Monday, November 23, 2009

OMB's budget review

Mid-Session Review
Budget of the U.S. Government
Office of Management and Budget
Fiscal Year 2010

David Oakley: Bets rise on rich country defaults

...In the past, the CDS market for developed countries was sluggish, because few investors saw the need to buy or sell protection against a risk of default that seemed exceedingly remote. However, rising debt levels and growing political and economic uncertainty has created a more active market, with more investors now seeking insurance. Meanwhile, many banks are prepared to offer protection in exchange for a fee.

This fee has recently jumped, as the cost to insure the debt of developed countries has increased since the summer of last year, while the cost of insuring emerging market debt has fallen.

Gillian Tett: Will sovereign debt be the new subprime?

...Finance ministries are hardly likely to complain about the banks’ investments. Major industrialised countries will need to sell more than $12,000bn worth of government bonds this year and next to fund their fiscal hole. This is a rise of at least a third, or $3,000bn, in just two years.

Wednesday, November 18, 2009

Oakley and Atkins: Central banks seek exits as markets regain their poise

The US Federal Reserve has also stopped buying US Treasuries, while many strategists believe the Bank of England is unlikely to extend its £200bn ($336bn) quantitative easing programme, which involves mostly buying UK government bonds.

The normalising of money markets is reflected in indicators such as the spread between three-month Libor and overnight market rates - a measure of credit risk. These spreads have narrowed to about 20 basis points for all the main currencies, levels last seen before Lehman went bankrupt. After the bank went under, these spreads jumped to over 300bp, reflecting heightened risk aversion by banks towards other banks.

Another sign of the normalising of the market is conveyed in the narrowing between the rates for unsecured and secured lending.

Tuesday, November 17, 2009

Tom Briathwaite:

...It said last week that $366.4bn (€244.5bn, £222bn) had been paid out and $472.5bn of the $700bn had been committed. As the expectation for spending comes down, there is a reduction in the projected debt levels and a positive impact on the budget deficit

Bullock, Guerrera: Wall Street and Fed in discussions over CoCos

Standard & Poor's, the credit rating agency, warned on Tuesday that contingent convertibles were "not a panacea" for banks' efforts to bolster their capital.

"We see contingent capital securities as introducing another potential tool to manage the capital base in times of stress. However, they are not being designed by banks to address the need to repair existing weak balance sheets."

Jennifer Hughes: Coco bonds no panacea

A new form of hybrid capital is "no panacea" for banks' efforts to bolster their capital, according to a report that comes amid increasing interest in so-called contingent convertibles, or CoCo, bonds.

Dave Shellock: Central bank policy meetings bolster equities

The Federal Reserve on Wednesday sought to allay investor fears about an early withdrawal of liquidity as it reaffirmed its commitment to keep US interest rates low for an "extended period".

"We remain of the view that big changes in the Fed's forward-looking language on policy are some way off and the exit strategy is a story for the coming years, not for the coming quarters," said Lena Komileva, head of G7 market economics at Tullett Prebon.

Guerrera, Bullock:

Institutions seeking to reduce their reliance on short-term paper will have to pay up because interest rates are likely to rise and governments will stop supporting the financial system, the study by the credit rating agency Moody’s concludes.
Fed survey says banks tighten loan terms - Nov-10
European banks strive to delay capital reforms - Nov-09
Flood initiative shows cross-border risk - Nov-09
Tobin tax appears rank outsider - Nov-10
Short View: Yield curves - Nov-05
High refinancing level eases debt fears - Nov-09

The flood of expiring debt will hit the US and the UK hard – with $2,000bn of debt coming due by 2012 – and could curb banks’ profits or force them to charge individuals and companies more for their services.

The rush to refinance more than $7,000bn of debt by 2012 and a further $3,000bn by 2015 will exacerbate the divide between winners and losers from the crisis, with healthier banks able to fund themselves at cheaper rates than troubled rivals.

Michael Mackenzie: Jitters over key policy meetings spark risk aversion

At its March meeting, the FOMC stated: "Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." The use of "extended period" has been repeated in subsequent statements. As the economy has shown signs of recovery, so a debate over whether the Fed statement should evolve has begun.

