Thursday, 29 January 2015

Markets fall despite Fed patience

The Federal Reserve left monetary policy unchanged on Wednesday.

While the Fed noted in its monetary policy meeting statement that economic activity has been expanding at a “solid pace”, it also said that it “can be patient in beginning to normalize the stance of monetary policy”.

Investors did not seem to take much comfort from the Fed statement though. Markets mostly fell on Wednesday. The S&P 500 fell 1.4 percent, US 10-year Treasury yields fell 10 basis points to 1.72 percent and oil plunged 3.9 percent.

In Europe, the STOXX Europe 600 managed to close up 0.1 percent. However, Greece’s 10-year bond yields rose 87 basis points to 10.35 percent, Italy’s 10-year yield increased six basis points to 1.59 percent and Portugal’s climbed 15 basis points to 2.59 percent.

Wednesday, 28 January 2015

Markets fall as US durable goods orders show decline

Markets fell on Tuesday.

The S&P 500 fell 1.3 percent amid concerns on the economy. A report on Tuesday showed that orders for US durable goods declined 3.4 percent in December after falling 2.1 percent the prior month.

The STOXX Europe 600 fell 1.0 percent, ending an eight-day rally that had taken it to a seven-year high. Greek stocks fell 3.7 percent, extending declines since Sunday’s elections to 6.9 percent.

The Shanghai Composite Index fell 0.9 percent after closing at a more than five-year high on Monday.

The US dollar fell against the euro and yen while the US 10-year Treasury yield fell one basis point to 1.82 percent.

Among commodities, copper fell 3.2 percent but gold, natural gas and oil rose.

Monday, 26 January 2015

Markets rally on ECB bond-buying announcement

Markets rose last week, and not for the first time, investors have a central bank to thank.

On Thursday, the European Central Bank announced after its monetary policy meeting that it would be buying 60 billion euros of sovereign bonds and other debt securities every month from March through September next year in an effort to avert deflation.

Stocks rose on Thursday on the decision, helping markets to finish the week up. The MSCI All-Country World Index rose 2.1 percent last week for its biggest weekly gain of the year. The Standard & Poor’s 500 Index rose 1.6 percent. The STOXX Europe 600 jumped 5.1 percent to the highest since December 2007. The Nikkei 225 Stock Average rose 3.8 percent. The MSCI Emerging Markets Index rose 3.5 percent.

The euro fell 3.1 percent against the US dollar last week while European government bonds rose. Germany's 10-year bond yield hit a record low of 0.345 percent while Italy's 10-year bond yield touched a record low of 1.413 percent.

The euro could decline further this week after the Syriza party won the elections in Greece on Sunday. Led by Alexis Tsipras, the Syriza party had campaigned against fiscal austerity and promised to renegotiate Greece's debts, a move that could risk getting the country expelled from the euro bloc.

Friday, 23 January 2015

ECB launches trillion euro QE

The European Central Bank announced its quantitative easing programme on Thursday. Bloomberg reports:

Mario Draghi led the European Central Bank into a new era, committing to a quantitative easing program worth at least 1.1 trillion euros ($1.3 trillion) to counter the threat of a deflationary spiral.

The ECB president shrugged off determined opposition led by German officials with a pledge to buy 60 billion euros every month through September next year in a once-and-for-all push to put more cash into circulation and revive inflation. To assuage critics, the region’s 19 national central banks will make 80 percent of the purchases and take on any risk they carry.

Markets reacted positively to the announcement. The S&P 500 rose 1.5 percent while the STOXX Europe 600 jumped 1.7 percent.

The euro declined 2.1 percent to $1.1363 as Italy’s 10-year yield fell 14 basis points to 1.55 percent, Spain's 10-year yield declined 13 basis points to 1.41 percent and Germany's bund yield fell eight basis points to 0.45 percent.

Wednesday, 21 January 2015

US auto loans fuel concerns

There have been increasing concerns that US auto loans may become a source of problems for the financial system. From the Wall Street Journal earlier this month:

Borrowers who took out auto loans over the past year are missing payments at the highest level since the recession, fueling concerns among regulators, analysts and some in the car industry that practices that helped boost 2014 light-vehicle sales to a near-decade high could backfire.

“It’s clear that credit quality is eroding now, and pretty quickly,” said Mark Zandi, chief economist at Moody’s Analytics.

One problem is that many of the auto loans are subprime, that is, being made to borrowers with low credit scores. Honda’s US sales chief John Mendel said in an interview last week that competitors are doing “stupid things” to boost auto sales, including making 84-month loans that reduce monthly payments while making it tougher to repay faster than cars lose value.

However, Bank of America Merrill Lynch’s Michael Hanson said in an October note to clients that auto loans are not a threat to the financial system, being a much smaller proportion of household debt than mortgages.

Still, they are an additional risk to a financial system that is still reeling from the Swiss bombshell last week.

Monday, 19 January 2015

Europe risks Lehman Brothers moment while Chinese shares plunge

Desmond Lachman asks whether Greece will trigger a Lehman Brothers moment for Europe.

In September 2008, United States policymakers made the costliest of policy miscalculations by allowing the Lehman investment bank to go bankrupt. That mistake triggered the worst global economic recession in the post-war period.

Judging by recent statements by German and French political leaders, it appears that it is now the European policymakers’ turn to make a major economic policy blunder. Since, ahead of the January 25 Greek parliamentary elections, those leaders are clearly signaling that they stand ready to cut Greece loose from the Euro should Greece choose not to comply with its European commitments...

Sadly, it is all too likely that, as was the case when U.S. policymakers allowed Lehman to go bankrupt, European policymakers are now underestimating the all too real risks of a Greek exit.

The reality, though, is that markets and financial institutions have become highly leveraged and a Lehman Brothers moment can potentially be triggered by a number of events. For example, even the decision by the Swiss central bank last week to abandon its cap of the Swiss franc against the euro is causing significant losses among financial institutions. From Bloomberg:

The $400 million of cumulative losses that Citigroup Inc., Deutsche Bank AG and Barclays Plc are said to have suffered from the Swiss central bank’s decision to end the cap on the franc may be followed by others in coming days.

“The losses will be in the billions -- they are still being tallied,” said Mark T. Williams, an executive-in-residence at Boston University specializing in risk management. “They will range from large banks, brokers, hedge funds, mutual funds to currency speculators. There will be ripple effects throughout the financial system.”

And it is not just Europe. The 16th Geneva Report on the World Economy in September last year identified the debt trajectories of emerging economies, especially China, as a source of concern and “which could host the next leg of the global leverage crisis”.

Indeed, after a strong rally that some say has been fuelled by margin financing, Chinese shares plunged on Monday, with the Shanghai Composite Index falling 7.7 percent, the biggest fall in more than six years, after the China Securities Regulatory Commission said on Friday that it had suspended three brokerages from opening new margin trading customer accounts for three months after an inspection found rule violations.