Sweden’s Covid-19 experiment holds a worldwide warning

Do not jump to conclusions about lockdowns before all the data is in and analysed

Wolfgang Münchau


Sweden did not follow the same strict lockdown measures that much of Europe adopted © Jonathan Nackstrand/AFP/Getty


Only a fool would draw strong conclusions from sketchy data. The biggest fools this year were those who prematurely declared the spike in Swedish infections from April until June as evidence that the Swedish decision not to lock down their economy was wrong. I recall many armchair epidemiologists hyperventilating about Sweden’s obstinate refusal to follow the rest of the world.

Over the summer, Sweden took other steps to control the virus, including local lockdowns, and cases started to rise again in other parts of Europe. Now, Sweden’s new infection statistics look better than much of the EU. But we shouldn’t draw any conclusions yet. It was wrong two months ago to condemn the Swedish strategy based on that data, and it would be equally wrong to draw the opposite conclusion now.

It took many years for epidemiologists and biostatisticians to understand the infection rate and progression of the 2003 Sars outbreak. It will not be different this time. 

Experts are most at risk of error when they go beyond their narrow field of expertise — and particularly when they venture into the world of statistics. In some cases, they get the maths wrong. But often they fail to see subtleties.

Years ago, when I was researching the asset bubble that later gave rise to the 2008 financial crisis, I studied value-at-risk data for banks. These statistics are the way bankers measure their risk exposure on a day-to-day basis. Back then, senior bank executives treated VAR like football scores, looking for winners and losers.

I found that the tiniest shifts in a measurement parameter had massive implications on the final result. The obvious conclusion is that you cannot reduce something as complex as a bank’s risk exposure to a single number. Today’s equivalent fallacy is the idea that you can compare the infection rate of one country with that of another and draw policy conclusions in real time.

It is a more profitable use of time to look behind the data. In Sweden, it is now clear that a major reason for the spike in infection rates in the early stages of the crisis was the failure to protect care homes. Protecting the elderly is where Germany, for example, did really well.

Chart showing that the profile of Sweden’s pandemic differs radically from those of its neighbours


The infection rate in Sweden also showed strong geographical variation. Most of the Swedish cases were concentrated in two regions, including Stockholm. Meanwhile, the southern Swedish city Malmö is close to the Danish capital, Copenhagen, separated by the narrow Oresund Strait. Malmö’s rates look good by comparison with Copenhagen, even though the two operated under different lockdown regimes.

I don’t know why regional gaps were so strong, and my interlocutors in Sweden do not either.

If you want to make grand pronouncements about Swedish lockdown policies and infection rates, you should probably make an effort to understand this first.

Policy in times of Covid-19 amounts to decision-making under extreme uncertainty. The latest Swedish numbers do not prove or disprove anything. But before policymakers order something as extreme as another lockdown, they should have had incontrovertible statistical evidence, not just a bunch of numbers that feed their confirmation bias. As long as statistical doubt persists, we certainly do not want to do this twice.
A lockdown is an extreme policy measure and its consequences will not become apparent for some time. I have no doubt that it will end up increasing inequality. Unemployment and corporate insolvencies will rise once the support measures are withdrawn. Although stock market indices have fallen and recovered, these are just averages.

Behind them stand huge shifts of capital from old to new sectors. If people continue to work from home, this will boost residential and rural areas at the expense of city centres and shift resources from commercial to residential property.

I consider the lockdown reflex as currently the biggest threat to western capitalist democracies. The data at this point do not tell us what we need to know, but they inject useful uncertainty into the consensus that a lockdown is the only way to respond to a global pandemic.

To put it another way, next time we had better make sure that the data justify such actions beyond reasonable doubt and put policies in place to deal with the consequences. We did not do that the first time.

It is my hope that Sweden’s experiment will eventually provide us with enough data to make a valid cross-country comparison. Until then, we should keep watching closely.

Buttonwood

What can be learnt from Chinese futures trading?

