Panic In Washington, US currency traders on the frontlines as Trump’s 2-year stock honeymoon ends with hunt for betrayer and govt shutdown


Panic In Washington – Treasury Secretary Calls Top Bankers To Check Liquidity, While On Vacation

 

  Jerome Powell Photographer: Andrew Harrer/Bloomberg

Currency Traders on Front Line as Markets Stay Wary of U.S. Risk

The final week of 2018 could prove tumultuous for investors as holiday-thinned trading combines with a growing array of pressures on markets.

Traders in the $5.1 trillion-a-day currency market were among the first to respond to a partial U.S. government shutdown and a report that President Donald Trump has discussed firing Federal Reserve Chairman Jerome Powell. The dollar slipped against its Group-of-10 peers, while the yen, seen by many as a haven, gained for a seventh day.

Treasury futures climbed in early Asian hours before paring their advance. Cash bonds trading was shut in Asia due to a holiday in Japan, the first in a week that will see a number of closures across major markets.

Sentiment in global financial markets has already taken a beating with the S&P 500 Index just recording its worst week in seven years. Increased uncertainty over the leadership of the Fed could add to turmoil along with a partial shutdown of the U.S. government, although assurances from U.S. Treasury Steven Mnuchin about liquidity and the future of the central bank chief may ease some concerns.

The Treasuries yield curve last week moved closer than ever to its first post-crisis inversion and the rally in safer assets dragged the 10-year yield below 2.75 percent for the first time since April. However, given that much of the upheaval is emanating from the U.S., it is not entirely clear whether Treasuries, and also the U.S. dollar, will act as reliable havens should Powell’s leadership face a genuine threat.

Societe Generale SA’s head of U.S. rates strategy Subadra Rajappa said she thinks a change in Fed leadership is “extremely unlikely,” though she’s not ruling out the possibility of the president persuading Powell to “resign.”

“If it comes to that, given the backdrop of the recent government shutdown, investors might be less inclined to treat Treasuries as safe haven assets,” she said by email. “A change in Fed leadership will likely rattle the already-fragile financial markets and further tighten financial conditions.”

Market participants are generally of the view that Powell will not be fired, and senior administration officials say Trump recognizes he doesn’t have that authority. But even continued exploration of the possibility could make for a volatile week.

The market response to a material threat to the Fed’s independence would be complicated, according to Steve Englander, head of global G-10 FX research and North America macro strategy for Standard Chartered Bank. He said near-term uncertainty over the process and politics in a fluid situation would weigh on equity prices and bond yields. The dollar, he said, would likely face multiple opposing forces, but the “near-term response is likely negative on the risk that U.S. economic policy becomes more erratic.”

Kitchen Sink

The Bloomberg Dollar Index was up more than 4 percent in 2018 at the end of last week and is close to its highest level in a year and a half, while the Japanese yen surged around 2 percent last week versus the greenback.

Chris Rupkey, chief financial economist at MUFG Union Bank in New York, is among the few eyeing the strained relations between the president and the Fed chair with equanimity.

The stock market “has discounted everything but the kitchen sink, including the loss of a Fed Chair who hasn’t been in office for even a year yet,” he said by email.

Given that the Fed is already close to the end of its hiking cycle, the markets won’t melt down if Powell leaves office, according to Rupkey. “They already did,” he said.

Those on the front lines of this week’s opening trade say markets are on a knife edge.

Mind the Machines

“If equity markets fall further, they’re going to set off machine-based selling,” said Saed Abukarsh, the co-founder of Dubai-based hedge fund Ark Capital Management. “The other risk is that experienced traders are on holiday, so the ones left will be trigger happy with every new headline.”

“I can’t see buyers stepping into this market to stem off any selling pressure until January,” said Abukarsh. “So if you need to adjust your books for the year-end with any meaningful size, you’re going to have to pay for it.”

Trump’s two-year stock honeymoon ends with hunt for betrayer

Nobody was happier to take credit for surging stocks than Donald Trump, who touted and tweeted each leg up. Now the bull is on life support and the search for its killer is on.

