May 24 – Bloomberg (David Ingles): “Nvidia’s 110% gain this year is enough to slingshot the company’s value above the entire market capitalization of Germany along with a range of other major bourses. The AI-boom poster child overtook Australia in early February, topped South Korea a few weeks later and as of the Thursday close, is now also above Germany. The next 20% leg higher would likely add Saudi Arabia and Canada to the list. And if the prediction from one of Bloomberg TV’s guests on Thursday is correct and Nvidia does top $10 trillion, that would make it larger than all the world’s stock markets except the US.”

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AOL, Cisco, Intel, Compaq Computer, Gateway 2000, Blackberry, 3Com, etc. – the Speculative Bubble Hype list could go on and on. And we don’t have to limit our reminiscing to the late nineties Bubble period. There was no doubt that Tesla would dominate the EV world.

February 5, 2020 – CNBC (Kevin Stankiewicz): “Money manager Catherine Wood told CNBC… that she stands by her latest five-year price target of $7,000 per share for Tesla. ‘Our confidence level that this stock is heading for $7,000 over the next five years is very high,’ Wood, the founder and CEO of Ark Investment Management, said… ‘We’ve arrived at that price by weighting the probabilities of 10 different scenarios, including bankruptcy, to be honest. So we’ve tried to be as fair and balanced as we could possibly be,’ added Wood…”

Nvidia’s stock surged 15% this week, boosting market capitalization to $2.619 TN – or 62 times earnings and 32.9 times revenues (from Bloomberg). “Nvidia CEO Jensen Huang’s Net Worth Swells From $3 Billion to $90 Billion in Five Years.” “Nvidia’s Landmark Performance Hasn’t Been Seen ‘In the History of Capitalism,’ Says Tech CEO.” “Nvidia Shares Are Up Roughly 28-Fold in the Past Five Years.” “Nvidia Shows No Signs of AI Slowdown After Over 400% Increase in Data Center Business.” “Nvidia's First Quarter Results Confirm That The Next Industrial Revolution Is Well Underway.”

May 22 – Reuters (Robert Cyran): “For firms designing AI models and building the networks that train and run them, the response has been a spending arms race to grab new markets and prevent rivals from disrupting their existing businesses. Microsoft, Amazon, Alphabet and Meta collectively splurged $200 billion on capital expenditure last year…, according to Bernstein. The research firm estimates this will increase by over 50% this year, mostly because of AI. Compared to these huge sums, the income generated by AI remains small. Sequoia estimates generative AI now brings in about $3 billion a year in revenue… The promise of future riches has unleashed some gigantic forecasts for the spending needed to make the advanced semiconductors, build the data centers, and generate the power to train and run AI models. OpenAI boss Sam Altman earlier this year put the figure at up to $7 trillion…”

“New Eras”, “New Paradigms” and, these days, “the next industrial revolution.” For now, loose financial conditions accommodate delusions of grandeur.

May 23 – Reuters (Jamie McGeever): “If you want evidence of how much the ‘soft landing’ narrative is driving bullish investor sentiment, look no further than benchmark measures of implied volatility. In equities, bonds, credit and currencies, ‘vol’ has not been this low in years, clearing the way for investors to push up asset prices to historic and, in the case of the S&P 500 and Nasdaq, record highs.”

The VIX (equities volatility) Index traded intraday Thursday down to 11.52 – the lowest level since November 2019 (following the restart of Fed QE). Curiously, the MOVE (bond volatility) Index traded Wednesday at 82.49, the low since pre-Fed “tightening” February 9, 2022.

Investment-grade bond spreads (to Treasuries) traded this week at 86 bps, near the low back to September 2021. At 2.96 percentage points, the high yield spread was within seven bps of the low back to 2021. Keep in mind that spreads compressed in 2021 (Fed’s balance sheet expanded $1.4 TN in ’21) to the narrowest levels since (pre-subprime blowup) 2007.

Goldman Sachs (52.66 bps), Bank of America (47.40), Morgan Stanley (48.41), and Citigroup (47.81) CDS all traded this week at lows since September 2021 (JPMorgan’s 39.67 was close).

Loose conditions have become a global phenomenon. European bank (subordinated) CDS closed the week at 104.10, the low since September 15, 2021. European high yield CDS declined Wednesday (286.14) to within three bps of the low back to February 2022. Emerging market CDS traded intraweek (155.62) to the low since September 17, 2021.

Compressed risk premiums and CDS prices are certainly indicative of complacency. Closely monitoring the backdrop, I focus more on extraordinary market risk embracement and liquidity excess. Markets don’t behave this way unless there is some underlying monetary disorder (dislocation in liquidity creation). I have focused for a while now on the global proliferation of leveraged speculation, including popular “basis trades,” “carry trades” and such.There was further evidence this week that this historic speculative Bubble inflation continues to luxuriate in “Terminal Phase Excess.”

May 20 – Bloomberg (Alice Gledhill): “A leveraged trade that’s worrying regulators worldwide has caught the attention of the European Central Bank, which pointed to signs the strategy is gaining traction in the region. The ECB noted a group of offshore hedge funds has become increasingly present in Europe’s government bond repo market, suggesting growing use of the so-called basis trade. The strategy, which looks to exploit price differences between futures and bonds, has come under scrutiny in the US after it contributed to market turmoil at the start of the pandemic in 2020. The hedge funds in question are mostly domiciled in the Cayman Islands and hold more than half of investment funds’ positions on euro-area government bond futures... They also account for almost all the activity of non-EU investment funds in the region’s government repo market.”

As is typically the case, policies (i.e., QE) and speculation strategies (i.e., “basis trade”) that take U.S. finance by storm soon permeate the world. The ECB revelation follows last month’s Reuters article, “Hedge Funds Shake Up the Euro Zone’s $10 Trillion Government Bond Market,” with the zingers “three traders estimated that hedge funds have been buying between 20% to more than 50% of auctions in some instances” and “two thirds of Italian bond trading on Tradeweb comes from hedge funds…”

May 24 – Bloomberg (Alice Gledhill): “Exploiting differences in interest rates is set to become one of the most popular investment strategies in coming months as markets bet shallower cuts will keep volatility subdued. Strategists across Wall Street are touting carry trades, which harvest the extra income on higher-yielding currencies and bonds, and thrive in calm markets when there’s a lower risk of wild price swings wiping out profits… Carry has gained traction since Federal Reserve Chair Jerome Powell effectively ruled out further rate hikes. That removed a potential volatility trigger and set the scene for cautious easing alongside major peers like the European Central Bank and Bank of England… ‘The Fed’s signaling of no further hikes is a green light for carry trades in fixed income and elsewhere,’ Bank of America strategists including Ralph Axel wrote… ‘Carry trades are being put on ‘everywhere’ as investors prepare for this quiet period, according to Peter Schaffrik, global macro strategist at RBC Capital Markets.”

This is critically important: “The Fed’s signaling of no further hikes is a green light for carry trades;” “removed a potential volatility trigger;” “carry trades are being put on ‘everywhere’.”

Taking additional rate hikes off the table eliminated the risk of a Fed-induced tightening of financial conditions (with the likelihood of de-risking/deleveraging and liquidity dislocations). At this late stage of the speculative cycle, there has been powerful impetus to partake in lucrative levered “basis” and “carry” trades (not to mention equities margin borrowing and options trading). Signaling the end of rate hikes (along with a predisposition for cuts) momentously improved the risk vs. reward calculus for leveraged speculation in U.S. and global markets. The upshot has been ongoing leveraged speculation-induced liquidity creation and abundance – necessary sustenance for arguably the most financially and economically consequential mania in human history.

