Someone had to, because the net supply of new bonds was minimal and the European Central Bank has been buying €60bn per month.
Foreigners? No, according to a chart from Citi’s Han’s Lorenzen, it was the locals:
If you accept the standard textbook view of central banking — roughly, that employment near its “natural” level coupled with accelerating wage growth will lead to faster consumer price inflation, whose pace should be kept moderate — UK domestic conditions would seem to merit significantly higher interest rates.
The number of hours worked is booming at the fastest rate in decades:
In our previous post, we were inspired by a fascinating note from Deutsche Bank to look into the peculiar behaviour of the “net errors and omissions” category in certain European countries’ balance of payments statistics, on the theory that these can tell us about capital flows occurring under the radar.
One explanation would be a desire to avoid tax. As Gabriel Zucman has noted, there are trillions of dollars more financial liabilities in the world than there are corresponding financial assets. That only makes sense if people are hiding their wealth from the authorities. And, as it happens, the places we identified as having particularly large hidden capital outflows — Sweden, Denmark, Finland, Italy, the Netherlands, and Austria — all have very high taxes, while Malta, which was a large recipient of hidden inflows, is known for being a convenient euro-denominated tax haven. Read more
Those with the patience to pore over balance of payments data occasionally get rewarded with surprising nuggets of insight.
As a case in point, a new note from Deutsche Bank points us to the mysteries contained in the “net errors and omissions” category. In theory, mistakes that occur each quarter should cancel each other out. In many places, however, summing up these flows up over time produces distinctly non-random patterns — what Deutsche Bank calls “dark matter”. Read more
Charts from Nomura showing, on the left, China’s largest cumulative two-month decline in FX purchase positions on record occurring despite a record trade surplus over the same period and, on the right, the probable hoarding of foreign currency as reflected in a sharp monthly rise in foreign-currency deposits in January.
This is literally the best analysis of the euro area’s problems we’ve ever read. You should take the time to closely read the whole thing yourself. We’ll wait.
Now that you’re back, we thought we could add some value by highlighting and expanding on what we believe to be Pettis’s most important insights. Read more
There is a straightforward answer to the question in the headline: more money has been trying to get into Switzerland than get out, which didn’t affect the exchange rate as long as the Swiss National Bank bought foreign currency. As soon as they stopped, the exchange rate adjusted to balance the new set of flows. But a detailed look at the gross flows in and out of the country provides a more nuanced and interesting picture.
In the heady days of 2010-2012, when it seemed as if the European Project was always one secret weekend meeting away from exploding in a fireball of poisonous politics and innumerate economics, Switzerland looked like a nice place to put your money. It was especially attractive if you were a resident of a stressed euro area country worried about wealth taxes, bank failures, currency re-denomination, or all of the above. Read more
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
From JPM’s Flows & Liquidity team, this is what ECB QE incontinence looks like:
On Wednesday we wrote about the growing consensus among scholars and policymakers that unencumbered financial flows are bad, focusing on some recent research from the Bank for International Settlements.
Now we want to draw your attention to a detailed historical account of the interwar and pre-crisis financial systems by Claudio Borio, Harold James, and Hyun Song Shin.
Their aim is to explain which “global imbalances” mattered and which did not. Read more
“It, therefore, agreed that the Fund’s Articles should be amended to make the promotion of capital account liberalization a specific purpose of the Fund…”
— The IMF interim committee of the board of governors… in April, 1997.
We needn’t tell you what happened next.
The free flow of capital across borders was once thought to be a basic requirement of modern civilisation.
Despite the damage caused by excessive lending from Germany and the Netherlands to Spanish, Greek, and Irish borrowers in the 2000s, the European Commission still says that the “free movement of capital” is one of the “four freedoms” underpinning the single market.
The consensus among Western policymakers is beginning to shift, however. The IMF officially changed its tune in 2011 by suggesting how emerging market countries could best limit overabundant inflows.
A trio of recent papers by top officials from the Bank for International Settlements goes further, however, arguing that financial globalisation itself makes booms and busts far more frequent and destabilising than they otherwise would be. Read more
Every month, the US Treasury publishes data on international capital flows by the type of asset and the country in which the transaction occurred.
In a recent note on the latest data, CreditSights highlighted something we found very interesting: foreigners appear to have stopped buying US corporate bonds (on a net basis) during the crisis and have refused to return to the market in the years since. The truth of the matter is a little more complex, but still interesting: Read more
Outflows from US high yield bond exchange traded funds slowed last week, according to JP Morgan, so that mini-correction in debt markets may have run its course.
Keep an eye on US stocks, however, as the mini-correction there has only seen 0.5 per cent of the assets in equity ETFs withdrawn since June 24th, leaving further outflows as a potential source of vulnerability, in the judgement of strategist Nikolaos Panigirtzoglou. Read more
Or, the line between a pretty standard EM problem and those of a uniquely enormous democracy heading into an election which happens to suffer from many of those standard EM issues.
First, the negative loopiness from Goldman’s Tushar Poddar: Read more
With all the excitement about ‘the great rotation’, it often feels that the debate focuses too much on analysing the recent flows, and less about the greed/fear dynamics driving them.
