Category Archives: Currencies

Shanghai Plunges 3.2%, below 3,000 for 1st Time in 2 Years, After Trump Threatens to Massively Escalate Trade War and China Threatens to Massively Retaliate, by Wolf Richter

Trump’s threat to levy 10% tariffs on another $200 billion of China’s exports to the US is causing financial turmoil. From Wolf Richter at wolfstreet.com:

Apparently, the trade talks have collapsed.

On May 20, Treasury Secretary Mnuchin declared that the US-China trade war was “on hold” while the trade talks were being conducted. That didn’t last long. Apparently, those talks have collapsed. And Monday evening, President Trump threatened to hit another $200 billion of imports from China with 10% tariffs.

The Shanghai Composite Index plunged 3.2% by midday in China on Tuesday, to 2,924, the lowest level since June 2016. The index is down 12% since the end of February. Hong Kong’s Hang Seng fell 2.4% by midday. Tokyo’s Nikkei fell 1.5%. US futures edged down.

It would be the second wave of tariffs, following the already decided first wave of 25% tariffs on $50 billion in goods, with $34 billion of imports to be hit on July 6, and $16 billion to be hit at a later date.

But instead of buckling under Trump’s first wave and addressing the IP-theft issues brought forth by the US, China vowed to retaliate in equal measure, which caused the infuriated White House to massively escalate the trade war with the second wave of threats.

“This latest action by China clearly indicates its determination to keep the United States at a permanent and unfair disadvantage, which is reflected in our massive $376 billion trade imbalance in goods. This is unacceptable,” Trump said.

“Further action must be taken to encourage China to change its unfair practices, open its market to United States goods, and accept a more balanced trade relationship with the United States.”

“After the legal process is complete, these tariffs will go into effect if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced,” Trump said.

And Trump threatened a third wave of tariffs – 10% on another $200 billion of Chinese goods – if China retaliates against the second wave. But that threat also fell on deaf ears.

To continue reading: Shanghai Plunges 3.2%, below 3,000 for 1st Time in 2 Years, After Trump Threatens to Massively Escalate Trade War and China Threatens to Massively Retaliate

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Critical Mass: When Will Investors Care About The Dollar Shortage Crisis? by Adem Tumerkan

Investors may not care about an impending dollar shortage until there aren’t enough dollars around to drive markets higher. From Adem Tumerkan at palisade-research.com:

Former Federal Reserve Chairman – Ben ‘Helicopter’ Bernanke – just threw cold water on the mainstream growth narrative. He said the economy by 2020 is going to go right over the cliff.

Although rarely – I do agree with Helicopter Ben about something. . .

President Trump’s $1.5 trillion in personal and corporate tax cuts – plus $300 billion in increased federal spending – was done at the “very wrong moment.”

The huge tax cuts and government spending requires a significant amount of new debt to be issued, all while the Fed’s tightening and unwinding their balance sheet via Quantitative Tightening (QT). 

This is going to cause an evaporation of dollar liquidity – making the markets extremely fragile.

Putting it simply – the soaring U.S. deficit requires an even greater amount dollars from foreigners to fund the U.S. Treasury. But if the Fed is shrinking their balance sheet, that means the bonds they’re selling to banks are sucking dollars out of the economy (the reverse of Quantitative Easing which was injecting dollars into the economy). This is creating a shortage of U.S. dollars – the world’s reserve currency – therefore affecting every global economy.

This illiquidity is going to cause the oil that greases the wheels of markets to dry up – fast.

So, with the dollar shortage making matters worse – we also have that there’s never been a time when the Fed began tightening and it didn’t lead to negative economic growth or a market crisis.

The historic evidence of the Fed’s rate hikes – and the inverting yield curve – right before a recession is irrefutable.

Take a look at over the last 40 years. . .

As the Fed continues their rate hikes and QT, the over-indebted system becomes illiquid and more fragile. Things will eventually crack.

The protégé of Austrian Economist Ludwig Von Mises – Murray Rothbard – once asked a series of questions that stumped many economists defending the Fed.

From his book America’s Great Depression, he called these ‘The Sudden Cluster of Errors’, which were. . .

1. Most businesses in the economy generate steady profits and can service their debts fine. Then suddenly, without warning, conditions change, and the bulk of businesses begin posting huge losses and can’t pay their creditors.

2. How did all these astute business men, MBA graduates, and ‘professional’ forecasters make such huge errors together. And – most importantly – why did it all suddenly happen at this particular time?

3. Why do the capital goods industries – raw materials, construction, etc – fluctuate much more wildly than the consumer goods industries? During recessions you see home construction firms belly up, but places like GAP and Hollister survive.

The explanation is the Fed’s artificial moving of rates up after keeping them down for years triggers the harsh bust.

To continue reading: Critical Mass: When Will Investors Care About The Dollar Shortage Crisis?