The headline from Robert Cyran’s Reuters article (excerpted above): “The $5 Trillion AI Boom Could Both Succeed and Fizzle.” Whether it’s $5 TN or Sam Altman’s $7 TN, there should be no doubt that the A.I. Bubble has unleashed an epic spending black hole. Data centers. Semiconductor chips and equipment. New computers and servers. The power grid and energy infrastructure. Software and equipment upgrades across corporate America. Over-liquefied and highly speculative markets. A medley of historic developments ready and willing to finance an arms race to change the world.

May 23 – Reuters (Heekyong Yang and Ju-min Park): “South Korea announced… a 26 trillion won ($19bn) support package for its chip businesses, citing a need to keep up in areas like chip design and contract manufacturing amid ‘all-out warfare’ in the global semiconductor market. Under the package, President Yoon Suk Yeol said a financial support programme worth about 17 trillion won was planned through state-run Korea Development Bank to back investments by semiconductor companies… ‘As we all know, semiconductors are a field where all-out national warfare is underway. Win or lose, that depends on who can make cutting-edge semiconductors first,’ Yoon said at a meeting with top government officials.”

The global government finance Bubble “all-out national warfare” phase. How could things not go terribly wrong? We have failed to safeguard Capitalism. Tens of Trillions of central bank liquidity and repeated market interventions and bailouts completely distorted price mechanisms, with financial markets degenerating into runaway speculative Bubbles. Are we to trust that today's markets and governments effectively allocate financial and real resources?

A.I. is important, and its development will surely have far-reaching consequences. But this arms race spending Bubble has entered the realms of crazy and reckless – and broken markets have turned perilously dysfunctional. Over recent decades, there have been bouts of outrageous exuberance, hype, and excess. But today’s A.I./tech mania has gone completely off the rails.

The past decade’s massive spending boom on all things EV and autonomous driving implore some caution and a healthy dose of skepticism. Apple spends $10 billion on development, only to abruptly shutter the entire operation. “Ford Lost $130,000 on Every EV It Sold in the First Quarter.” “Electric Vehicle Failures Offer Lessons for the Next Boom.” “Major Robotaxi Firms Face Federal Safety Investigations After Crashes.”

We are likely witnessing history’s greatest episode of global resource misallocation and malinvestment. Do we really want to aggressively promote colossal arms race spending on technologies where the only certainty seems to be massive energy consumption? There are today few of us who care about how resources are expended and the quality of investment. If the Fed even has a modicum of concern, I haven’t seen evidence.

It recalls the old Jay Leno Doritos commercial: Spend all you want. We’ll make more (“money”). Always more “money” is how we got into today’s predicament. Granted, it’s so much easier to create “money” than to produce real economic wealth – especially during the waning days of a historic boom cycle. And it’s all this monetary fuel stoking inflation, market distortions, speculative Bubbles, resource misallocation, and historic maladjustment.

I’d rather not be compelled to pound away week after week. But the environment is historic and perilous. Nvidia adds $341 billion of market capitalization this week. Manias have such a seductive way of masking reality.

“Radio was the internet and AI of its day. All you had to do was include ‘radio’ in the name of your company and the price of your stock would shoot up, even if there was very little behind the company. A stock like Kolster Radio, which manufactured radio receiving sets rose from 10 to 95 between 1927 and 1929, then crashed down below one by 1930 when it filed for bankruptcy. During the 1920s…, RCA stock rose from 5.825 in 1921 to 420 in 1928, split 5 for 1 in March 1929 and peaked at 114.75 in September 1929 before beginning its 98% decline to 2.50 in May 1932.” RCA and the Roaring Twenties, Bryan Taylor, Chief Economist, Global Financial Data, November 13th, 2023

May 24 – AFP: “China warned on Friday of war over Taiwan and said it would ramp up countermeasures until ‘complete reunification’ was achieved, as Chinese forces conducted military drills around the self-ruled island. Warships and fighter jets encircled Taiwan on the second day of exercises… The exercises were launched three days after Lai Ching-te took office and made an inauguration speech that China denounced as a ‘confession of independence.’ Beijing's defense ministry spokesman Wu Qian said… that Lai ‘has seriously challenged the one-China principle... pushing our compatriots in Taiwan into a perilous situation of war and danger.’ ‘Every time 'Taiwan independence' provokes us, we will push our countermeasures one step further, until the complete reunification of the motherland is achieved,’ he said.”

“Taiwan independence forces will be left with their heads broken and blood flowing after colliding against the great... trend of China achieving complete unification.”

Is this belligerent bluster from the Foreign Ministry spokesman of China or North Korea? A more dangerous phase of conflict has commenced in the Taiwan Strait. Sure, it’s natural to dismiss China’s latest Taiwan military operations. We’ve seen it all before. Besides, if there was a real threat, markets would surely be responding. Right?

It recalls the complacency as Russian tanks and equipment organized along the Ukraine border in early 2022. It was widely viewed as too irrational for Putin to actually mount an invasion. I’m uncomfortable with China’s rhetoric, especially as it follows last week’s Putin jaunt to plot with Xi.

I used “thug bromance spectacle” in the previous CBB after careful consideration. There was something more alarming – vaguely sinister - about last week’s dictator PDA (public display of attachment). Xi’s China is in financial and economic dire straits. If his priority was to thwart crisis dynamics and reestablish China's growth trajectory, I doubt Xi thumbs his nose at the West with his balmy Putin embrace.

But if he narrows his focus on Taiwan, the enemy of his enemy is his dear friend and no limits partner. I’ll assume Beijing this week initiated the noose tightening process. Get ready, they might be proceeding down a well-crafted list of threats, intimidation, and ultimatums. By the way, how much longer will Xi tolerate U.S. weapons shipments and military support for our important ally, Taiwan?

With the Fed failing to tighten conditions, market Bubbles are today extraordinarily vulnerable to a geopolitical shock. I’ve been surprised that global bond markets have been so accommodating to A.I. and equities Bubble dynamics. So long as loose financial conditions stoke Bubble excess, we should be prepared for more upside inflation surprises.

Too soon to make much of it, but global bonds indicated some vulnerability this week. What's up with U.S. munis? At the “periphery,” EM bonds, stocks, currencies and CDS seemed to hint at incipient risk aversion. Dollar/yen was back to 157 (yen down 0.85%), while Japan’s 10-year government yields jumped six bps to a 13-year high 1.01%. China’s renminbi declined 0.27%, nearing the low versus the dollar since November. There’s enough fragility in the world for markets to be susceptible to another pop in the dollar.

 

For the Week:

The S&P500 was little changed (up 11.2% y-t-d), while the Dow dropped 2.3% (up 3.7%). The Utilities declined 1.3% (up 13.0%). The Banks fell 2.3% (up 9.2%), and the Broker/Dealers slipped 0.7% (up 13.8%). The Transports dropped 2.7% (down 5.1%). The S&P 400 Midcaps declined 1.3% (up 7.0%), and the small cap Russell 2000 lost 1.2% (up 2.1%). The Nasdaq100 advanced 1.4% (up 11.8%). The Semiconductors surged 4.8% (up 25.0%). The Biotechs declined 0.7% (down 3.8%). With bullion down $81, the HUI gold index fell 3.7% (up 13.5%).

Three-month Treasury bill rates ended the week at 5.2425%. Two-year government yields jumped 12 bps this week to 4.95% (up 70bps y-t-d). Five-year T-note yields rose eight bps to 4.53% (up 68bps). Ten-year Treasury yields gained five bps to 4.47% (up 59bps). Long bond yields added a basis point to 4.57% (up 54bps). Benchmark Fannie Mae MBS yields gained eight bps to 5.90% (up 63bps).

Italian yields rose seven bps to 3.89% (up 19bps y-t-d). Greek 10-year yields gained eight bps to 3.59% (up 54bps). Spain's 10-year yields increased seven bps to 3.35% (up 35bps). German bund yields jumped seven bps to 2.58% (up 56bps). French yields rose six bps to 3.06% (up 50bps). The French to German 10-year bond spread was little changed at 48 bps. U.K. 10-year gilt yields jumped 13 bps to 4.26% (up 72bps). U.K.'s FTSE equities index declined 1.2% (up 7.6% y-t-d).