"The consensus is that there will be no change, but there is a possibility that they tweak the statement," says Rick Klingman, managing director at BNP Paribas. "The problem with staying with the same language for a long time is that it becomes a bigger deal when you eventually change it."

While the FOMC may elect to retain the current wording today, the bond market is on guard for a change soon.

Carola Hoyos: Burning ambition

Chinese oilmen have plotted a strategy to win a huge portfolio of Kazakh energy assets to feed their country’s need for oil.

China began discreetly buying Kazakh oilfields 10 years ago and now has more energy projects on the go in the central Asian nation than any other country. While the west’s biggest oil groups agonise over the risks of undertaking expensive infrastructure developments in obscure locations, Beijing has boldly built a 3,000km pipeline to lock Kazakhstan’s oilfields into its orbit.

Javier Blas: Global oil yardsticks she\aken by Saudis

..While WTI and Brent dominate, Saudi Arabia's decision last week to drop WTI to price US-bound exports and replace it with the Argus Sour Crude Index (Asci), an index tracking the price of oil extracted in the US Gulf of Mexico, has shaken the supremacy of the traditional benchmarks, opening the door for new ones.

"[The Saudi move] is an indication that probably the industry is seeking other benchmarks," says Philip Verleger, an energy economist at the University of Calgary. "It is suggesting the time may be coming to find a new measure for crude."

Monday, November 16, 2009

Robin Wigglesworth: Islamic bonds spark rush of international interest

Robin Wigglesworth: Islamic bonds spark rush of international interest

Jeremy Grant:Trading in European 'dark pools' leaps fivefold since start of year

Renminbi, euro, real dollar exchange rates

Alan Beattie: Renmindbi at heart of world trade imbalances

Mr Williams suspects that the Chinese currency, which was repegged against the dollar in July last year after being allowed to drift upwards for a few years, will not be permitted to resume appreciating against the greenback before the middle of next year....

Gerard Lyons, chief economist at Standard Chartered bank, says: “To help rebalancing, we really need currency flexibility in the two big surplus areas – the Middle East and east Asia. But that is likely to come later rather than sooner.”...

...the International Monetary Fund pointed out in its most recent world economic outlook, China’s consumption is equal to only about a quarter of total consumption in the US and in those European countries with large current account deficits.

Saturday, November 14, 2009

divert forex reserves to BRICs

In the background, another big idea has been gathering support, with much more potential to have an impact soon. A growing number in Beijing are calling for some of the reserves to be channelled to the Bric nations (Brazil, Russia, India and China) and other developing countries. This is not just about snapping up oilfields and copper mines on the cheap, as China has been doing all decade. The stated goal is much bigger: to use the reserves to help stimulate a new cycle of development and trade with the developing world.

The discussion has largely come from China's flourishing think-tank world. Over the summer the economist Xu Shanda, who used to run the federal tax bureau, called for the creation of a Chinese "Marshall plan" to lend money to Africa, Asia and Latin America to boost living standards in those regions and create demand for Chinese products to replace struggling US and European customers...

Hu Xiaolian, deputy governor of the central bank, proposed at a Group of 20 meeting the creation of a "supra-sovereign-wealth investment fund" that would invest foreign exchange reserves in developing countries to allow "these countries to serve as new engines in global recovery and growth". Justin Yifu Lin, the Chinese academic who is now the World Bank's chief economist, said in an interview last week with Caijing magazine that Chinese companies should step up investment in Africa and south-east Asia, including outsourcing some low-end manufacturing, to boost consumer demand.

banks pay bakc TARP money

It may be tempting to conclude that the G20 push for higher capital prompted the spate of rights issues as banks acted to comply. But things are not as simple as that. Indeed, there is a sense in which the tattered titans of the world’s financial sector, having smartened themselves up again, are raising the minimum possible to repay bail-out money and relying on future earnings to do the rest.

