled inflation after decades. Then the Bank of Japan hiked rates last Wednesday and Governor Kazuo Ueda indicated he intended to keep going, helping trigger a sharp rise in the yen and wild gyrations across the global markets. Traders and investors were forced to abandon strategies based on macro views that Japan’s currency would stay weak and interest rates wouldn’t rise too fast. ‘Without a doubt this is absolutely new ground for markets. There’s soul searching everywhere now that we have a BOJ that seems hellbent on getting away from years of zero or negative rates policy,’ said Stephen Miller, a consultant at Grant Samuel Funds Management and former BlackRock Inc. fund manager. ‘Japan is now at the center of emergent worries — across everything, stocks, bonds, yen, credit, everything.’”

Quite a week. By Friday, I’ll assume FOMC members were relaxed and thinking about their weekends. Just markets being markets. “Emergency meeting LOL!!!” The reversal of hedges and the well-conditioned buy the dip crowd provide a potent combo. And rallying markets will mask mounting liquidity issues, while keeping the Fed’s attention squarely on economic data. Our central bank wouldn’t give Regime Change a second thought. But how about the big levered speculators that must stay fixated on liquidity?
 For the Week:

The S&P500 was unchanged (up 12.0% y-t-d), while the Dow slipped 0.6% (up 4.8%). The Utilities declined 1.2% (up 17.6%). The Banks added 0.2% (up 11.0%), and the Broker/Dealers rallied 2.2% (up 13.4%). The Transports dipped 0.3% (down 3.5%). The S&P 400 Midcaps slipped 0.4% (up 5.5%), and the small cap Russell 2000 fell 1.3% (up 2.7%). The Nasdaq100 increased 0.4% (up 10.3%). The Semiconductors rallied 2.2% (up 12.8%). The Biotechs declined 0.5% (up 4.7%). With bullion dipping $12, the HUI gold index fell 2.1% (up 18.0%).

Three-month Treasury bill rates ended the week at 5.075%. Two-year government yields jumped 17 bps this week to 4.05% (down 20bps y-t-d). Five-year T-note yields rose 18 bps to 3.80% (down 5bps). Ten-year Treasury yields gained 15 bps to 3.94% (up 6bps). Long bond yields rose 11 bps to 4.22% (up 19bps). Benchmark Fannie Mae MBS yields surged 27 bps to 5.31% (up 4bps).

Italian yields added a basis point to 3.64% (down 6bps y-t-d). Greek 10-year yields increased two bps to 3.31% (up 26bps). Spain’s 10-year yields added two bps to 3.09% (up 9bps). German bund yields rose five bps to 2.23% (up 20bps). French yields were unchanged at to 2.97% (up 41bps). The French to German 10-year bond spread narrowed five to 74 bps. U.K. 10-year gilt yields jumped 12 bps to 3.95% (up 41bps). U.K.’s FTSE equities index were little changed (up 5.6% y-t-d).

In a wildly volatile week, Japan’s Nikkei Equities Index fell 2.5% (up 4.7% y-t-d). Japanese 10-year “JGB” yields dropped 10 bps to 0.85% (up 24bps y-t-d). France’s CAC40 increased 0.2% (down 3.6%). The German DAX equities index added 0.3% (up 5.8%). Spain’s IBEX 35 equities index slipped 0.3% (up 5.3%). Italy’s FTSE MIB index declined 0.7% (up 4.7%). EM equities were mixed. Brazil’s Bovespa index rallied 3.8% (down 2.7%), and Mexico’s Bolsa index recovered 1.5% (down 7.6%). South Korea’s Kospi index sank 3.3% (down 2.5%). India’s Sensex equities index fell 1.6% (up 10.3%). China’s Shanghai Exchange Index declined 1.5% (down 3.8%). Turkey’s Borsa Istanbul National 100 index dropped 5.4% (up 32.6%).

Federal Reserve Credit declined $10.2 billion last week to $7.136 TN. Fed Credit was down $1.754 TN from the June 22, 2022, peak. Over the past 256 weeks, Fed Credit expanded $3.409 TN, or 91%. Fed Credit inflated $4.325 TN, or 154%, over the past 613 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $12.1bn last week to $3.313 TN. “Custody holdings” were down $141 billion y-o-y, or 4.1%.

Total money market fund assets surged $52.7 billion to a record $6.187 TN. Money funds were up $301 billion y-t-d and $657 billion, or 11.9%, y-o-y.

Total Commercial Paper increased $13.6 billion to $1.253 TN. CP was up $81 billion, or 6.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 26 bps to a 15-month low 6.47% (down 48bps y-o-y). Fifteen-year rates sank 36 bps to 5.63% (down 73bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up five bps to 7.09% (down 42bps).

Currency Watch:

August 6 – Reuters (Makiko Yamazaki): “Japan said… that it conducted a record single-day yen-buying intervention in April, selling 5.92 trillion yen ($40.83bn) worth of dollars in a fight against a falling yen at that time. Quarterly data from the Ministry of Finance (MOF) showed that Japan spent a record 5.92 trillion yen on a single-day yen-buying intervention on April 29 and a further 3.87 trillion yen on May 1. The previous single-day record for such intervention was 5.62 trillion yen spent on Oct. 21, 2022…”

August 8 – Bloomberg (Malavika Kaur Makol): “India’s central bank looks to have drawn a new line in the sand for the rupee at the 84-per-dollar level… The Indian currency tested a series of record lows in recent days but stopped short of crossing that key level on likely intervention by the Reserve Bank of India… Even while emerging-market currencies came under pressure in recent days as the global carry trade unwound, the rupee remained one of the least volatile emerging-market currencies this year due to the central bank’s repeated interventions.”

