It really is crunch time folks. Or at least, it’s a crunch time. We’re sure another could be arranged. Related question: how many ‘extraordinary meetings’ would it take to make the phrase redundant?
From JPM’s always excellent Flows & Liquidity team…
Purchases of offshore money market funds by Greek citizens, our proxy of Greek bank deposit outflows [the purchases of offshore money market funds by Greek citizens shown in Fig 1], points to a large €6bn deposit outflow this [being, last] week, bringing the cumulative deposit outflow since last December to €44bn.
This guest contribution, from Giles Wilkes, sprung from a fierce internal debate amongst the FT’s leader writing team on Wednesday…
The standoff between the Greeks and their European creditors has often been compared to a Prisoner’s dilemma. This foundational scenario for game theory – famously, the expert discipline of Yanis Varoufakis, the Greek finance minister – concerns two prisoners accused of a crime who are handled separately by the police. Each are given the choice either of ratting on their accomplice, or staying silent. Should just one of the prisoners choose to rat on the other, he will walk free with a reward while his mate languishes in jail. If both hold firm, they each walk free unrewarded, while if they each betray their friend, then both are thrown into jail. Read more
As SocGen’s Kit Juckes says, the main topic in currency markets may be the resilience of the euro in the face of the ongoing Greek
tragedy (ed – no, sorry) comedy (ed- really now, no) thing.
I wouldn’t know. I’ve been on holidays.
But in case that’s true, here’s Nomura’s Jens Nordvig on why it might be holding up. Read more
Might have to pop this at the top, it’s a chart with lots of negative yield stuff on it after all:
Now, as we have said before… friends don’t let friends extrapolate too wildly from the IMF’s COFER data. Read more
From a hyperbolic Citi, a new normal stat du jour:
The end of the world as we know it is approaching. Very few market participants remember a bond market where the structural trend in yields wasn’t relentlessly lower.
We can continue to quibble about the scope for marginal performance in both rates and credit – and quibble we will over the coming months. But for all intents and purposes any € fixed income investor is now picking up pennies – if not outright paying for the privilege of taking someone else’s credit risk. The 30yr bull-run in fixed income is on its last legs.
One third of €-denominated bonds have negative yields. 82% now yields less than 1%
General collateral rates are known to get volatile as banks scramble for liquidity ahead of the quarter’s close.
But this March 31, GC rates didn’t just get volatile. They went positively paraobolic.
According to Bloomberg Data, the overnight US dollar GC rate more than doubled to 0.45 per cent, a rate not seen in the markets since October 2012. They fell back to 0.2 per cent range on Wednesday, implying there’s no systemic threat to talk about, but the spike does prompt questions over how and why a funding mismatch of this level might have come about. Read more
Citi’s Chief Economist Willem Buiter spent some time with FT Alphaville explaining why he believes Draghi’s concession on profit and loss sharing among ECB member national central banks turns, in all likelihood, the single monetary unit into nothing more than a glorified currency board.
Quick background: The ECB’s profit-and-loss sharing mechanism became a key negotiating point ahead of European QE. For the Bundesbank, QE was only viable if NCBs assumed most of the responsibility for losses on assets they brought into the consolidated balance sheet. In the end Draghi acquiesced by reducing risk-sharing to only 20 per cent of assets.
A currency board works by pegging liabilities (central bank reserves and currency) to an exchange rate target, rather than a CPI or employment target. The monetary authority managing the board achieves the target by ensuring all commercial entities served by the system can convert the authority’s liabilities into foreign currency at any point. In short, there’s a guaranteed FX convertibility promise at the central bank. Read more
From JPM’s Raphael Brun-Aguerre
And from the same source (with our emphasis): Read more
Is this nuts?
…the speed of the Euro depreciation is starting to look very fast. We are in the 99th percentile (at least) of 3M, 6M, 9M, and 12M moves since initiation in 1999.
– Nordvig, Nomura
Over the last eight months the USD has appreciated faster on a trade-weighted basis than at any time in the last 40 years and probably over a longer, much longer duration.
– Englander, Citi
Which, again, looks like this: Read more
You know how Bitcoin miners get a natural advantage in the cryptocurrency pyramid of inequality because of being early adopters that get first dibs on all new currency that’s created?
Turns out the ECB has a similar problem.
Here’s a nice write up of the distributive problems associated with QE-style helicopter drops in the current asset-purchasing framework from Pierre Monnin, a fellow at the Council on Economic Policies (our emphasis):
In practice, targeted money drops, like quantitative easing (QE), do not spread instantaneously throughout the economy. Like a vaccine, money is injected at one place and then disperses more or less quickly to other areas. Stephen Williamson and Olivier Ledoit have closely looked at how a money injection moves through the economy. They both use a model in which different economic groups trade randomly and repeatedly with each other.
You may have noticed that a US dollar goes a lot further in much of Europe than it used to. In fact, it goes about 25 per cent further. From our colleagues at FastFT:
The Swiss National Bank made G10 FX a lot more fun to watch today. One interesting thing is how the options markets responded.
Via Jared Woodard of BGC, here’s a chart comparing the move in one-week implied volatility in the exchange rate between the Swiss franc and the euro — basically, the cost of hedging the risk that the franc appreciates plus the cost of hedging the risk that it depreciates — against the actual move in the EURCHF exchange rate: Read more
Despite many recent reforms, standstill in euro area output and prices–alongside renewed debates on Grexit–have put fundamental questions about the euro back on the map. Perhaps, argues Peter Doyle, economist and former IMF staffer, that is because the key question about the euro has yet to be posed.
________________________ Read more
From JPM’s Flows & Liquidity team, this is what ECB QE incontinence looks like:
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
Numbers are limited, so no more than 6 downloads per registered user please. (Before you click, it’s an 8meg file.)
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
What ails Europe is not “secular stagnation” or “normalisation”, but rather the much more specific problem of a “Euroglut”.
So, at least, says George Saravelos at Deutsche Bank.
His argument relates to the idea that the global imbalances which were created by Europe’s massive current account surplus are becoming the defining variables which will drive a weaker euro, low long-end yields and exceptionally flat global yield curves, as well as ongoing inflows into “good” EM assets. Read more