Japan's Nikkei Equities Index slipped 0.4% (up 15.5% y-t-d). Japanese 10-year "JGB" yields jumped six bps to 1.01% (up 39bps y-t-d). France's CAC40 declined 0.9% (up 15.5%). The German DAX equities index was about unchanged (up 11.6%). Spain's IBEX 35 equities index slipped 0.7% (up 11.3%). Italy's FTSE MIB index dropped 2.6% (up 13.6%). EM equities were mostly lower. Brazil's Bovespa index slumped 3.0% (down 7.4%), and Mexico's Bolsa index dropped 3.8% (down 3.4%). South Korea's Kospi index declined 1.4% (up 1.2%). India's Sensex equities index rose 2.0% (up 4.4%). China's Shanghai Exchange Index fell 2.1% (up 3.8%). Turkey's Borsa Istanbul National 100 index added 0.3% (up 42.9%). Russia's MICEX equities index dropped 3.0% (up 9.6%).

Federal Reserve Credit declined $44.7bn last week to $7.266 TN. Fed Credit was down $1.624 TN from the June 22, 2022, peak. Over the past 245 weeks, Fed Credit expanded $3.539 TN, or 95%. Fed Credit inflated $4.455 TN, or 158%, over the past 602 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $13.4bn last week to a 13-month low $3.324 TN. "Custody holdings" were down $73.7 billion y-o-y, or 2.2%.

Total money market fund assets gained $17.1bn to $6.066 TN. Money funds were up $738bn, or 13.8%, y-o-y.

Total Commercial Paper declined $16.6bn to $1.279 TN. CP was up $152bn, or 13.7%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell eight bps to 6.94% (up 18bps y-o-y). Fifteen-year rates declined four bps to 6.27% (up 15bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up seven bps to 7.40% (up 23bps).

Currency Watch:

May 22 – Bloomberg (Iris Ouyang): “China signaled its permission for the yuan to weaken against the dollar, as a jump in capital outflows and a resilient greenback pressured the central bank into loosening its grip. The People’s Bank of China weakened its daily reference rate for the yuan to a level unseen since January. The move came as the currency slid in the spot market this week amid signs investors are avoiding yuan-denominated assets for higher-yielding ones and bets the dollar will stay strong. The PBOC’s tweaks to the so-called fixing — though moderate so far — may carry an important clue for the market, as it shows Beijing may be ready to end a pattern of supporting the yuan by holding the reference rate largely steady.”

May 20 – Bloomberg: “China’s capital outflows worsened in April, underscoring headwinds for the yuan amid a weak domestic economy and uncertainties over the Federal Reserve’s rate trajectory. Local firms purchased the largest amount of foreign exchange from banks since 2016 in April, while exporters held back dollar conversion and residents snapped up foreign currencies for overseas travel… Chinese banks sold a net $36.7 billion of foreign exchange to their clients last month, the most since December 2016… Chinese banks wired a net $29.5 billion worth of funds overseas on behalf of clients for direct investment, which was a record high. This measure includes both foreign investment into China and China’s outbound investment overseas.”

May 24 – Bloomberg: “Foreign investment into China slowed for a fourth straight month in April, underscoring Beijing’s struggle to attract more overseas funds to boost its flagging economic growth. New actually utilized foreign investment into China was 58.5 billion yuan ($8.1bn) last month… That was down 36% compared with the same month in 2023 and was the second-lowest result for any month since late 2019. The release comes after separate data from the central bank showed the value of inbound new investment fell 56% in the first quarter. Capital outflows also worsened in April…”

For the week, the U.S. Dollar Index increased 0.3% to 104.72 (up 3.3% y-t-d). For the week on the upside, the Norwegian krone increased 0.9%, the Swedish krona 0.5%, and the British pound 0.3%. On the downside, the South African rand declined 1.4%, the Brazilian real 1.2%, the South Korean won 1.0%, the Australian dollar 1.0%, the Japanese yen 0.9%, the Swiss franc 0.6%, the Mexican peso 0.5%, the Canadian dollar 0.4%, the Singapore dollar 0.4%, the euro 0.2%, and the New Zealand dollar 0.2%. The Chinese (onshore) renminbi declined 0.27% versus the dollar (down 1.98% y-t-d).

Commodities Watch:

May 23 – Bloomberg (Ye Xie and Yvonne Yue Li): “For much of the past half century, US Treasuries have handily outpaced gold as a buy-and-hold investment. Now, bonds’ status as the ultimate haven is facing one of its biggest challenges yet. Investors traditionally flocked to US debt as a super-safe investment paying steady income, and backed by the world’s economic powerhouse. For buyers ranging from individual savers to sovereign nations, these attributes made it a superior investment to gold… This relationship has been shifting lately, with recent trends moving in gold’s favor.”

May 24 – Bloomberg (Keira Wright and Mumbi Gitau): “An index of major crops wiped out its 2024 loss as bad weather stokes worries about harvests from wheat to coffee, reviving concerns about rising food prices. Droughts, frosts and heavy rain are popping up across key growers, threatening tighter supplies and lifting the cost of agricultural staples. A Bloomberg gauge tracking nine farm commodities has turned higher on the year and is headed for the largest weekly gain since July.”

The Bloomberg Commodities Index slipped 0.7% (up 6.5% y-t-d). Spot Gold dropped 3.4% to $2,334 (up 13.1%). Silver fell 3.9% to $30.262 (up 27.2%). WTI crude lost $2.34, or 2.9%, to $77.72 (up 9%). Gasoline dropped 3.5% (up 18%), and Natural Gas fell 4.0% to $2.52 (unchanged). Copper sank 5.9% (up 22%). Wheat surged 7.1% (up 11%), and Corn jumped 2.7% (down 1%). Bitcoin gained $1,750, or 2.6%, to $68,535 (up 61.2%).

Middle East War Watch:

May 20 – Reuters (Parisa Hafezi and Yomna Mohamed): “Iranian President Ebrahim Raisi, a hardliner seen as a potential successor to Supreme Leader Ayatollah Ali Khamenei, was killed when his helicopter crashed in poor weather in mountains near the Azerbaijan border, officials and state media said… The charred wreckage of the helicopter which crashed on Sunday carrying Raisi, Foreign Minister Hossein Amirabdollahian and six other passengers and crew was found early on Monday after an overnight search in blizzard conditions.”

May 20 – Reuters (Parisa Hafezi): “Iran proclaimed five days of mourning for President Ebrahim Raisi on Monday, though the muted atmosphere revealed little of the spectacular public grief that has accompanied the deaths of other senior figures in the Islamic Republic's 45-year history. While government loyalists packed into mosques and squares to pray for Raisi and Foreign Minister Hossein Amir Abdollahian, both killed in a helicopter crash, most shops remained open and the authorities made little effort to interrupt ordinary life.”

May 20 – Reuters: “Here are some key facts about Mohammad Mokhber, 68, Iran's first vice president who became interim president following the death of Ebrahim Raisi in a helicopter crash. As interim president, Mokhber is part of a three-person council, along with the speaker of parliament and the head of the judiciary, that will organise a new presidential election within 50 days of the president's death. Born on Sept. 1, 1955, Mokhber, like Raisi, is seen as close to Supreme Leader Ali Khamenei… Mokhber was part of a team of Iranian officials who visited Moscow in October and agreed to supply surface-to-surface missiles and more drones to Russia's military…”

May 22 – Financial Times (Jude Webber, Richard Milne, Barney Jopson, Neri Zilber and Leila Abboud): “Israel recalled its ambassadors to Spain, Ireland and Norway… to deliver a ‘severe reprimand’ to the three countries after they committed to recognise Palestinian statehood next week. Israeli Prime Minister Benjamin Netanyahu released a video criticising the move, and calling the intention to recognise a Palestinian state a ‘reward for terrorism’.”