For the week, the U.S. Dollar Index was little changed at 103.135 (up 1.8% y-t-d). For the week on the upside, the Brazilian real increased 4.0%, the Mexican peso 1.9%, the Norwegian krone 1.3%, the Canadian dollar 1.0%, the Australian dollar 1.0%, the New Zealand dollar 0.7%, the Swedish krona 0.6%, the Singapore dollar 0.2%, and the euro 0.1%. On the downside, the Swiss franc declined 0.7%, the South African rand 0.4%, the British pound 0.3%, the South Korean won 0.3%, and the Japanese yen 0.1%. The Chinese (onshore) renminbi increased 0.05% versus the dollar (down 0.95% y-t-d).
 Commodities Watch:
July 28 – Nikkei Asia: “Gold has not lost its shine for Chinese consumers even amid the economic gloom, with people in their 20s and 30s finding new ways to enjoy the precious metal. Jinzhan Jewelry Plaza, a market in Shenzhen with nearly 500 shops, bustled with shoppers and onlookers on a recent day. A store owner in his 30s was doing a TikTok livestream to 23,000 viewers as he wove through the crowd, drawing questions from his online audience about prices. An office worker in her 30s visiting the market bought a gold bracelet for more than 10,000 yuan ($1,400). ‘The price of gold continues to rise, so I’m not worried about its value decreasing,’ the woman said.”

The Bloomberg Commodities Index recovered 0.8% (down 3.2% y-t-d). Spot Gold slipped 0.5% to $2,431 (up 17.9%). Silver dropped 3.9% to $27.4592 (up 15.4%). WTI crude rallied $3.32, or 4.5%, to $76.84 (up 7%). Gasoline jumped 3.1% (up 14%), and Natural Gas recovered 8.9% to $2.143 (down 15%). Copper fell 2.7% (up 3%). Wheat increased 0.6% (down 14%), while Corn dropped 2.5% (down 20%). Bitcoin fell $1,383, or 2.2%, to $60,400 (up 42%).

Middle East War Watch:

August 5 – Bloomberg (Dan Williams, Arsalan Shahla and Iain Marlow): “The US and its allies worked to head off an Iranian attack on Israel and avert a wider regional war as concerns grew that a strike may come at any moment in retaliation for the killing of a top Hamas leader in Tehran. The Biden administration moved additional forces to the region, and Secretary of State Antony Blinken conferred with top officials from Qatar and Egypt — the two countries helping lead negotiations for a cease-fire between Israel and Hamas militants — on Monday…”

August 4 – Financial Times (Raya Jalabi, Andrew England and Stefania Palma): “Western governments have stepped up calls for their citizens to leave Lebanon while commercial flights are still available, as an anxious region braced for the possibility of a full-blown regional war… France urged its citizens to leave the country as soon as possible owing to the ‘very volatile security context’, following similar calls by the UK, US and Jordan… ‘We encourage those wishing to leave Lebanon to book any available ticket, even if that flight does not depart immediately or does not follow the itinerary of their choice,’ the US embassy in Lebanon said…”

August 4 – Financial Times (Najmeh Bozorgmehr, Mehul Srivastava and Felicia Schwartz): “Iranian President Masoud Pezeshkian said… Tehran would ‘definitely’ respond to Israel in retaliation for the assassination of Hamas’s political leader Ismail Haniyeh. ‘The Islamic Republic of Iran is in no way seeking to expand the scope of war and crisis in the region, but this regime [Israel] will definitely receive a response for its crimes and insolence,’ Pezeshkian said during a meeting with Russia’s security council secretary Sergei Shoigu. The warning came a day after US secretary of state Antony Blinken told his G7 counterparts that Washington was prepared for an ‘imminent’ attack, according to people briefed on the matter.”

August 5 – Bloomberg (Arsalan Shahla, Alberto Nardelli and Fiona MacDonald): “Iran reiterated it wants to avoid all-out war with Israel, even as it threatened to retaliate for last week’s assassination of a leading Hamas figure in its capital… ‘Reinforcing stability and security in the region will be achieved by punishing the aggressor and creating deterrence against Israel and its adventurism,’ a spokesperson for Iran’s foreign ministry told reporters…”

August 6 – Reuters (Timour Azhari and Maya Gebeily): “The leader of Hezbollah on Tuesday pledged a ‘strong and effective’ response to the killing of its military commander by Israel last week no matter the consequences and said Hezbollah would act either alone or with its regional allies. Sayyed Hassan Nasrallah said Hezbollah would wait for the right moment to respond but did not hint at its form or timing. All international attempts at persuading Hezbollah not to retaliate were futile, he said.”

August 9 – Financial Times (Neri Zilber and Ian Bott): “Israel has strengthened its air defences in anticipation of an expected aerial retaliation from Iran and its allies for the assassinations of two senior militant leaders. The country’s much-vaunted defences have so far largely succeeded in blocking airborne assaults from Tehran and its proxies, notably the Lebanon-based militant group Hizbollah, which have amassed a huge rocket, missile and drone arsenal. But Israeli officials expect that the multi-layered system will face its biggest test yet in the days ahead…”

August 5 – Wall Street Journal (Michael R. Gordon, Alexander Ward and Lara Seligman): “The Biden administration is working to blunt a potential Iranian attack on Israel, but it faces an array of fresh challenges as it seeks to replicate the success it had in April when a multinational coalition helped Israel intercept a barrage of Iranian missiles and drones. U.S. officials said they have since the weekend started seeing Iran moving missile launchers and conducting military drills, which could indicate Tehran is preparing for an attack in the coming days… Biden administration officials also are concerned that an Iranian assault might be accompanied this time by strikes from Hezbollah, the Lebanese militia, and Tehran’s other proxies in an attempt to overwhelm Israeli defenses.”

August 5 – Associated Press (Lolita C. Baldor): “Several U.S. personnel were injured in a suspected rocket attack at a military base in Iraq, U.S. defense officials said…, in what has been a recent uptick in strikes on American forces by Iranian-backed militias. The attack comes as tensions across the Middle East are spiking following the killings last week of a senior Hezbollah commander in Lebanon and Hamas’ top political leader in Iran… The U.S. defense officials said troops at al-Asad air base were still assessing the injuries and damage, and it appeared that as many as seven military troops and civilians were injured.”

