Davos must face up to life after ZIRP

This guest post is from the co-authors of UBS’s white paper for the WEF meeting in Davos, which started on Wednesday.

Note that one of the co-authors, UBS Global Asset Management’s head of asset allocation & currency Andreas Koester, will be fielding questions on the financial policy chapter on Thursday at 11am during Markets Live. Read more

The dollar is still our currency and still your problem

For some reason, a lot of people outside the US like to borrow from and lend to each other in dollars.

A new paper from the Bank of International Settlements, which has consistently been producing some of the best research on these flows, describes how the action has shifted from banks to bond investors since 2008. Read more

ECB QE guesswork, cut out and keep edition

Guesswork from Deutsche (click to enlarge):

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Further reading

Elsewhere on Thursday,

- In which Matt Levine takes swipes at S&P parties. Also, some stuff about blended constants and Herodotus.

- Euroblunders.

- Structuring ECB QE to keep the German taxpayers (and their economists) happy.  Read more

FirstFT (the new 6am Cut)

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The ECB has been debating plans for a one to two year programme to make monthly purchases of EUR50bn in government bonds. No formal decision had been made last night but it looks set to embark on large scale quantitative easing for the first time in its history. Mario Draghi is expected to announce the decision at 1.30pmGMT today. (FT) Read more

Just how big a day was Jan 15 for FX markets?

The first numbers by way of CLS, the continuous link settlement system used by the vast majority of the FX market to settle transactions, are in.

As Nick Murray-Leslie tells FT Alphaville on Wednesday:

CLS settled a record number of transactions following the decision by the Swiss National Bank to remove a currency ceiling against the euro.

CLS settled 2.26 million transactions on 20 January, totalling USD 9.2 trillion with 99.5% of these transactions were settled within 45 minutes.”

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Reining in the tech gods

The FT’s Gillian Tett reports from Davos that the Powers that Be may finally have noticed how — while they were busy regulating the banks — the technology companies quietly moved into what was once their unregulated turf.

Via Wednesday’s Davos dispatch:

Large technology companies will experience the same collapse in reputation as banks have endured in recent years unless they rapidly change their policy approach, business leaders cautioned in Davos. Their warning was directed at the influential heads of technology companies, such as the Silicon Valley giants, who were told they needed to recognise that self-regulation will not be sufficient to stave off mounting public alarm about issues such as privacy.

“Self-regulation, no matter what you do, is just not going to be good enough [for tech companies],” said Paul Achleitner, chairman of the supervisory board of Deutsche Bank. He pointed out that a self-regulatory approach had been previously employed by banks — but notably failed to quell a political backlash against their over-reach.

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Canada cuts

Central banks are just full of surprises these days, from Mumbai to Zurich to Copenhagen. Today, Ottawa:

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada…The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response… Read more

BoAML: ‘Dividend stocks could double from here’

“Safe” dividend stocks, to be precise.

It’s a straightforward argument: as yields on high-grade government debt increasingly turn negative, so the search for income amongst investors will channel money into quality equities. Read more

Guest post: Was the Swiss National Bank nuts?

Debate still rages about the merits of last week’s Swiss National Bank move. Peter Doyle, economist and former IMF staffer, argues that the SNB in fact kept its exchange-rate cap for too long — and was wrong to have targeted the euro alone.

__________________________ Read more

Re-re-visiting the 1986 oil crash

As already mentioned, this may not be your usual oil-price decline. But it’s also not crude’s first appearance in the 50 per cent club:

Now, in absolute terms the falls aren’t comparable ($100 to $50 versus $30 to $15) but there are similarities. Read more

‘Let 100 think tanks bloom’

The Chinese government seems to have noticed that the country has no policy institutes or think tanks with global clout. So it’s going to get some. Up to a hundred, in fact. But this isn’t Xi Jinping reworking Mao’s famous 100 flowers campaign. Wouldbe think takers are not being invited to think freely…

A new type of think tanks with Chinese characteristics would support development and strengthen soft power, according to a guideline issued Tuesday.

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FirstFT (Lunch Wrap edition)

Barack Obama’s State of the Union address sought to capitalise on the resurgent economy to win support for his progressive policies, but Republicans were quick to point out that many Americans have yet to feel the benefits. Pointing out that the president’s overview might not be completely objective, the NYT’s Upshot did their own analysis of the State of the Union – stronger than when Mr Obama took office, but still troubled. (FT, NYT)

When a Democratic president talks up “transgender” rights in prime time, you can be sure he does not face re-election. His real game was to set the field for Hillary Clinton’s election victory next year, which is also Mr Obama’s best hope of cementing his legacy, writes Ed Luce. (FT) Read more


With apologies for the angelic imagery, here’s BNP Paribas on Wednesday (our emphasis):

In our analysis, six EM sovereigns are at risk of becoming fallen angels this year or next. Three of these we consider ‘high risk’. As much as USD 259bn of sovereign and corporate bonds is at high risk of being cast down into speculative grade perdition. This accounts for 9% of all EM bonds outstanding (USD 2.87trn).


… it is little surprise that the peak of credit quality for EM appears to be over. After having hit the BBBthreshold in 2013 and improving another 1/6th of a notch over2013 (Figure 2), the credit quality of the EM benchmark has begun to slide downward. Already it has lost 1/6th of a notch and we forecast the index to slide another half notch by the year end.

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Markets Live: Wednesday, 21st January, 2015

Live markets commentary from FT.com 

Twin sources of tech-related instability

This guest post is from the co-authors of UBS’s white paper for the WEF meeting in Davos, which gets underway today.