And while many on Wall Street share the president’s frustration with the man atop his markets enemies list, Federal Reserve Chairman Jerome Powell, they say Trump himself risks making things worse with too much aggression when equities are one bad session away from a bear market.

“You would think that after coming off of the worst week for the markets since the financial crisis in 2008, he would look to create some stability,” said Chuck Cumello, CEO of Essex Financial Services. “Instead we get the opposite, with this headline and more self-induced uncertainty. This coming from a president who when the market goes up views it as a barometer of his success.”

U.S. stock futures whipsawed Monday and were little changed after swinging from a 0.9 percent gain to a loss of the same magnitude. The equity market closes at 1 p.m. in New York ahead of the Christmas holiday.

Click here to see all of Trump’s tweets on the economy and markets.

Attempts by Treasury Secretary Steven Mnuchin to reassure markets that Powell wouldn’t be ousted appeared to have largely removed that as an immediate concern for traders, but the secretary’s tweet Sunday that he called top executives from the six largest U.S. banks to check on their liquidity and lending infrastructure added to anxiety.

To be sure, equities remain solidly higher since Trump took office. Even with its 17 percent drop over the last three months, the S&P 500 has risen 18 percent since Election Day. The Nasdaq Composite Index is up 25 percent with dividends. True, volatility has jumped to a 10-month high, but market turbulence was significantly worse for three long stretches under Barack Obama.

The S&P 500 slumped 7.1 percent last week and the Nasdaq Composite Index spiraled into a bear market. As of 2:31 p.m. in Hong Kong, futures on the S&P 500 were up 0.6 percent while Nasdaq 100 contracts added 0.5 percent.

While Trump seems to have found his villain in Powell, blame is a dubious concept in financial markets, as anyone who has tried to explain the current rout can attest.

Along with the Fed chairman, everything from rising bond yields, trade tariffs, falling bond yields, Brexit, tech valuations and Italian finances have been implicated in the downdraft that has erased $5 trillion from American equity values in three months.

Whatever’s behind it, nothing has been able to stop it. And while many on Wall Street credit the president for helping jump-start the market after taking office, they say he should look in the mirror to see another person creating stress for it right now.

“Trump was gloating how much good he had done for the economy and the market. Now he’s blaming Powell for the decline instead of himself,” said Rick Bensignor, founder of Bensignor Group and a former strategist for Morgan Stanley. “Half his key staff has been fired or quit. The markets are off for a variety of reasons, but most of them have Trump behind them.”

If Trump is bent on getting rid of Powell, there may be ways of doing it that don’t risk kicking a volatile market into hysteria, said Walter “Bucky” Hellwig, a senior vice president at BB&T Wealth Management in Birmingham, Alabama.

“It doesn’t have to be firing, it could be someone else taking Powell’s job. That could be a net positive for the markets,” Hellwig said. “A friendly change in the head of the Fed may cause some turbulence short-term but it may be offset with the markets repricing the risk associated with two rate hikes in 2019.”

For now, the turmoil shows no signs of letting up. In the Nasdaq 100, home to tech giants like Apple Inc. and Amazon.com, there have been 17 sessions with losses greater than 1.5 percent this quarter, the most since 2009. Small caps are down 26 percent from a record, while the Nasdaq Biotech Index has dropped at least 1 percent on seven straight days, the longest streak since its inception in 1993.

It’s been a long time since anyone in the U.S. has lived through this protracted a decline. Including Trump.

”It’s impossible to tease out what the proximate causes are,” said Kevin Caron, a senior portfolio manager at Washington Crossing Advisors. “The normal ebb and flow of financial markets are all part of the mix. It’s impossible just to point to the chairman as the only input.”

Credit: Bloomberg

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US Federal Reserve rate rise, Malaysia and regional equity markets in the red


 

Fed’s big balance-sheet unwind could be coming to an early end

NEW YORK: The Federal Reserve’s balance sheet may not have that much further to shrink.

