US states of emergency
Mitu Gulati and Bob Rasmussen — members of the law faculties of Duke University and the University of Southern California, respectively — argue that Puerto Rico has another route to restructuring its debts… The federal courts have declared that Puerto Rico does not have the authority to enact an insolvency regime applicable to its public sector borrowers.
We hosted our New York Pub Quiz on Wednesday night. Congrats to the winning team, Lower Expectations, who defended their title from last year’s event by answering 53 out of 70 questions correctly, eking out a win over the team Paul Volcker Rules, William Miller Drools by just a single answer. We had a blast producing the event and were honoured to have been joined by former Fed chair Paul Volcker, who co-hosted the economics and history section of the quiz and even submitted a few questions of his own. For more on the night’s activity, you can scroll down through the #FTPubQuiz hashtag on Twitter, and be sure to listen to the vox-pop segment of this week’s Alphachat, in which producer Aimee Keane asked attendees for their views on the Fed and the likelihood of a China crash. First up are the questions alone (for those who want to test themselves), and halfway down begins the same set of questions with the answers provided. ROUND 1 NAME THAT FINANCE MINISTER
The FT has just published its big “When Rates Rise” package on the prospects of tighter US monetary policy. Of course, it remains far from certain that the Federal Reserve will act later this month – or even this year – but we thought a more visual guide would be appropriate. Back in the noughties, the global economy was growing at a healthy clip, and the finance industry was feeling great. Essentially, things were a bit like this.
Repo expert Scott Skyrm at Wedbush warned last week that August 24 could be a date to watch because it’s a GSIB surcharge calculation day, along with July 31 and September 30. As he stressed: Taking that one step further, traders are even thinking about September 30 quarter‐end Repo rates. And here’s another date to watch ‐ August 24th, which is the second G‐SIB capital surcharge calculation date (in addition to July 31 and September 30) We should expect some type of funding pressure and/or Repo market distortion on Monday. If there is no obvious change in GC rates, it could be that cash is permanently gone from the market through early October, or maybe even forever. With the GSE cash in the market this week and slight soft funding, it’s a good time to finance long positions through month‐end and into September.
You can sign up to receive the email here. Don’t expect that rate rise anytime soon. Minutes from the latest Federal Reserve meeting show policy makers have doubts about the strength of the US recovery. June was the expected timing for a rate rise but few of the Federal Open Market Committee think that would be the right time now first-quarter data has raised the prospect of a slowing economy. The central bank must weigh whether the slowdown was the result of the long, cold winter and a lengthy port strike, and whether the economy is in for a sharp rebound. (FT)
In a previous post we looked at which US states were the best for job growth in 2014. (North Dakota was best overall, followed closely by Utah, which has the advantage of not being reliant on energy extraction, as well as one of the highest median incomes in the US.) In this post we’re going to take a longer view of how the distribution of employment has shifted across the most populous US metro areas since 1990, when the data begin. The first thing to note is that the share of Americans employed in one of the major metro areas in our sample* has stayed relatively constant since 1990, although there have been some interesting trends over the period:
The number of Spaniards with a job fell by more than 18 per cent between mid-2007 and the beginning of 2014. That is a staggering sum, and it helps explain why Podemos, the anti-establishment party, is expected to win a large share of the vote in Spain’s elections later this year. The literalist explanation is that Spain’s real GDP fell about 6 per cent lower at the same time as Spanish labour productivity rose around 12 per cent. You could blame the euro crisis, the overhang of private debt, fiscal austerity, an undercapitalised banking system, and the strictures of the single currency for the former, and perhaps attribute the latter to the Spanish government’s reform programmes. While we don’t want to dismiss the importance of policy errors and unsuitable exchange rate regimes, much of Spain’s suffering in the bust can be explained by the structure of its economy in the long boom that preceded it. On the eve of the downturn, Spain had the misfortune of looking like a Mediterranean hybrid of Nevada and Michigan. Compared to those US states, which ostensibly benefit from their membership in a functional monetary union, Spain has actually done quite well.
With Argentina in default, the pari passu saga has become a long, ludicrous, gruelling standoff — which plenty of financial institutions and Argentina’s restructured bondholders have been trying to escape. And then running smack into the US court system. On Friday the Second Circuit Court of Appeals dismissed an appeal by Citibank to get local-law, US dollar-denominated restructured bonds (the ones with the ISIN confusion) out of the pari passu embargo:
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.
On Wednesday we wrote about the growing consensus among scholars and policymakers that unencumbered financial flows are bad, focusing on some recent research from the Bank for International Settlements. Now we want to draw your attention to a detailed historical account of the interwar and pre-crisis financial systems by Claudio Borio, Harold James, and Hyun Song Shin. Their aim is to explain which “global imbalances” mattered and which did not.
That is, Argentina filed a case at the International Court of Justice in the Hague on Thursday — claiming that US court decisions in the pari passu saga have violated its sovereign immunity in public international law. Note that Argentina originally waived immunity within the New York law bonds owned by the holdouts.
Markets: Asia-Pacific equities climbed to fresh six-year highs as investors continued to place geopolitical concerns on the back burner. The upward moves followed an overnight session that saw global equities rally, in part because sales of previously owned homes in the US rose to their highest since October. The S&P 500 touched a record intraday high but then pared gains, ending up 0.5 per cent at 1,983.5. Volatility, as measured by the CBOE Vix index, fell 6.8 per cent. Even Russia’s Micex snapped a six-day run of losses, gaining 1.6 per cent. (FT’s Global Markets Overview)
With less than a fortnight until Argentina risks defaulting on its restructured debt, there will be another hearing in the pari passu saga later on Tuesday. After a look at Argentina’s position, now for what Judge Griesa’s hearing will focus on — restructured bondholders who argue that he has no jurisdiction over them… Notably, local-law restructured bondholders.
