Here’s the Lerrick Plan. It looks perfect for Italy’s Banca Monte dei Paschi di Siena. Read more
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Here’s the Lerrick Plan. It looks perfect for Italy’s Banca Monte dei Paschi di Siena. Read more
Explaining the BoJ’s shift to Quantitative and Qualitative Easing (QQE) with yield curve control is hard.
Or, at least, doing so definitively is hard because everyone is very keen to point out reasons against whatever suggestion you’ve got. Read more
Good idea: More reactive than a quantitative target; can signal long-term commitment to policy; potentially reduces purchases required if market believes your yield target is credible; potentially good for effectiveness of fiscal policy; potentially good for banks as it can imply a steeper yield curve; and allows for an “automatic exit” from the policy if everything goes to plan.
Is the central bank in the business of lending bank reserves for final and absolute settlement purposes, or is it now in the business of lending safe assets like Tbills for final and absolute settlement purposes? Read more
https://twitter.com/GavinHJackson/status/773111012476260352 Read more
Before that though, here is a thing we know and have known since the ECB launched its (probably) soon to be extended QE programme: Draghi et al will have to deal with the idea of QE scarcity — it’s running out of available bonds to buy. It’s already coming up against a self-imposed constraint and it has been well flagged that the big one, Germany, is looming as an ever larger roadblock.
Here is a thing we also know and have already mentioned in this post: The constraint is self-imposed and, as such, can be alleviated. Like this, for example: Read more
Resistance may be futile but we’ll have to wait to make sure.
To move into those riskier assets you’d like to think that eventually the search for yield will become a real, worthwhile thing in Europe again. And not everyone buys that – Credit Suisse for example point out that over the last 2.5yrs in particular government bonds (bunds) have outperformed both high and low yielding credit assets. Their point is that “the time to hunt for yield as a dominant strategy (rather than as a short-term trade) might actually be when yields start to rise.”
But BofAML’s European credit team think it’ll maybe happen a bit sooner: Read more
Everybody knows much of the City of London was vehemently opposed to Brexit because of fears of what might happen to banks’ interests if so-called “passporting” rights into and out of the European system were lost.
What is less talked about, however, is Brexit’s impact on the European payments clearing system, Target2 — and how the passporting issue connects by way of Target2 to the realm of sovereign monetary policy.
At the absolute heart of the matter is the status and treatment of payment systems worldwide, and whether or not they can really be treated as something independent and thus distinct from national monetary policy (and hence open to commercial competition) — or as integral to sovereign interests. Read more
This is a guest post from Richard Koo, chief economist of the Nomura Research Institute and, amongst many other things, author of “The Holy Grail of Macroeconomics, Lessons from Japan’s Great Recession”, which lays out his balance sheet recession thesis in detail.
The post is an updated extract from his most recent note for Nomura and reproduced here, with his permission, for your arguing pleasure…
The US, the UK, Japan, and Europe all implemented quantitative easing (QE) policies, but the understanding of how those policies work apparently differs greatly from country to country, leading to very different outcomes. With the US economy doing better than the rest, there has been some debate in Europe as to why that is the case. Read more
One of the little-remarked consequences of the Brexit vote in the UK is that the subsequent generalised tightening of sovereign yields across the eurozone means that even less euro-core government paper qualifies for Draghi’s QE programme. There are dangers in the ECB ignoring this looming problem. Here’s a cheat sheet on action that could be taken.
We’re a little bit late to Friday’s note from Citi’s Hans Lorenzen and Aritra Banerjee, but it’s a pretty good assessment of the tensions in European credit markets at the moment:
Without implying causation, corporate credit spreads tend to be highly correlated with European bank stocks. But recently, those conventions have clearly broken down. Most notably, returns on non-financial credit have seemingly decoupled completely from returns on bank equity.
But bank credit returns have also diverged notably from equity returns. And incidentally, the correlation between financial and non-financial credit spreads has broken down too – in case you were in any doubt.
A new era – German 10-year bund yield drops below zero for the first time: pic.twitter.com/XJAoFDZ3mE
— Tracy Alloway (@tracyalloway) June 14, 2016
Yeah. Fun. This is also fun:
Make that 50% of Bunds no longer eligible to ECB QE! (€400bn out of €810bn) pic.twitter.com/y8qP7fHk3c
— Frederik Ducrozet (@fwred) June 14, 2016
ICYMI on Wednesday, here’s Deutsche’s chief economist David Folkerts-Landau taking another, expanded, shot at the ECB:
Over the past century central banks have become the guardians of our economic and financial security. The Bundesbank and Federal Reserve are respected for achieving monetary stability, often in the face of political opposition. But central bankers can also lose the plot, usually by following the economic dogma of the day. When they do, their mistakes can be catastrophic.