An unexpected rise in overnight interest rates is pulling forward a key debate among US central bankers over how much liquidity they should keep in the financial system. The outcome will determine the ultimate size of the balance sheet, which they are slowly winding down, with key implications for US monetary policy.

One consequence was visible on Wednesday. The Fed raised the target range for its benchmark rate by a quarter point to 1.75% to 2%, but only increased the rate it pays banks on cash held with it overnight to 1.95%. The step was designed to keep the federal funds rate from rising above the target range. Previously, the Fed set the rate of interest on reserves at the top of the target range.

Shrinking the balance sheet effectively constitutes a form of policy tightening by putting upward pressure on long-term borrowing costs, just as expanding it via bond purchases during the financial crisis made financial conditions easier. Since beginning the shrinking process in October, the Fed has trimmed its bond portfolio by around US$150bil to US$4.3 trillion, while remaining vague on how small it could become.

This reticence is partly because the Fed doesn’t know how much cash banks will want to hold at the central bank, which they need to do in order to satisfy post-crisis regulatory requirements.

Officials have said that, as they drain cash from the system by shrinking the balance sheet, a rise in the federal funds rate within their target range would be an important sign that liquidity is becoming scarce.

Now that the benchmark rate is rising, there is some skepticism. The increase appears to be mainly driven by another factor: the US Treasury ramped up issuance of short-term US government bills, which drove up yields on those and other competing assets, including in the overnight market.

“We are looking carefully at that, and the truth is, we don’t know with any precision,” Fed chairman Jerome Powell told reporters on Wednesday when asked about the increase. “Really, no one does. You can’t run experiments with one effect and not the other.”

“We’re just going to have to be watching and learning. And, frankly, we don’t have to know today,” he added.

But many also see increasingly scarce cash balances as at least a partial explanation for the upward drift of the funds rate, and as a result, several analysts are pulling forward their estimates of when the balance sheet shrinkage will end.

Mark Cabana, a Bank of America rates strategist, said in a report published June 5 that Fed officials may stop draining liquidity from the system in late 2019 or early 2020, leaving US$1 trillion of cash on bank balance sheets. That compares with an average of around US$2.1 trillion held in reserves at the Fed so far this year.

Cabana, who from 2007 to 2015 worked in the New York Fed’s markets group responsible for managing the balance sheet, even sees a risk that the unwind ends this year.

One reason why people may have underestimated bank demand for cash to meet the new rules is that Fed supervisors have been quietly telling banks they need more of it, according to William Nelson, chief economist at The Clearing House Association, a banking industry group.

The requirement, known as the Liquidity Coverage Ratio, says banks must hold a certain percentage of their assets either in the form of cash deposited at the Fed or in US Treasury securities, to ensure they have enough liquidity to deal with deposit outflows.

The Fed flooded the banking system with reserves as a byproduct of its crisis-era bond-buying programs, known as quantitative easing, to stimulate the economy. The money it paid investors to buy their bonds was deposited in banks, which the banks in turn hold as cash in reserve accounts at the Fed.

In theory, the unwind of the bond portfolio, which involves the reverse swap of assets between the Fed and investors, shouldn’t affect the total amount of Treasuries and reserves available to meet the requirement. The Fed destroys reserves by unwinding the portfolio, but releases an equivalent amount of Treasuries to the market in the process.

But if Fed supervisors are telling banks to prioritise reserves, that logic no longer applies. Nelson asked Randal Quarles, the Fed’s vice-chairman for supervision, if this was the Fed’s new policy. Quarles, who was taking part in a May 4 conference at Stanford University, said he knew that message had been communicated and is “being rethought”.

If Fed officials do opt for a bigger balance sheet and decide to continue telling banks to prioritise cash over Treasuries, it may mean lower long-term interest rates, according to Seth Carpenter, the New York-based chief US economist at UBS Securities.