Ukraine War Watch:

May 22 – Associated Press (Samya Kullab): “Sustained Russian attacks on Ukraine’s power grid in recent weeks have forced leaders of the war-ravaged country to institute nationwide rolling blackouts. Without adequate air defenses to counter assaults and allow for repairs, though, the shortages could still worsen as need spikes in late summer and the bitter-cold winter. The Russian airstrikes targeting the grid since March have meant blackouts have even returned to the capital, Kyiv, which hadn’t experienced them since the first year of the war.”

May 21 – Reuters (Mark Trevelyan): “Russian forces have started the first stage of exercises ordered by President Vladimir Putin to simulate preparation for the launch of tactical nuclear weapons, the Defence Ministry said… Moscow has linked the exercises to what it calls ‘militant statements’ by Western officials, including French President Emmanuel Macron, which it said created security threats for Russia. Nuclear analysts say the exercises are designed as a warning signal by Putin to deter the West from wading more deeply into the war in Ukraine.”

Taiwan Watch:

May 22 – AFP (James Edgar, Amber Wang and Michael Zhang): “China… encircled Taiwan with naval vessels and military aircraft in war games, as it vowed the blood of ‘independence forces’ on the self-ruled island would flow. The two days of drills are part of an escalating campaign of intimidation by China that has seen it carry out a series of large-scale military exercises around Taiwan in recent years… As the drills got underway, China's military said they would serve as ‘strong punishment for the separatist acts of 'Taiwan independence' forces’. Foreign ministry spokesman Wang Wenbin then delivered a warning that included language more commonly used by China's propaganda outlets. ‘Taiwan independence forces will be left with their heads broken and blood flowing after colliding against the great... trend of China achieving complete unification,’ Wang told reporters.”

May 23 – Associated Press (Christopher Bodeen): “Taiwan scrambled jets and put missile, naval and land units on alert Thursday over Chinese military exercises being conducted around the self-governing island democracy where a new president took office this week. China’s military said its two-day exercises around Taiwan were punishment for separatist forces seeking independence… China’s ‘irrational provocation has jeopardized regional peace and stability,’ the island’s Defense Ministry said. It said Taiwan will seek no conflicts but ‘will not shy away from one.’”

May 20 – Financial Times (Kathrin Hille): “Taiwan’s new president, Lai Ching-te, has called on Beijing to work with him to achieve peace and common prosperity rather than menace his country as he was sworn into office amid high tensions across the Taiwan Strait. China should ‘stop its verbal attacks and military intimidation… shoulder global responsibilities together with Taiwan, commit to maintaining peace and stability across the Taiwan Strait and in the region and ensure that the world is free from the fear of war’, Lai said in his inaugural address… Lai appealed to Beijing to engage with Taiwan’s democratically elected government, calling for the resumption of mutual tourism exchanges and programmes bringing Chinese students to Taiwan.”

May 20 – Reuters (Yimou Lee and Ben Blanchard): “Taiwan President Lai Ching-te asked China… to stop its military and political threats, saying in his inauguration speech that peace was the only choice and that Beijing had to respect the choice of the Taiwanese people. China responded by saying Lai had sent ‘dangerous signals’ that sought to undermine peace and stability across the Taiwan Strait. Lai, addressing the crowd outside the Japanese-colonial-era presidential office in central Taipei, repeated a call for talks with China…”

May 22 – Reuters (Peter Hobson and Lewis Jackson): “Chinese military drills in the straits of Taiwan in 2023 practiced manoeuvres key to an invasion of the island, although an actual attack was not imminent or inevitable, a senior U.S. general… said… In the exercises, the People's Liberation Army simulated a maritime and air blockade of Taiwan, amphibious assaults and counter-intervention operations, Lieutenant General Stephen Sklenka, Deputy Commander of U.S. Indo-Pacific Command, said…”

May 20 – Reuters: “China's embassy in Japan… said it firmly opposes Japanese lawmakers visiting Taiwan and expressed firm protests. ‘The Japanese government and some politicians ignored China’s strong opposition and congratulated Taiwan's Lai," an embassy spokesperson said…”

May 21 – Bloomberg (Diederik Baazil, Cagan Koc, and Jordan Robertson): “ASML Holding NV and Taiwan Semiconductor Manufacturing Co. have ways to disable the world’s most sophisticated chipmaking machines in the event that China invades Taiwan, according to people familiar... Officials from the US government have privately expressed concerns to both their Dutch and Taiwanese counterparts about what happens if Chinese aggression escalates into an attack on the island responsible for producing the vast majority of the world’s advanced semiconductors… ASML reassured officials about its ability to remotely disable the machines when the Dutch government met with the company on the threat, two others said. The Netherlands has run simulations on a possible invasion in order to better assess the risks, they added.”

Market Instability Watch:

May 20 – Reuters (Satoshi Sugiyama and Makiko Yamazaki): “Japanese Finance Minister Shunichi Suzuki said… he was concerned about the negative implications of the current weakness in the yen and its effect on incentives to increase wages. ‘One of our major goals is to achieve wage increases that exceed the rise in prices,’ Suzuki said. ‘On the other hand, if prices continue to remain high, it will be difficult to reach this target even if wages rise.’ While a weak yen is a boon to exporters, it has become a headache for Japanese policymakers as it hurts consumption by pushing up the cost of raw material imports.”

May 23 – Reuters (Jamie McGeever): “If you want evidence of how much the 'soft landing' narrative is driving bullish investor sentiment, look no further than benchmark measures of implied volatility. In equities, bonds, credit and currencies, 'vol' has not been this low in years, clearing the way for investors to push up asset prices to historic and, in the case of the S&P 500 and Nasdaq, record highs.”

May 20 – Bloomberg (Srinivasan Sivabalan): “Investors are getting the least compensation in six years for leaving the safety of US Treasuries and taking on the risk of emerging-market corporate bonds. A Bloomberg index of dollar-denominated EM company debt has rallied since October, reaching the highest level since February 2022. That’s sent its yield premium over Treasuries down to 216 bps, less than half of the spread seen as recently as 2022. A similar measure shows emerging-market companies are now able to borrow by paying just 133 bps more than their US peers.”

May 18 – Financial Times (Harriet Clarfelt and Kate Duguid): “Surging share prices and falling borrowing premiums are making it easier for companies to access fresh cash, as an index of US financial conditions returns to levels last seen before the Federal Reserve started raising interest rates more than two years ago. The Chicago Fed’s National Financial Conditions index — which measures how easy it is for companies to borrow money — this month reached its loosest level since January 2022. The reading comes even though the Fed has yet to start lowering rates, which have sat in a range of 5.25 to 5.5% for the past 10 months, their highest level in 23 years.”

May 23 – Bloomberg (Cameron Crise): “Despite today’s rise in nominal and real yields, the 10-year TIPS re-opening tailed by more than 2 bps, stopping at 2.184%. That’s the highest yield for a 10-year TIPS auction since the start of 2009 at the height of the GFC. Demand was limp…”

Global Credit Bubble Watch:

May 23 – Bloomberg (Carmen Arroyo and Natalie Wong): “For the first time since the financial crisis, investors in top-rated bonds backed by commercial real estate debt are getting hit with losses. Buyers of the AAA portion of a $308 million note backed by the mortgage on the 1740 Broadway building in midtown Manhattan got less than three-quarters of their original investment back earlier this month after the loan was sold at a steep discount. It’s the first such loss of the post-crisis era… All five groups of lower ranking creditors were wiped out. Market watchers say the fact the pain is reaching all the way up to top-ranked holders, overwhelming safeguards put in place to ensure their full repayment, is a testament to how deeply distressed pockets of the US commercial real estate market have become.”