Ukraine War Watch:

August 9 – Reuters (Guy Faulconbridge and Lidia Kelly): “Russia said… it was fighting intense battles against Ukrainian forces that had penetrated its southern border near a major natural gas transmission hub, in one of the largest incursions into Russian territory since the war began. The acting governor of Kursk region, Alexey Smirnov, said he had introduced a state of emergency in the border region. Regional officials said that meant restricting access to specific areas… ‘The Kyiv regime has launched another major provocation,’ President Vladimir Putin told members of the Russian government…”

Market Instability Watch:

August 5 – Wall Street Journal (James Mackintosh): “Financial markets are supposed to capture the wisdom of the crowd, but on Monday the crowd ran in all directions waving its hands in the air screaming. Japan’s stock market fell the most in 37 years with a 12% plunge that wiped out all its gains for the year, while in the U.S. the VIX index of implied stock volatility briefly had its biggest rise ever. Panic hit… The selloff—which at one point had chip maker Nvidia down 15%—was so big because investors had been all-in betting that things would work out well.”

August 5 – Bloomberg (Aya Wagatsuma and Winnie Hsu): “Japan’s Topix stock index slid 24% from a record high reached last month and the Nikkei 225 Stock Average suffered its worst one-day slump in yen terms as investor confidence evaporated. The Topix and Nikkei 225 tumbled 12% Monday… On a three-day basis, the Topix had its biggest drop in data stretching back to 1959. Tech companies and banks were the heaviest drags on the Topix…”

August 7 – Bloomberg (River Akira Davis): “Over the past week, markets tumbled as fears ricocheted around the world about the health of the U.S. economy, tech sector and more. No market bore the brunt as much as Japan. A key Japanese stock index, starting last Thursday, experienced its most severe two- and three-day trading drops since the 1950s — declines that analysts said could not be fully explained by the same factors affecting other countries.”

August 5 – Reuters (Jihoon Lee): “South Korea’s stock market marked its worst session since the global financial crisis of 2008 on Monday, with trading curbs activated for the first time in four years, as tech stocks slumped amid U.S. recession fears. The benchmark KOSPI stock index ended the session down 8.8% at 2,441.55, its biggest percentage fall since Oct. 24, 2008. During the session, the KOSPI fell as much as 10.8%, triggering circuit breakers for the first time since March 2020…”

August 5 – Bloomberg (Abhishek Vishnoi, Youkyung Lee and John Cheng): “Asian equities tumbled as fears of a deeper US economic slowdown and an extended rout in Japanese shares sapped risk appetite, with matters made worse by a violent rotation away from heavyweight tech stocks. Many equity indexes across the region hit bleak milestones on Monday, with those in export-reliant markets of Japan, Taiwan and Korea suffering the most — their benchmarks sank more than 10% each intraday. Circuit breakers temporarily suspended trading of futures for the Topix as well as the Nikkei 225 Stock Average multiple times, while trading was also briefly halted for the Kospi and Kosdaq cash and futures markets in Seoul. The MSCI Asia Pacific Index plunged as much as 6.7%, erasing all its gains for the year and taking losses from a July 11 peak to more than 10%.”

August 5 – Bloomberg (David Marino and Natalia Kniazhevich): “In a day full of rare moves, S&P 500 options volatility spiked higher than the Nasdaq 100 for the first time since the Covid pandemic. The Cboe Volatility Index, or VIX, jumped to 38.57 Monday, 1.1 times the level of the VXN, a similar measure for the Nasdaq 100. The last time it happened was in 2020, and to Citigroup’s Stuart Kaiser it’s a crisis-type dynamic.”

August 5 – Reuters (Aditya Soni): “Apple and other heavyweight companies sold off on Monday… Apple, Tesla, Alphabet and Amazon each dropped more than 4%, while Nvidia tumbled 7%, and Microsoft and Meta Platforms fell 3% as worries about a potential U.S. recession compounded investor concerns about massive spending to build AI infrastructure. Those seven corporations were on track to lose about $800 billion in stock market value for the session, according to LSEG data.”

August 7 – Bloomberg (Denitsa Tsekova): “Quant funds that chase the hottest trades on Wall Street are getting thrashed as momentum bets backfire all at once. Going into July, trend followers were positioned for the year’s big trades to keep gathering momentum: They were plowing into stocks, betting against developed-nation government bonds and counting on the yen to keep weakening, according to Societe Generale SA. Then each of those markets moved sharply in the wrong direction, hitting them with deep losses. By one broad measure of the group, nearly all of this year’s gains were wiped out. ‘Everything went wrong at the same time,’ said Andrew Beer, founder of Dynamic Beta Investments…”

August 9 – Bloomberg (Matthew Burgess): “Unwinding of yen-funded carry trades has further room to run and the Japanese currency may strengthen toward 100 per dollar over time, according to BNY. Investors are still too bearish on the yen and short positions will continue to be slashed, said Bob Savage… ‘Expect the pain for yen shorts to remain in play for the weeks, if not months ahead,’ Savage wrote. ‘Further risk reductions are going to follow and August will continue to be a highly volatile month.’”

August 5 – Bloomberg (Matthew Burgess and Alice Atkins): “An unwinding of global carry trades is helping to jolt markets around the world. The yen and yuan pushed higher Monday, while the Mexican peso extended its decline as traders continued to roll back the popular trading strategy… ‘This is a carry trade liquidation still in the FX space and a race to cash across asset classes,’ said Brad Bechtel, global head of FX at Jefferies LLC. ‘One heck of a deleveraging is taking place now and with the market so unhinged it’s hard to call a bottom just yet.’”

August 5 – Bloomberg (Iris Ouyang): “The offshore yuan strengthened through China’s daily reference rate for the first time since November, as traders rushed to abandon a once popular short strategy. The yuan jumped to as high as 7.1125 per dollar, trading at a premium to Beijing’s so-called fixing and close to erasing this year’s losses. That’s a sign market sentiment had turned more positive, after concerns over China’s growth had sent the currency to the lowest since November last month.”