It’s been well documented that bond holders are increasingly frustrated by the miserable yields on offer in the fixed income markets, and are apparently flocking into the ‘cheap’ equity markets. We’ve already voiced our scepticism about the scale of this flocking. Yet what’s potentially also underestimated is the degree of skittishness by bond holders when the stock markets show signs of a wobble. After all, a lot of capital in fixed income got there after investors were burnt in the early 2000s. This loss aversion shouldn’t be underestimated. Read more
Meanwhile, in the domestic banking scene… [See part 1 on capital outflows here.]
China’s financial system stability is increasingly intertwined with its shadow banking system — which is big, according to various tallies. Bank of America Merrill Lynch says it accounts for a quarter of all bank loans, with the biggest segments being wealth management products or WMPs (8 per cent) and trust companies (8.9 per cent). Fitch Ratings says that WMPs now account for about 16 per cent of all commercial bank deposits; KPMG says trust companies will overtake insurance to become the second-biggest component of the financial sector. Read more
Crossing the Reuters tape a little while ago, it seems members of the G20 have learned to play nice(r) since their last meeting in November:
G20 CONSENSUS REACHED ON CAPITAL CONTROLS AND EXPANSION OF IMF CURRENCY BASKET FOR SPECIAL DRAWING RIGHTS
In a previous post about the efficacy of capital controls, we interpreted a passage from Reinhart & Rogoff’s epic This Time is Different by saying “there remains an awful lot we simply don’t know about the consequences of capital flows, capital controls, or, more generally, about the appropriate pace and nature of financial liberalisation in developing economies.”
Well, the crisis-expert duo is back, joined by Nicolas Magud of the IMF, with a new paper summarised at VoxEU that explains why such a prominent economic topic brings so much confusion — though their conclusions include more questions than answers about the ability of capital controls to successfully manage flows. Read more
Here’s a chart to ponder as regulators continue their forensics of the financial crisis:
China has not seen a surge in “hot money” coming into the country, the country’s foreign exchange regulator said on Thursday, despite the loose monetary policy in the US that Beijing has sometimes blamed for causing destablising capital inflows, reports the FT. A net $35.5bn of hot money, illegal speculative capital, entered the country last year, which was “ant-like” in comparison to the size of the economy, the State Administration of Foreign Exchange said.
From the IMF’s latest World Economic Outlook (emphasis ours):
At the same time, monetary accommodation needs to continue in the advanced economies. As long as inflation expectations remain anchored and unemployment stays high, this is the right policy from a domestic perspective. Furthermore, it seems to have had an effect: following the news in August that a second round of quantitative easing was imminent, long-term rates fell to new lows in the United States. Although U.S. Treasury yields have since increased, particularly in the last quarter of 2010, this seems primarily attributable to the improving outlook for the U.S. economy, a fact corroborated by the strong performance of equity markets. From an external perspective, however, there is concern that quantitative easing in the United States could result in a flood of capital outflows toward emerging markets. The recent slowdown in capital inflows to emerging markets suggests that such effects may be limited so far. Read more
Worries about capital flows and the potential side effects of poorly designed capital controls (trade wars, market inefficiencies and distortions) are all the rage these days.
But some economists are sceptical (here’s one) as to whether capital controls even work, or if the market — in the form of investors using fancy bank-contrived derivatives — will simply find a way around them. Perhaps they’re inconvenient but ineffective? Read more
Growth in cross-border lending by banks came to an abrupt halt in the second quarter of 2010, reports the FT, driven particularly by a contraction of roughly $100bn in lending to banks in the eurozone, according to the latest quarterly report from the Bank for International Settlements. The latest report, released on Monday, highlights the vulnerability of countries dependent on cross-border flows for lending and underscores the rapidity with which lending to weaker eurozone nations dried up as anxiety about their finances gained force in the three months to June 2010. The BIS said that cross-border lending, which grew in the first quarter of 2010 for the first time since the collapse of Lehman Brothers in September 2008, continued to tilt markedly towards banks and non-financial companies in the faster-growing emerging economies in the Asia Pacific and Latin America-Caribbean regions and away from mature economies in Europe.
There’s a lot of focus in the market on China possibly implementing more rate hikes — but this process isn’t a simple for the People’s Bank of China as many might imagine, especially as capital flows increasingly catch up with trade flows, says FT Alphaville. The problem with the dollar peg is that it’s less about the US trade deficit than huge backed-up demand in China’s own economy. Which, FT Alphaville adds, makes Fed chairman Ben Bernanke’s recent speech on structural flaws in the world economy very interesting — while recognising the existence of a dollar standard, the speech suggests that Bernanke now sees his task as coordinating a multilateral monetary policy. Which rather puts the lack of coordination so far in context.
Official data show that capital inflows into the Chinese economy acclerated in April, the WSJ reports, reflecting the country’s robust recovery and an anticipated rise in the renminbi. A spokeswoman said that low US interest rates may have encouraged the inflow. perhaps through investors borrowing in the US and investing in China.