May 21 – Bloomberg (Eleanor Duncan and Kat Hidalgo): “Investment banks including Goldman Sachs… are pitching broadly syndicated refinancings of some of the riskiest types of private credit, in the latest sign that Wall Street is trying to poach back business from direct lenders. Bankers in Europe are speaking with buyout firms about options for private payment-in-kind debt their companies took on when broadly syndicated markets were much more volatile and expensive. Now that conditions have improved, institutional lenders are becoming increasingly assertive. ‘A lot of sponsors have been doing PIK but in the private market,’ said Luke Gillam, co-head of EMEA credit capital markets at Goldman Sachs. ‘This is now the chance to use the public markets to refinance those instruments, which are much cheaper than private credit.’ In many cases, the private debt can be refinanced as PIK toggle bonds, which give borrowers the option to delay interest payments until the notes’ final maturity.”

May 22 – Bloomberg (Amanda Albright and Sri Taylor): “US university students are up to their ears in debt. And, increasingly, so are many US colleges. From small liberal-arts schools to giant universities, America’s ivory towers are on a borrowing binge as part of an effort to spruce up their campuses and lure the next generation of students. In just the last five months, roughly 50 colleges have tapped investors to build student centers, refurbish dorms, and make-over academic buildings as well as refinance debt — to the tune of $10 billion… That volume is more than double from the same time last year.”

Bubble and Mania Watch:

May 22 – Bloomberg (Liz Capo McCormick): “Goldman Sachs… updated its longer-term US fiscal outlook…, with its new projections seeing a key metric of debt sustainability head to historically extreme levels. ‘The outlook for US fiscal sustainability has become more challenging over the last five years,’ Goldman Sachs economists Manuel Abecasis and David Mericle wrote... ‘Higher expected future interest rates in particular have substantially worsened the trajectories of the debt-to-GDP ratio and of real interest expense as a share of gross domestic product.’”

May 23 – Bloomberg (John Sage and Carmen Arroyo): “Private credit’s historic rise is creating a problem that most asset managers would love to have: too much cash in their coffers. Dry powder… is at a record… What’s more, bank leveraged finance desks are increasingly seeking to poach back business. The result has been what some have called a ‘race to the bottom’ among private credit managers. ‘Because of this supply-demand imbalance you’re starting to see this behavior shift in parts of the private credit market — turning into a bit of an auction for the tightest terms,’ said Sachin Khajuria, who runs… Achilles Management and invests across private assets. ‘That means weaker underwriting standards due to competition.’”

May 23 – New York Times (Maureen Farrell): “A giant real estate fund managed by the company of the billionaire investor Barry Sternlicht is limiting the amount of money that investors can redeem, in an attempt to fend off a potential cash crunch as high interest rates pummel the market for commercial properties like office buildings. Starwood Real Estate Income Trust, which manages about $10 billion and is one of the largest real estate investment trusts around, said… it would buy back only 1% of the value of the fund’s assets every quarter, down from 5% earlier. Starwood said that it had chosen to tighten the limit because it was facing more withdrawals than it could meet with its cash on hand…”

May 20 – Reuters (Farah Elbahrawy): “One of Wall Street’s most prominent bears has just turned positive on the outlook for US stocks. Morgan Stanley’s Michael Wilson now sees the S&P 500 rising 2% by June 2025, a major about turn from his view that the benchmark will tumble 15% by December. The strategist — whose bearish 2023 outlook failed to materialize as markets kept rallying — finally gave in and boosted his target for the S&P 500 to 5,400 points from 4,500.”

May 23 – Bloomberg (Suzanne Woolley): “The universe of 401(k) accounts with balances of $1 million or more at Fidelity Investments rose to a record 485,000 in the first quarter… With stocks surging, the number of retirement account millionaires jumped 15% from the prior quarter and 43% since March 2023. Average retirement account balances, meanwhile, hit their highest level since the end of 2021, rising to $125,900 for 401(k)s...”

AI Bubble Watch:

May 23 – Reuters (Foo Yun Chee and Tassilo Hummel): “Europe’s landmark rules on artificial intelligence will enter into force next month after EU countries endorsed… a political deal reached in December, setting a potential global benchmark for a technology used in business and everyday life. The European Union's AI Act is more comprehensive than the United States' light-touch voluntary compliance approach while China’s approach aims to maintain social stability and state control… Concerns about AI contributing to misinformation, fake news and copyrighted material have intensified globally in recent months amid the growing popularity of generative AI systems such as Microsoft-backed OpenAI's ChatGPT, and Google's chatbot Gemini.”

U.S./Russia/China/Europe Watch:

May 22 – Reuters (Andrew Macaskill): “British defence minister Grant Shapps accused China… of providing or preparing to provide Russia with lethal aid for use in its war against Ukraine… Britain for the first time is accusing China of working to supply Russia with weapons for use in Ukraine. Shapps told a conference in London that U.S. and British defence intelligence had evidence that ‘lethal aid is now, or will be, flowing from China to Russia and into Ukraine, I think it is a significant development’.”

May 21 – Bloomberg (Li Liu): “Chinese Foreign Minister Wang Yi told a vice foreign minister from Iran that China will strengthen ‘strategic cooperation’ with Iran and safeguard mutual interests of the two countries… Wang says… that China believes Iran will remain stable and developing after Iranian President Ebrahim Raisi’s death in a helicopter crash. China ‘firmly’ stands with its Iranian friends, Wang says.”

May 20 – Bloomberg (Joe Mayes): “The UK government said the growing alliance between Russia and China is a threat to Western nations, as it urged European countries to boost lethal aid to Ukraine. ‘That is a direct threat to our way of life,’ Defense Secretary Grant Shapps said…, discussing growing Russian and Chinese influence around the world. ‘If we cherish our freedom and cherish our democracy, we have to be concerned that they’re linking together,’ he added.”

May 23 – Reuters: “Russian Foreign Ministry spokeswoman Maria Zakharova said… that Moscow will retaliate with strikes on British targets if British weapons are used by Ukraine to strike Russian territory. Zakharova told reporters that British targets ‘on Ukraine's territory and beyond its borders’ could be hit in such a scenario.”

De-globalization and Iron Curtain Watch:

May 24 – Bloomberg (Jorge Valero): “China’s outsized role in world trade is alarming global finance chiefs, who are poised to forge a united front in Italy priming their nations to challenge ‘harmful practices.’ A draft communique formulated at the Group of Seven meeting… introduces much stronger common language than the club adopted just one year ago… ‘We will advance our cooperation to enhance global economic resilience and economic security and protect our economies from systemic shocks and vulnerabilities… To this end, we will work to make our supply chains more resilient, reliable, diversified and sustainable and to respond to harmful practices, while safeguarding critical and emerging technologies.’”

May 24 – Bloomberg (Enda Curran, Alberto Nardelli and James Mayger): “The world’s three dominant economies are entering a new, combative phase as the US increasingly uses trade weapons borrowed from China’s playbook. That’s threatening to deepen international fractures and to challenge decades of free-market orthodoxy — and it leaves Europe with big decisions to make. Then-President Donald Trump fired the first shots with tariffs on China seven years ago, and then Joe Biden ushered America into the new industrial policy age. Stage three, punctuated by Biden’s latest round of duties on Chinese imports, builds on the first two: using tariffs to defend US interests, with subsidies now at the core of policy and without fear of retaliation.”

May 21 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen said… the United States and Europe needed to respond to China's industrial overcapacity in a ‘strategic and united way’ to keep manufacturers viable on both sides of the Atlantic. Yellen told reporters during a visit to Frankfurt that G7 finance ministers shared U.S. concerns about Chinese efforts to dominate clean energy industries, but did not need ‘detailed coordination’ on trade actions following the imposition of steep U.S. tariffs on Chinese goods. ‘But I do think that the concerns about China's strategy are shared and all I'm suggesting is that given that many countries share this concern, it's more forceful to communicate to China as a group,’ Yellen said.”