August 5 – Bloomberg (Denitsa Tsekova and Lu Wang): “Systematic funds have offloaded more than $130 billion of global stock bets in recent weeks. Now these rules-based players threaten to take their selling to a whole new level as volatility spikes. Strategies including risk parity, vol-targeting and trend following will dispose $70 billion to $80 billion of shares Monday, with at least $90 billion more to unwind over the next four sessions, according to… Morgan Stanley’s trading team. The warning comes on the heels of volatility-controlled or ‘managed risk’ products offloading $103 billion worth of US shares since the middle of July and fast-money quants selling $33 billion of global equities over the past three weeks, according to… Nomura…”

August 7 – Reuters (Nell Mackenzie): “A wager that stock markets would stay calm has cost retail traders, hedge funds and pension funds billions after a selloff in global stocks, highlighting the risks of piling into a popular bet. The CBOE VIX index, which tracks the stock market’s expectation of volatility based on S&P 500 index options, posted its largest-ever intraday jump and closed at its highest since October 2020 on Monday as U.S. recession fears and a sharp position unwind have wiped off $6 trillion from global stocks in three weeks. Investors in 10 of the biggest short-volatility exchange traded funds saw $4.1 billion of returns erased from highs reached earlier in the year…”

August 5 – Bloomberg (Suvashree Ghosh and Ryan Weeks): “Cryptocurrencies reeled from a bout of risk aversion in global markets on Monday, at one point sending Bitcoin down more than 16% and saddling second-ranked Ether with the steepest fall since the collapse of FTX in 2022. Top token Bitcoin traded 9% lower at $53,883 as of 4:51 p.m. in New York, adding to a 13.1% drop last week that was the worst since the period when the FTX exchange imploded. Ether shed over a fifth of its value before paring some of the slide to change hands at $2,419. Most major coins nursed losses.”

August 5 – Bloomberg (Vildana Hajric and Denitsa Tsekova): “Traders plowed billions of dollars into betting on a big rebound in tech stocks last month. Now their leveraged-up ETF positions are getting thrashed in the sweeping market meltdown. Even as the Nasdaq 100 Index tumbled in July, cash continued flowing into funds with notable exposures to companies like Nvidia Corp. and Intel… But some of the ETFs — which use leverage to boost returns — are now being hit by double-digit drops… That’s increasing the risk that the ETFs will tumble even more deeply if investors start rushing to the exits. The Direxion Daily Semiconductors Bull 3x Shares… took in a record $2.8 billion inflow in July, only to slide about 60% slide since July 10.”

August 7 – Financial Times (Nicholas Megaw and Will Schmitt): “Investors who pumped tens of billions of dollars into funds offering insulation from volatility suffered sharp losses during this week’s stock sell-off… ‘Covered call’ ETFs have boomed in popularity in recent years, with assets under management growing from about $18bn in early 2022 to roughly $80bn as of July… Covered call strategies involve buying a basket of stocks while selling income-generating derivatives tied to the underlying assets… But when markets move quickly, the relatively small income generated by selling options is not enough to offset the decline in the underlying shares. Many funds have been simultaneously underperforming and suffering sharp swings.”

Global Credit Bubble Watch:

August 6 – Bloomberg (John Sage and Ellen Schneider): “Prospect Capital, a little-known New York firm that helped pioneer the private credit boom, has come up with an unusual technique to keep dividends flowing out of an $8 billion fund it runs. For years now, it’s sold financial instruments to retail investors and handed over the proceeds to shareholders. The sales helped the fund deliver hefty payouts even as the performance of its investments — mostly corporate loans to mid-size companies and real estate — deteriorated markedly. But they’ve also long raised concerns among some analysts who say the strategy obfuscates returns and is unsustainable. Now, two years after the Federal Reserve began rapidly pushing up interest rates, those concerns are getting louder.”

August 9 – Bloomberg (Michael Gambale): “No companies are looking to sell new US investment-grade bonds on Friday…, wrapping up a volatile week that saw at least 10 issuers stand down on Monday and 17 deals price Wednesday. Monday’s meltdown suggested market participants might see a tumultuous week where syndicate desks would have trouble in finalizing new bond deals, but that failed to materialize and issuers have so far sold nearly $45 billion of new debt. The incredible three-day sales bonanza outpaced estimates of around $40 billion.”

August 6 – Bloomberg (Jill R. Shah): “Funds that invest in leveraged loans are on track to suffer their biggest weekly outflows since March 2023’s regional banking crisis, according to JPMorgan… Withdrawals from Aug. 1-5 were an estimated $1.44 billion, including a combined $682 million for actively managed funds and exchange-traded funds…”

AI Bubble Watch:

August 3 – Wall Street Journal (Nate Rattner): “Big technology companies deepened their commitments to artificial-intelligence efforts in the latest quarter, pouring billions of dollars into capital-spending projects and telling investors more is on the way. In earnings statements over the past two weeks, Amazon.com, Microsoft, Facebook parent Meta Platforms and Google parent Alphabet each reported jumps in purchases of property and equipment, a measure of capital spending. For all but Meta, the latest quarterly figure was the highest in years. The companies don’t disclose the share of outlays going toward AI-related initiatives, but executives tied the spending surge to investments in infrastructure required for developing the technology, such as data centers, servers and real estate.”

Bubble and Mania Watch:

August 8 – Wall Street Journal (Carol Ryan): “‘Survive until 25’ has become a mantra for landlords who are hanging onto buildings by their fingernails and praying for rate cuts soon. While it is well understood that many offices are a lost cause, apartment loans are in surprisingly bad shape, too. More than $40 billion of office loans were in distress at the end of the second quarter…, which is around three times the value of distressed apartment loans. But the pool of apartment mortgages that could get into difficulty in the future is larger—$80.95 billion are at risk of distress, compared with $66.87 billion for offices. These loans are flashing amber because occupancy rates are falling or the income generated by the buildings is barely enough to meet interest payments…”

August 5 – Wall Street Journal (Gina Heeb): “Fannie Mae and Freddie Mac are preparing to impose stricter rules for commercial-property lenders and brokers, following a budding regulatory crackdown on fraud in the multitrillion-dollar market. Lenders would have to independently verify financial information related to borrowers for apartment complexes and other multifamily properties, according to people familiar… Additionally, lenders could face tougher requirements for confirming whether a property borrower has adequate cash and verifying their source of funds. The new rules might also require lenders to complete due diligence on the appraised value of a property…”

De-globalization and Iron Curtain Watch:

August 3 – Wall Street Journal (Jason Douglas and Clarence Leong): “Countries around the world are throwing tens of billions of dollars at manufacturing in a race to dominate clean energy, computer chips and other technologies of tomorrow. But when it comes to lavishing support on its favored industries, China is in a league of its own. Beijing easily outspends the U.S., the European Union and even other Asian export powerhouses in the support it grants its factories. By one estimate, China shovels a sum equivalent to almost 5% of its annual national income toward its industries, six times the level of support extended by the second-biggest spender, South Korea. The immensity of China’s financial support for manufacturing is at the heart of the growing global backlash against a rising tide of Chinese exports pouring onto global markets.”

