This might get zeitgeist-y, but stay with us.
It’s basically the idea that extreme events and outcomes are getting more common, in part because systems are getting more complex — it’s played out through inequality stats and in the polarisation of politics, geography, the economy and markets.
It’s also charted by Citi’s Matt King in his latest note: Read more
It’s all a bit messy at the moment — European banks, Japanese banks post the BoJ’s move negative, er other stuff — but it’s not really clear what’s actually going on.
This seems like a decent list of possibilities, from Citi’s Steven Englander:
We think the following concerns are weighing on the market.
1. US economic fragility means there is no one to depreciate against
2. Too many simultaneous issues and policy coordination unlikely.
3. QE/negative rates have lost their financial market impact,
4. QE/negative rates have lost their economic impact
5. QE/negative rates are constrained by bank profits
But his colleague Matt King has a somewhat more involved, if not entirely separate, explanation for what he says is, at the surface, an orderly sell-off but which hides a number of indicators under “extreme stress”.
Basically, it’s all about bank balance sheets coming under pressure. Less basically, he suggests these dislocations “raise awkward questions about the entire narrative which led to the wave of post-crisis bank regulation.” Read more
So, hypothetically, the world has reached its current credit limit. Which, again hypothetically, explains this kind of thing. From Citi’s credit maven, Matt King:
Some of you may remember how the ECB fecked up last week, when “an internal procedural error” meant an eventually market moving speech given by one Benoît Coeuré on Monday to, amongst others, a load of hedgies wasn’t made public until Tuesday morning.
The speech — apart from starting a debate about Chatham House rules, priviliged information and knee jerk responses by the ECB — was about ECB plans to front-load their bond purchases in May and June.
And as Citi’s credit specialist Matt King said: “If the ECB had wanted to test the extent to which traders were hanging on their every word, they could hardly have come up with a better experiment than to promise to boost the pace of QE purchases today, only to cut it back during the summer.” Read more
Actually, the way Creditsights frames the question about credit issuance is “can it continue?” which points to their answer: probably, even if not at peak levels.
Speaking of which, if you have an investment grade credit rating, you must have been enjoying the party.
USD fixed-rate investment grade corporate issuance totaled $265 bn in the first quarter, which was a $75 bn increase over 4Q13 numbers and $30 bn greater than the amount seen in the first quarter of 2013. The 1Q14 tally only trails two prior periods: the $285 bn in 1Q09, when issuance was boosted by the TLGP program, and the $278 bn seen in 1Q12.
Returning to that theme of sticky risk, the search for yield and returns and what happens when the Federal Reserve et al point towards the exit, here are some charts of the divergence between fundamentals and markets courtesy of Matt King at Citi.
The point, as ever, is that while the Fed is handing out donuts then you want to grab your share. But everyone has been eating free food for a long time now, and there are a lot of fat and happy credit investors to fit through the door when the donuts run out… Read more
A holiday tradition from Citi’s credit strategist, hat tip to Tracy Alloway for passing along:
Walking in a credit wonderland Read more