May 22 – Bloomberg (Andrew Macaskill): “Beijing hinted it could retaliate against the European Union in a trade dispute that shows signs of escalating the same way as China’s contest with the US. If the EU keeps pursuing investigations into Chinese firms then China will ‘very likely have to take a series of measures to hit back,’ said a post… linked to China’s state media. Beijing has regularly used such channels as a way of signaling its thinking about trade. The EU is investigating Chinese subsidies across a range of industries, threatening tariffs for electric carmakers and keeping firms out of rail and energy tenders.”

May 21 – Wall Street Journal (Jon Emont): “For the past few years, the West has been trying to break China’s grip on minerals that are critical for defense and green technologies. Despite their efforts, Chinese companies are becoming more dominant, not less. They are expanding operations, supercharging supply and causing prices to drop. Their challengers can’t compete. ‘China is not just standing still waiting for us to catch up,’ said Morgan Bazilian, director of the Payne Institute at the Colorado School of Mines. ‘They are making investments on top of their already massive investments in all aspects of the critical-minerals supply chain.’”

Inflation Watch:

May 18 – Yahoo Finance (Janna Herron): “Americans despise inflation. It's a loathing that colors their perception of the economy and their personal finances. And even if the Federal Reserve hits its so-far unmet inflation target of 2%, it won't be enough to soften that revulsion for most people. In fact, if it were up to them, Americans would choose no inflation at all. Those are among the findings from a pair of recent studies exploring how Americans feel about inflation, whether those feelings can change, and what policymakers should make of that sentiment.”

May 21 – Wall Street Journal (Paul Kiernan): “Fewer American parents are hanging on financially. About 64% of parents living with children under the age of 18 said they were doing all right financially in 2023, down from 69% in 2022, according to a survey… by the Federal Reserve. That was worse than the broader response. Overall, about 72% of all respondents said they were doing all right financially in 2023, down slightly from 73% the prior year. More than a third of survey respondents, parents and not, cited inflation as their biggest financial challenge. A number of households with young children reported paying nearly as much on child care as they did on housing.”

Federal Reserve Watch:

May 22 – CNBC (Jeff Cox): “Federal Reserve officials grew more concerned at their most recent meeting about inflation, with members indicating that they lacked the confidence to move forward on interest rate reductions. Minutes from the April 30-May 1 policy meeting of the Federal Open Market Committee… indicated apprehension from policymakers about when it would be time to ease… ‘Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2% objective… The recent monthly data had showed significant increases in components of both goods and services price inflation.’ The minutes also showed ‘various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.’”

May 22 – Bloomberg (Craig Torres): “Federal Reserve officials earlier this month coalesced around a desire to hold interest rates higher for longer and ‘many’ questioned whether policy was restrictive enough to bring inflation down to their target… Though officials viewed policy as generally restrictive, policymakers pointed to the possibility of high interest rates having a smaller effect on the economy than in the past. They also said the long-run neutral rate — a level of rates that neither slows nor stimulates demand — may be higher than previously thought. ‘Many participants commented on their uncertainty about the degree of restrictiveness,’ the minutes said.”

May 21 – Bloomberg (Amara Omeokwe and Craig Torres): “Federal Reserve Governor Christopher Waller said a continued softening in data over the next three to five months would allow the central bank to consider lowering borrowing costs at the end of 2024… ‘If the data were to continue softening throughout the next three to five months, you can even think about doing it at the end of this year,’ Waller said... ‘If we get enough data going the right way, then we can think about cutting rates later this year, beginning of next year.’”

May 20 – Reuters (Michael S. Derby and Howard Schneider): “Federal Reserve officials are not ready to say inflation is heading to the central bank's 2% target after data last week showed a welcome easing in consumer price pressures in April, with several on Monday calling for continued policy caution. ‘It is too early to tell whether the recent slowdown in the disinflationary process will be long lasting,’ Fed Vice Chair Philip Jefferson told the Mortgage Bankers Association conference… Speaking separately…, Fed Vice Chair of Supervision Michael Barr, said ‘disappointing’ first-quarter inflation readings were ‘did not provide me with the increased confidence that I was hoping to find to support easing monetary policy.’”

May 21 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic says officials at the US central bank are holding active discussions on what is the level for interest rates that neither slows nor stimulates the economy. ‘Everyone is rethinking that dynamic’ on what is the long-term neutral rate;’ ‘the jury is still out, we are going to dig into this as we get deeper into this year,’ Bostic tells reporters… Bostic reiterates his view that ‘there may be reasons to think the baseline steady state’ is higher…”

Biden Administration Watch:

May 23 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen said… she wants market-driven countries to present a ‘wall of opposition’ to China over its state-driven industrial policies, a key issue she is pushing at a G7 finance meeting this week. Yellen also told a news conference that she is looking for ‘general agreement on the concept’ from G7 finance ministers and central bank governors on a plan to bring forward the earnings from some $300 billion in frozen Russian assets that could provide Ukraine with significant financial support beyond 2025.”

U.S. Economic Bubble Watch:

May 23 – Bloomberg (Vince Golle): “US business activity accelerated in early May at the fastest pace in two years, largely reflecting stronger growth at service providers and accompanied by a pickup in inflation. The S&P Global flash May composite purchasing managers index advanced by more than 3 points to 54.4, the highest since April 2022… The gauge topped all estimates… Factory input prices advanced at the fastest rate since November 2022... Prices-paid and received metrics for service providers also picked up.”

May 22 – Bloomberg (Michael Sasso): “Sales of US existing homes unexpectedly fell for a second month in April… Contract closings decreased 1.9% from a month ago to a 4.14 million annualized rate… Inventory has edged up a bit in recent months… The supply of homes on the resale market increased more than 16% in April from the same month last year to 1.21 million. At the current sales pace, selling all the properties on the market would take 3.5 months. Realtors see anything below five months of supply as indicative of a tight market. The median selling price increased 5.7% from a year ago to $407,600 — the highest for any April… About 68% of the homes sold were on the market for less than a month, up from 60% in March, while more than a quarter sold above the list price.”

May 22 – AFP: “Companies paid out a record amount of money in dividends to shareholders in the first quarter of 2024 as Alibaba and Meta made the their first-ever payments… Asset manager Janus Henderson tracks dividend payments by 1,200 of the largest publicly traded companies in the world and found that together they paid a record $339.2 billion in dividends in the January through March period. That represents an increase of 2.4% from the same period in 2023.”

Fixed Income Watch:

May 24 – Bloomberg (Erin Hudson): “The $4 trillion municipal bond market is wrapping up its worst week since early 2020 as an onslaught of issuance weighs on the debt of US states and cities. Yields on 10-year state and local-government debt have jumped 34 bps this week, to 2.99% on Friday, for the steepest weekly climb since March 2020… The trigger, investors say, has been a burst of supply. Borrowers have issued more than $180 billion in long-term municipal bonds this year, making the first five months of 2024 the busiest start to a year in more than a decade by volume…”

May 22 – Wall Street Journal (Vicky Ge Huang): “If the U.S. economy is headed for trouble, no one told the junk-bond market. The premium that investors demand to hold debt from sub-investment-grade companies instead of relatively safe Treasurys has shrunk to near pandemic-era lows… Low-rated debt has been swept up in a broad market rally fueled by signs of cooling inflation and hopes for interest-rate cuts. Attracted by yields around 8%, investors have added a net $3.7 billion into junk-bond funds so far this year… Collectively, low-rated businesses issued $131 billion of speculative-grade debt this year through mid-May, according to PitchBook LCD, up from about $71 billion during the same period of 2023.”

