From Nomura, with our emphasis:
According to today’s official People’s Daily [link here and Bloomberg writeup here], an “authoritative” person who was not identified indicated that China should not support growth by adding leverage. “High leverage will lead to high risk; if not well controlled, it will lead to systemic financial crisis and negative growth”. Considering China’s severe structural problems, this “authoritative” person believes that “China’s economic growth trend in future should be ‘L-shaped’, rather than ‘U-shaped’, not to mention ‘V-shaped’”, which suggests that growth will trend lower. This individual believes China should avoid using strong stimulus to raise investment growth in the short term, as it would create larger problems later. For now, the most important thing, in this person’s view, is to push forward supply-side reforms (i.e., cutting over-capacity, reducing property inventory etc.) and actively but steadily reduce leverage.
The influence of the ‘China factor’ on currency markets is waning.
That at least is the view of HSBC’s FX strategy team, headed by David Bloom. Read more
An interesting debate is popping up regarding the topic of capital expenditure.
Take the latest from Societe Generale’s Andrew Lapthorne and team. They argued on Thursday that the commonly held belief that companies’ capital investing ratios have been falling, whilst hoarded cash pools have been going up, is inaccurate. Read more
Some interesting stuff on corporate balance sheets from SocGen’s Albert Edwards on Wednesday.
Edwards observes, for example, that corporate leverage is finally recovering after a temporary retraction:
Standard Chartered’s increasingly bullish China team are arguing that fears of an aggressive deleveraging process are wide of the mark. If they’re right (implicit Chinese data opacity warning there), it’s a reason for some short term cheer but longer term worry — and it’s something the new leadership being ushered on to the stage in Beijing will have to take control of.
According to our numbers, China’s total leverage will rise from 191% of GDP at the end of 2011 to 206% by the end of this year, as we show in Figure 1.
Credit Suisse has totally bored Matt Levine at Dealbreaker with their latest earnings announcement.
There are only so many ways to outperform in banking. But these days balance sheets are constrained, regulations are biting, and financial ‘innovation’ raises eyebrows. It’s just dull, in some respects.
Here’s Matt, bemoaning the utterings of Credit Suisse CEO Brady Dougan:
I had so much hope!
Click the pic to peruse the UK government’s white paper on bank reform, published on Thursday in response to Vickers…
The consultation is open until September. On a quick read-through we’d highlight some of the proposed exemptions from ring-fencing retail ops — also this move on leverage ratios: Read more
Or, old-fashioned fun with default correlation.
By this point it is not looking good (if it ever really did) for the touted levering of the EFSF’s resources by borrowing from, or insuring in some way, the European Central Bank’s operations. The reasons for this are partly legal, mostly German, and in the last resort pretty much all to do with the leverage and/or loss tolerance being neither practical nor credible. Read more
Rather than start directly with the weekend rumour of using the European Central Bank to “leverage” the EFSF…
… instead we’ll start what the ECB has done with the current Greek bond swap (these are answers to questions from the official bond swap website): Read more
So much focus on government debt lately — won’t somebody please think of the household leverage?
Morgan Stanley’s Global Monetary Analyst team has: Read more
Your daily dose of financial innovation, right here.
Flexi ABS Trust 2011-1 may be a structured finance deal you’ve never heard of, but it’s making waves amongst securitisation types in Australia. Put simply it’s the first ever Australian deal to bundle interest-free payment plans for retail goods like jewellery, gym equipment, furniture and the like, according to Moody’s. Read more
Risk-weightings for bank assets are still relatively new things.
Codified in the Basel II rules first published in 2004, they were meant to shift financials away from set levels of required capital, tailoring them to the perceived amount of risky assets held by banks. Read more
We ♥ this note from Bank of America Merrill Lynch’s Ruslan Bikbov and Priya Misra.
It’s on a subject dear to our own hearts here on FT Alphaville — the curious case of persistently low volatility and the idea that it might be masking systemic risk. It also weaves together a plethora of other themes — massive short volatility positions, search for yield, correlation, LTCM – we’ve touched on. Read more
Whatever happened to China’s amazing copper collateral shenanigans?