Inflation Watch:

August 4 – Wall Street Journal (Ruth Simon): “Small businesses are facing steep increases in insurance costs this year—and that is prompting them to make difficult decisions on how they run their operations. Some businesses are raising prices. Others are adopting stricter screening for job candidates, stepping up workplace safety training and weighing changes to employee healthcare coverage—all in an effort to keep soaring premiums from climbing even higher. At Jay-Hill Repairs, insurance premiums for health, auto and liability coverage jumped by an average of 20% this year, well above the 9% to 12% increase the company was expecting.”

August 9 – Reuters (Siddharth Cavale and Lisa Baertlein): “Retailers are fueling a summer rush of imports to the United States this year as companies guard against a potential strike by port workers and ongoing shipping disruptions from attacks in the Red Sea ahead of a shortened holiday shopping season. Container imports and freight rates surged in July, signaling an earlier than usual peak season for an ocean shipping industry that handles about 80% of global trade.”

August 7 – Bloomberg (Paulina Cachero, Francesca Maglione and Jennifer Epstein): “The search for a New York apartment has gotten more frustrating than ever for many renters in this fiercely competitive summer. A Brooklyn woman braves a line snaking around the block to vie for an affordable studio. Another loses multiple bidding wars for a coveted two-bedroom in Bushwick. A new college grad pulls together a personal dossier in an effort to show he’s trustworthy. More than just one-off tales of woe, situations like those are a new normal in a city where leasing and rents are near all-time highs.”

Election Watch:

August 8 – Bloomberg (Josh Wingrove and Nancy Cook): “Republican nominee Donald Trump said that the president should have some say over interest rates and monetary policy, a move that would go against the longstanding practice of the US Federal Reserve being independent of political actors. ‘I think that, in my case, I made a lot of money. I was very successful,’ Trump said at a press conference… ‘And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.’ Trump has frequently expressed frustration that the executive branch doesn’t have more sway over interest rates.”

Biden Administration Watch:

August 7 – Financial Times (Adam Samson and Chris Cook): “Washington has warned Turkey that there will be ‘consequences’ if the country does not curtail its exports to Russia of US military-linked hardware that is vital to Moscow’s war machine. Matthew Axelrod, assistant commerce secretary…, recently met Turkish officials and executives in Ankara and Istanbul as part of efforts to halt the illicit trade. His message… was that Turkey must work harder to curb trade in American-origin chips and other parts that are pivotal for Moscow’s war in Ukraine. ‘We need Turkey to help us stop the illicit flow of US technology to Russia… We need to see progress, and quickly, by Turkish authorities and industry or we will have no choice but to impose consequences on those that evade our export controls,’ he added.”

August 6 – Bloomberg (Noah Buhayar and Will Kubzansky): “President Joe Biden’s administration and Senate Democrats are ramping up pressure on the Federal Home Loan Bank system to pump more money into solving the nation’s housing crisis. Senators Catherine Cortez Masto, Elizabeth Warren, Ron Wyden and other lawmakers sent letters to FHLBs last week, calling out how much the government-backed system pays to executives. They also called on the lenders to increase the share of profit they put toward affordable housing and community development programs beyond the 15% they’ve already pledged.”

Federal Reserve Watch:

August 6 – Yahoo Finance (Jennifer Schonberger): “Some Fed watchers are urging the central bank to do something it rarely does: lower rates outside of a regularly scheduled policy meeting. The Fed has done so before, but typically during times of extreme crisis. The 2020 global pandemic. The 2008 financial meltdown. The 1987 ‘Black Monday’ market crash. The calls for the Fed to do so before its next meeting on Sept. 17-18 got louder Monday during the worst one-day rout for the stock market since 2022. There is a ‘strong case to act before September,’ JPMorgan chief economist Michael Feroli said…”

August 9 – Reuters (Ann Saphir): “Federal Reserve policymakers are increasingly confident that inflation is cooling enough to allow interest-rate cuts ahead, and they will take their cues on the size and timing of those rate cuts not from stock-market turmoil but from the economic data. That was the shared message of three U.S. central bankers speaking on Thursday who otherwise had slightly different takes on exactly where the economy stands… ‘It’s hard to make the case that something has just happened that is monumental on the equity side,’ Richmond Federal Reserve Bank President Thomas Barkin said…, noting major U.S. stock-market indices are still up from the start of the year.”

August 5 – Reuters (Lindsay Dunsmuir and Ann Saphir): “U.S. central bank policymakers pushed back on Monday against the notion that weaker-than-expected July jobs data means the economy is in recessionary freefall, but also warned that the Federal Reserve will need to cut rates to avoid such an outcome. Many of the latest job report’s details leave ‘a little more room for confidence that we’re slowing but not falling off a cliff,’ San Francisco Fed President Mary Daly said… ‘Our minds are quite open to adjusting the policy rate in coming meetings,’ she said. When and by how much will depend on incoming economic data, of which there is a lot before the Fed’s next meeting in mid-September, she said, adding, ‘it’s extremely important that we not let (the job market) slow so much that it tips itself into a downturn.’”