Markets: “Asian stocks rose, joining a global rebound as better U.S. earnings offset the downing of a passenger jet in Ukraine and Israel’s invasion of Gaza. Emerging-market currencies climbed while corn fell to the lowest since 2010. The MSCI Asia Pacific excluding Japan Index advanced 0.3 percent as of 11:44 a.m. in Hong Kong, with three stocks rising for every two that fell. Futures on the Standard & Poor’s 500 Index (SPX) were little changed after the U.S. gauge climbed from its biggest loss in three months. Indonesia’s currency added 0.4 percent versus the dollar before the result of presidential elections is announced. Corn slumped 1.3 percent on U.S. production. Natural gas slid 1.9 percent.” (Bloomberg)
Markets: The influential head of the US House Financial Services Committee has called on US Treasury secretary Jack Lew to investigate whether sweeping financial reform has impaired the $10tn market for US corporate debt and risks amplifying an interest rate shock for large companies.In a letter sent this week to Mr Lew, Congressman Jeb Hensarling argued that it was the responsibility of regulators to ensure that the Volcker rule, a core element of the Dodd-Frank financial reforms that bans banks from proprietary trading, does not harm US capital markets. (Financial Times) UK ministers, led by business secretary Vince Cable, have ordered a review into the sell-off of state assets, just days before MPs publish a report that is expected to criticise last year’s privatisation of Royal Mail. Lord Myners, former City minister, will lead a panel of experts to examine alternatives to initial public offerings for privatising state assets, as well as whether the process of gauging what investors are willing to pay for shares can be improved. (Financial Times)
Camp Alphaville reminder: Yes, the colour-code used to illustrate the full line-up of Camp AV speakers has relevance. No, I don’t know what it is. (Details here) Markets: Asia-Pacific markets were given a boost as manufacturing readings for the region’s two powerhouses, China and Japan, showed a return to growth this month. SBC’s “flash” purchasing managers’ index for China jumped from 49.4 in May to 50.8 in June, beating forecasts and ending a five-month streak of contraction. Markit’s PMI for Japan rose from 49.9 in May to 51.1 in June, its highest since March. (FT’s Global Markets Overview)
Markets: Asian markets were under pressure in the face of fresh tension in Ukraine and after the S&P 500 dropped to a two-month low on Friday. However, action was muted as investors waited for key Asian data later in the week, including China GDP figures on Wednesday. The US earnings season also ramps up, with about 10 per cent of S&P 500 companies set to report this week. (FT’s Global Markets Overview)
Markets: Asian markets were in a near-frozen state ahead of the US jobs report due to be released later on Friday, which influences the Federal Reserve’s thinking on monetary policy. A retreat from risk was apparent among some Asia tech stocks, however, which followed their US counterparts lower. Wall Street paused for breath after two successive record closing highs for the S&P 500. (FT’s Global Markets Overview)
Markets: Asian markets wilted after Janet Yellen stumbled in her first meeting as chairwoman of the US Federal Reserve after sending signals that appear to point to earlier rises in interest rates. Following an overnight brief plunge in US markets when Ms Yellen implied rates could rise six months after the Fed stops buying assets, Asian currencies and equity markets opened lower. (Financial Times)
Markets: Asian equity markets pulled back in response to more signals that the US economy slowed down last month. US equities were held back from reclaiming record highs after a survey of US homebuilder confidence saw its biggest monthly drop on record, blamed on snowstorms that hit the eastern seaboard. A reading of New York state manufacturing conditions also disappointed. (FT’s Global Markets Overview)
Markets: US and European markets might have paused for breath, but Asian markets continued to climb ahead of Janet Yellen’s first public appearance as US Federal Reserve chairwoman. Major indices in the region were positive, with Hong Kong’s Hang Seng leading in its third climb in four sessions. (FT’s Global Markets Overview)
Markets: Caution continued to reign across Asian equity markets after US stocks fell for a third straight session and as investors looked ahead to key events later in the week. In Japan, the Nikkei 225 average was 0.5 per cent lower following a 2.4 per cent fall in its first trading day of the year on Monday. In China, the Shanghai Composite was down 0.4 per cent, a fourth straight decline that placed the index at a six-month low. (Financial Times Global Markets Overview)
As we’ve noted before it’s all feeling a little 1999 out there. Lombard Street ‘s Dario Perkins agrees. He’s just released research entitled “Party like it’s 1999″, in he notes:
Markets: Asian markets were mixed, after strong US retail sales data and news that the House of Representatives passed the budget bill, increasing the likelihood of the Federal Reserve pulling back its stimulus programme. (Financial Times)
Markets: Equity markets are weaker across the Asia-Pacific region. Investors are cautious ahead of interest rate decisions in the eurozone and the UK on Thursday plus a highly-anticipated monthly US jobs report on Friday. The broad losses follow a 0.1 per cent pullback in the S&P 500, after a strong private payrolls survey increased speculation that the Federal Reserve could soon trim back, or “taper”, its stimulus measures known as quantitative easing. (Financial Times)
Markets: Asian markets were mixed, with Japanese stocks dropping from a six-year high, while China stocks outperformed. Overall, most bourses weakened as investors stayed on the sidelines ahead of important data due out later this week, including Friday’s US jobs report from November. (Financial Times)