Goldman Sachs said last month that China’s central bank may have cracked-down on the scheme, which saw Chinese corporates use copper as collateral for new loans. Meanwhile, attention turned to other commodities that could potentially be used by China’s companies in a similar way. Read more
US bank use of debt to juice up returns in their trading books is almost twice that of the average hedge fund, according to a report from JPMorgan, says the FT. Hedge funds have been steadily reducing their leverage since 2008, the report found. In contrast, bank leverage has remained sharply elevated. The bank’s analysts estimated leverage using a proxy based on the higher volatility of trading returns versus the volatility of the underlying assets that were invested in. For banks, the ratio of these measures stood at 1.5, having peaked in the second quarter of last year at 2.2. For the average hedge fund it was just 0.7.
Investors are tired of hedging against unrealised tail risks. That much we know.
What happens, though, when that tail risk does emerge and investors rush to hedge the unthinkable, once it’s a bit more thinkable? Please meet the CoCo death spiral. Read more
In spite of a growing appetite for risk and a sense of a once-in-a-generation set of market opportunities, hedge fund managers continue to be wary in their use of leverage, according to the FT. According to data from Credit Suisse, made available to its hedge fund clients last week, the average hedge fund started 2010 with leverage of about 2.53 times and ended the year with leverage of about 2.52 times, rising to as much as 2.68 in March. The level has since risen to 2.65 times, says Credit Suisse. Financial News adds that the Swiss bank found that investors are looking for uncorrelated returns further afield, beyond just emerging markets strategies.
Spread better IG Group has taken a full write down of the goodwill associated with its Japanese business FXOnline — its biggest operation outside of the UK, reports FT Alphaville. The £123m impairment follows new leverage limits being introduced in Japan’s forex and equity index markets. Leverage in FX was restricted to 50 per cent in August, while a limit of 10 times leverage was introduced for equity indices at the start of this year. IG Index had warned investors in December that its foray into the Japanese retail foreign exchange market had been “something of a disaster”. Read more
Hey, institutional investors — those Basel III capital rules really are something for European banks to worry about, aren’t they?
Err… Read more
Corporate cash hoarding is still on the rise.
And here, courtesy of UBS’s global investment strategy team, is the extent to which it’s increasing among US non-financial corporates: Read more
That’s the speed at which retail punters can be parted from their money on one of the many forex trading platforms that have sprung up in the past decade. Read more
A US regulator has softened proposals on the use of borrowed money in retail foreign exchange trades in the face of an unprecedented pushback from dealers and small traders, the FT reports. The Commodity Futures Trading Commission on Tuesday announced final regulations for spot transactions that will allow traders to borrow as much as 50 times the value of their collateral to trade major currency pairs such as dollar-yen or euro-dollar, and 20 times collateral for other pairs. The new rules, while tougher than existing limits, are much laxer than earlier proposals. Under earlier proposals, the rules would have capped retail forex leverage at 10 to one.
A big H/T to Alea for this story, plus the title.
Late on Monday, the US Commodity Futures Trading Commission released its final foreign exchange market rule. The centrepiece is the limit on leverage for firms dealing in retail forex — the decision itself, following months of weighty deliberation. Read more
The Bank of England’s executive director of financial stability has a refreshingly straight-forward answer to his self-imposed question “The Contribution of the Financial Sector: Miracle or Mirage?”
His response: Read more
Giles Thorley has called time on his reign at the Toxic Pub Company.
From a press release, issued on Tuesday morning: Read more
A Moody’s report on private equity reveals a paradox inherent to highly-leveraged buyouts: they’re a good idea in times of distress, but less positive for the firms involved when times are good. FT Alphaville has more. Read more
The CFTC has had a busy week. On Thursday the regulator unveiled details of how it plans to curb excessive speculation in the energy market.
Earlier on Wednesday, meanwhile, it revealed proposals for the spot FX market — an area that has until now escaped the scrutiny of regulators due to its over-the-counter status. Read more
Flying somewhat under bankers’ radars on Thursday, obfuscated as they are by new bonus taxes, are the maneuverings of the Basel Committee.
The Committee met on Tuesday and Wednesday to discuss a package of potential reforms to the global banking system. Under discussion were issues such as living wills, liquidity buffers, possible leverage ratios (the three `L’s if you like). And if the below story, from Risk.net, is anything to go by it looks like they’ve made some early progress on the draft reform — which is due to be published by the end of January. Read more