"There's a liquidity conundrum in fixed income markets facing policy makers and investors: how it’s resolved will have long term investment implications across banks, asset managers and infrastructure players," a new report from Morgan Stanley and Oliver Wyman notes. The joint effort is an attempt to dig deep into the all important issue of credit market liquidity (or lack thereof) and determine the short term and long term implications.
"Proactive central banks figure this out early and fight the inevitable slowdown by implementing QE and weaker currencies. They grab the other guy’s pizza slice. Their asset markets soar. As Figure 5 shows, 70% of the world’s developed markets have inflation below 0.5% – almost as high as the depths of the 2008 financial crisis. So the USD8.6tn in central bank balance sheet expansion (from the Fed, ECB, BOE, BoJ, and PBoC, which amounts to 130% growth over Dec-07 to now) has been unable to get inflation going." - Bank of America
What happens in the event a Fed rate hike triggers widening corporate credit spreads in a corporate bond market devoid of liquidity? Could it indeed be the case that the Fed’s highly anticipated “lift-off” will serve as the catalyst for credit market carnage? Some traders think so.
For merchants in Italy, there's a tradeoff for putting up an awning that may end up casting a shadow on the sidewalk.
The only market year to date that has shown truly impressive gains in both local currency and USD terms, is also the best performing market of 2014 - China, which is now up almost 100% in less than a year! Here, courtesy of UBS, is the complete list of what may be causing China's relentless stock market surge.
the next time someone asks "why is Yellen so terrified of even the smallest possible rate hike", show them this chart above and explain that the Fed vividly remembers what heppened when LTCM blew up. What the Fed doesn't want, is not one but one thousand LTCMs going off at exactly the same time in what is now the world's most levered trade...
Borrowing in USD was risk-on; buying USD is risk-off. As the real global economy slips into recession, risk-on trades in USD-denominated debt are blowing up and those seeking risk-off liquidity and safe yields are scrambling for USD-denominated assets. Add all this up and we have to conclude that, in terms of demand for USD--you ain't seen nuthin' yet.
unlike the late summer and early fall of 2014, when the rise in the Chinese stock market could be attributed to the PBOC's PSL "QE Lite", the relentless buying leg that started in mid-November has stunned most people, as nobody has been able to figure out just who is responsible for all this buying. Until now. According to Reuters, it is precisely China's trust firms, with total assets of $2.2 trillion, and who together with Banker Acceptances comrpise the bulk of China's shadow banking pipeline, are shifting more cash into frothy capital markets and over-the-counter (OTC) instruments instead of loans. In other words, instead of using their vast cash hoard of over $2 trillion to re-lend and stimulate China's economy, China's unregulated, shadow banking conduits are now directly buying stocks!
When even JPMorgan strongly implies that the ECB's QE is about to fail, one short week after it started, now may be a time to panic: "In all, we note the above analysis challenges the ability of the Eurosystem to meet its quantitative target without distorting market liquidity and price discovery."
Central banks' ability to distort markets, inhibit price discovery, and create systemic risk is alive and well as ECB asset purchases ripple through euro money markets. "The ECB’s liquidity bazooka will likely create the conditions for all rates money markets to stay in negative territory. This would represent a very challenging environment for investors, especially those focusing on the euro money markets, whose resilience to negative rates has not fully tested yet," Barclays warns.
"While equity prices look expensive relative to real economic activity, they are arguably cheap relative to bond valuations. S&P 500 earning yields are similar to BB/B bond yields, as opposed to A/BBB yields historically, indicating excessive yield-seeking behavior in the face of reduced bond market liquidity," UBS cautions.
China is in the midst of attempting to help local governments refinance a mountain of debt, some of which was accumulated off balance sheet via shadow banking conduits at relatively high rates. According to UBS, "Chinese domestic media are saying that the authorities are considering a Chinese "QE" with the central bank funding the purchase of RMB 10 trillion in local government debt."
The entire formerly rich world is addicted to debt, and it is not capable of shaking that addiction. Not until the whole facade that was built to hide this addiction must and will come crashing down along with the corpus itself. Central banks are a huge part of keeping the disease going, instead of helping the patient quit and regain health, which arguably should be their function. In other words, central banks are not doctors, they’re crack dealers and faith healers. Why anyone would ever agree to that role for some of the world’s economically most powerful entities is a question that surely deserves and demands an answer.
The BoJ's Takahide Kiuchi warns of “dire consequences” if the central bank continues to blatantly disregard the “side effects” of QE and also expresses skepticism about the ability of further asset purchases to boost inflation, going so far as to suggest that the BoJ’s prediction of 2% inflation by mid-2016 is nothing more than a fairytale.
- 3 days after Zero Hedge, here's Bloomberg: Company Cash Bathes Stocks as Monthly Buybacks Set Record (BBG)
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- Before Key Speech, Netanyahu Hails U.S. Ties (WSJ)
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- Barclays Awards Jenkins First Bonus as CEO, Cuts Pay Pool (BBG)
- Exxon’s Russia Exposure Surges as Long View Outweighs Sanctions (BBG)
- Obama says Iran must halt key nuclear work for at least a decade (Reuters)
- Yellen Turning from Friend to Foe for Dollar Bulls (BBG)