More Euro Mess

by Michael J. Howell27. March 2013 11:44

We cannot see how the Cyprus news is good, particularly when viewed in context. The ECBs balance sheet has shrunk by nearly 20% over the past six months, thereby depleting overall funding. We acknowledge that this funding may not be needed right now, but that is only (a) because funding markets have not been tested lately, and (b) banks do not want reserves because they too are contracting their balance sheets as lending falls away. This is not good news. It may also reflect the huge skew in Eurozone funding conditions. The still whopping Target2 balances tell us that 'Northern' banks have surplus funds and so can afford to payback long-term loans to the ECB. Yet they do not tell us that the 'Southern' banks are off the ECB drip-feed. Consequently, even a reduction in Target2 balances are not a sufficient condition for the Euro Crisis to end. Troubles likely lie ahead given the skidding levels of our Eurozone liquidity indexes. We have been warned.

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Poor News....Capital Flows to EM

by Michael J. Howell27. March 2013 11:36

Latest End-February data on net capital flows to EM do not make great reading. The late-2012 rally in net inward funds has died out. Both Jan and Feb saw net out flows totalling US$0.5 trillion at an annualised rate. Excluding the BRICs, other EM managed a small US$0.1 trillion annualised net inflow. China looks bad. We have had 10 of the last 12 months showing large net outflows. The only brigt spots are India where inflows continue strongly, Indonesia, Czech, Poland, South Africa and Turkey. Capital inflows are important for monetary conditions since they often lead EM Central Bank policy actions. As we have warned, the strong US dollar is starting to weigh heavily.

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GLI February 2013 Data Release

by Michael J. Howell13. March 2013 21:48
February 2013 data released today show our headline Global Liquidity Index (GLI) hit an index of 62.1, 'normal' range 0-100. This is up from the 58.1 January 2013 reading and is the highest value of the index for more than a year. Contact us for more information.

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CBC Financial Stress Index, w/e 8/3/2013

by Michael J. Howell12. March 2013 14:18

Our Financial Stress Index fell to 75.7 at w/e 8/3/2013, or the lowest stress reading since July 2011. This index comprises several measures of US credit market tensions and correlates closely with the St Louis Federal Reserve's own Financial Stress Index. Our index is set at a base level of 100 for Year 2000. The index hit a peak of 339.9 at w/e 17/10/2008 and a low of 56.0 on 4/3/2004. 




Bank of England Liquidity Injections...More QE Needed?

by Michael J. Howell12. March 2013 12:51

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What Do Central Banks Do?

by Michael J. Howell11. March 2013 12:11

Prompted by yet another claim, this time by the great house of Goldman that Central Bank QE push up bond prices and push down yields by circa 100-125bp, it is worth looking at the facts and the theory. QE1, QE2 and now QE3 have seen generic 10 year yields rise. The ending of QE1 and QE2 saw 10 year yields fall. It is really that simple. If the 10 year bond represents the risk free asset for many long-term funds, then Central Bank balance sheet expansion will likely lower the risk premia on other risky assets and raise the risk premia on bonds. In short, the yield curve will steepen after each QE: it did and it is again now. Why the fuss? Surely, this is exactly what policy-makers want to do? Falling long-term yields would signal their failure not their success!

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A Peak With A View?

by Michael J. Howell10. March 2013 22:02
New highs on Wall Street have prompted inevitable navel-gazing. A popular repost is the 'lack of correlation between GDP and stock prices'. Another is the artificial '100-150bp drop in bond yields caused by QE policies'. The real questions should be (1) is there a strong correlation between GDP and profits growth, and (2) what governs the valuation of these profits? The first answer is an unequivocal 'yes' and the second comes down to two things - the scale of QE (and other liquidity effects) and the underlying inflation rate. It is clear that more QE reduces risk premia on risk assets. Since bonds are a low risk asset for long-term funds, QE is more likely to raise not lower risk prema on bonds. Therefore, the longer than QE persists, the more that equity risk premia will fall and bond risk premia will rise. Regarding inflation, Central Banks do not create CPI inflation, but governments do. While private sectr debt is high and excess capacity high, there will be no acceleration in inflation. Therefore, based on these 'internal' risk factors, Wall Street et al should rise. But two 'external' risk factors worry us: a too strong US dollar and the recent tightening by the ECB. End-February GLI liquidity data will be published around March 14th. They need to be watched.

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New Report 'Dance of the Dollar'

by Michael J. Howell7. March 2013 17:11

Research published today analyses swings in fortunes of US dollar and how its gyrations affect the global investment cycle

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Emerging Market Strategy March 2013 Published

by Michael J. Howell7. March 2013 14:31

Latest Report 'The Waiting Game' has been published. Main point is sign of rebounding EM liquidity vs. threat from stronger US dollar. Contact us for more information

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Finance and Economics, Or Economics and Finance?

by Michael J. Howell7. March 2013 14:12

It is widely-accepted that financial markets respond to economic phenomenon. However, we see it the other way. Finance is far more important to economics, than economics is to finance. Think of it in terms of flow of funds accounting. Economics focuses on ‘uses of funds’; finance focuses on ‘sources of funds’. Sources naturally lead uses. Thus our research is always more interested in whether the pool of liquidity is actually rising or falling, rather than the prediction of whether or not more will be spent on consumption. Two corollaries of this work are that Central Banks do NOT set interest rates, the market does (2007/08 confirmed this), and that interest rates are not the ‘price of money’. Rather interest rates are the ‘cost of capital’ and they are high or low ultimately depending on the profitability of industry. The ‘price of money’ is the exchange rate. Thus, low US interest rates and a weak US dollar tell us that US profitability is weak and the Fed is loose. In contrast, low Japanese interest rates and a strong Yen tell us that Japanese profitability is weak and the BoJ is tight. This also explains why real interest rates are higher in Emerging Markets.


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