If you love eggs, this is the market for you




“So long as you think about what others are thinking about, and stick to your trading strategy, you can always be successful.” This encouraging, if dubious, sliver of market wisdom was proffered on September 3rd by Zhou Chengji, a Chinese investment adviser, during a two-hour online tutorial.

China is hardly alone in having a raucous community of would-be market gurus and day traders. But Mr Zhou’s focus was on an asset that makes China look rather unusual: egg futures, the only ones of their kind in the world nowadays.

For punters with strong views about whether hens will be productive this autumn and whether people will crave egg-fried noodles and the like, China is the place to be. All they need do is contact local brokerages and put down a 4,000 yuan ($585) deposit.

Going long eggs (ie, betting prices will rise) was, briefly, one of the trades of the summer, with futures soaring 65% from late May to late July. Since then the market has cracked, prices tumbling more than 20%.

Turnover is extraordinarily high. Investors buy and sell roughly 3m tonnes in egg futures every day, about a tenth of the total that China actually consumes in a full year. The rights to a single egg may, in effect, pass through a few dozen hands before it lands in boiling water.

All this makes it tempting to dismiss Chinese futures as a hotbed of speculative excess. Retail traders do play a much bigger role on the country’s commodity exchanges—in Shanghai, Dalian and Zhengzhou—than in Chicago or London, which have long been the world leaders in, respectively, agriculture and metals.

Officials estimated that in 2016 about 85% of open positions on Chinese exchanges were held by individuals, compared with less than 15% in America, where institutions dominate trading.

Nevertheless, the very immaturity of the Chinese market also reveals some enduring truths about futures that are obscured by the smoother functioning of century-old exchanges.

Start with the most basic, the need to hedge. Futures are a tool for producers to guard against prices plunging and for consumers to guard against them soaring. In the West this can look quite straightforward because market power is so concentrated.

The top four steel companies accounted for about 80% of production in America in 2017 versus just 20% or so in China. Fragmented spot markets make it harder for futures to serve as a benchmark.

Yet it is dangerous to operate without a pricing backstop. So China has been rushing to expand its universe of futures. In the past two years alone it has launched more than ten new contracts, from crude oil and stainless steel to apples and red dates. It will take time to establish their credibility.

If China still has much to learn about futures, there is something to be said for its trading intensity. Of the 20 most active contracts in the world last year, 14 were on Chinese exchanges, according to the Futures Industry Association, a global trade body. Some of that is because of double counting.

It can also reflect the swirling pool of money trapped in China by capital controls. Nevertheless, there are limits to the potential irrationality in futures trading because ultimately the underlying commodities are due for physical delivery. Futures contracts thus converge with spot prices as they near expiry. Two other factors help explain China’s trading volumen.

Lot sizes are generally small (for example, five tonnes for copper futures in Shanghai, compared with 25 tonnes in London). And ordinary investors have easy access through their brokerage accounts.

Institutional traders in China love the liquidity that results from this. It eliminates the risk of being unable to enter or exit a position because of a lack of trading.

There is another reason why institutional traders like China. They can profit with relative ease.

Commodity futures illustrate how cloistering a financial system from the rest of the world leads to distortions. Darin Friedrichs of StoneX, a commodities brokerage, says that easily disprovable rumours can cause price swings; unfounded reports of a Brazilian port closure recently drove up soyabean futures.

Traders relish their “import-arb” windows, when prices of Chinese futures exceed those of their global counterparts, making it worthwhile to arbitrage by buying abroad and selling onshore.

Slowly, regulators are dismantling the walls, allowing more international firms to trade in China. Futures with international counterparts such as oil and corn are starting to align more with global prices. For the adventurous, though, there are always eggs. 

Stop Expecting Life to Go Back to Normal Next Year

Americans will need to take pandemic precautions well into 2021 — yes, even after a vaccine arrives.

By Aaron E. Carroll
Contributing Opinion Writer


Mike Segar/Reuters


Anthony Fauci warned us last week that Covid-19 is likely to be hanging over our lives well into 2021. He’s right, of course. We need to accept this reality and take steps to meet it rather than deny his message.

