Missiles, Minutes and things ......
Friday 7th April 2017
Missiles, Minutes and things ......
Plenty of things worth a look this morning and not much time to do it, so just some quick pointers :
ref :- "Here's What Trump's Syria Strike Did to Markets , As Impact Eases" , Bloomberg Markets
Only one place to start after the overnight news that the US had launched over 50 cruise missiles at the Syrian Air Force base allegedly responsible for the use of chemical weapons against civilians earlier this week. It would be hard to overstate the potential impact of this development, given what it might say about the new US administration's future approach to other black sheep such as Iran and of course N. Korea. With the latter in mind, it may not be entirely coincidental that Chinese Premier Xi Jinping is in the States to witness Mr Trump's decisive action. The president may also hope that the strike will allay accusations that he has been altogether too cosy with Syria's ally Russia. Certainly, Russian reaction is predictably frosty and the world will be crossing fingers, toes and everything else that situation doesn't develop.
For now though markets have taken a restrained (optimistic ?) view of events, assuming it to be a one-off -- hence the comparatively muted reactions. The familiar safe-havens are still benefitting however , most obviously Gold, which at $1265 per oz has got some technical traders excited at the prospect of breaking up through some long-term moving averages. Treasury bonds and other sovereign debt have seen some "flight-to-quality" buying, as has the Japanese Yen, though in general the Dollar remains pretty firm. Oil is higher again on the back of what an escalation of the conflagration might do to oil supplies in that very vulnerable part of the world.
All the usual suspects then , though the moves are not dramatic. Let's hope the market's assessment proves to be the correct one.
ref :- "Fed's plan to shrink balance sheet still skimpy on details" , The Financial Times, Markets and Investing
Just because this article comes under the FT Explainer column, don't think it's going to explain what the Fed intends to do about a balance sheet that has been swollen by its purchases of Treasuries and Mortgage-backed Securities. Quantitative Easing has seen the Fed's holdings jump from about $750 billion at the end of 2007 to $4.2 trillion at the end of last month. The FT wouldn't be able to explain the Fed's intentions because nobody knows what they are yet, and that includes the Fed itself.
Wednesday's release of the minutes of the Fed's March meeting reveal that there's plenty of discussion about it however. Most members of the Fed believe that the process should start by the end of the year assuming the economy performs as expected. Since reducing the balance sheet would tighten monetary conditions, that would seem to endorse the view that no more than two further rate hikes will be required this year. It is extremely unlikely that the Fed will sell any of its bonds onto the market, but rather will let the bonds it owns mature without re-investing the paid-back capital , which is what it has been doing up till now.
Should it cease to re-invest totally as bonds mature (which would be easier to communicate to the market) , or should it reduce re-investment gradually (which would be less likely to spark unwelcome volatility) ?
This will be a tricky manoeuvre to pull off. If they get it wrong, increased supply of bonds and reduced liquidity, at a time of rising interest rates and other global central bank tapering of QE bond purchases, present some obvious dangers to bond markets and to the wider economies beyond.
ref :- "ECB dashes hopes of end to negative rates" , The Financial Times , International
We can assume that yesterday's offerings from two of the European Central Bank's finest, president Mario Draghi and chief economist Peter Praet, will not have gone down too well in Germany (amongst others). There may be some growing hubbub about it being time to consider the first moves away from ultra-easy monetary policy, but it didn't sound that way when listening to these two powers-that-be.
Talking about the negative deposit rate of -0.4%, Mr Draghi said that the downsides to such a policy "have so far been limited" and more than offset by the benefits provided by easier financial conditions. Mr Praet said that raising the rate prematurely would damage the effectiveness of other policies, specifically QE one assumes.
One imagines that Bundesbank boss Jens Weidmann would not agree. Not for the first time , he warned yesterday about the damage that ultra-low rates do to banks' profitability. The negative deposit rate means that private lenders are charged 0.4% to park their money at the central bank. Since they don't feel able to pass that cost onto retail customers, they end up wearing it themselves. It was time, Mr Weidmann said, to begin to head for the exit and "consider monetary policy normalization".
Mr Weidmann may not have much luck with that for a while ..... the ECB's governing council is on record as saying current rates will be maintained until it ends QE. €60 billion per month of QE purchases are planned until the end of 2017, and most expect the programme to be extended into the first half of 2018, although possibly in smaller amounts. That would mean that we're looking into the second half of 2018 before a change in the deposit rate. That is highly likely to try Mr Weidmann's patience, but right now it appears that he's going to need some pretty strong data to bring other key personnel on the ECB board round to his way of thinking .
ref :- "La Vache Qui Rit maker gets the cream" , The Financial Times, Markets and Investing
This caught our eye not just because we are tickled by serious financial articles about cheeses and laughing cows, but because it's a great illustration of just how low yields still are. Fromageries Bel, makers of "Babybel" and "La Vache Qui Rit" , have issued a €500 million, seven-year eurobond which will yield just 1.59%. Not only that, but it was over four times oversubscribed. These incredibly low levels of corporate borrowing costs can still pull one up short on occasions, but the truly remarkable thing about this issue is that Fromageries Bel has absolutely no credit rating whatsoever.
Whether you take the view that it's time to rein back Quantitative Easing or not, nobody can deny that it's been effective for companies like Fromageries Bel -- a case of "take it while you can get it" and just what the ECB intended. For savers and investors however ...... well, they may not be laughing as much as the eponymous cow.