China is in Trouble, by Ronald-Peter Stöferle and Mark J. Valek

Like most of the rest of the world, China has a problem with debt. From Ronald-Peter Stöferle and Mark J. Valek at mises.org:

Before we discuss the economic situation of China, a few words about China’s strongman, Xi Jinping. The “new Chinese emperor” has engineered a meteoric rise. He started off as simple rural laborer but is now the most powerful Chinese president since Deng Xiaoping. Such a career path requires strength, tact, and probably a dash of unscrupulousness.

While the rulers of China have been able all along to hedge their plans over longer periods than their Western counterparts have, the new legal situation has extended this planning horizon even further.1 In comparison with those of Western economies, China’s countermeasures against the crisis in 2008 were significantly more drastic. While in the US the balance sheet total of the banking system increased by USD 4,000bn in the years after the global financial crisis, the balance sheet of the Chinese banking system expanded by USD 20,000bn in the same period. For reference: This is four times the Japanese GDP.

increm-China-1.png

The following chart shows the expansion of the bank balance sheet total as compared to economic output. Did the Chinese authorities assume excessive risks in fighting the crisis?

increm-China-2.png

Neither the fact that China’s bank balance sheets amount to more than 600% of GDP nor the fact that they have doubled in terms of percentage of GDP in the past several years suggests a healthy development. Our friends from Condor Capital expect NPL ratios51F to rise in China, which could translate into credit losses of USD 2,700 to 3,500bn for China’s banks, and this is under the assumption of no contagion (!). By comparison, the losses of the global banking system since the financial crisis have been almost moderate at USD 1,500bn

The most recent crisis does teach us, however, that the Chinese are prepared to take drastic measures if necessary. China fought the financial crisis by flooding the credit markets: 35% credit growth in one year on the basis of a classic Keynesian spending program is no small matter.

increm-China-3.png

Chinese money not only inflates a property bubble domestically but also around the globe (e.g. in Sydney and Vancouver). Further support for the global property markets is in question, given the measures China has recently launched. Due to financial problems, Chinese groups such as Anbang and HNA will have to swap the role of buyer for that of seller.

To continue reading: China is in Trouble

The Gently Rotting Debt-Ridden EU, by Alasdair Macleod

The EU is essentially Marxist in its orientation, and tolerates dissent about like Joseph Stalin used to. From Alasdair Macleod at goldmoney.com

The EU as a political construction is in a state of terminal decay. We know this for one reason and one reason alone: its core principle is the state is superior to its people. A system of government can only work over the longer term if it recognises that it is the servant of the people, not its master. It matters not what electoral system is in place, so long as this principle is adhered to.

The EU executive in Brussels does not accept electoral primacy. It shares with Marxist communism a belief in statist primacy instead. The only difference between the two creeds is Marx planned to rule the world, while Brussels is on the way to ruling Europe.

The methods of satisfying their objectives differ. Marx advocated civil war on a global scale to destroy capitalism and the bourgeoisie, while Brussels has progressively taken on powers that marginalise national parliaments. Both creeds share a belief in an all-powerful executive. The comparison with Marxism does not flatter the EU, and suggests it has a limited life and that we may be on the verge of seeing the EU beginning to disintegrate. Despite economic evolution in the rest of the world, like Marxian communists Brussels is stuck with a failing economic and political creed.

It has no mechanism for compromise or adaptation. A rebellion from Greece was put down, the British voted for Brexit, which is proving impossible to negotiate, and now Italy thinks it can partially escape from this statist version of Hotel California. The Italians are making huge mistakes. The rebel parties forming a coalition government want to stay in the EU but are looking to exit from the euro. Putting aside the impossibility of change for a moment, they have it the wrong way around. If they are to achieve anything, they should be exiting the EU and staying in the euro. Let me explain, starting with the politics, before considering the economics.

To continue reading: The Gently Rotting Debt-Ridden EU

“The ECB Is Basically Giving The Finger To Italy”: Is Draghi Risking Everything To Teach Rome A Lesson, from Tyler Durden

One of the more consequential dramas on the world stage in what happens between Italy’s new government and the ECB and EU. It’s like Greece a few years ago, but Italy is much bigger and more important within the EU. From Tyler Durden at zerohedge.com:

Perhaps the most perplexing market-moving event of the past 48 hours, was the 1-2 punch of a Tuesday Bloomberg report that next Thursday’s ECB meeting is “live” in that policy makers anticipate (at long last) holding a discussion that could conclude with a public announcement on when they intend to cease asset purchases (QE), coupled with a slew of ECB members overnight coming out with unexpectedly hawkish comments.

Of these, the ECB’s otherwise dovish Peter Praet said inflation expectations are increasingly consistent with the ECB’s aim, and added that markets are expecting an end of QE at end of 2018, this is an observation and input that is up for discussion and that “it’s  clear that next week the Governing Council will have to make this assessment, the assessment on whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases.”