China Watch:

May 20 – Reuters (Clare Jim and Xie Yu): “Shares of Chinese developers wobbled on Monday as investors fretted that China's ‘historic’ steps to stabilize its crisis-hit property sector fell short of what is required to foster a sustainable turnaround in demand and confidence… There were 391 million square metres (4.2bn square feet) of new housing for sale in January-April, up 24% year-on-year…, equivalent to 6.6 Manhattans. Tianfeng Securities estimates it will cost around $1 trillion to buy the entire stock. Bank of America head of Greater China property research, Karl Choi, noted that social housing programs are only mandated in larger cities, estimating that the 500 billion funding could purchase up to 15% of inventory in tier-2 cities at a deep discount… Local governments, already some $9 trillion in debt, may be reluctant to expand their social housing projects which provide low returns, and banks would also be hesitant to lend to potentially loss-making businesses.”

May 21 – Financial Times (Thomas Hale and Joe Leahy): “With the announcement of a Rmb300bn ($41bn) fund to support government purchases of unsold housing, the Chinese government last week appeared to finally unleash major firepower to tackle a three-year slowdown in the country’s real estate market. But while the new measures may mark a turning point in a crisis that has weighed heavily on China’s economy, analysts and economists said the hundreds of billions of renminbi was nowhere near enough. ‘This is a drop in the ocean given the scale of unsold stock,’ said Harry Murphy Cruise, an economist at Moody’s Analytics. Goldman Sachs estimated last week that, based on cost, China has Rmb30tn of unsold housing inventory, spanning land and completed apartments — equivalent to 10 times the amount sold last year.”

May 21 – Bloomberg (Eric Zhu): “China last week rolled out plans that effectively make the government a buyer of last resort to help mop up the country’s housing glut. The message is clear: The government no longer sees private buyers as willing or able to solve the enormous inventory problem on their own. Our calculations show that, without the government’s help, it would take more than four years for developers to sell all the homes they’ve built or that are under construction – and that’s assuming sales don’t keep falling. We estimate China now has an inventory of roughly 5.2 billion square meters of unsold housing — equivalent to 60 million apartments.”

May 21 – Bloomberg: “China’s mega banks are urging branch managers to lend to state-owned companies that buy unsold homes, offering a quick show of support for the government’s housing rescue package unveiled last week. Industrial & Commercial Bank of China Ltd. and other state lenders are guiding managers to lend against the purchased properties as collateral… The directives — aimed largely as a way to clear excess housing inventory — underscore the urgency in addressing the nation’s property crisis. The push is fraught with challenges for banks, given uncertainties around property valuations and state firms’ ability to generate returns.”

May 23 – Bloomberg: “China’s efforts to bolster economic growth by reducing the allure of bank deposits has driven a record exodus from cash, with a big proportion of that going into bonds and wealth management products. The nation’s total deposits slumped by 3.9 trillion yuan ($538bn), or 1.3%, in April as investors looked for higher returns elsewhere and policymakers cracked down on companies that took advantage of preferential deposit rates to park cash at banks. One-year deposits at China’s largest banks pay a record-low of just 1.45%. ‘Factors, including an end of arbitrage borrowings, have vastly driven the reallocation of deposits, and it’s expected to continue,’ said Ming Ming, chief economist at Citic Securities… The outstanding value of wealth management products jumped by 2.95 trillion yuan in April, with the biggest gains being made by fixed-income assets, according to Citic’s analysis.”

May 20 – Reuters (Qiaoyi Li, Ellen Zhang and Ryan Woo): “China’s fiscal revenue slipped 2.7% in the first four months of 2024 from a year earlier, after a 2.3% slide in the January-March period, in a further sign of an uneven economic recovery. Fiscal expenditure rose 3.5% in the first four months, versus a 2.9% gain in the first quarter… For April alone, fiscal revenue fell 3.7% against a 2.4% decline in March, while fiscal spending was up 6.1%, compared with March's 2.9% fall…”

May 24 – Wall Street Journal (Stu Woo): “Chinese artificial-intelligence companies face two big challenges in trying to create chatbots on par with OpenAI’s ChatGPT. One is overcoming U.S. export controls on buying leading-edge artificial-intelligence chips. The other? Making sure the chatbot adheres to Xi Jinping Thought. That’s the doctrine of Xi, the leader of China’s ruling Communist Party. And Chinese authorities offered a reminder of how AI companies are expected to behave on Monday, when they announced a new chatbot trained on Xi’s 14-point theory, which emphasizes socialist values and the party’s leadership over everything in China.”

Central Bank Watch:

May 21 – Bloomberg (Jennifer Duggan and Olivia Fletcher): “European Central Bank President Christine Lagarde indicated that an interest-rate cut is probable next month with the rapid gain in consumer-price growth now largely contained. ‘It is a case that if the data that we receive reinforces the confidence level that we have — that we will deliver 2% inflation in the medium term, which is our objective, our mission, our duty — then there is a strong likelihood’ of a move on June 6, she told Ireland’s RTE One…”

May 22 – Bloomberg (Tom Rees and Philip Aldrick): “Stronger-than-expected British inflation prompted traders to sharply pare back bets on interest rate cuts… The Consumer Prices Index rose 2.3% from a year ago in April…, compared with 2.1% forecast by economists… Economists in the UK zeroed-in on services inflation, which was little changed at 5.9% as price growth remained strong in the hospitality sector. The central bank, which is watching the number closely for signs of domestic inflationary pressures, had expected a reading of 5.5%. A core gauge of prices that excludes volatile food and energy costs fell to 3.9% from 4.2%.”

May 23 – Reuters (Cynthia Kim and Jihoon Lee): “South Korea’s central bank held interest rates at a 15-year high… and struck a balanced policy tone while reiterating risks around inflationary pressures in the wake of stronger-than-expected economic growth. Governor Rhee Chang-yong said for now the Bank of Korea will continue to keep policy restrictive at the current 3.50% benchmark rate amid sticky inflation and the surprise first-quarter growth performance.”

Europe Watch:

May 23 – Bloomberg (Alexander Weber): “A key gauge of euro-area wages failed to slow at the start of 2024 — a warning sign to European Central Bank officials counting on a slowdown to maintain the retreat in inflation. Negotiated pay increased 4.7% from a year ago in the first quarter... That’s up from 4.5% in the final three months of 2023 and matches a record set in the third quarter of last year.”

May 23 – Bloomberg (Mark Schroers): “Euro-area private-sector business activity reached its highest level in a year — suggesting the region’s economic rebound is taking hold. S&P Global’s purchasing managers’ index rose to 52.3 in May — exceeding analyst forecasts… ‘This looks as good as it could be,’ said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. ‘The euro zone’s economy is gathering further strength. Encouragingly, new orders are growing at a healthy rate while the companies’ confidence is reflected by a steady hiring pace.’”

May 20 – Reuters (Giuseppe Fonte): “Italy's huge budget deficit and debt along with delays in spending post-COVID EU funds could erode investor confidence, the International Monetary Fund warned… In its annual… report on the Italian economy, the IMF urged the government to reach a primary surplus - net of debt servicing costs - of around 3% of output to ensure a gradually declining debt-to-GDP ratio. Italy plans to bring the deficit below the European Union's 3% threshold in 2026 while the debt, the second largest in the euro zone as a proportion of output, will follow a rising trend towards 140% of GDP through 2026.”

May 22 – Financial Times (Martin Arnold): “German wages rose at the fastest pace for almost a decade, pointing to a pick-up in the wider Eurozone and casting doubt over how aggressively the European Central Bank will cut interest rates this year. Collectively agreed wages in Germany rose 6.2% in the first three months of the year, accelerating from 3.6% in the previous quarter… Economists said the German numbers along with other countries’ data suggested that Eurozone annual collective wage growth rose to 4.7% in the first quarter, up from 4.5% in the previous quarter.”

