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.

(more…)

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.

(more…)

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.

(more…)

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.

(more…)

The unpleasant dynamics of fiscal tightening

March 12, 2013

A new IMF paper argues that the short-term negative feedback of fiscal consolidation on economic growth is particularly strong at present, because of lending constraints, limits to monetary easing, and the global scope of restriction. As a result, fiscal tightening in today’s developed countries may, by itself, initially raise debt ratios over and above their trajectory without fiscal action. While the effect may not be lasting, it can lead to dangerous dynamics if financial markets fixate on debt dynamics and governments engage in multiple rounds of tightening.

(more…)

Asset overvaluation and bubbles

March 9, 2013

Ever wondered why an asset or asset class maintains an implausibly high price? A new IMF paper summarizes research on “bubbles”, the phenomenon of a lasting overvaluation. It suggests, for example, that the focus on relative performance among asset managers and the presumption of informed decisions by peers causes herding. Also, limited liability of managers and leveraged institutions encourages upside risk taking. Meanwhile, sell-side research, rating agencies, and accountants often lack the incentives to pre-emptively reveal downside risks. Political and institutional aversion to short selling aggravates overvaluation bias.

(more…)

A Fed view on low long-term yields

March 9, 2013

Federal Reserve Chairman Bernanke recently explained globally low long-term yields as a combination of anchored inflation expectations, negative real policy rates, and a compressed term premium. The latter is seen as the key development since 2010 resulting from (i) the surge in private demand in the wake of reduced nominal volatility and negative correlation with risk markets and (ii) a surge in public demand resulting from asset purchase programs and FX reserves replenishing. Bernanke emphasizes that the Fed, markets, and forecasters all expect long-term yields to drift higher by 50-75bps per year through 2017. Yet, actually his reasoning would make a sustained directional change in yields contingent on fading crisis and deflation fears.

(more…)

CS on systemic risks of China’s shadow banking

February 25, 2013

Credit Suisse’s Dong Tao and Weishen Deng nicely summarize causes, size, and systemic risks arising from China’s rapidly growing shadown banking sector. Low regulated bank interest rates and rationed supply of credit have created ample incentives to by-pass the regular banking channels. By end-2012 the shadow banking sector has soared to about 44% of GDP and continues expanding at a torrid pace. Meanwhile, poor transparency and lack of risk management and regulation bode ill for credit and liquidity risks, and even a state bailout could involve a drastic deterioration of credit conditions.

(more…)

Discrediting euro area crisis-driven austerity

February 23, 2013

Paul de Grauwe and Yuemei Ji have produced disarmingly simple charts that show why the euro area’s 2010-12 crisis response is being discredited. Essentially they illustrate that (i) market conditions rather than fundamentals have driven large absolute changes of credit spreads, (ii) fiscal tightening has been a mechanical response to credit spreads, and (iii) austerity has largely been self-defeating. Such evidence of failed excessive austerity dovetails anti-euro populism, underpinning euro area policy change towards more accommodation.

(more…)

On the risks of a new U.S. credit overheating

February 17, 2013

An interesting speech by Jeremy Stein emphasizes the ingrained tendency of financial institutions to boost earnings by selling tail risk insurance in forms not covered by covered risk measures and regulation. Hence, financial innovation, changes in regulation, and macroeconomic changes often result in credit market overheating through implicit subordination in conjunction with excessive maturity transformation. At present such tendencies may materialize in the rising share of low-grade credit issuance, the rapid expansion of agency mortgage REITs, and the increasing maturity of securities in bank portfolios. For the future, the expansion of collateral swaps and other forms of collateral transformation deserves attention.

(more…)

Tags

Tags
asset management Asset Purchase Program banks bond returns bond yields bubbles capital regulation carry China collateral commodities credit returns default ECB economic data EM equity returns euro area crisis Fed financial crisis FX FX interventions FX returns government debt government deficits herding inflation information insurances Japan leverage liquidity machine learning market turmoil price factors regulation risk management shadow banking statistical methods term structure trend following variance risk premium VIX volatility ZLB
ABOUT US

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.

FOLLOW US
Linkedin
LEGAL
Research
Quantamental Academy
About Us