Other ECB hawks such Hanson, Weidmann and Knot doubled down on the central bank’s sudden QE-ending jawboning pivot, saying that the ECB could lift rates before mid-2019 due to “moderately” rising inflation, that market expectation of end of QE by end of 2018 is plausible, and that the ECB should wind down QE as soon as possible.

The market response was instant, and it not only pushed both German and Italian yields sharply higher…

… as well those of US Treasurys, but spiked the EUR while sending the USD lower, and unleashing today’s euphoric stock surge.

Now, it is hardly rocket surgery that without ECB support, Italian bonds are toast. After all, as we have shown and predicted since last December, without the only marginal buyer of Italian debt for the past 2 years – the ECB – Italian yields would soar, leading to a prompt default by the nation which would suddenly find itself drowning under untenable interest expense.

To continue reading: “The ECB Is Basically Giving The Finger To Italy”: Is Draghi Risking Everything To Teach Rome A Lesson

Is It Time To Start Worrying About China’s Debt Default Avalanche? by Tyler Durden

The short answer is yes. From Tyler Durden at zerohedge.com:

With Bank of America reporting that US corporate leverage just hit a fresh all time high…

and with both Moody‘s and various restructuring bankers warning that the bond party is almost over, there is a distinct smell of corporate crisis in the air.

But what if the first domino to fall in the coming corporate debt crisis is not in the US, but in China?

After all, as part of China’s aggressive deleveraging campaign, there has already been a spike of corporate bankruptcies as banks shed more of their massive note holdings and de-risk their balance sheets. According to Logan Wright, Hong Kong-based director at research firm Rhodium Group LLC, there have already been least 14 corporate bond defaults in China in 2018; a separate analysis by Economic Information Daily, as of May 25, there had already been no less than 20 corporate defaults, involving more than 17 billion yuan, a shockingly high number for a country which until recently had never seen a single corporate bankruptcy, and a number which is set to increase as Chinese banks pull pull back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market.

“You have seen banks redeeming funds placed with non-bank financial institutions that have reduced the pool of funds available for corporate bond investment overall,” Wright told Bloomberg, adding that additional bond defaults are especially likely among those property developers and local-government financing vehicles which have relied on shadow banking sources of funds.

As we discussed last year, as part of Beijing’s crackdown on China’s $10 trillion shadow banking sector, strains have spread from high-yield trust products to corporate bonds as the lack of shadow funding has choked off refinancing for weaker borrowers. Separately, Banks’ lending to other financial firms, a common route for funds and securities brokers to add leverage for corporate bond investments, declined for three straight months, or a total of 1.7 trillion yuan ($265 billion), since January according to Bloomberg calculations.

To continue reading: Is It Time To Start Worrying About China’s Debt Default Avalanche?

Central Banker Observes Sudden “Evaporation” Of Dollar Funding, Warns Of Global Turmoil, by Tyler Durden

There was a dollar funding crisis during the last financial crisis, and there will probably be one during the next financial crisis, too. From Tyler Durden at zerohedge.com:

Last October, just as the Fed started shrinking its balance sheet, we published yet another article on what is arguably the biggest threat to not only risk assets, but also the global economy: “The Dollar Funding Shortage: It Never Went Away And It’s Starting To Get Worse Again.

While hardly a novel problem, we first discussed the return of the dollar funding shortage in March 2015, the fact that global stocks kept rising, and that overall funding conditions remained relatively loose keeping the global economy well-lubricated, prevented said dollar funding shortage from becoming a major concern to policymakers, despite occasional recent hiccups such as the Libor-OIS spread blow out, which both we and Citi explained w as a symptom of the creeping shortage of the world’s reserve currency.

Until now.

In an op-ed published overnight in the FT, a central banker writes that when it comes to the turmoil gripping the world’s Emerging Markets, whether it is the acute, idiosyncratic version observed in Argentina and Turkey, which according to JPM may be doomed…

… or the more gradual selloffs observed in places like Indonesia, Malaysia, Brazil, Mexico and India, don’t blame the Fed’s rate hike cycle. Instead blame the “double whammy” of the Fed’s shrinking balance sheet coupled with the dollar draining surge in debt issuance by the US Treasury.

That’s the message from the current Reserve Bank of India, Urjit Patel, who writes that “unlike previous turbulence, this episode cannot be attributed to the US Federal Reserve’s moves on interest rates, which have been rising steadily since December 2016 in a calibrated manner.” But does that mean that the Fed is not to blame for what increasingly looks like another budding EM crisis? Not at all: according to Patel, the dollar funding shortage “upheaval” stems from what he sees as the confluence of two significant events of which the Fed’s balance sheet reduction is one, while the second is the dramatic increase in US Treasury issuance to pay for Trump’s tax cuts; what is notable is that both events are drastically soaking up dollar liquidity.

To continue reading: Central Banker Observes Sudden “Evaporation” Of Dollar Funding, Warns Of Global Turmoil