May 21 – Wall Street Journal (Martin Arnold): “The EU’s trade deficit in goods with China has shrunk to its lowest quarterly level for almost three years, despite fears about the bloc being flooded with cheap Chinese products. There are also signs of growing transatlantic demand for European products, after the EU’s trade surplus with the US rose to a record high in the first quarter… In the three months to March, the EU’s trade deficit with China fell to €62.5bn, down 10% from the previous quarter and 18% from a year ago. That is its lowest level since the second quarter of 2021…”

Japan Watch:

May 22 – Bloomberg (Taiga Uranaka and Takashi Umekawa): “Norinchukin, Japan’s premier agricultural bank and one of the nation’s largest institutional investors, plans to raise 1.2 trillion yen ($7.7bn) of capital and reshuffle its overseas investment portfolio after losses on its bond holdings swelled. The bank’s paper losses rose to 2.2 trillion yen as of the end of March 2024 compared with 1.7 trillion yen a year earlier… The company expects a loss of at least 500 billion yen this fiscal year. Norinchukin has become one of Japan’s biggest victims of the surge in interest rates in the wake of the US Federal Reserve’s aggressive monetary tightening launched in March 2022. This echoes the bank’s plight in 2009 when it racked up billions in losses from investments in overseas securitized products.”

May 22 – Bloomberg (Taiga Uranaka): “Japan’s premier agricultural bank, Norinchukin, plans a complete overhaul of its investment strategy after massive losses on its overseas portfolio… Norinchukin relies primarily on its securities portfolio worth about 60 trillion yen ($384bn) to generate profit. Its lending business is far smaller than rivals and it doesn’t have investment banking operations. Yet the pressure to make money is no less urgent than for peers, since Norinchukin has to keep generating returns for the farming cooperatives that own it. For years, that imperative has pushed Norinchukin to invest overseas to escape Japan’s environment of negative interest rates. The firm poured funds into US government bonds, only to be saddled with losses after the Federal Reserve raised interest rates.”

May 22 – Financial Times (Kana Inagaki and Leo Lewis): “A surge in US and European interest rates has hit the vast overseas investment portfolio of Norinchukin, prompting the Japanese agricultural lender to plan a capital raise of ¥1.2tn ($7.7bn)… Norinchukin, which manages the savings of farmers and fisherman from Hokkaido to Okinawa, warned that it would incur a loss of about ¥500bn in the current financial year and pledged to review the way it balanced out its investment risks. Paper losses from its bond holdings ballooned to ¥2.2tn as of the end of March from ¥1.7tn a year earlier, and a profit of ¥959.8bn in 2021, as its investments were hit by the rapid pace of rate hikes in the US and Europe…”

May 19 – Bloomberg (Taiga Uranaka and Nao Sano): “Norinchukin Bank is considering raising 1.2 trillion yen ($7.7bn) to boost capital and cover losses arising from a plan to get rid of low-yielding foreign bonds… The Tokyo-based bank, best known as one of the world’s biggest buyers of collateralized loan obligations, may book about 500 billion yen in losses for the current fiscal year through March 2025 as a result of restructuring its securities portfolio…”

May 22 – Bloomberg (Erica Yokoyama): “Service prices, a key component of Japan’s inflation data, are sustaining momentum, adding to the case for the Bank of Japan to take another step before too long toward policy normalization. Rising prices for everything from haircuts to dry cleaning show that underlying consumer price trends may be sturdier than in the past. About 60% of major service providers surveyed in March said they would lift their prices or consider doing so in April…”

May 22 – Reuters (Satoshi Sugiyama): “Japan’s factory activity crept into expansion for the first time in a year in May…, as manufacturing gathered pace after months of weakness. The au Jibun Bank flash Japan manufacturing purchasing managers' index (PMI) climbed to 50.5 in May from 49.6 in April…”

May 22 – Associated Press (Yuia Kageyama): “Japan’s trade deficit in April grew nearly 8% from a year earlier as the weak yen boosted the value of imports, offsetting gains from a jump in exports… Exports totaled 8.98 trillion yen ($57bn), while imports totaled 9.4 trillion yen ($60bn), both up 8% from the previous year… The trade deficit for the month came out to 462.5 billion yen ($3bn).”

Emerging Market Watch:

May 23 – Bloomberg (Alex Vasquez and Andrew Rosati): “Mexico’s annual inflation accelerated slightly more than expected during the first two weeks of May, likely fueling bets that the hawkish central bank will be slow to lower its interest rate. Consumer prices rose 4.78% from a year prior…”

May 21 – Bloomberg (Ashutosh Joshi): “The surge in Indian equity derivatives that’s driven up volumes to the highest in the world is spurring concern among the nation’s policymakers that the frenzy may hurt efforts to harness household savings for productive purposes. Finance Minister Nirmala Sitharaman and Chief Economic Advisor V. Anantha Nageswaran sounded caution in recent days about growing retail participation in the equity futures and options market. ‘We need to ask ourselves is that a sign of progress or a sign of concern,’ Nageswaran said… ‘India needs to make sure that the capital market grows in areas where the country can actually harness household savings for productive purposes.’”

Leveraged Speculation Watch:

May 24 – Bloomberg (Justina Lee): “A once-niche stock trade beloved by hedge funds and volatility players has ballooned into one of the biggest options strategies on Wall Street, stirring fears it will get crushed by its own popularity. Known as dispersion, it’s traditionally been the preserve of bank trading desks and fast-money players… But it’s been luring new cash in the post-pandemic era as a market riven by rising interest rates has boosted performance. The approach pairs a long and short position to profit from differences between the volatility of an index like the S&P 500 and that of its individual members. By one estimate, assets in the strategy have as much as tripled in three years.”

May 22 – Reuters (Xie Yu): “A major geopolitical conflict is the top risk for global family offices in both the near- and medium-term, while North America and Asia Pacific are set to become the top destinations for fresh asset allocations, a recent UBS survey found. Among global peers, North Asian family offices are mostly concerned about geopolitical risks…, with 70% of them rating these factors as a top risk over the next five years, compared with 62% by global family offices.”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 22 – Bloomberg (Gregory Korte): “Half of swing-state voters say they’re worried about violence surrounding the US presidential election, suggesting misgivings about how an acrimonious race and its results will be received by a highly polarized electorate. Roughly equal shares of Democrats and Republicans hold that fear, and it is even more common among independents, a Bloomberg News/Morning Consult poll found.”

May 22 – CBS (Li Cohen): “The massive ‘doomsday glacier’ known for its rapid destabilization is undergoing a ‘vigorous ice melt’ that scientists say could reshape sea level rise projections. In a new study, glaciologists from the University of California, Irvine, found that warm, high-pressure ocean water is seeping beneath West Antarctica's Thwaites Glacier, making it more vulnerable to melting than previously thought. The glacier is roughly 80 miles across, the widest on Earth. It packs so much ice that if it were to completely collapse, it could singlehandedly cause global sea levels to rise by more than two feet…”

Geopolitical Watch:

May 19 – Wall Street Journal (Dustin Volz, Drew FitzGerald, Peter Champelli and Emma Brown): “U.S. officials are privately delivering an unusual warning to telecommunications companies: Undersea cables that ferry internet traffic across the Pacific Ocean could be vulnerable to tampering by Chinese repair ships. State Department officials said a state-controlled Chinese company that helps repair international cables, S.B. Submarine Systems, appeared to be hiding its vessels’ locations from radio and satellite tracking services… The warnings highlight an overlooked security risk to undersea fiber-optic cables, according to these officials: Silicon Valley giants, such as Google and Meta Platforms, partially own many cables and are investing in more.”

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Weekly Commentary: Citadel vs. Jane Street
Weekly Commentary: Instability
Weekly Commentary: World-Wide De-Risking/Deleveraging