August 8 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Kansas City President Jeffrey Schmid signaled he’s not ready to support a reduction in interest rates with inflation above target and the labor market still healthy despite some cooling… Schmid said the recent decline in inflation has been ‘encouraging’ and further reports of low price pressures would add to his confidence that inflation was on a path to the central bank’s 2% target, and to therefore lower interest rates. ‘We are close, but we are still not quite there,’ Schmid said. He didn’t give a view on when the Fed should cut interest rates: ‘The path of policy will be determined by the data and the strength of the economy.’”

August 8 – Bloomberg (Alexandra Harris): “The end of the Federal Reserve’s balance-sheet unwind is in sight, though its actual conclusion depends on the pace of interest-rate cuts and stresses in funding markets. Many on Wall Street agree that an abrupt end to quantitative tightening, or QT, is unlikely, with policymakers signaling its rolloff of Treasury holdings will finish by year-end. But recent data suggesting an economic slowdown as well the risk of liquidity pressures — already evident in the financial system — call that outlook into question. ‘If the Fed is cutting to stimulate the economy, then QT will likely stop,’ Bank of America strategists Mark Cabana and Katie Craig wrote… ‘If the Fed is cutting to normalize policy, then QT can continue.’”

August 2 – Bloomberg (Craig Torres): “Federal Reserve Bank of Richmond President Thomas Barkin said the US economy is in good shape, though it’s unclear whether the labor market is getting back to normal rates of hiring or more seriously deteriorating… ‘We’ve been through two years, two-and-a-half years of very frothy labor markets,’ Barkin said… ‘The question is, of course, are we normalizing or are we weakening?’ The difference is meaningful, he said, adding, ‘It gets to the question of whether we’re going to plateau or whether unemployment’s going to rise from here.’”

U.S. Economic Bubble Watch:

August 6 – Reuters (Lindsay Dunsmuir): “Total U.S. household debt levels edged up in the second quarter but overall delinquency rates stabilized, indicating that borrowers are still in decent enough shape to support the economy, a report from the Federal Reserve Bank of New York said… The bank report… showed that overall debt levels rose by $109 billion, or 0.6%, in the second quarter to $17.80 trillion. Overall borrowing levels are now $3.7 trillion above where they were at the end of 2019, before the onset of the coronavirus pandemic…”

August 5 – Bloomberg (Vince Golle and Mark Niquette): “The US services sector expanded in July after contracting a month earlier by the most in four years… The Institute for Supply Management’s index of services rose 2.6 points to 51.4… The gauge was boosted by rebounds in services employment, orders and business activity that suggest the largest part of the economy is growing at a modest pace… The ISM’s services employment gauge expanded for the first time since the start of the year and at the fastest pace since September…”

August 7 – Bloomberg (Augusta Saraiva): “US consumer borrowing increased in June by less than forecast, reflecting smaller credit-card balances. Total credit outstanding rose $8.9 billion after an upwardly revised $13.9 billion advance in May… Revolving credit, which includes credit cards, declined by nearly $1.7 billion, the most since early 2021. Non-revolving credit, such as loans for vehicle purchases and school tuition, rose $10.6 billion, the most in a year.”

August 5 – Reuters (Ann Saphir): “U.S. banks reported unchanged demand for commercial and industrial loans in the second quarter, the first time in two years that demand did not weaken, a Federal Reserve survey of senior loan officers… showed… The net share of banks reporting tighter standards for C&I loans fell to the lowest in two years for all sizes of borrowers, but they still outnumbered banks reporting loosening requirements… A net 0% of banks reported weaker C&I loan demand from firms of all sizes, the first time in two years that such banks did not outnumber those reporting stronger demand…. Credit conditions for households are similarly stabilizing and demand for most types of consumer loans is improving, the survey showed.”

August 8 – Associated Press (Matt Ott): “The number of Americans filing for jobless benefits fell last week but remain at slightly elevated though not troubling levels. Jobless claims for the week of Aug. 3 fell by 17,000 to 233,000 last week… That’s fewer than the 240,000 analysts surveyed by FactSet were expecting.”

August 7 – CNBC (Diana Olick): “Mortgage interest rates dropped last week to the lowest level since May 2023, causing a surge in mortgage demand from both homebuyers and especially current homeowners… Applications to refinance a home loan, which are most sensitive to weekly rate changes, jumped 16% for the week and were 59% higher than the same week one year ago… Applications for a mortgage to purchase a home increased just 1% for the week, but were still 11% lower than the same week one year ago.”

August 6 – Bloomberg (Jonnelle Marte and Alex Tanzi): “Americans who want to tap the rising equity of their homes without giving up their low mortgage rates are increasingly turning to home equity lines of credit. After almost 13 years of declines, balances on home equity lines of credit, known as HELOCs, have begun to rebound, gaining 20% since bottoming out at the end of 2021, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit… HELOC balances have rebounded as people use this source of cash to pay down other debt or meet large expenses. Around 1.8 million HELOCs in total were originated in 2023 and the first two quarters of 2024, and many went to older borrowers… Overall household debt increased by $109 billion in the second quarter to $17.8 trillion…”

August 4 – CNBC (Alex Harring): “Dailey Jogan was pleased to learn she would get $15 an hour and a handful of perks as the head swim coach for a metro Detroit team. Her older brother’s reaction looked more like surprise. At 18 years old, Jogan has spent the summer organizing meets as staff leader of the 250-person team. She also gets some freebies for facilities housed within the park where they practice, like access to the gym and a few comped tickets to the movie theater. That $15 per hour wage is about 25%, or $3 per hour, more than her older brother earned in the same role five years ago. And if he wanted to use the workout equipment or catch a film, he had to dig into his wallet to pay like everyone else.”

August 8 – Associated Press (Alex Veiga): “The average rate on a 30-year mortgage fell this week to its lowest level in more than a year… The rate fell to 6.47% from 6.73% last week, mortgage buyer Freddie Mac said…. A year ago, the rate averaged 6.96%. This is the second straight weekly drop in the average rate. It’s now the lowest it’s been since mid-May last year, when it was 6.39%.”

Fixed-Income Bubble Watch:

August 7 – Bloomberg (Josyana Joshua): “Blue-chip companies rushed to sell corporate bonds Wednesday after the Bank of Japan moved to reassure markets following its unexpected rate hike last week. Seventeen firms are offering $31.8 billion of debt, the highest amount of US investment-grade issuance this year… The number of borrowers is the most since Feb. 26, when 18 firms were in the market.”

