Central bank intervention
Citi’s Matt King has some harsh words for central bankers ahead of this week’s gathering in Jackson Hole, Wyoming: he says they’ve broken the market. King echoes a group of fund managers who say central banks’ stimulus efforts are distorting the way global markets function. The problem is this: with negative yields on $13 trillion of safe assets, investment managers are crowding into the shrinking group of investments with yield — or into securities they may be able to sell to central banks.
That’s it. That thing that seemed first impossible, then worryingly plausible, then shockingly probable — it’s actually happened. The stunning vote for Leave hasn’t just cratered financial markets. It also introduces a period of baffling uncertainty that, we suspect, far too many advocates of Remain have been too complacent about ever having to face one day. But ready or not, it’s here. As far as we can tell, these are the immediate questions raised by the stunning outcome:
Friends, advisors, clients, counterparties: it’s almost over. By Friday we’ll have emerged from the tyranny of the Brexit campaign into a brave new world where either: a) things will be the same and we’ll still be arguing about it; or b) things will be the same but we’ll be arguing about it in Brussels and maybe there’ll be less immigration, eventually, who knows. In the meantime, the Civil Service is trying to remember what trade negotiations are like; currency traders are girding their loins for an orgy of volatility; and the FX strategists over at Credit Suisse are looking back to Black Wednesday for clues on just how royally screwed (or Absolutely Fine) we’ll be in the event of a Leave vote and subsequent sterling crash. Namely, in the event the Bank of England decides to intervene in the currency markets to protect the pound, will it be successful and can it depend on help from the Fed, ECB and BoJ? First some Black Wednesday history, chartified:
The first question is whether there was a lovely new, but secret, currency accord agreed at the G20 in Shanghai in February. The answer is: Probably not.
Ben Bernanke first gained the catchy but unfortunate nickname “Helicopter Ben” when he gave a speech in 2002 endorsing Milton Friedman’s idea of a metaphorical helicopter drop of money as an extreme but effective way of combating deflation – a moniker that haunted him when he introduced a $4tn quantitative easing programme at the Federal Reserve. But in his latest blogpost at Brookings he has cautiously endorsed the concept again. While careful not to step on current Fed chair Janet Yellen’s toes by suggesting at all that this is a likely course of action – and the US economy is doing fairly well, if unspectacularly – he now writes that it shouldn’t be ignored as a policy tool:
Or, pictorially, what’s up with this? And we mean apart from the whole “hey, we gave you negative rates why aren’t you giving us weaker yen?” thing as we’ve already spread plenty of pixels on a webpage about that. It’s more about they strong negative correlation between the yen and equities on show in that chart.
Kuroda et al might want to look away: That’s the yen being “whacked to the lowest since October 2014″ (when the BoJ decided to extend its easing programme) in the words of Citi’s FX team. It’s now under Y109 having been at Y125 in June last year. Also from Citi:
You may have come across this story about Barclays partnering up with a “Goldman-backed” bitcoin payments app called Circle International Financial, which uses bitcoin to transfer central bank currencies as digital money increasingly moves into mainstream finance, and thought “wow” that sounds innovative and exciting. But is it? Is it really all that innovative? Let’s break down some of the key claims being made.
Bearer securities have been a thing since the dawn of finance (and specifically the dawn of the eurodollar security market). BUT! They were supposed to have been phased out years ago due to their capacity for misuse in shady dealings, not to mention Die Hard plot lines — or so at least the popular narrative went. The phasing out came part and parcel with regulatory efforts focused on dematerialising and registering assets in common databases, with intermediaries at best playing the role of proxy owners on a trust basis with clients. One fascinating insight from the ICIJ’s Panama Papers leaks, however, is that we may have over-estimated the degree to which bearer securities were phased out in the international system these last few decades. To the contrary, the papers point to the highly prolific and institutionalised use of bearer structures in the offshore tax haven world, at least up until the 2008 crisis took place. (Panama itself only got rid of the bearer structure at the end of last year).
By Nomura first, who are worried that Japan’s economy has taken a dangerous turn — what with GDP dropping at an annualised rate of 1.4 per cent in the fourth quarter and Abenomics being felt for a pulse:
Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be: If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis):
Jaime Caruana, the general manager of the Bank for International Settlements, and the former boss of the Bank of Spain, gave an important speech Friday, which, among other things, highlights the radically different frameworks economists use to evaluate what’s going on. In textbook macro models, economies grow at some “trend” rate based on productivity on population growth, except when occasionally buffeted by “shocks” in different directions such as an oil price spike or a tax cut — shocks that fade in importance over time as economies “naturally” return to their “trend”. In these models, policymakers should focus on boosting productivity, which improves the trend path, and establishing institutions that smooth out the impact of the shocks when they occur by temporarily shifting resources to those most affected. Little else matters.
