Archive

Reuters blog archive

from Counterparties:

MORNING BID – European Deflation

Never say the Europeans aren’t cautious. The dollar has been on a roll of late, in part because of the market’s growing expectation for more stimulus from the European Central Bank before long that would include some kind of larger-scale quantitative easing program after a speech last week from Mario Draghi that European markets seem to still be reacting to several days later. Reuters, however, reported that the ECB isn’t quite likely to do move quite so fast (heard this one before) and that took some of the wind out of the dollar’s sails and boosted the euro a bit.

Some of the move in the euro will depend on the trend in European yields, where everything is going down – German Bunds continue to make their way rapidly toward zero, and Bund futures remain in an overwhelming bullish trend, per data from Bank of America-Merrill Lynch. Analysts there also anticipate the dollar is going to experience some kind of medium-term correction – but remains in rally mode otherwise. There’s a headwind there for equities from that – rising greenback makes U.S. goods more expensive, but the gains are still only in earlier stages, and haven’t pushed into territory that would otherwise indicate surprising strength that we haven’t seen in some time.

What’s happening in part is that there’s been a definitive change in how bond markets are viewed – even the peripheral markets like Spain and Italy are less favorable as investments when compared with the United States; Merrill analysts foresee more of a move into U.S. fixed income assets after several months of seeing European funds garner strong inflows (the count is $158 billion to $86 billion, favor the Europeans so far this year). So what’s going on here? Many investors have been perpetually frightened of “catching a falling knife,” and the number of big-name bond managers who have shied away from Treasuries on the assumption that the Fed was going to declare the party over in due course are a great many. “The perceived tail risk associated with Eurozone bonds is lower than that for U.S. bonds,” they write.

Then again, this year has been a class study in foiled expectations, particularly in the bond market. Rates have remained stubbornly low; the bullish investors in the government market have reaped big rewards, and even if the U.S. dollar creeps higher, the ongoing interest out of pension funds for higher yielding credit will continue to pressure yields. And Merrill sees more buying in the bond market from foreigners, an increasing percentage of that from Europe and other investors. That should again benefit the dollar, which is expected to stay near where it is.

from Breakingviews:

“Seller beware” when profiting from market calm

By Swaha Pattanaik

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Seller beware. That is an unusual warning, but it applies right now to the options market. Sellers of protection against large price moves have been pocketing gains. But many will suffer losses if markets become less calm.

from Expert Zone:

Currencies and the collapse of globalisation

(Any opinions expressed here are those of the author and not of Thomson Reuters)

We live in stirring times. The president of the European Central Bank, Mario Draghi, crossed the monetary policy Rubicon and cut one of the euro area’s key interest rates into negative territory. This is dramatic stuff, as even the most economically oblivious are likely to recognise that negative interest rates are a radical policy.A picture illustration of Euro banknotes and coins taken in central Bosnian town of Zenica

At the same time, the United States Federal Reserve is gracefully gliding out of its quantitative policy position - and by October that money printing process is likely to be effectively at an end. The question from most investors is therefore “what next for U.S. monetary policy?”.

from Expert Zone:

The rupee at a crossroads

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The rupee was tossed around quite a bit in the last 10 months. It dropped to a low of nearly 69 to the dollar, creating an economic crisis, before it recovered and is now at 59-60. The threat is not that it may drop once again, but that it may appreciate further and upset the economy in other ways.

Why would the rupee appreciate? Because there are expectations the Narendra Modi government will facilitate development and enable the economy to get back on course. This is what drove the Sensex beyond 25,000. But the currency market was more stable in spite of the huge inflow of $2.2 billion in 10 trading days of May.

from Global Investing:

Buying back into emerging markets

After almost a year of selling emerging markets, investors seem to be returning in force. The latest to turn positive on the asset class is asset and wealth manager Pictet Group (AUM: 265 billion pounds) which said on Tuesday its asset management division (clarifies division of Pictet) was starting to build positions on emerging equities and local currency debt. It has an overweight position on the latter for the first time since it went underweight last July.

Local emerging debt has been out of favour with investors because of how volatile currencies have been since last May, For an investor who is funding an emerging market investments from dollars or euros, a fast-falling rand can wipe out any gains he makes on a South African bond. But the rand and its peers such as the Turkish lira, Indian rupee, Indonesian rupiah and Brazilan real -- at the forefront of last year's selloff --  have stabilised from the lows hit in recent months.  According to Pictet Asset Management:

from Expert Zone:

Why the Fed is not worried by emerging market moves

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Several emerging market central banks have been forced to react to market events already this year. Interest rate increases in India, Turkey and South Africa followed bond or currency market volatility. Argentina has endured dramatic moves in its currency, and Brazil has been forced to tighten policy.

from MacroScope:

The Bank of Canada is probably not ready to seriously consider cutting rates — yet

With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.

But that doesn't mean Governor Stephen Poloz is ready to signal on Wednesday that his rate shears are about to get hauled out of the shed.

from Counterparties:

Morning Bid: Dollar Bills and Dollar Bulls

The dollar’s performance hasn’t been anything to write home about in the last few years. It has weakened against major currencies like the euro and the Swiss franc, and been held back by lower interest rates thanks to the Federal Reserve’s triple-dose of quantitative easing, but there’s been a turn of late, though it’s too early to say whether it will have lasting power.

In 2013, the dollar was at least better than the yen, amassing a 35 percent move against the Japanese currency, which countered the Fed’s QE with Abenomics and a massive monetary dose of its own.

from Global Investing:

Waiting for current account improvement in Turkey

The fall in Turkey's lira to record lows is raising jitters among foreign investors who will have lost a good deal of money on the currency side of their stock and bond investments.  They are also worrying about the response of the central bank, which has effectively ruled out large rate hikes to stabilise the currency. But can the 20 percent lira depreciation seen since May 2013 help correct the country's balance of payments gap?

Turkey's current account deficit is its Achilles heel . Without a large domestic savings pool, that deficit tends to blow out whenever growth quickens and the lira strengthens . That leaves the country highly vulnerable to a withdrawal of foreign capital. Take a look at the following graphic (click on it to enlarge) :

from Global Investing:

Banks cannot ease Ukraine’s reserve pain

The latest data from Ukraine shows its hard currency reserves fell $2 billion over November to $18.9 billion. That's perilously low by any measure. (Check out this graphic showing how poorly Ukraine's reserve adequacy ratios compare with other emerging markets: http://link.reuters.com/quq25v)

Central banks often have tricks to temporarily boost reserves, or at least, to give the impression that they are doing so. Turkey, for instance, allows commercial banks to keep some of their lira reserve requirements in hard currency and gold. Others may get friendly foreign central banks to deposit some cash. Yet another ploy is to issue T-bills in hard currency to mop up banks' cash holdings. But it may be hard for Ukraine to do any of this says Exotix economist Gabriel Sterne, who has compared the Ukraine national bank's plight with that of Egypt.

  •