Many Americans are resistant to this possibility. They’re hoping to restart postponed sports seasons, attend schools more easily, enjoy rescheduled vacations and participate in delayed parties and gatherings.

It is completely understandable that many are tiring of restrictions due to Covid-19. Unfortunately, their resolve is weakening right when we need it to harden. This could cost us dearly.

The unrealistic optimism stems in part from the fact that people have started pinning their hopes on a medical breakthrough. There have been promising developments. Remdesivir holds potential for those who are hospitalized. Convalescent plasma might do the same. Antibody treatments might improve outcomes for some or prevent infections in those at highest risk.

But most cases don’t benefit from these treatments. Further, none of these therapies can prevent infections or hospitalizations on a broad scale. The concern over an unflattened curve isn’t just about death, although that’s certainly a concern. 

It’s also about an overwhelmed health care system where so many beds are filled that we can’t get care for the many other conditions people experience. Untreated or undertreated heart attacks, strokes, cancer and more will also cause a spike in morbidity and mortality.

Americans are also overestimating what a vaccine might do. Many are focusing on whether approval is being rushed as a campaign ploy, but that’s almost beside the point. It seems likely that a vaccine will be approved this fall and that it will be “effective.” But it’s very unlikely that this vaccine will be a game changer.

All immunizations are not the same. Some, like the measles, mumps and rubella vaccine, provide strong, nearly lifelong benefits after a few doses. Others, like the influenza vaccine, produce limited benefits that last for a season. 

We don’t know yet where a coronavirus vaccine will fall, although something along the lines of a flu shot seems more probable. We don’t know how long whatever immunity it provides will last. We don’t know whether there will be populations that derive more or less benefit.

Because of all these unknowns, we will need to continue to be exceedingly careful even as we immunize. Until we see convincing evidence that a vaccine has a large population-level effect, we will still need to mask and distance and restrain ourselves. Too many of us won’t. Too many will believe that the vaccine has saved them, and they will throw themselves back into more normal activities.

That could lead to big outbreaks, just as winter hits at its hardest.

Even this assumes, of course, that we can distribute the vaccine widely and quickly (which is doubtful), that most people will get it (many won’t) and that we will succeed in prioritizing distribution so that those most at risk will get it first (flying in the face of decades of disparities in the way health care is distributed).

The approval of a vaccine may be the beginning of a real coronavirus response; it certainly won’t be the end.

It is much more likely that life in 2021, especially in the first half of the year, will need to look much like life does now. Those who think that we have just a few more months of pain to endure will need to adjust their expectations. Those thinking that school this fall will be a one-off, that we will be back to normal next year, let alone next semester, may be in for a rude awakening.

As Dr. Fauci told MSNBC’s Andrea Mitchell, “If you’re talking about getting back to a degree of normality which resembles where we were prior to Covid, it’s going to be well into 2021, maybe even towards the end of 2021.”

We wasted our chance to get a better summer in the spring. We wasted our chance to plan for the fall in the summer. We’re wasting time again now. Next year isn’t that far away.

We still need to figure out how to live in this new world, now, and that means embracing, finally, all the strategies for fighting the virus that many of us have resisted.

It’s not too late to invest in testing both symptomatic and asymptomatic people. Back in the spring, I estimated that we might need a million tests a week to manage the virus. That estimate assumed that America would drive the prevalence rate of the disease into the ground, much as other countries did. We failed in that respect. We left shelter-in-place too early, letting cases grow once again.

Because of this, we can no longer rely on just symptomatic testing and contact tracing. We need much more than a million tests a week. The only way to get there is through ubiquitous, cheap, fast tests that can be distributed widely to identify those at risk who don’t even know it.

Identifying cases is only the first step. Those who are infected need to isolate, and their close contacts need to quarantine. Too many Americans cannot do so adequately because they need to work, or their housing is inadequate, or they need food and supplies delivered to them. We have failed to address these gaps. 

Those who need the most assistance are often those at highest risk for getting and spreading the coronavirus and for having the worst outcomes, and our government has not provided for them.