“If reserves are scarce right now, and if the Fed does stop unwinding its balance sheet, the market is going to react to that, a lot,” said Carpenter, a former Fed economist. “Everyone anticipates a certain amount of extra Treasury supply coming to the market, and this would tell people, ‘Nope, it’s going to be less than you thought’.” — Bloomberg

Malaysia and regional equity markets in the red

 

In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow
stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

PETALING JAYA: It was a sea of red for equity markets across the region after the Federal Reserve raised interest rates by a quarter percentage point to a range of 1.75% to 2% on Wednesday, and funds continued to move their money back to the US. This is the second time the Fed has raised interest rates this year.

In general, markets weren’t down by much, probably because the rate hike had mostly been anticipated. Furthermore for Asia, the withdrawal of funds has been taking place over the last 11 weeks, hence, the pace of selling was slowing.

The Nikkei 225 was down 0.99% to 22,738, the Hang Seng Index was down 0.93% to 30,440, the Shanghai Composite Index was down 0.08% to 3,047.34 while the Singapore Straits Times Index was down 1.05% to 3,356.73.

In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

Meanwhile, the Fed is nine months into its plan to shrink its balance sheet which consists some US$4.5 trillion of bonds. The Fed has begun unwinding its balance sheet slowly by selling off US$10bil in assets a month. Eventually, it plans to increase sales to US$50bil per month.

With the economy of the United States showing it was strong enough to grow with higher borrowing costs, the Federal Reserve raised interest rates on Wednesday and signalled that two additional increases would be made this year.

Fed chairman Jerome H. Powell in a news conference on Wednesday said the economy had strengthened significantly since the 2008 financial crisis and was approaching a “normal” level that could allow the Fed to soon step back and play less of a hands-on role in encouraging economic activity.

Rate hikes basically mean higher borrowing costs for cars, home mortgages and credit cards over the years to come.

Wednesday’s rate increase was the second this year and the seventh since the end of the Great Recession and brings the Fed’s benchmark rate to a range of 1.75% to 2%. The last time the rate reached 2% was in late 2008, when the economy was contracting.

“With a slightly more aggressive plan to tighten monetary policy this year than had previously been projected by the Fed, it will narrow our closely watched gap between the yield rates of two-year and 10-year Treasury notes, which has recently been one of a strong predictor of recessions,” said Anthony Dass, chief economist in AmBank.

Dass expects the policy rate to normalise at 2.75% to 3%.

“Thus, we should potentially see the yield curve invert in the first half of 2019,” he said.

So what does higher interest rates mean for emerging markets?

It means a flight of capital back to the US, and many Asian countries will be forced to increase interest rates to defend their respective currencies.

Certainly, capital has been exiting emerging market economies. Data from the Institute of International Finance for May showed that emerging markets experienced a combined US$12.3bil of outflows from bonds and stocks last month.

With that sort of global capital outflow, countries such as India, Indonesia, the Philippines and Turkey, have hiked their domestic rates recently.

Data from Lipper, a unit of Thomson Reuters, shows that for the week ending June 6, US-based money market funds saw inflows of nearly US$34.9bil.

It makes sense for investors to be drawn to the US, where the economy is increasingly solid, coupled with higher yields and lower perceived risks.

Hong Kong for example is fighting an intense battle to fend off currency traders. Since April, Hong Kong has spent at least US$9bil defending its peg to the US dollar. Judging by the fact that two more rate hikes are on the way this year, more ammunition is going to be needed.

Hong Kong has the world’s largest per capita foreign exchange reserves – US$434bil more in firepower.

By right, the Hong Kong dollar should be surging. Nonetheless, the currency is sliding because of a massive “carry trade.”

Investors are borrowing cheaply in Hong Kong to buy higher-yielding assets in the US, where 10-year Treasury yields are near 3%.

From a contrarian’s perspective, global funds are now massively under-weighted Asia.

With Asian markets currently trading at 12.3 times forward price earnings ratio, this is a reasonable valuation at this matured stage of the market.

By Tee Lin Say StarBiz

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US: an engine or a threat to the world economy? Unwise to write shortsighted rules!


WEF_improving

Is the US an engine or a threat to the world economy?

