The effectiveness of non-conventional monetary policy

May 18, 2013

The latest IMF publications on non-conventional monetary policies affirm their effectiveness. This seems to hold true for all major forms, i.e. government bond purchases, forward guidance, and private asset purchases. However, bond purchases are likely to yield diminishing effects going forward. Their initial stimulus seems to owe much to the signalling of commitment and the repair of broken markets. Also, the economic impact seems to have a time limit. Meanwhile additional credible yield compression becomes ever more difficult as the zero boundary is drawing closer and central banks would struggle to extend commitments to ever longer durations.

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Historical precursor of Abenomics

May 13, 2013

Warwick professor Nicolas Crafts notes that the UK’s exit from recession and deflation in 1930s has similarities to Japan’s current expansionary policy. At the time the UK managed recovery and reflation through very low rates and initial currency devaluation. Crafts argues that such strategies may require abandoning inflation-targeting independent central banks.

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China’s highly leveraged state-owned corporates

May 3, 2013

Morgan Stanley’s Viktor Hjort, Nishant Sood, and Gaurav Singhal show that financial leverage of China’s corporates has reached record highs, particularly for state-owned enterprises (SOEs). Increased debt financing reflects easy credit conditions and has partly served to cover funding gaps. In case of an economic downturn, consequences for credit quality would probably be more severe now than back in 2009.

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Improving the information value of dividend yields

April 24, 2013

Marco Dion, Viquar Shaikh and colleagues at J.P. Morgan Cazenove illustrate how the information value of equity dividend yield can be enhanced. Their measure of “shareholder yield” integrates dividends with other forms of cash returns, i.e. share buybacks and debt redemption. They present evidence that for U.S. and European stocks the enhanced measures creates alpha for systematic trading styles.

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Nomura research on rising China crisis risk

April 23, 2013

According to Nomura’s Zhiwei Zhang and Wendy Chen, “China is displaying the same three symptoms that Japan, the US and parts of Europe all showed before suffering financial crises: a rapid build-up of leverage, elevated property prices and a decline in potential growth…the most vulnerable areas are local government financing vehicles, property developers, trust companies and credit guarantee companies.”

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Useful summary of fiscal developments from the IMF

April 20, 2013

The IMF Fiscal Monitor provides the usual insightful global summary of public finance trends. It reveals significant progress in the reduction of structural deficits in the developed world, at the price of drastic fiscal tightening that will aggravate further this year. However, public debt ratios have yet to peak and their current levels bode ill for future growth and government shock-absorption capabilities. A major implicit concern is Japan, where the structural deficit has not been reduced and both net and gross debt have been soaring.

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The impact of non-conventional monetary policy on financial markets

April 19, 2013

The April 2013 IMF Global Financial Stability Report takes stock of the market impact of non-conventional central bank policies. In particular, the latter have replaced traditional interbank and money market activity, turned the Fed into a dominant player in the U.S. MBS market, and made all G4 centrals banks (and particularly the Bank of England) a major holder of local government debt. The politically mandated biases in market prices could unwind disorderly if and when economic development mandates a reversal of non-conventional policies.

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Europe’s financial transaction tax and the consequences

April 18, 2013

A recent HSBC report argues that the planned financial transaction tax in the Eurozone will have a profound negative impact on investment returns, as well as on liquidity in cash products and derivatives. The tax is expected to be introduced next year and have broad implication well beyond the countries that have agreed to it.

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Japan’s “Quantitative and Qualitative Easing”

April 14, 2013

On April 4 Bank of Japan Governor Haruhiko Kuroda unveiled aggressive “Quantitative and Qualitative Monetary Easing” (QQE), in order to meet a 2% inflation target within two years after 15 years of deflation. QQE means a shift of the operating targeting of the central bank to the monetary base, massive planned bond and other asset purchases, and a significant extension of duration in bond purchases. Market commentators almost uniformly concluded that QQE marks an extraordinary policy shift with historical dimensions and significant implication for global asset prices.

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Why and when “equity duration” matters

March 23, 2013

A new HSBC report suggests that if and when Quantitative Easing is being reversed it could be a watershed event for sectoral equity performance. Their view is based on the concept of “equity duration”. The long-standing outperformance of low-beta and high-quality stocks, which have longest duration and benefited most from three decades of falling yields, should come to an end and be replaced by relative strength of cyclical, financial and materials stocks.

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