We need to normalize mask-wearing. It’s a tragedy that this has become politicized and that this simple, safe and effective measure is in dispute. It’s about protecting others even more than ourselves. That such an action is now viewed as weakness is horrific.

Finally, we need a functioning scientific infrastructure to provide detailed and specific plans on how schools, businesses and institutions can open and operate safely. We also need a functioning Congress to fund whatever it takes to put those plans into practice. That may cost a lot of money; it’s likely to be still less than what continuing to flail about will cost.

None of these ideas is a complete solution, but just because they’re individually insufficient alone doesn’t mean they aren’t necessary.

Colder weather will force us indoors, closer together, removing the benefits of being outside. Influenza is coming. Those drawing comfort from the fact that many countries in the Southern Hemisphere had mild flu seasons need to recognize that those countries were also engaging in the behaviors that controlled the spread of the coronavirus. It’s a mistake to assume that we will reap the same rewards without committing to the same sacrifices.

Too many are relaxing because they think that salvation is just around the corner. That’s possible, but certainly not probable. It would be better to prepare for a difficult 2021 and be surprised by its being easier than to assume things will be easier and find life is still hard.

This is a marathon, not a sprint. Both, though, require running.


Aaron E. Carroll is a contributing opinion writer for The New York Times. He is a professor of pediatrics at Indiana University School of Medicine and the Regenstrief Institute who blogs on health research and policy at The Incidental Economist and makes videos at Healthcare Triage. He is the author of “The Bad Food Bible: How and Why to Eat Sinfully.” @aaronecarroll

Citigroup Gives Wall Street a Sobering Message

The bank’s need to spend to upgrade risk systems make it hard to bet on a turnaround

By Telis Demos


Citigroup was recently more downbeat about economic trends than some peers. / PHOTO: PETER FOLEY/BLOOMBERG NEWS


Incoming Chief Executive Jane Fraser’s historic appointment last week shed a light on Citigroup’s C -3.94% upside potential. But investors hoping that might spark a rebound were greeted instead by news Monday that “the next phase” of the bank’s investment will be “strengthening” and “transforming” its risk and control environment—and a subsequent 8% correction in the shares over Monday and early Tuesday.

A presentation by the bank detailed $1 billion in investments in 2020. That is roughly 2% of analysts’ forecast for 2020 operating expenses. However, the bank also noted that prior tech enhancements were generating productivity savings to fund more investment spend. This “should create capacity for these investments while holding expenses more or less flat,” Chief Financial Officer Mark Mason said at the Barclays Global Financial Services Conference. 



This week’s stock move is perhaps an overreaction to that level of overall spending. But there is context to consider: The investment comes as Citigroup is in the midst of dealing with a breakdown that led to an erroneous $900 million bond payment. The Wall Street Journal also reported that federal regulators are preparing to reprimand Citigroup for failing to improve risk systems.

Trading at one of the steepest discounts to book value among its peers, Citigroup has huge potential for a sharp turnaround. Yet the timing of any rebound is increasingly hard to figure.

For one, the pandemic’s ongoing effect on banks’ overall expense plans is still murky. Banks have had to spend to accommodate employees and customers and to make emergency small-business loans.

Wells Fargo, in the midst of an even wider cost overhaul, said on Monday that it paused layoffs at the start of the pandemic. Yet at the same time, Fifth Third Bancorp on Monday noted the trend toward digital banking was accelerating its tech-investment returns and its ability to rationalize its branch network.

Also notably, Citigroup was more downbeat about recent economic trends than some peers. A big question is what that means for credit, particularly cards. Mr. Mason said on Monday that the bank’s latest forecast “contemplates a somewhat slower pace of economic recovery, particularly in the U.S.,” noting slower rehiring and less pickup in travel spend than the bank initially expected.

Citigroup anticipates making further reserve builds in the third quarter, though “meaningfully lower” than so far this year. Mr. Mason said that “we also see strong payment trends” for card borrowers, and that the bank wasn’t yet seeing signs of outsize losses.