August 6 – Bloomberg (Carmen Arroyo, Jill R. Shah, Michael Tobin and Paula Seligson): “The turmoil in global markets is threatening to end a summer debt boom that helped some of the riskiest US companies cut borrowing costs, push out maturities and even defer interest payments. The change in tone was obvious on Monday, when SeaWorld Parks & Entertainment Inc. shelved its planned refinancing of a $1.55 billion term loan, while SBA Communications Corp. postponed the repricing of a $2.3 billion term loan. On Tuesday a $3.65 billion package for Focus Financial Partners was delayed, and market participants expect more lower rated deals will be pulled.”

August 7 – Bloomberg (Shruti Singh): “Chicago is delaying its $643 million bond sale that was expected to price on Wednesday amid volatility in the $4 trillion market for state and local bonds. ‘We are not selling today as we did not like the volatility in the market and are waiting for more stable market conditions,’ Chicago Chief Financial Officer Jill Jaworski said…”

China Watch:

August 4 – Reuters (Liangping Gao and Ryan Woo): “Growth in China’s services activity accelerated in July helped by new orders, although momentum in overseas demand eased to its slowest pace in 11 months… The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 52.1 from 51.2 in June, pointing to expansion for the 19th straight month. The index covers mostly private and export-oriented companies and the 50-mark separates expansion from contraction on a monthly basis. In contrast, the official services PMI showed the sector stalling in July from growth in June, with retail sales, capital market services and real estate service industries all shrinking.”

August 3 – Bloomberg: “China’s government… laid out its priorities to spur consumer spending as weak domestic demand continues to weigh on growth. The State Council, China’s cabinet, designated 20 key steps, including exploring the potential to expand basic consumption in areas such as catering, home services and elder care… Authorities will also look to foster new types of spending, cultivate unmanned retail stores and self-pickup lockers, and support the development of electronic sports and live streaming e-commerce.”

August 8 – Reuters (Qiaoyi Li, Ryan Woo and Jason Xue): “China’s consumer prices rose at a slightly faster-than-expected rate in July partly due to weather disruptions to food supplies, while producer deflation persisted, keeping the country’s underlying consumption trends soft in a test for policymakers. China’s frail consumer sector has been a major focus for Beijing as weak domestic demand hobbles the world’s second-biggest economy while manufacturing activity shrinks. The consumer price index (CPI) edged up to a five-month high of 0.5% year-on-year in July, versus a 0.2% rise in June…”

August 6 – Bloomberg: “China’s exports growth unexpectedly slowed in July, signaling a cooling of global demand that has been propping up growth in the world’s second-biggest economy. Exports rose 7% in July in dollar terms from a year earlier, falling short of economists’ median forecast of a 9.5% gain… Meanwhile, imports beat expectations and expanded 7.2%, narrowing a trade surplus to $84.65 billion from the previous month.”

August 7 – Bloomberg: “China’s biggest lenders are on a debt issuance spree as they lock in cheap rates and plug a $224 billion loss absorbency shortfall before the end of the year. New regulatory requirements taking effect on Jan. 1 mean China’s globally systematically important banks, G-SIBs, need to raise more capital. While retained profits or issuing stock would also help fund the gap, their profitability has been crimped by record low margins and the country’s markets and economy remain in the doldrums.”

August 8 – Bloomberg: “China widened its battleground against bond speculators, targeting everything from fund companies to rural banks to one of traders’ favorite parts of the debt market. Within a span of 24 hours, China’s state-banks unexpectedly began selling seven-year bonds to pull up yields, undermining a popular sweet spot in the market. Local authorities asked some rural lenders in one of the most affluent provinces to suspend trading in sovereign notes. And regulators were reported to have slowed the approval for new bond funds. The fight against the record bond rally picked up this week, after benchmark yields sank to fresh lows…”

August 6 – Bloomberg: “China Vanke Co.’s sales slump extended in July, adding to liquidity pressure at the developer that’s become the latest focal point of the nation’s property crisis. Contracted sales for the month slumped 13% from a year earlier to 19.2 billion yuan ($2.7bn), following a 29.3% slide in June… The total was 24% lower on month. The protracted sales slump is escalating investor concern over its liquidity. The company, once considered a sound player due to its state-backing has been raising funds and exploring assets sales to stave off a cash crunch. ‘Vanke’s solvency in 2025 and 2026 remains at risk,’ Bloomberg Intelligence analyst Kristy Hung wrote… ‘Buyers’ weariness of private developers’ presales and preference for secondhand homes will likely hinder a recovery in its sales and liquidity.’”

August 4 – Bloomberg: “Punishing heat throughout southern China is stressing power networks and farmland as extreme weather continues to exact a deadly toll in the world’s second-biggest economy. Electricity demand in Shanghai has hit a record as temperatures surged to 40.4C (105F) on Sunday, close to the city’s all-time high of 40.9C first recorded in 1873 and repeated two years ago… So far, the grid is holding up, supported by ample stockpiles of coal, China’s mainstay fuel, as well as increased contributions from solar and hydroelectric power…”

August 8 – Reuters (Liz Lee and Ryan Woo): “Extreme rainfall and severe flooding in China led to a near doubling in economic losses from natural disasters in July from a year earlier, the government said. China suffered 76.9 billion yuan ($10.1bn) in economic losses from natural disasters last month, with 88% of those losses caused by heavy rains, floods or their effects, according to the Ministry of Emergency Management.”

Central Banking Watch:

August 8 – Bloomberg (Mia Glass and Yoshiaki Nohara): “Bank of Japan Governor Kazuo Ueda had a clear message last week — the weak yen was a risk and rates were likely to keep rising. The reaction from traders to Ueda’s apparent hawkish turn was severe. The currency surged more than 3% against the dollar, and Japanese stocks had their biggest rout since 1987. In response, his deputy Shinichi Uchida delivered a fresh message this week — rate hikes were off the table so long as markets were in turmoil. That had the desired response of paring some of the yen’s sharp gains and helping to calm markets. But it also left investors puzzling over how much faith to put in the BOJ’s comments and underscored how difficult it is for the central bank to limit market shocks as it unwinds years of extraordinary monetary stimulus.”