According to the World Economic Outlook published by the World Bank, the international economy is forecast to grow by 3 percent in 2015 and 3.3 percent in 2016. The US and the UK will maintain their economy recovery while Japan and the eurozone will remain sluggish, with growth forecast at no more than 1.1 percent. The World Bank also predicted that the US economy will grow by 3.2 percent in 2015. Developing countries are facing lots of challenges in its economic development.

The US seems to be the only engine of the world economy. But the US Federal Reserve is likely to raise its interest rate from 0 to 0.25 percent. The World Bank worries that any such move will make it more difficult for emerging economies to raise money. The US has emerged from its financial crisis while other countries are still trapped in economic troubles. From this perspective it is hard to assess whether the US is an engine or a threat to the world economy.

There is still a worry that Greece will exit the eurozone. If this happens, the eurozone will be thrown into turmoil. In Japan, so-called “Abenomics” have failed to generate the anticipated results. Russia and Venezuela are each facing their own troubles and threats.

The US economy is closely linked to the whole. Only when other economies achieve sound development, can the US economy maintain sustainable development. The US can’t just focus on its own development.

This article was edited and translated from 《美国是引擎还是威胁?》, source: People’s Daily Overseas Edition, Author: Zhang Hong

It is unwise for the U.S. to write shortsighted rules

In the latest State of the Union Address, President Barack Obama mentioned China many times. He claimed that China wants to write the rules for the world’s fastest-growing region (Asia-Pacific) but the U.S. should write those rules. He went on to urge Congress to give him the authority to promote trade with this region.

Obama is setting considerable store by the Trans-Pacific Strategic Economic Partnership (TPP) Agreement (TPP) and Transatlantic Trade and Investment Partnership (TTIP). These trans-regional trade and investment agreements are designed to increase America’s competitiveness and encourage its exports. Although Obama’s government has tried hard to promote these agreements and to make his mark on presidential history in the U.S., parts of the bills of the two agreements are opposed by some of the negotiation partners, and it is not clear whether Congress will support the agreements.

The U.S. is avoiding queries over its strategic rebalancing toward the Asia-Pacific. The American government cannot give a clear answer to whether TPP targets any specific country. However Obama has now made his position clear: “We should write those rules. We should level the playing field. That’s why I’m asking both parties to give me trade promotion authority to protect American workers, with strong new trade deals from Asia to Europe that aren’t just free, but fair.”

It is readily apparent that America is not satisfied with international trade rules set by the World Trade Organization (WTO). Some countries are trying to break rules while China is attempting to set rules for the world’s fastest-growing region. However, China’s efforts could undermine American interests. Obama hold the view that China is taking advantages of existing free trade rules and it is not fair to the U.S.

It is not wrong for America to benefit from reform of international trade rules. But from a country good at promoting global rules in the past to one now busy promoting trans-regional rules between Asia and Europe, America’s leadership in international system gradually fades out. The U.S. thinks that it has suffered losses from past world trade rules and therefore wants to establish new trans-regional institutions that exclude China and other counties.

America is no longer a country positively promoting global financial trade rules. It now seems to be focused on short-term rules to suit itself and a few allies. Although these agreements will co-exist with the WTO, world trade may become more fragmentized due to trans-regional agreements. A conflict of interests is slowly developing between a group of developed countries, including America, and the developing countries. Trade interests between developing countries might also be damaged. In view of this situation, it is hard to say that the world will be freer or fairer.

Are the trade rules established by WTO really unfair? The U.S. thinks that the standards involving environmental protection, intellectual property protection, and markets are too low. However, America should always bear in mind that it too encountered these problems during its industrialization. Progress was achieved only after a long period. If America remains reluctant to cooperate with other countries to define international rules, it might lose international respect and miss out on new opportunities for development.

The article is edited and translated from 《美国切莫制定短视规则(望海楼)》, source: People’s Daily Overseas Edition, author: Shen Dingli, Vice Dean and professor of Institute of International Studies, Fudan University

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