Putting China’s cuts in some context

As you’ve surely just seen, China has cut its reserve requirement ratio, by 50bps with effect from Sept 6, and its 1yr lending rate by 25bps to 4.6 per cent with immediate effect.

Markets will like this. And the timing suggests that the ongoing stock market puke did have something to do with the decision.

But there’s also certainly a broader rationale to these moves. Read more

Markets Live: Tuesday, 25th August, 2015

Live markets commentary from FT.com 

Myths and facts about “risk parity”

Companies often denigrate products sold by competitors, so it isn’t surprising that Alliance Bernstein is warning that the growth of so-called “risk parity” strategies is akin to the growth of the dreaded “portfolio insurance” in the 1980s — and could similarly make “the system more fragile”.

We’re sceptical. Ben Inker of GMO wrote up a more thoughtful critique a few years ago, although it also contains some important errors. More broadly, there is a common misconception that these investment products are uniquely vulnerable to rising interest rates, relative to more traditional portfolios. Our colleagues in the Markets section have a good overview.

While we don’t want to defend every investment product that markets itself as “risk parity”, since there are plenty of differences between them, we think we can usefully clear up some misconceptions and explain why these strategies make sense for certain kinds of investors. Read more

Offshore repo, capital charges and petrodollars

Repo expert Scott Skyrm at Wedbush warned last week that August 24 could be a date to watch because it’s a GSIB surcharge calculation day, along with July 31 and September 30.

As he stressed:

Taking that one step further, traders are even thinking about September 30 quarter‐end Repo rates. And here’s another date to watch ‐ August 24th, which is the second G‐SIB capital surcharge calculation date (in addition to July 31 and September 30) We should expect some type of funding pressure and/or Repo market distortion on Monday. If there is no obvious change in GC rates, it could be that cash is permanently gone from the market through early October, or maybe even forever. With the GSE cash in the market this week and slight soft funding, it’s a good time to finance long positions through month‐end and into September.

 Read more

China, so…. what now?

China, walloped again — Shanghai is off another 7.6 per cent and below 3000 points — even if the rest of Asia the world doesn’t seem to care quite as much as it did on Monday.

Have a compulsory longer term, context heavy, chart which shows that the index is still well up over 1yr but down 8 per cent YTD and 42 per cent since June:

The obvious question now is, what’s next? For the stock market and for the economy. The actions taken with regard to the former will contain a non-zero amount of information about the latter — which, to be extra obvious, is the important bit. After all, for EM at least, China matter thiiiiiis much according to BofAML Read more

FT Opening Quote – Zurich tables £5.6bn RSA offer

RSA seems willing to accept Zurich’s latest offer in turbulent markets and Poundland faces no quid pro quo for its 99p Stores takeover. FT Opening Quote, with commentary by City editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here. Read more

Further reading

Elsewhere on Tuesday,

- Some good things about crashes.

- Official Russian cheese attacks, an attempted historical perspective.

- How Google could … COULD … rig the US election.

- I knew Black Monday. Black Monday was a friend of mine. This was no Black Monday.  Read more

FirstFT – Chinese stocks sink again, the carbon credit con and the key to weight loss

Chinese stocks falls to as much as 6.4 per cent at the open to 4.3 per cent at lunch Read more

Morgan Stanley: ‘Buy! Buy! Buy! Buy! Buy!’

Corr! It’s almost like Teun Draaisma, FTAV’s favourite quant during the proper crisis, was suddenly back in action.

Clock this from Morgan Stanley’s Graham Secker and Matthew Garman: Read more

“Overall, we think this global bull market is ageing but not finished”

A calming checklist from Citi’s Robert Buckland. Click to enlarge…

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So this is how internet liberty dies? With thunderous spam filters

Twitter has a problem.

 Read more

Markets Live: Monday, 24th August, 2015 — second session of the day

Live markets commentary from FT.com 

Snap Markets Live — starting shortly

Footsie smacked; currencies are going loopy…

Click here. Read more

Bloodbath, charted

From on high, via Alberto Gallo and RBS:

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Guest post: The importance of credibility in capital markets, China edition

By Christopher Balding, Professor of Economics at Peking University, HSBC Business School, and blogger at Balding’s World.

The job of the modern economic and financial policy maker is a difficult one. Markets are being created at breakneck pace to trade incredible varieties of financial products and the complexity of major modern economies is dizzying. Considering the constraints of managing enormous economies and financial products, the most important asset of the economic regulator is not perfect decision making but credibility.

As China has battled a variety of financial pressures this year — from a falling stock market to capital outflows pressuring its US dollar peg — Beijing’s lack of a credible coordinated policy response worsened their public reception. Rather than articulate a clear vision of how to address a falling stock market and slowing economy and proceed to methodically execute that plan, Beijing swerves between conflicting announcements and less than credible positions that the market discounts. Read more

Markets Live: Monday, 24th August, 2015

Live markets commentary from FT.com 

Surprise! — Markets Live returns a day early

The weather in London is so bad, Bryce and Murphy assumed their holiday must be over.

Oh, and there’s events in China… Read more

China’s Black Monday… and the Fed

Xinhua’s words, so it’s official:

 Read more

Further reading

Elsewhere on Monday,

- The future under Corbyn — totally barmy, not to be taken seriously, Mad-Max-like, prophecy edition.