“The G20 timetable for increasing capital only by the end of 2012 means that they can rely on three years of retained profits,” says Cyril Court, a capital markets banker at HSBC, which ran BNP’s rights issue. “G20 was essential in determining the [smaller] quantum of capital that banks would have to raise.” In other words, the vast capital raisings that some banks had feared they would have to launch have been unnecessary. Those that have taken place have been relatively modest, and largely restricted to banks that have government bail-out money to repay...

Some deals have come from banks with no government involvement – notably HSBC’s record rights issue in the spring and Nomura’s $5.6bn offering last month. The first repayments of government money came in the US in June when 10 banks, including Goldman Sachs, JPMorgan Chase and Morgan Stanley, repaid a combined $68bn received eight months earlier under the so-called troubled asset relief programme. As a prerequisite for that deal, Washington forced them to raise fresh equity and bond finance...

The big question now is whether the two sick men of the US banking system – Citi and BofA – will be allowed to repay the $90bn in Tarp money they have and, if so, how much capital they would be asked to raise.

Friday, November 13, 2009

"Bank moves spur gold rush"

Michael Lewis, commodities strategist at Deutsche Bank, notes that the majority of central banks banks in the developing world have less than 10 per cent of their reserves in gold.

Mr Lewis combines this list with major holders of US Treasuries who have a strong incentive to diversify into gold given the "non-negligible risk of a US debt and currency crisis".

China, Japan, Russia, Taiwan, India, Singapore, Brazil and Korea are strong potential candidates to increase their bullion holdings, he says. "We expect central banks, in aggregate, to be net buyers of gold over the coming year for the first time since 1998."

Fears of end of Fed easing

As the Federal Reserve’s programme of buying mortgage debt edges towards $1,000bn this week, investors are starting to worry about what happens once the central bank starts to slow down and exit from this key plank of its monetary easing policy.

mbs-thumb.jpg“Many investors treat the three asset classes that the Fed has been buying – Treasuries, agency debt and agency mortgage-backed securities – as very similar,” says Ajay Rajadhyaksha, head of US fixed income strategy at Barclays Capital.

Libor rates low point

London Interbank Offered Rates, or Libor, are at record lows for dollars, euro and sterling, leading many pundits to say that they cannot fall much further. Three-month Libor rates have fallen almost to the levels of base rates in the US and the UK - and below base rates in the eurozone.

The question now is: at what point will they start rising aga

UK quantitative easing 6 months on

Already the Bank of England has bought £142bn ($233bn) in gilts – 20 per cent of the market – and £2bn in corporate assets.

The total size of the programme is £175bn – £50bn more than at the outset – but still less than the £200bn Mr King himself wanted before he was outvoted at a recent Bank meeting. QE involves the Bank electronically creating new money by buying gilts and corporate bonds in the market

Thursday, November 5, 2009

FOMC statement Nov 4, 2009

IMF: World Economic Outlook, October 2009: Sustaining the Recovery

IMF real GDP trend graph

he latest IMF World Economic Outlook returns, however, to the charge in its fourth chapter, which unfortunately is only obtainable online.

The IMF authors estimate that after a financial crisis output remains 10 per cent below its previous trend in the medium term, which it defines as seven years. This is, of course, an average with wide variations on either side. In Chile after 1981 and Mexico after 1994, output soon rose well above its previous trend while in Japan after 1997 it stagnated for many years. The average estimate may give an exaggerated impression of the enduring loss of productive capacity. It may be influenced by lingering recession effects, which may take more than seven years to disappear. The UK Treasury for example puts the permanent loss of output at 5 per cent of gross domestic product.

Countries currently in the midst of a banking crisis account for close to one-half of real GDP for the advanced economies. This is equivalent to a combined GDP total of about $40,000bn (€27,050bn, £24,440bn) per annum. Applying the 5 per cent figure for the enduring output loss, the ensuing hole in the world economy amounts to $2,000bn. It is only limited consolation that, according to the IMF, “economies that apply countercyclical fiscal and monetary stimulus in the short run to cushion the downturn after a crisis tend to have smaller output losses over the medium term”.

Lower gdp trend?

dollar fortunes by Krishna Guha FT

. The dollar's decline has so far been remarkably orderly, with none of the warning indicators that might signal an incipient crisis flashing even an amber alert.

