Guesswork from Deutsche (click to enlarge):
© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
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 money. Read more
UPDATE: The full, 263 point, opinion is out and here.
Do click through for the full statement on OMT (and QE by extension) from Pedro Cruz Villalon, one of the European Court of Justice advocates generals: Read more
From JPM’s Flows & Liquidity team, this is what ECB QE incontinence looks like:
CreditSights points out today that changes in gross ECB liquidity provided to the euro area’s banking sector closely track changes in 10 year Bund yields:
If you don’t you might miss all the capital outflow which, according to Deutsche’s George Saravelos, “not only has depreciatory implications for the euro, but also suggests that the consequences of Euroglut – low global bond yields and a stronger dollar – are here to stay.”
Oh, and blame Germany. Read more
Peering into the near future, Europe’s largest economy remains central to the direction for Europe as a whole. And, judged by the recent long profile of chancellor Angela Merkel in the New Yorker, there is self-confidence in the Bundestag.
Here she is dismissing the Russian president, after a macho incident with a labrador:
I understand why he has to do this—to prove he’s a man,” she told a group of reporters. “He’s afraid of his own weakness. Russia has nothing, no successful politics or economy. All they have is this.
Political economy is the point, however. Read more
On the potential death of that long awaited negative deposit rate, interesting thoughts from HSBC’s Steven Major below if sovereign quantitative easing does eventually raise its head in Europe.
But first, a necessary nod to QE skepticism from Peter Stella:
Rather amazingly, a crude quantitative measure of ECB stimulus—the sum of refinancing operations and securities held for monetary policy purposes—peaked the very month of Dr. Draghi’s [whatever it takes] speech. Those who are now seeking QE apparently believe that, despite the inverse correlation between quantitative stimulus and actual results, an increase in the size of the ECB balance sheet will lead to an outcome superior to that associated with the increase in policy “size” evident above during the 14 months prior to the Draghi speech. During that time, the sum of ECB monetary operations instruments expanded by 168 percent without any discernible palliative impact on markets. So if the definition of insanity is repeatedly trying the same behavior and expecting different results, the market would appear slightly insane. Or perhaps it is simply guilty of failing to fully comprehend the complexity of monetary operations, and more specifically, which monetary medicines work and which do not.
One of the problems with ECB QE, as we all know, is the lack of a collective eurobond or sovereign-neutral asset to target, which would make asset purchasing less, you know, subjective vis-a-vis the assets you choose to support and those you don’t.
It is for this reason that analysts are divided about the type of assets Draghi may or may not be inclined to target.
There is, after all, a delicate balance between targeting ETFs or real-estate trusts neutrally and buying corporate stock or housing, which can evoke the start of quasi nationalisation of the economic system, if not government favouritsation of specific sectors, corporations or industries. Read more
With a large hat-tip to the Irish Times, here’s a friendly 2010 missive from former ECB president, Jean-Claude Trichet, to former Irish finance minister Brian Lenihan suggesting, secretly of course, that Ireland might just want to apply for that bailout if it wanted to continue to enjoy access to emergency liquidity assistance. As the Irish Times says, “around €50 billion [in ELA] had been extended to Irish banks at the time – with additional funds approved by the ECB the day before.”
More so, the letter “was sent the day after Central Bank governor Patrick Honohan appeared on Morning Ireland to say Ireland had no option but to apply for support. The ECB letter called for a “swift response” from the government. Two days later, on November 21st, the formal application for the bailout was made.”
You’ll find the letter itself below, but here are the key lines: Read more
The European Central Bank’s latest quarterly bank lending survey shows that lending standards are getting looser and that demand for credit is rising. Lorcan Roche Kelly of Agenda Research summarised the main findings with this handy chart:
Negative numbers for the orange-ish lines mean that lending standards have loosened (slightly), meaning credit is easier to get. Positive numbers for the green and blue lines mean that demand for loans is increasing. Overall the supply of loans is still shrinking, but not as fast as it was in recent years and loan growth could even return by the end of 2015 if current trends hold up. That said, we can’t help but note the large difference visible in the chart between loans to households (orange and beige) and loans to businesses (red). Read more
The results of the ECB’s Asset Quality Review are in. As ever it was the taking part that counted, we’re all winners here. Were you minded to look for losers, however, here’s the FT:
Italy’s central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area’s financial sector.
Nine Italian lenders fell short, out of 25 banks mainly in Europe’s periphery and Germany that need more capital following the stress tests. The general reaction, however, seems to be that the whole exercise is credible, without unpleasant surprises, and that we really need to talk about lending. Read more
Some perspective amidst the angst:
Think main takeaway from this weekend's AQR / stress test data dump-fest is that it's gonna be over and people can get on with their lives.
— Five Minute Macro (@5_min_macro) October 24, 2014
And proving perspective and angst aren’t mutually exclusive, some words from Alberto Gallo of RBS (our emphasis): Read more
The European Central Bank is set to release the results of its latest stress tests on euro area banks this Sunday. Those more interested in the fragility and resilience of euro area households should focus instead on a new working paper from ECB researchers.
The economists first looked at income after taxes, debt service, and basic living costs across and within countries. As long as this number is positive, a household is not in distress. Even when it is negative, people with sufficient liquid savings are not considered to be in trouble as long they can hold out for a certain amount of time. And even some households that don’t have enough emergency cash may avoid defaulting on their debts for various reasons. Read more
Reuters is reporting that the European Central Bank might be willing to purchase corporate bonds as part of its €1 trillion effort to restore “the size of [its] balance sheet towards the dimensions it used to have at the beginning of 2012.” The story has also been picked up by the FT and WSJ.