- Questioning China’s reserves with Charlene Chu.

- On the internal turmoil at the top of the CCP.

- People are worried about EM bond liquidty.

- Bansky’s Dismaland, where Cinderalla dies and no one gives a toss. Read more

FirstFT — China stock market rout resumes, Biden’s bid and Canadian English

Chinese equities fell more than 8 per cent in early trading Read more

More on questioning China’s weirdly stable unemployment rate

Some thought-provoking paragraphs on China this Friday from Stephen Lewis, chief economist, at ADM Investor Services International, regarding the reliability of the country’s jobs data. He starts with this useful reminder:

Of the ten conflicts in human history with the highest death tolls, five were civil wars in China. Chief among these was the Three Kingdoms War (184-280 CE) when up to 40 million are reckoned to have perished in military operations and from the destructive consequences of warfare. This is an enormous number, considering that the global population at that time is unlikely to have exceeded 400 million. More recently, the Taiping Rebellion (1850-1864) claimed more than 20 million lives while the civil war that brought the Communist Party to power in 1949 resulted in 7.5 million deaths, over and above the 20 million estimated to have been killed in the roughly contemporary Japanese invasion. This is not the history we were taught at school but Chinese leaders are well aware of these facts. When disorder breaks out in China, things turn very nasty indeed. It is best, therefore, to avoid disorder at almost any cost.

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Cultural learnings of stock market valuation for make benefit glorious commodity trader Glencore

When people start worrying about commodity traders in bear markets, the commodity traders themselves tend to reassure the market with comments like: “Ha! This clearly demonstrates you don’t understand our business at all. Lower commodity prices are GRRREAT for us. They liberate our balance sheet on a working capital basis and allow us to focus on our real value add, which is… spread trading.”

Though, if you’re Glencore, you tweak the comment so it goes something like:

“Prices are still not making sense where they are … it’s the funds driving it where it is today, not the actual demand,” Mr Glasenberg argued. “They believe demand for commodities is going to fall and continue to fall and that’s their view. Our view is what we see on the physical movement of commodities and it’s not too bad. We see the flows are still pretty strong.”

 Read more

Of China’s “dirty peg” and spreading EM pain

Jim Reid at Deutsche assesses the damage so far. As he says, this has something of a taper tantrum feel to it but seperating out China from Fed fear is a tough job even if given “that the odds of a September hike are fading again (32% this morning, down 16% over the last 48 hours)” it seems “China and the impact on EM is the overriding driver”.

With our emphasis:

One of the big problems with China’s FX move is that although they’ve ‘only’ seen a 3% currency fall (in the onshore Yuan) since their announcement last week, others have subsequently followed suit either deliberately or via market [and oil based] pressure. The following countries have seen their currency depreciate at least 4% since last Monday (and using last night’s closing prices): Kazakhstan (leading the way with a huge 26% devaluation following the removal of the trading band), Russia, Ghana, Guinea, Colombia, Belarus, Turkey, Malaysia and Algeria. In fact, if we extended the analysis to include those that have seen at least a 3% depreciation then the number of countries hits 17 and unsurprisingly all sit in the EM bracket.

 Read more

Alphachat: the Chinese economy, and the dodgy Flibanserin (fine, the “female Viagra”)

We recorded this podcast on Thursday, August 20th. Alphachat is on iTunes and Stitcher, and to give us feedback you can email us at alphachat@ft.com or call us at 917-551-5012. And here are today’s two topics: Read more

Opening Quote: Beware China’s bemused markets

July 8… now why does that sound significant? [updated with a China victory... of sorts]

Oh yes, that was when the Shanghai index hit its “nadir of 3,507 points” and “when the government announced measures to prop up a market that had collapsed more than 30 per cent in less than a month.”

And oh look. We’re back there again. Well, a bit lower actually: Read more

FirstFT – Greece calls snap elections, three-day weekends and the ‘sixth man’

Prime minister Alexis Tsipras calls for snap elections and asks people to pass judgement on new bailout deal Read more

Further reading

Elsewhere on Friday,

- Musings on Thomas Malthus, the Hellenistic Age, the loyal-spirit great kings of Iran 550-330 BCE, and other topics.

- Are hedge funds fake?

- Finland considering a basic income.

- China’s dodgy credit guarantee firms are very US 2008.

- Dear early stage tech stocks, think you can get to profitability on your final round? Read more

Productivity polarisation in our ‘Modern Times’

About a month ago, Citi’s Disruptive Innovations report revived the debate over the cause of slowing productivity in Western economies.

One insight related to how modern technology encourages smarter distribution rather than outright production growth. You don’t need to produce as many spoons because, well, in the digital age less is more and everyone drinks Soylent. You probably don’t need a big house either, because, hey virtual reality.

But if true, why does it not feel like quality of life is improving in many corners of the developed world? Perhaps there is something more to it. Read more

Solera – PE’s next software buyout?

Shares in Solera Holdings, a provider of software to insurers and car companies, closed at $48 in New York on Wednesday.

That might change soon. A trio of private equity funds are weighing bids for Solera Holdings that would value the company at over $6bn including debt, according to usually well informed people. Read more