The US currency's decline has slowed in recent months, and implied volatility in key bilateral currency markets is much lower now than it was in the early summer. Risk premiums on a wide range of dollar assets have fallen. There is no evidence of a rise in the cost of borrowing for the US government.

"Panicking over the dollar decline to this point is unwarranted," says Rick Mishkin of Columbia Business School, a former Fed governor. "We haven't seen a big sell-off in long-term Treasuries at the same time. We haven't seen a run-up in inflation expectations."


Across town, the Fed is focused on inflation expectations. But officials are paying attention to currency developments and would not be indifferent to a combination of dollar weakness, rising commodity prices and rising inflation expectations.

high frequency trading, background article

Among the most common strategies are: being automated market-makers; deploying a predictive approach, whereby certain changes in stocks trigger an order; and pursuing arbitrage, seeking to buy and sell shares at a profit across different platforms.

The speed factor in trading is known as latency and requires constant upgrading of computer systems to stay ahead of the pack. Exchanges also provide space at their data centres for computer servers owned by high frequency traders. This “co-location” means a high frequency trading system can access prices a fraction faster than if it were located down the street, let alone in another city.

It is estimated that high frequency trading accounts for as much as 70 per cent of daily US share trading, up from about 30 per cent a few years ago.

Among the largest of the traders are hedge funds Citadel Investment Group, DE Shaw & Co. and Renaissance Technologies. Meanwhile, automated brokerages including Getco, Hudson River Trading, Wolverine Trading and RGM Advisors are active.

Wednesday, November 4, 2009

'The Federal Reserve, in its role as the financial system's emergency plumber, recently created a task force, pulling together clearing banks, dealers and other investors, so they can strengthen the pipes [repo market].'

...reforming the repo market is where the rubber meets the road for regulators. The use of borrowed money, which can pump up returns, requires a fully functioning repo market as it enables a bank and investors to borrow short-term funds using their securities as collateral. In return, lenders of cash, earn a return and this works well so long as they trust the collateral.

US banks gain from rally in toxic assets

US banks such as Citigroup and JPMorgan Chase have earned billions of dollars from their "toxic" portfolios in the past three months as a rally in some of these distressed assets enabled them to book accounting gains or sell them.

Bankers say the gains revealed by Citi and JPMorgan in last week's third- quarter results bode well for other banks, after the sector suffered more than $1,000bn in writedowns globally on troubled assets such as mortgage-backed securities, as a result of the crisis.

Low U.S. rates feed risk appetite...

The dollar index continued its slide towards 75, as the currency backed by the Federal Reserve’s zero interest rate policy, is seen as the source of cheap funding for all types of risky trades for global investors. As the dollar slid, gold extended its record move above $1,000 a troy ounce, while US Treasury yields also rose.

In recent months, equities and Treasuries have often rallied in unison, which has perplexed investors given the weakness of the dollar.

'Little room for Libor to fall ...'

... the failure of banks to inc-rease lending to businesses and consumers, which is critical for econ-omic recovery, could put the money markets under strain.

In short, the money market - the first link in the borrowing chain - may appear to be repaired but, without circulation of funds to consumers and businesses, confidence could start to erode, sending Libor higher.

Fed confirms reverse repo tests

"This work is a matter of prudent advance planning by the Federal Reserve, and no inference should be drawn about the timing of monetary policy tightening," the New York Fed said.

"Over the past year, the New York Fed has been working internally and with market participants on operational aspects of reverse repos to ensure that this tool will be ready when and if the Federal Open Market Committee decides they should be used."

Fed tests reverse repos..

However, dealers say in recent days, the Fed has conducted reverse repo tests in the so-called tri-party repurchase market, in which custodian banks such as Bank of New York and JPMorgan act as intermediaries.

Fed exit with reverse repos

The Federal Reserve is looking to team up with the money market mutual fund industry as part of its exit strategy to avoid a bout of post-crisis inflation.

The central bank wants to use the deep-pocketed sector to refinance part of the giant portfolio of mortgage-backed securities and Treasuries acquired during the crisis, using a technique called "reverse repos"....