Missiles, Minutes and things ......
Plenty of things worth a look this morning and not much time to do it, so just some quick pointers :
ref :- "Here's What Trump's Syria Strike Did to Markets , As Impact Eases" , Bloomberg Markets
Only one place to start after the overnight news that the US had launched over 50 cruise missiles at the Syrian Air Force base allegedly responsible for the use of chemical weapons against civilians earlier this week. It would be hard to overstate the potential impact of this development, given what it might say about the new US administration's future approach to other black sheep such as Iran and of course N. Korea. With the latter in mind, it may not be entirely coincidental that Chinese Premier Xi Jinping is in the States to witness Mr Trump's decisive action. The president may also hope that the strike will allay accusations that he has been altogether too cosy with Syria's ally Russia. Certainly, Russian reaction is predictably frosty and the world will be crossing fingers, toes and everything else that situation doesn't develop.
For now though markets have taken a restrained (optimistic ?) view of events, assuming it to be a one-off -- hence the comparatively muted reactions. The familiar safe-havens are still benefitting however , most obviously Gold, which at $1265 per oz has got some technical traders excited at the prospect of breaking up through some long-term moving averages. Treasury bonds and other sovereign debt have seen some "flight-to-quality" buying, as has the Japanese Yen, though in general the Dollar remains pretty firm. Oil is higher again on the back of what an escalation of the conflagration might do to oil supplies in that very vulnerable part of the world.
All the usual suspects then , though the moves are not dramatic. Let's hope the market's assessment proves to be the correct one.
ref :- "Fed's plan to shrink balance sheet still skimpy on details" , The Financial Times, Markets and Investing
Just because this article comes under the FT Explainer column, don't think it's going to explain what the Fed intends to do about a balance sheet that has been swollen by its purchases of Treasuries and Mortgage-backed Securities. Quantitative Easing has seen the Fed's holdings jump from about $750 billion at the end of 2007 to $4.2 trillion at the end of last month. The FT wouldn't be able to explain the Fed's intentions because nobody knows what they are yet, and that includes the Fed itself.
Wednesday's release of the minutes of the Fed's March meeting reveal that there's plenty of discussion about it however. Most members of the Fed believe that the process should start by the end of the year assuming the economy performs as expected. Since reducing the balance sheet would tighten monetary conditions, that would seem to endorse the view that no more than two further rate hikes will be required this year. It is extremely unlikely that the Fed will sell any of its bonds onto the market, but rather will let the bonds it owns mature without re-investing the paid-back capital , which is what it has been doing up till now.
Should it cease to re-invest totally as bonds mature (which would be easier to communicate to the market) , or should it reduce re-investment gradually (which would be less likely to spark unwelcome volatility) ?
This will be a tricky manoeuvre to pull off. If they get it wrong, increased supply of bonds and reduced liquidity, at a time of rising interest rates and other global central bank tapering of QE bond purchases, present some obvious dangers to bond markets and to the wider economies beyond.
ref :- "ECB dashes hopes of end to negative rates" , The Financial Times , International
We can assume that yesterday's offerings from two of the European Central Bank's finest, president Mario Draghi and chief economist Peter Praet, will not have gone down too well in Germany (amongst others). There may be some growing hubbub about it being time to consider the first moves away from ultra-easy monetary policy, but it didn't sound that way when listening to these two powers-that-be.
Talking about the negative deposit rate of -0.4%, Mr Draghi said that the downsides to such a policy "have so far been limited" and more than offset by the benefits provided by easier financial conditions. Mr Praet said that raising the rate prematurely would damage the effectiveness of other policies, specifically QE one assumes.
One imagines that Bundesbank boss Jens Weidmann would not agree. Not for the first time , he warned yesterday about the damage that ultra-low rates do to banks' profitability. The negative deposit rate means that private lenders are charged 0.4% to park their money at the central bank. Since they don't feel able to pass that cost onto retail customers, they end up wearing it themselves. It was time, Mr Weidmann said, to begin to head for the exit and "consider monetary policy normalization".
Mr Weidmann may not have much luck with that for a while ..... the ECB's governing council is on record as saying current rates will be maintained until it ends QE. €60 billion per month of QE purchases are planned until the end of 2017, and most expect the programme to be extended into the first half of 2018, although possibly in smaller amounts. That would mean that we're looking into the second half of 2018 before a change in the deposit rate. That is highly likely to try Mr Weidmann's patience, but right now it appears that he's going to need some pretty strong data to bring other key personnel on the ECB board round to his way of thinking .
ref :- "La Vache Qui Rit maker gets the cream" , The Financial Times, Markets and Investing
This caught our eye not just because we are tickled by serious financial articles about cheeses and laughing cows, but because it's a great illustration of just how low yields still are. Fromageries Bel, makers of "Babybel" and "La Vache Qui Rit" , have issued a €500 million, seven-year eurobond which will yield just 1.59%. Not only that, but it was over four times oversubscribed. These incredibly low levels of corporate borrowing costs can still pull one up short on occasions, but the truly remarkable thing about this issue is that Fromageries Bel has absolutely no credit rating whatsoever.
Whether you take the view that it's time to rein back Quantitative Easing or not, nobody can deny that it's been effective for companies like Fromageries Bel -- a case of "take it while you can get it" and just what the ECB intended. For savers and investors however ...... well, they may not be laughing as much as the eponymous cow.
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