Meanwhile, Fifth Third said that “indicators are moving in a more favorable direction” and says based on that, “a further reserve build appears to be unlikely.” Wells Fargo was a bit more ambivalent, saying “it’s probably a little too soon to say that things are better than previously forecast,” but also that “they’re probably not worse than previously forecast.”

Beaten up bank stocks like Citigroup remain tempting turnaround bets. But with the rest of the market hitting new highs, the cost of waiting for banking’s turn is steep.

Extraordinary Q2 2020 Z.1 Flow of Funds 

Doug Nolan


The numbers are just monstrous.

The Fed’s own data illuminate the historic Monetary Disorder that today runs wild. 

The Federal Reserve’s balance sheet. Treasuries. Debt and Equities Securities. The banking system. The Household balance sheet. Rest of World holdings.

In short, finance has completely run amuck, with the data corroborating the super cycle “end game” thesis.

Non-Financial Debt (NFD) increased $3.522 TN during Q2, more than doubling Q1’s record $1.449 TN gain. This pushed first-half NFD growth to an incredible $4.971 TN. 

For perspective, NFD expanded $2.439 TN in 2019 and averaged $1.826 TN annually over the past decade. Q2 growth actually surpassed 2004’s annual record $2.912 TN NFD expansion.

At $59.304 TN, Non-Financial Debt surged to a record 304% of GDP. NFD-to-GDP ended 1999 at 184%, 2007 at 227%, and 2019 at 250%.

“Off the charts,” as they say.

Unprecedented deficit spending saw Treasury Securities jump $2.852 TN during the quarter to a record $22.371 TN. Treasuries were up $3.352 TN during the first-half.

Over the past year, Treasuries jumped $4.556 TN, or 25.6%. This dwarfs the previous annual record (2010’s $1.645 TN). After ending 2007 at $6.051 TN, outstanding Treasury Securities ballooned $16.320 TN, or 270%. Treasuries ended Q2 at 115% of GDP. This is up from 44% to end the nineties; 41% to conclude 2007; and 69% to close out 2010. 

Agency Securities declined $25 billion during Q2 to $9.746 TN. Agency Securities were up $481 billion during the past year and $786 billion over two years. Having increased an incredible $5.037 TN over the past four quarters, combined Treasuries and GSE Securities ended Q2 at $32.117 TN, or 165% of GDP.

Total Debt Securities jumped $3.364 TN during Q2 to a record $51.690 TN. Over the past year, Debt Securities jumped $5.959 TN (more than double 2007’s record $2.669 TN increase). As a percentage of GDP, Debt Securities surged to 265%. For comparison, Debt Securities ended 2007 at 200% of GDP; the nineties at 157%; the eighties at 126%; and the seventies at 74%.

Total Equities surged $9.121 TN during the quarter to $51.956 TN, with a one-year increase of $884 billion (1.7%). Equities as a percentage of GDP rose to a record 267%. This compares to cycle peaks 181% at the end of Q3 2007 and 202% to conclude Q1 2000. 

Total (Debt and Equities) Securities increased an unprecedented $12.485 TN during Q2 to a record $103.646 TN. This more than doubled Q1 2019’s record $5.970 TN gain. 

For comparison, Q4 2009’s $3.449 TN gain was the largest increase prior to 2019. Total Securities ended Q2 at a record 532% of GDP, compared to cycle peaks 379% during Q3 2007; and 359% to end Q1 2000. Total Securities ended the eighties at 194% and the seventies at 117%.

The Household balance sheet always offers fruitful Bubble Analysis. Unprecedented growth in the Fed’s balance sheet, debt and securities translated into record Household perceived wealth. Household Assets jumped $7.637 TN during Q2 to a record $135.435 TN. And with Liabilities only increasing about $29 million, Household Net Worth inflated a quarterly record $7.607 TN - to an all-time high $118.955 TN. Net Worth was up $5.0 TN over the past year. Net Worth ended the quarter at a record 610% of GDP. This compares to previous cycle peaks 492% (Q1 2007) and 446% (Q1 2000). 