Note that one of the co-authors, UBS Wealth Management’s global chief investment officer Mark Haefele, will be fielding questions on the technology chapter during Wednesday’s Markets Live session at 11am. Read more

Further reading

Elsewhere on Wednesday,

- Will Should the ECB load up on euro denominated equities?

- When central bank losses matter.

- QE and central bank insolvency.

- Shane Ferro vs. Diane Coyle… mediated by Brad DeLongRead more

FirstFT (the 6am Cut)

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Barack Obama called on the US to “turn the page” on an era of war and recession in his State of the Union address. He tried to capitalise on the resurgent economy to win support for his progressive policies, but Republicans were quick to remind Americans that many of them are yet to feel the benefits of an economic recovery. (FT) Read more

Time to buy some krone?

Last week’s Swiss surprise was a useful reminder that betting against currency pegs is one of the classic macro hedge fund trades.

Think Soros and Druckenmiller versus the Bank of England. It’s attractive because the cost of maintaining the position is usually small while the potential upside can be quite large. Someone who had been continuously buying short-dated puts on EURCHF at 1.2 since the establishment of the Swiss National Bank’s exchange rate floor over the past few years would have paid a pittance for the opportunity to make a lot of moneyRead more

Strawberry Yields [updated]

On Friday, we previewed today’s IRS auction of the Darryl Strawberry deferred compensation contract with the New York Mets. According to the IRS, the winning bid today was $1.3m. The bidding began at $900k and the room contained nearly 20 bidders, Alphaville was told.

According to our arithmetic the implied annual yield to maturity is a surprisingly high 5.14 per cent. We had speculated on Friday that the winning price would be $1.7m, implying a yield of just above 2 per cent (recall that almost 19 years remain on the annuity). The original 30 year annuity had priced at yield of 5 per cent in 2004, just about where the 30 year Treasury was at the time. Unfortunately, for Uncle Sam, the spread for a stream of payments from the New York Mets has apparently widened since then. Read more

Just in case Grexit were to happen…

Eric Dor of the IESEG School of Management in Lille has a handy table. Click to enlarge…

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FXCM, welcome to the ‘cov-heavy’ reality…

The price of life in retail FX land….

The loan has an initial interest rate of 10% per annum, increasing by 1.5% per annum each quarter for so long as it is outstanding, but in no event exceeding 17% per annum (before giving effect to any applicable default rate). It is also subject to various conditions and terms such as requiring mandatory prepayments, including from proceeds of dispositions, condemnation and insurance proceeds, debt issuances, and equity issuances. The credit agreement includes a variety of restrictive covenants, including, but not limited to, limitations on the ability to merge, dissolve, liquidate, consolidate or sell, lease or otherwise transfer all or substantially all assets; limitations on the incurrence of liens; limitations on the incurrence of debt by subsidiaries of the company; and limitations on transactions with affiliates, without the prior consent of the lender. Read more

Markets Live: Tuesday, 20th January, 2015

Live markets commentary from FT.com 

Deflaters gonna reflate

Ahead of the European Central Bank’s possible announcement of quantitative easing in Europe on Thursday, a quick thanks to falling oil prices.

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The Great China FX Outflow

As Goldman flagged this morning, December has brought with it $19bn of FX outflows from China. That’s the biggest move since 2007 (with our emphasis):

The position of FX purchases for the entire banking system (the PBOC plus commercial banks) decreased by about $19bn in December (vs. essentially flat in November)…

The FX outflow in December underlined the weakness in demand for the CNY, despite a strong trade balance of close to $50bn. The FX outflow size is the largest since December 2007 (and this earlier data point was skewed by the MOF’s FX injection in China’s sovereign wealth fund). The PBOC has been setting the daily USDCNY fix on the strong side of the spot rate since late November to counteract depreciation expectations. Today’s data suggest that besides displaying such a bias in fix setting, the central bank might have gone further in supporting the currency by buying CNY in the market. But we await PBOC balance sheet data, due out in the coming weeks, to confirm if it is indeed the case. The FX outflow also partly explains the slow M2 growth in December.

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Further reading

Elsewhere on Tuesday,

- Cass Sunstein versus the libertarians.

- The retail FX market is a joke, redux.

- The (worrying) European scene.

- “If your lot in life is to supply the internationally desirable currency of a small open economy… it is the height of folly to believe that you can place some arbitrary limit on the size of your balance sheet.”  Read more

FirstFT (the new 6am Cut)

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China’s economy grew at the slowest pace in nearly a quarter of a century last year, even as it overtook the US to become the world’s largest in purchasing power terms.

The annual expansion of 7.4 per cent was the slowest since 1990.That slowdown is expected to continue in the coming years, partly as a result of its far larger size, but also as its credit-fuelled, investment-led growth model, reliant on low wages and polluting industries, runs out of steam. (FT)

In the news

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Not your usual oil-price decline effect

Yup. Analysts and economists still can’t decide whether the fall in oil prices is net positive or net negative for the global economy.

Unfortunately for the net positive camp, it looks increasingly like global demand and growth figures are beginning to side with the negativity team.

Indeed, the longer the oil price stays low, the more it looks like global stimulus hopes were overdone due to poor understanding of financial feedback loops in the commodity space.

So what’s behind the anomaly? How did a whole school of economists get this potentially so wrong? Read more

FirstFT (the new lunch wrap)

Ukrainian troops retook Donetsk airport The area had been lost to rebels in recent weeks but government forces recaptured it yesterday, while thousands marched in Kiev in memory of civilians killed in an attack on a passenger bus. (Reuters)

Banks and Congress attacked Obama’s Wall St tax The president plans to exploit a rising tide of populism and pump tax raised from banks and rich families into policies likely to be popular with the middle class. But the backlash began before it was even officially announced, and it looks unlikely to pass the Republican-controlled Congress. (FT) Read more