The Federal Reserve has pursued the unprecedented monetary policy of lowering rates to zero and increasing their portfolio from 500 billion to over 4 trillion. But as the Fed reminds us, there is a cost.
The central bank on Friday increased the interest rates on reverse repo by 10bp - the last time the PBOC raised OMO rates was more than two years ago in 2014. The PBOC also increased SLF rates, in what some have dubbed "the Most Important Unnoticed Global Event."
"...someone with a great risk-adjusted return might have employed a strategy of selling way out-of-the money puts on equities since late 2008. That strategy would have produced great return/risk performance, almost like a money machine, but the trouble is that type of strategy also embeds a large tail risk. So even though the track record of this strategy would show low volatility, there would be the risk of catastrophic losses... Ironically, many strategies with low volatility are the most susceptible to event risk.
A probe into October’s sterling "flash crash" has focused on the Japanese trading operations of Citigroup, which fired off repeated sell orders that exacerbated the pound’s fall. One of the US bank’s traders "panicked" and placed multiple sell orders when the currency slumped in unusually fragile market conditions.
China’s central bank will limit the amount of renminbi that Chinese companies and individuals can remit outside the country, imposing a cap for the first time in more than two decades to stem the yuan’s outflow as the currency plumbs daily lows.
While the term 'stress test' has been applied almost mockingly to European and US banks in an effort to create confidence for investors (because if the government sees risks 'contained' then why worry), this morning's Bank of England stress test results highlighted "capital inadequacies" for three major UK banks. While Barclays and Standard Chartered fell short, it is taxpayer-owned Royal Bank of Scotland that is slumping on a need to cut costs, raise capital, and sell assets.
"Monetary policy is no longer what’s driving these moves. Increasingly, central banks see themselves in a defensive role, reacting rather than dictating trends. The greenback’s rally is already forcing Asian and Latin American central banks to protect their currencies. More such moves may be in the offing if dollar gains continue.... But for now, after growing weary of monetary-led slow growth, markets are grasping at Trump’s answer to the New Normal."
In what may or may not be a coincidence, just hours after Bloomberg reported that DB launched a probe into whether it "misstated" derivatives, moments ago the FT reported that the Bank of England is seeking details from large British banks on their current exposure to Deutsche Bank and some of the biggest Italian banks, including Monte dei Paschi, "amid mounting market jitters over the health of Europe’s financial sector."