Tuesday, November 3, 2009

SEC ... looks at dark pools

But a concern for the SEC is how some dark pools are allowing information about trading intentions to be transmitted ahead of a transaction to a select group of investors, potentially giving these select investors beneficial market knowledge. Similar to flash orders on an exchange, which the SEC moved to ban last month, these so-called indications of interest, or IOIs, are used by "grey" pools, blurring the line between trading in dark pools and quotes on an exchange....

The wording of the SEC's proposals now defines an actionable IOI as a quote, and if a dark pool using IOIs breaks the threshold of 0.25 per cent, that price must be incorporated into the public market," says Adam Sussman, head of research at TABB Group.

Dan Mathisson, managing director of Advanced Execution Services at Credit Suisse, which runs the largest US dark pool, agrees: "Credit Suisse's CrossFinder is a true dark pool. We do not send IOIs and therefore the lower threshold will not affect us."

That interpretation could limit the scope of the SEC's proposed changes. With an average daily volume of about 140m shares, CrossFinder accounts for between 15 and 20 per cent of dark pool trading. Other large pools, such as those run by Goldman Sachs and electronic trading firm Getco, with about 120m and 100m respectively, say they do not use IOIs.

"The big question is what percentage of internalised dark pools' matched volume comes from actionable IOIs," says Mr Sussman.

Fed the new monetary target

Treasury dealers foil HFT

The presence of these traders in bonds, however, lags behind their dominant role in the US equity market. One reason the US Treasury market has withstood the challenge of these computer traders, and their algorithms designed to spot small market moves and blips which are then quickly traded on to lock in profits, is that bond trading remains segmented.

Intent on maintaining their dominant market share and big profits, the big dealers have embraced technology and keep large institutional investors at arm’s length, away from direct access to the big two electronic trading platforms – ESpeed and Brokertec – which underpin the $6,900bn Treasury market.

This reduces the size of the potential “pool” in which the computer-driven traders can dabble. Large parts of the market are essentially walled off to direct trading by investors such as the high-frequency traders and available just to Treasury dealers

Co-location and latency...

Placing a server next to an exchange's hub is also the next battleground between exchanges and electronic trading platforms in the increasingly competitive and fragmented markets that now define equity trading.

Fast rise in global trade

At its meeting in April, the G20 group of nations urged multilateral development banks and export credit agencies to increase support for trade finance, since when its cost has come down.

But they remained uncertain over how much of the contraction in trade was caused by expensive financing.

Robert Zoellick, president of the World Bank, estimates that trade finance caused no more than 10-15 per cent of the fall.

CDS concentrated among few plays in interest and currency swaps

In practice, many corporate users have never really adopted the instruments on any scale. That is in stark contrast to the world of interest or currency swaps, where such instruments are very widely used.

That pattern has left the CDS market marked by striking levels of circularity, since a limited pool of large financial players dominate much activity. In some respects, this sense of concentration has actually risen - not fallen - in the last year, because hedge funds and other players (including AIG) have been forced out of the sector. The Banque de France, for example, calculates that the 10 largest dealers now account for 90 per cent of trading volume (it was below 75 per cent in 2004). In the US, JPMorgan Chase alone now apparently represents 30 per cent of the US market. This is similar - ironically - to its share a decade ago when it first pioneered the CDS world.

Fed looks at traders' books

Wall Street executives said that regulators, led by the Federal Reserve, had been asking major banks in recent weeks to provide a detailed breakdown of their balance sheets, with particular attention to their trading books.

The authorities wanted to know what proportion of a bank's balance sheet was held in more liquid positions and how much was held in derivatives and other trading positions whose profitability might not be known for years, they added.

The nature of the behind-the-scenes request surprised some Wall Street executives until news broke last week that the Fed was planning to ask for new veto powers over traders' pay packages.

Barclay's Protimum finance -- not a SIV

Barclays plans to sell $12.3bn of credit assets to a “newly established fund” called Protium Finance – which will be independent but mostly financed by a loan from Barclay

UK quantitative easing 6 months on

...the Bank of England has bought £142bn ($233bn) in gilts – 20 per cent of the market – and £2bn in corporate assets.