“Helicopter money”: A practical guide for markets

June 11, 2016

If current non-conventional monetary policies fail to contain deflation risk, some form of debt monetization or “helicopter money” will become a policy option. The barriers are high but not insurmountable in the G3. Policies could range from a simple combination of QE and fiscal expansion to outright central bank funding or debt restructuring. If and when monetization of government debt becomes apparent the consequences for financial markets would be profound: the policy response to deflation risk would no longer drive bond yields lower but higher.

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How poor liquidity creates rational price distortions

June 4, 2016

When OTC markets become illiquid and dealers fail to buffer flows, institutional investors effectively face each other directly in the market. They can observe each other’s actions and position changes. For example, if large investors make offers to sell under illiquidity, the market expects to become “over-positioned” and will avoid bids at a fair price or even put in offers. In equilibrium investors transact at prices below true value and exacerbate initial negative shocks.

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Understanding market beta in FX

May 25, 2016

The beta of an investment measures its sensitivity to “market returns”. Unlike in equity, in FX the relevant benchmark for a beta cannot be a long-only index. Instead, an FX-specific beta can be based on common types of currency strategies, such as carry and trend. Currency betas measured against such benchmarks can be valuable for portfolio construction and measuring positioning risk.

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Climate change and systemic financial risk

May 22, 2016

The rise in global temperatures calls for a lower-carbon economy overtime. This poses systemic financial risk in two ways. First, large fossil-fuel reserves may become unburnable, triggering a collapse in asset valuations and a rise in corporate and sovereign default risk. Second, ecological deterioration may trigger belated and sudden policy adjustments, forcing the financial system to confront large underestimated carbon risk exposure and an economic recession at the same time.

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The China credit risk

May 18, 2016

The rapid rise of China’s internal debt stock is a global concern. Oxford Economics research shows that non-financial sector debt has soared to 250% of GDP in 2015, due mainly to a very high investment ratio alongside falling corporate profitability. Debt-to-asset ratios look worrisome in problem industries and real estate. Problem loans could be 10-15% of GDP now and might rise to systemically critical levels if the credit boom continues.

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Understanding bid-offer spreads in OTC markets

May 14, 2016

Bid-offer spreads are traditionally explained by inventory costs, operating expenses and dealers’ risk of transacting with better-informed clients. In OTC (over-the-counter) markets, however, client knowledge and market power of dealers gives rise to price discrimination in favor of clients with high volumes and sophistication. Institutional investment strategies in forwards, swaps and options that are sensitive to transaction cost must consider the institution’s standing with their market makers.

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The term premium of interest rate swaps

May 7, 2016

A Commerzbank paper proposes a practical way to estimate term premia across interest rate swap markets. The method adjusts conventional yield curves for median error curves, i.e. for recent tendencies of implied future yields to overpredict spot yields. The adjustment produces “neutral curves” or presumed unbiased predictors of future yields. The neutral curves can then be used to back out term premia.

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China housing and global base metal prices

April 30, 2016

China consumes half of the world’s base metal supply. Its housing market is the most metal-intensive large sector. A new quantitative study shows that China housing has been a key determinant of global metal prices during the boom of the 2000s and the bust since 2014. It is a crucial ingredient of forecasting models for directional commodity trading.

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Insurance companies and systemic risk

April 23, 2016

The contribution of life insurers to systemic risk has increased, according to the IMF Global Financial Stability Report. They now hold about 12% of global assets and common exposure to aggregate risk has risen. Insurers are vital for key market segments such as corporate bonds and securities lending. Meanwhile, low global interest rates have aggravated duration gaps, increased interest rate sensitivity and may encourage greater risk taking.

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The rise of EM fiscal risks

April 20, 2016

The latest IMF Fiscal Monitor quantifies the significant deterioration in emerging market government finances. The average deficit-to-GDP ratio in EM is expected to reach 4.7% of GDP this year while the average debt ratio is approaching 48%. The structural deficits of many commodity exporters seem too large to sustain if commodity prices fail to recover. Moreover, dangers from contingent liabilities related to banks and the massive EM corporate debt stock have increased.

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Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.

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