Today the behaviour of the European Central Bank suggests that it too has gone awry. After seven years of ever-looser monetary policy there is increasing evidence that following the current dogma, broad-based quantitative easing and negative interest rates, risks the long-term stability of the eurozone.
Already it is clear that lower and lower interest rates and ever larger purchases are confronting the law of decreasing returns. What is more, the ECB has lost credibility within markets and more worryingly among the public.
The ECB will begin something truly unprecedented on Wednesday June 8. It will start buying corporate debt in a bid to push inflation to the hallowed 2 per cent mark and boost growth with it. What’s more, it will buy this debt both in the secondary market and the primary one.
Known as the corporate sector purchase programme (CSPP), market watchers say the move could push the cost of borrowing in euros to new lows. Some even argue the programme could become the central bank’s most market disruptive intervention yet. Read more
This post will be made up of two pieces. The first will try to explain why JPY continues to defy Japan’s negative rate-led demand for currency weakness. The second will add words to this picture from HSBC which proclaims a break in the (so-called, he adds hastily) currency wars, predicated mostly on said JPY strength:
At last sighting JPY was hovering at about Y108. That’s not good if you are the BoJ’s Kuroda or the overarching Abe, particularly because FX strength can beget more FX strength. The question is why did the yen start this slide: Read more
Nick Rowe is the latest to try and define a helicopter drop. Cutting through the faff, it comes down to the idea that helicopter money is permanent. Which is problematic since we’ve recently been told nothing is permanent and have basically bought that argument.
So, yeah, how are we going to know a helicopter drop when we see it? Take this for example:
An important question for anyone who thinks the euro area needs to keep its currency weak to grab foreign demand. Or who thinks that’s what the ECB thinks, anyway.
That was considered, after some confusion, impressive by markets, amongst other things because of the ECB’s shift to buying up private assets — “investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area are to be inccluded in QE,” as Deutsche summarised while others wondered aloud about what else the ECB might end up buying. Read more
A cut out and keep guide to trading the ECB, courtesy of Deutsche, do click to enlarge:
Negative central bank interest rates yet rising bank net interest income. Where else but Switzerland?
By Morgan Stanley, do obviously click to enlarge:
Courtesy of Nishay Patel and Justin Knight at UBS, ahead of the expected easing of policy from the ECB on Thursday. Click to enlarge…
First, on the rather small proportion of euro area bank balance sheets taken up by excess reserves, charted by Credit Suisse’s Neville Hill and Peter Foley:
Or: Read more
We wrote — when talking about the ECB’s potential move to a tiered depo facility which would allow a deeper cut than expected into negative territory on Thursday — that Draghi was in the somewhat relaxed position of being able to follow where other central banks had gone before.
We were of course referring to the Swiss and Danish central banks, which are currently at -75bps versus the ECB’s -20bps and have in place versions of the tiered model being mooted for the ECB.
But… Nomura’s Jens Nordvig thinks we were being too casual in our comparison. The ECB needs to be analysed as its own central bank because: Read more
A tiered depo rate (to be explained below) coming from the ECB at their meeting on Thursday, you say?
Well… the mooted tiered system itself wouldn’t be unprecedented and we look forward to even the expected cut allowing our go-to measure of euro-nuttiness to keep ticking up. From JP Morgan’s Niko Panigirtzoglou and team over the weekend: Read more
The euro may have been pointless, but it might have been a whole lot less pointless if there’d been political union from the onset. So implied Mario Draghi, ECB President, at the BoE Open Forum on Wednesday.
For the laissez faire radicals out there, here’s how he went on to define the nature of “truly free” markets in that context (our emphasis):
Consider the case of markets that are truly open – by which I mean, as open as the Single Market of the European Union, where internal frontiers have been abolished entirely, where passporting of services across the entire EU is a right, not a privilege.
In this situation, national governments, or national courts of law, cannot alone provide full protection to their citizens against abuse of property rights or any form of unfair competition that may arise from abroad. Nor can they alone protect the rights of their citizens to carry out business abroad unimpeded by protectionist restrictions. For the market to be truly free, there needs to exist a judiciary power that can enforce the Rule of Law on all, everywhere. It has to have jurisdiction across the entire market.
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