Household holdings of Financial Assets increased $7.0 TN during the quarter (up $3.758 TN y-o-y) to $94.548 TN (record 485% of GDP). For comparison, Financial Assets ended 2007 at $54.557 TN (372% of GDP) and 1999 at $34.656 TN (350% of GDP). Real Estate holdings ended Q2 at a record $34.406 TN, with a y-o-y gain of $1.493 TN. At 177% of GDP, Real Estate holdings as a percentage of GDP reached the highest level since Q4 2007.

Banking system (“Private Depository Institutions”) Assets jumped $859 billion (almost 16% annualized) during the quarter to a record $22.780 TN – a gain second only to Q1’s $1.869 TN jump. Loans increased (a measly) $24 billion, or 0.8% annualized (with mortgages up $36bn). The Asset “Reserves at the Fed” jumped another $313 billion to a record $2.787 TN. “Fed Funds and Repos” Assets rose $204 billion to a record $863 billion. Debt Securities holdings surged a record $359 billion to an all-time high $5.241 TN. Treasuries gained $207 billion, surpassing $1 TN ($1.102TN) for the first time, and Agency/GSE MBS rose $110 billion to a record $2.934 TN. 

Over the past year, Bank Assets surged $3.268 TN, or 16.7% (more than doubling 2008’s annual record $1.249 TN).

Reserves at the Fed jumped $1.366 TN, while Loans expanded $862 billion and “repos” increased $507 billion. Bank Debt Securities holdings surged $743 billion, or 16.5%, with Treasuries up $331 billion, or 43%, and Agency Securities gaining $353 billion, or 13.7%. Corporate, muni and open-market paper gained moderately during the quarter and y-o-y. 

On the Bank Liability side, Total (Checking and Time & Savings) Deposits surged a record $1.376 TN during Q2 to an all-time high $18.037 TN. Total Deposits rose $2.515 TN during the first half, or 32% annualized – and were up $3.056 TN, or 20.4%, year-on-year. Over the past year, Total Deposits ballooned from 70% to 93% of GDP. Banking system Total Deposits (Liabilities) peaked at 70% of GDP in 1986; ended the eighties at 66%; and the nineties at 48% - before rising back to 65% by 2009.

Rest of World (ROW) holdings of U.S. Financial Assets increased $3.364 TN (more than reversing Q1’s $2.665 TN decline – having been significantly impacted by the recovery in equities prices) to a record $35.465 TN. Debt Securities holdings gained a record $464 billion (after declining only $34bn during Q1) to a record $12.501 TN. Treasury holdings rose $82 billion to a record $6.892 TN, while Agency Securities declined $60 billion to $1.200 TN. 

In an intriguing development, ROW boosted holdings of U.S. Corporate Bonds by an unprecedented $427 billion during Q2 to a record $4.177 TN. How much of this gain was associated with buying from foreign domiciled hedge funds, offshore financial entities and structured finance, and other elements of global leveraged speculation – following the Fed’s move to backstop U.S. corporate Credit and ETFs? 

Over the past six quarters, ROW holdings of U.S. Debt Securities jumped $1.315 TN. Treasuries gained $222 billion, and Agency Securities increased $112 billion. Meanwhile, holdings of U.S. Corporate Bonds surged $572 billion. Equities holdings surged $1.608 TN over the past year. 

Having doubled over the past decade, Total ROW holdings of U.S. Financial Assets jumped to a record 182% of GDP to end Q2. This compares to 108% to end 2007; 74% at the end of the nineties; 31% to conclude the eighties; and 16% to round out the seventies.

Federal Reserve Assets jumped $1.185 TN, or 19.2%, during the quarter to a record $7.364 TN. This pushed first-half growth to $2.985 TN, or 68.2%. This compares to the $729 billion increase during Q4 2008 – and 2008’s $1.320 TN second-half expansion. The Fed’s balance sheet ballooned $3.355 TN over the past year, or 83.7%. 

