Posts from June 2013

Subprime securities – still being downgraded

If you woke up on June 10, 2013 and thought the subprime securities crisis was behind us, well, you were wrong.

Some two weeks ago Moody’s announced it was downgrading 28 tranches of various bonds (as well as upgrading two tranches, and confirming others) in an action that covered roughly $1.2bn worth of mortgage-backed securities (MBS). Read more



– Three logicians walk into a bar. Read more

Advantage Abe

The first bits of post-Abenomics data are finally trickling in. And so far, it has to be said, it’s looking good for Shinzo Abe.

Lombard Street Research’s Michael Taylor takes us through the initial findings (our emphasis):

A recovery in industrial production and consumer spending points to above-trend growth in Q2. Consumer price inflation may soon make a brief appearance above zero on the back of higher energy and import prices. But deflation isn’t beaten yet. The splurge of Japanese data overnight confirms the overall positive trend in the economy. Notably, industrial production increased by 2% in the month of May, the fourth consecutive monthly increase. Output in May was boosted by electronic components and machinery in particular. Both industrial production and exports are now on an upward trend (see chart below). To a large extent this recovery is due to the weaker yen. Although the yen is above its recent lows against the US dollar, it is still 19% lower than last November.

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China, the devaluation possibility

A couple of points from Deutsche Bank’s GEM Equity strategy team on Friday to file under the “it’s China, not the Fed, that’s driving everything at the moment” meme:

…‘we believe that the improvement in the Chinese economic and corporate data, which has become evident since the end of August, is not sustainable’ and that ‘the Chinese growth story is starting to unravel’. As regular readers will know, our negative structural view derives from an examination of the relationship between the corporate sector and the state, especially at a local level, which we have documented in two longer research reports (China’s corporate sector; a messy transition’, 15 May 2012, and ‘China; no quick fix for the Beijing model’, 30 August 2012). Read more

Markets Live: Friday, 28th June, 2013

Live markets commentary from 

The (early) Lunch Wrap

China’s central bank assures financial markets || Flat Japanese consumer prices aid Kuroda || Investors pull $8.6bn from US bond funds || European leaders agreed on new steps to fight youth unemployment and promote lending to credit-starved small business on Thursday || Chinese wind-turbine maker indicted in US || Bank fees rise 9% despite dealmaking dip || Vatican cleric arrested in bank probe || China poised to name new head for $500bn wealth fund CIC || CVC attracts pledges of €14bn in six months || Markets wrap || FTAV’s latest Read more

How low can gold go?

Gold descended through the key psychological level of $1,200 on Thursday:

This has now led a whole bunch of people getting excited about an upcoming bottom in gold, as well its prospective speedy revival.  Read more

Further reading

Elsewhere on Friday,

– “Just another piece of irrelevant Austrian metaphysics.”

– Sub-Saharan bonds as the new subprime?

– Record outflow for ETFs in June. Read more

The Closer


– Michael Pettis on the China liquidity crunchRead more

Market structure and the rate rise

Michael Cloherty of RBC Capital Markets makes an interesting point in a short note today about the role played by market structure in pushing interest rates higher than the Fed expected when Bernanke telegraphed the eventual tapering strategy.

Yes, Cloherty writes, markets might have overreacted — but they are more jittery than in normal times because financial markets have increased their sensitivity to reabsorbing credit risk: Read more

All the shale boom are belong to US

This is well beyond the borders of our expertise, but John Kemp has a column critiquing the new report from the Harvard Belfer Center on the prospects for the shale boom to go international, and we think both worth passing along.

First is a summary from the long and detailed report by Leonardo Maugeri, who argues that a combination of technological and institutional constraints will prevent other countries from reaping similar benefits from shale as those enjoyed by the US: Read more

Wall St boom, Main St bust

Merrill Lynch’s Michael Hartnett sure knows how to grab the readers’ attention…

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The eurozone’s second sovereign restructuring, confirmed

You can tell it’s the real deal on PSI because of the missing Troika member...

Statement by the European Commission and the IMF on Cyprus Read more

Dudley, Powell: hey markets, relax

Several FOMC members have had their say since last week’s meeting, with Bullard explaining his dovish dissent and Kocherlakota encouraging the use of 7 per cent unemployment as a threshold for scaling back asset purchases rather than as a stopping point.

Fisher, on the other hand, was feeling good and using fun analogies. (Kocherlakota and Fisher are non-voting members.) Read more

Oh oh, those QE gilts are bleeding

Apparently the recent sovereign bond yield spike has almost completely wiped out the Bank of England’s QE bond portfolio’s unrealised profit. As Bank of America Merrill Lynch’s John Wraith said:

…the mark-to-market gains that were previously being registered by the Bank of England’s portfolio of Gilts acquired through the UK’s QE Asset Purchases since March 2009. As recently as 2nd May, this portfolio was showing an unrealised profit of £26.8bn; this had collapsed by 24th June to just £1.2bn.

Get your pitchforks out. Read more

Markets Live: Thursday, 27th June, 2013

Live markets commentary from 

The (early) Lunch Wrap

Bond rout threatens to hit bank funding || US rate volatility sparks surge in junk-rated debt yields || US states need $980bn to fill pension gap, says Moody’s || Saudi prince ‘refused’ to pay fee on Gaddafi jet sale || BP accused of intimidating spill claimants || German unemployment unexpectedly drops in recovery sign || Vodafone launches bid for Kabel Deutschland || Business feels pinch of swift rate rise || Markets wrap || FTAV’s latest Read more

The US yield move and the China premium

What’s really responsible for higher US yields? Falling demand from domestic and western investors? Or Chinese and Japanese official flows?