August 7 – Reuters (Stella Qiu): “Australia’s central bank will not hesitate to raise interest rates if needed to control inflation, its chief said…, reinforcing its hawkish messaging as the pace of underlying inflation remained high. Reserve Bank of Australia (RBA) Governor Michele Bullock… reiterated that the board was vigilant to the upside risk of inflation, days after the bank decided to hold rates steady.”

Japan Watch:

August 5 – Bloomberg (Yoshiaki Nohara and Erica Yokoyama): “The Bank of Japan’s monetary policy tightening last week has triggered a wave of criticism after it appears to have helped set off a historic plunge in Japanese stocks and contributed to global market turmoil — likely putting any plans for further interest-rate hikes on ice. ‘The BOJ needs to be humble about economic data and the markets,’ said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute and a former BOJ official. ‘The fact that the BOJ raised interest rates in the face of poor economic statistics shows that it did not pay attention to data.’”

August 7 – Reuters (Leika Kihara): “Bank of Japan policymakers, in deciding a landmark increase in interest rates last month, discussed further rate hikes, a summary of the discussion showed…, prompting a hawkish shift that has contributed to global market turmoil. One member of the policy board said the central bank should eventually raise its policy rate to around 1% or higher…, the first time a BOJ policymaker has specified a potential endpoint. In the surprise move on July 31, the central bank raised its short-term policy target to 0.25%, its highest in 15 years, from a zero-to-0.1% range, and released a plan for tapering its huge asset buying in a landmark shift away from a decade-long stimulus programme.”

Emerging Market Watch:

August 8 – Associated Press: “Analysts expressed shock… at a decision by Mexico’s central bank to cut interest rates on the same day that official figures showed a sharp rise in domestic inflation. Almost without exception, central banks raise interest rates to make money more expensive, in order to discourage price increases. But… the Bank of Mexico cut interest rates by 0.25% to 10.75%, even though inflation rose by over one percent to 5.57% in July. For most of this year, inflation has been moving further away from the central bank’s objective of 3%. The bank justified the move, saying there was a risk of lower growth in economic activity…”

August 8 – Reuters (Natalia Siniawski): “Mexico’s headline inflation rate rose again in July, reaching a level not seen in over a year, while the core index showed signs of moderation… Annual headline inflation in Latin America’s second-largest economy hit 5.57% in July, in line with expectations… but surpassing June’s figure of 4.98% and reaching a level not seen since May of last year.”

August 8 – Bloomberg (Matthew Malinowski and Andrew Rosati): “Mexico’s and Chile’s consumer prices rose more than expected in July, according…, the latest sign that policymakers in both nations have limited room for new interest rate cuts… Chile’s cost-of-living rose 0.7%…, above the 0.6% median forecast. Annual inflation in the chained series sped up to 4.6%… Chilean policymakers surprised most analysts on July 31 by pausing a yearlong easing cycle amid price threats…”

August 6 – Bloomberg (Maria Eloisa Capurro): “Brazil’s central bank said it won’t hesitate to raise its interest rate as the inflation outlook worsens, marking a significant change in guidance barely a month after pausing a monetary easing cycle. The committee ‘unanimously reinforced that it will not hesitate to raise the interest rate to ensure inflation convergence to the target if it deems it appropriate,’ central bankers wrote in minutes to their July 30-31 rate meeting…”

August 3 – Bloomberg (Valentina Fuentes and Marcelo Rochabrun): “When Venezuelans started leaving en masse at the start of an economic collapse almost a decade ago, South American governments including Brazil and Peru welcomed the migrants with open arms. Now, as officials in the region gear up for another possible wave after a disputed election that dashed hopes for change, it seems clear any newcomers won’t get nearly as nice a reception. Since 2015, almost 8 million Venezuelans have fled the country in what is considered the largest mass migration in the Americas.”

Leveraged Speculation Watch:

August 6 – Bloomberg (Matthew Burgess): “The recent unwinding in carry trades has more room to run as the yen remains one of the most undervalued currencies, according to JPMorgan Chase & Co. ‘We are not done by any stretch,’ Arindam Sandilya, co-head of global FX strategy, said…. ‘The carry trade unwind, at least within the speculative investing community, is somewhere between 50%-60% complete.’”

August 2 – Reuters (Carolina Mandl): “Global hedge funds continued to add bearish equity bets to portfolios in the week to Aug. 1 when fresh data sparked fears the U.S. economy is slowing faster than anticipated, Goldman Sachs said in a note to clients. It marks the third consecutive week that hedge funds’ bets that stocks will fall outpaced the addition of long positions, Goldman said, noting one long position was added for every 3.3 short bets.”

Social, Political, Environmental, Cybersecurity Instability Watch:

August 9 – Associated Press (Ali Swenson): “Iran is accelerating online activity that appears intended to influence the U.S. election, in one case targeting a presidential campaign with an email phishing attack, Microsoft said… Iranian actors also have spent recent months creating fake news sites and impersonating activists, laying the groundwork to stoke division and potentially sway American voters this fall, especially in swing states…”

Geopolitical Watch:

August 7 – Reuters (Neil Jerome Morales, Karen Lema, and Mikhail Flores): “The Philippines said… that three Chinese navy ships tailed a joint military exercise it began with Canada, the United States and Australia in disputed South China Sea waters. Southeast Asian states oppose Beijing’s claim to 90% of the water, which is rich in fishing stocks, is believed to have oil and gas deposits, and sees $3 trillion of annual trade transit. The two-day exercise was the first by the four nations… and follows the first Philippines-Japan joint exercise in the disputed South China Sea last week… ‘We stand together to address common maritime challenges and underscore our shared dedication to upholding international law and the rules-based order,’ the statement read.”More By This Author:Weekly Commentary: In A JumbleWeekly Commentary: Houston, We Have a Bubble Problem Weekly Commentary: Greatest Threat