Fed Assets ended 2008 at $2.271 TN, surging from year-end 2007’s $981 billion. Fed Assets ended 1999 at $697 billion (after a $107bn Q4 gain); the eighties at $315 billion; the seventies at $167 billion; and the sixties at $81 billion. Fed Assets averaged 6.4% of GDP during the three-decade period of the seventies through the nineties. This ratio jumped to 15% in 2008, rose to as high as 28% during Q1 2015, and ended Q2 at 38%.

Unprecedented stimulus and market intervention from the Federal Reserve and global central bank community unleashed epic market speculation (in the face of rapidly deteriorating fundamental prospects). There are indications this speculative cycle has commenced the process of succumbing to reality.

“Risk off” is gathering momentum across global markets.

While Friday’s rally cut U.S. equities losses for the week, painful losses were suffered elsewhere. Major equities indices were down 5.0% in France, 4.9% in Germany, 4.4% in Spain and 4.2% in Italy. Hong Kong’s Hang Seng Index sank 5.0%, with China’s CSE 300 index down 3.5%. Real estate jitters rekindle China housing Bubble anxiety.

September 25 – Bloomberg: “China Evergrande Group is facing a crisis of confidence among creditors who’ve lent the world’s most indebted developer more than $120 billion. Long-simmering doubts about the property giant’s financial health exploded to the fore on Thursday, following reports it had sent a letter to Chinese officials warning of a potential cash crunch that could pose systemic risks. The news sparked a bondholder exodus that continued into Friday, sending the price of Evergrande’s yuan note due 2023 down as much as 28% to a record low. Losses in the company’s dollar bonds spread to high-yield debt across Asia.”

September 25 – Bloomberg (Rebecca Choong Wilkins and Denise Wee): “Average spreads on Asian dollar bonds widened 3-5bps by noon in Hong Kong, reversing earlier tightening, according to a trader, amid jitters from a looming cash crunch at Evergrande. This week is set for the biggest widening since March, according to a Bloomberg Barclays index.”

Emerging Markets were under significant pressure.

South Korea’s Kospi Index sank 5.5%, with India’s Sensex down 3.8%. Taiwan’s TWSE index fell 5.0%. In EM currencies, the Mexican peso lost 5.4%, the South African rand 4.7%, the Colombian peso 3.9%, the Polish zloty 3.6%, the Russian ruble 3.2%, the Brazilian real 3.1%, the Chilean peso 3.0%, and the Hungarian forint 2.6%. Ten-year (dollar) yields surged 25 bps in Brazil, 25 bps in Ukraine, 12 bps in Indonesia, and eight bps in Philippines. 

Global “risk off” squeezed the U.S. dollar bears, as the dollar index rallied 1.8% to a two-month-high.

The dollar rally hit commodities markets, with gold dropping 4.6%, Silver 14.9%, Copper 4.7%, and Platinum 8.8%. The industrial metals were all under pressure.

Global bank stocks were under heavy selling pressure.

European banks were hit 7.8%, closing Friday near March lows. Hong Kong’s China H-Financials Index fell 5.8% to the lows since March. U.S. banks sank 6.8%, trading near four-month lows. Bank debt Credit default swap (CDS) prices jumped to near three-month highs. 

“Risk off” is making some headway in U.S. Credit.

At $4.86 billion, high-yield bond funds suffered their largest outflows since March. High-yield CDS prices jumped about 50 bps this week to a one-month high 400 bps. A natural gas company postponed its junk bond sale. Investment-grade CDS rose a notable 13 bps this week to a four-month high 74 bps. 

The unfolding global de-risking/deleveraging episode only heightens U.S. market fragility.

With U.S. elections now about 40 days away, the backdrop is set for extreme instability.

The degree of speculative excess experienced over recent months would typically ensure vulnerability to a disorderly downside reversal and market dislocation. These times are, of course, anything but typical. It’s an incredibly worrying backdrop, to say the least.

The Q2 report presented by far the most troubling data I’ve encountered in my 20 years of chronicling quarterly Z.1 data.