Here begins a tale of how the Bank of England’s settlement system got broken without anyone really noticing… On October 20 2014, the BoE suffered an embarrassing collapse of its real-time gross settlements (RTGS) system, forcing it to revert to manual processing for large payments such as CHAPs for about a day. At the time, Bank personnel, bankers and the market in general passed the incident off as largely a technical issue, like a site falling down or a regular IT fail. Nothing to lose sleep over. But the incident was arguably much graver than that. A long-standing RTGS collapse would have constituted nothing less than a systemic collapse of the sterling monetary market with potentially catastrophic consequences for the UK economy. Think human sacrifice, dogs and cats living together, mass hysteria. That sort of thing. Also never pointed out at the time was how the events of 20 October 2014 linked back to the banking crisis of 2008.
Bank of Russia Governor Elvira Nabiullina is leaving it to the market to imagine when a ruble collapse will pose a threat to financial stability and force policy makers into action. So far it hasn’t, and the currency is close to its “fundamental levels,” Nabiullina said in an interview on Wednesday. Other top officials also took the crisis in their stride, with President Vladimir Putin saying that changes in the exchange rate are actually opening up “additional opportunities” for some businesses. - Bloomberg, Jan 21 - Markets, Jan 21
The man who knows about the size of central bank reserves needed to defend domestic economic stability says this on Thursday at an economic forum in Sri Lanka (via Bloomberg): “China has a major adjustment problem,” Soros said. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.” Which is apropos because, via Reuters, on Thursday: China FX reserves fall $512.66 bln in 2015, biggest annual drop on record – RTRS BEIJING, Jan 7 (Reuters) – China’s foreign exchange reserves, the world’s largest, fell $107.9 billion in December to $3.33 trillion, the biggest monthly drop on record, central bank data showed on Thursday. The December figure missed market expectations of $3.40 trillion, according to a Reuters poll. China’s foreign exchange reserves fell $512.66 billion in 2015, the biggest annual drop on record. The value of its gold reserves stood at $60.19 billion at the end of December, up from $59.52 billion at the end of November, the People’s Bank of China said on its website. Gold reserves stood at 56.66 million fine troy ounces at the end of December, up from 56.05 million at end-November.
Today’s market priorities in one handy sentence, via SocGen’s Kit Juckes: With the USD/CNY fix up above 6.53 and the USD/CNH rate heading for 6.70, not to mention a reported hydrogen bomb test in North Korea and a weak milk auction yesterday afternoon.. Which is to say that you should all be watching the China devaluation threat building. The USD is up 1.1 per cent against the CNH, the offshore market unit, today.
As has been well reported, the IMF has recommended that China’s renminbi should join the basket of currencies used to value its own de facto currency. There’s been lots of talk, as a consequence, of China now being in a position to properly disrupt the US dollar’s global reserve currency status. Except, SDR inclusion doesn’t imply anything of the sort. Furthermore, we’ve very much been here before*.
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.
When your correspondent visited pawnshops in Macau this week and asked whether they could help him shift 1m yuan ($157,000) out of China—three times what one can legally withdraw in a year—most demurred. - Anon (ish), Economist, Sept 19 Sad really to see them in such decline, even if said correspondent did find a brave few who would help. Nervous times is the headline reason for their nervousness, what with all those police raids and a general chill redescending along China’s capital-borders as flows out of the country continue to make the government nervous — even if some of the headline outflow (a record of over $150bn or so in August according to estimates) is probably just dollars being hoarded by Chinese corporates, it’s very clearly a point of stress for China’s leaders. Which is fair when you consider what it would mean for Chinese reserves if it chooses to absorb the capital outflows and what it means for the CNY if it doesn’t.
Nobody knows China like Michael Pettis, and his latest post on the RMB doesn’t disappoint. Before we get to the crux of his argument we should point out that FT Alphaville has long argued that the RMB was probably over rather than under valued, based on its capital account position. Understandably we were feeling a bit chipper with our analysis following last week’s depreciation, until we read Pettis this morning. The Beijing-based academic argues convincingly that the RMB is still under valued because there’s a big difference between a technical misvaluation and a fundamental one.