We didn’t immediately get why the ECB would decide to do this, especially since spreads on even the junkiest of junk debt are still quite narrow. (Lufthansa’s recent 5-year note yielding just 1.1 per cent at issuance comes to mind.)
One explanation is that the size of the markets the ECB has already agreed to target — asset-backed securities and covered bonds — is too small for the central bank to achieve its objectives. Read more
Mario Draghi has been very clear about what would push him into the full-blown QE of buying government bonds. He faces some serious opposition from German monetary conservatives even to the less whizzy QE he’s unveiled so far, though — that of buying asset-backed securities.
Full-on QE faces legal difficulties from the ban on financing eurozone governments, as well as deep-seated opposition within Germany and major issues about which government bonds it should buy, and in what proportion. (Italy has the most in issue, so buy mostly Italian debt? Or buy in proportion to shares in the ECB? Or to economic size, meaning the biggest share would be German? Or in proportion to the size of the banking system?).
So it feels like time to explore some alternatives that have been, inexplicably in our view, ignored. Read more
From the opening to Mario Draghi’s speech at the Brookings Institution on Thursday:
As I was preparing these comments, I happened to re-read John Maynard Keynes’ open letter to President Franklin D. Roosevelt, published in the New York Times in December 1933. In it, Keynes tells President Roosevelt that the administration is engaged simultaneously in recovery and reform, and identifies a tension between the two. He worries especially about the risk that over-hasty reform impedes recovery. Read more
Peter Stella, former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund, who now heads his own consulting company, is — as ever — on a mission to explain central bank actions for what they really are.
His latest focus area: the real story behind negative interest rates at the ECB.
Critical to understanding the purpose of these, he suggests, is the following chart:
George Saravelos at Deutsche Bank has looked at Eurozone inflation break-even rates and worries that the ECB may be losing control:
From BofAML on the definitely underwhelming, potentially stigmafied TLTRO pickup (our emphasis):
When gathering all the comments made by banks on their participation at today’s operation, we find that the major banks in Spain, Italy and Greece have requested a total of €40bn, i.e., 40% of their Sep+Dec available allowance (Exhibit 1, page 4). After extrapolating this to the whole banking system in each of the three countries and including estimates for Portugal and Ireland, we find that the periphery could have accounted for as much as €61bn, out of the €82.6bn borrowed yesterday.
This leaves an estimate of €21.7bn for the take-up by core banks, representing as little as 9% of their available allowance (Table 1). To derive a more precise estimate of the country breakdown, we have to wait for each national central bank to release the details of their end-of-Sep balance sheet. This should happen starting from early-October (with Italy, Finland and Belgium the first to report).
There have been many failed attempts to unify the European continent by force.
More recently, politicians have tried to do it peacefully, with some limited success. The European Union has an elaborate bureaucracy and an elected parliament that together oversee everything from cheese names to foreign affairs. A majority of the EU shares a currency and monetary policy, as well as a common banking regulator.
But these supranational institutions are becoming increasingly unpopular among actual Europeans. Moreover, new research presented at the semiannual Brookings Papers on Economic Activity by Luigi Guiso, Paola Sapienza, and Luigi Zingales suggests the traditional strategy for promoting integration has reached a dead end. Instead of “more Europe”, the trend in the near future may be the revival of nationalism. Read more
Securitisation has gotten a bad rap thanks to its association with dodgy underwriting during the bubble. Yet bundling loans originated by banks and selling them to investors in the capital markets could be just what is needed to boost the flagging euro area economy.
This helps explains the European Central Bank’s recent announcement that it will be shopping for asset-backed securities (including mortgage bonds) and covered bonds starting in October. Read more
There’s an abundance of dollars in the Eurosystem with nowhere useful to go.
We think, as we argued earlier, this is down, at least in part, to the Fed busting apart the money-market arbitrage for non-FDIC insured foreign entities.
In any case, note the following chart (via the Bank of England) of the euro/dollar cross-currency swap, which shows how much cheaper dollars in Europe got since reverse repos kicked into action in September 2013 (the nearer zero the cheaper dollars are):
Whilst everyone was focused on the ECB on Thursday…
… the Fed pulled this little snippet out of its bag:
As part of the continuing program of operational testing of its policy tools, the Federal Reserve plans to conduct a series of eight consecutive seven-day term deposit operations through its Term Deposit Facility (TDF) beginning in October.
Okay, the Fed has tested term deposits before, so it’s not that mind blowing an announcement in and of itself. The significance, if any, is that it’s subtle confirmation that both reverse repos and TDs will be used in the Fed’s unwind process. The maximum award has also been increased to $20bn. Read more
Before we get into this it might be worth opening the transcript of Thursday’s ECB presser and Q&A with Mario Draghi and doing a “ctrl+f” for the phrase “structural reform”.
TL;DR: the answer is 19. (h/t to Aurelija Augulyte). There 15 mentions in August, and 5 in July.
But what’s a central banker to do? As Marc Ostwald at ADM Investor Services International says, “one cannot stress enough that believing that France and Italy will deliver meaningful (and indeed ‘growth friendly) reforms is an act of faith, for which there is little or no historical precedent.” Read more