Earlier in June, TIC data sent us a very important message. Abenomics was somehow prompting the repatriation and redistribution of money held in long-term USTs by Japanese investors, as this chart from Nomura shows:

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The negative pledge saga?

There’s one last crossover to consider between Grenada and Argentina in the current pari passu saga.

Here we might be getting slightly further into the future of sovereign debt litigation. But it’s equally important for the IMF and other keepers of the system to keep an eye on, we think.

It just happens to involve a different piece of bond contract… Read more

Pari passu: judgment day

Not a reference to the Second Circuit’s imminent ruling in the Argentina case, nor the Argentine government’s late-night petitioning to the Supreme Court over pari passu. Although it could be.

We’ve already seen how NML Capital v Argentina has influenced Grenada’s legal battle with the Taiwanese government-owned Export-Import Bank of the Republic of China.

Now for something that might particularly bear on the future. Read more

Days of future pari passu

Not long now until the US Court of Appeals for the Second Circuit finally makes its ruling on trickier parts of the Argentina pari passu case. No later than early July, probably. Can’t wait.

Argentina couldn’t wait. The government filed its long-expected cert petition to the Supreme Court this week, mostly in order to complain about the federal-law implications of the Second Circuit’s original ruling in October 2012. There’s lots of outrage about ‘sovereign property’ and the US Foreign Sovereign Immunities Act.

But one Taiwanese development bank and its Caribbean island borrower, fighting each other over $32m of defaulted loans in The Export-Import Bank of the Republic of China v Grenada, really couldn’t wait… Read more

Further reading

Elsewhere on Thursday,

– Non-inflation denial.

– Copyright law needs to be re-thought.

– How to account for global value chains. Read more

The 6am Cut London

FT markets round-up:“Efforts by global central bankers to reassure markets that there would be no rush away from accommodative policies helped fuel fresh gains for equities and a rally in US government bonds, although gold sank to its lowest level in nearly three years. Indeed, the gold price tumbled $53, or 4.3 per cent, to $1,224 an ounce, while silver fell 5.5 per cent to $18.56 amid further fretting over Fed chairman Ben Bernanke’s comments last week about “tapering” the central bank’s quantitative easing programme. The dollar, meanwhile, maintained its firmer tone, rising 0.4 per cent against a basket of currencies, with the euro below the $1.30 mark for most of the day after Mario Draghi, ECB president, said the eurozone economic outlook still warranted accommodative settings. His remarks echoed similar comments from David Miles and Sir Mervyn King of the Bank of England.” (Financial Times)

Sluggish growth data give Fed cause for caution on tapering: “The US economy grew at an annualised pace of 1.8 per cent in the first quarter, significantly slower than previously thought, which could give the Federal Reserve some reason for pause as it weighs slowing its support for the recovery. The surprisingly sharp downward revision – from an earlier projection of 2.4 per cent first-quarter gross domestic product growth – offers evidence that US growth remained quite sluggish even as the Federal Reserve began contemplating tapering the tempo of $85bn in monthly bond buys.” (Financial TimesRead more

The Closer


Noah Smith posts some links related to our Abenomics podcast with him. Read more

Rates and the US housing market

Even before last week’s FOMC meeting and the subsequent spike in long-term rates, the US refinancing wave was already receding, the result of both the higher rates and the limited pool of eligible borrowers.

Refinancing showed further unsurprising signs of decline in Wednesday’s mortgage application numbers, even as the number of applications for home purchases continued its steady uptick. (Though be careful with the dual Y axes above, and see Calculated Risk for more). Read more

Aggregate growth measures still less than the sum of their parts

Wednesday’s downward revision to first quarter US gross domestic product was accompanied by an unchanged gross domestic income reading for both the fourth quarter of last year and the first quarter.

The two measures are now showing a fairly big divergence for that half-year. GDI climbed by 5.5 per cent in the fourth quarter of last year and 2.5 per cent in the first quarter, while GDP was higher by 0.4 per cent and a newly revised 1.8 per cent in those two quarters respectively. (All numbers annualised.) Read more

Gold, the China connection

In the last few years China has become the single largest producer of gold.

It is also, by some measures, the second largest global consumer of the precious metal outright.

Given this, some goldbugs are befuddled as to why, despite all this Chinese buying and scenes like this…

….gold prices are still falling like this: Read more

Alphachat podcast: Noah Smith on the Japanese economy

We were joined on this podcast by Noah Smith, who writes at Noahpinion and teaches finance at Stony Brook University.

Noah lived in Japan for three years studying economics and still returns often to conduct research. He is very skilled at explaining multilayered subject matter in clear terms, and the discussion ranged across a variety of topics relevant to the Japanese economy, from the potential costs of structural reform to demographics to the surprising commitment by the BOJ.

Thanks again to Noah for his time: Read more

Markets Live: Wednesday, 26th June, 2013

Live markets commentary from 

The (early) Lunch Wrap

Italy risks potential losses of billions of euros on derivatives contracts || Chinese interbank lending rates dropped after the PBoC said it would provide liquidity where needed || Basel presses ahead with plans to limit bank borrowing || Kevin Rudd takes on Julia Gillard for Australia leadership || BP escalates efforts to block ‘inflated’ payments || Bond yields could undermine recovery in global banks’ balance sheets || King criticises ‘meddling’ banks in final public BoE appearance || Dublin worries that Anglo Irish tapes will harm its attempts to win debt relief from the EU || US oil and natural gas operations are increasingly vulnerable to cyber attacks || Markets wrap Read more