An independent professional's take on the latest news and trends in global financial markets

Posts Tagged ‘capital controls

Debt: still very much in favour

Reports by the Wall Street Journal that officials at the Federal Reserve are drawing up plans for starting to rein in the current programme of QE are worth noting. Jon Hilsenrath, the Journal reporter who wrote the story, is widely held to be the Fed’s favourite unofficial channel for making known its future intentions.  Could it be that even the Fed is starting to get concerned about the runaway effect that its monetary stimulus is having on asset prices? Throw in Mr Bernanke’s warnings about excessive risk-taking last week and it is tempting to suppose that even the Fed would be happy to see a pause in the the advance of risk assets, at least for now.

That would certainly seem to sit quite well with the normal midyear seasonal pullback that we have seen for each of the last three years. The worry with QE has always been that it is easy to get started on it, but very difficult to stop. Now that the Japanese have joined the QE party in an even more dramatic way, the ripples are being felt in financial markets all round the globe, compounding the scale of the eventual problem. Yields in a number of credit markets (eg junk bonds, leveraged loans) have fallen to what look like dangerously complacent levels. Companies such as Apple are obviously happy to take advantage of the ultra-low rates on corporate debt, but whether that achieves any longer term benefit remains to be seen – not so obvious when the purpose of the debt is committed to share repurchases rather than new capital investment. All the while a return to the levels of economic growth we witnessed before the crisis broke in 2008 remains stubbornly distant. Read the rest of this entry »

Even cash is now at risk

Albert Edwards, the lead strategist at Societe Generale, has added some typically forthright (and witty) comments on the latest developments in Euroland. By making explicit the fact that both uninsured bank depositors and all classes of bondholder have been required to take part in the rescue/liquidation of the two largest Cypriot banks, the troika (EU, IMF and ECB) has highlighted the fact that cash itself is now officially potentially an unsafe asset. He wonders also (as do I) how long it will be before a Eurozone country finally decides that remaining in the single currency is not worth the trauma that staying in involves.

Most economic analysis concludes, probably correctly, how much more costly it would be for either a creditor or debtor nation to leave the eurozone system compared to struggling on within it. Indeed for Germany, despite becoming increasingly irritated by having to dip their hands into their rapidly fraying pockets, the crisis in the eurozone has been accompanied by the lowest unemployment rates since before re-unification in 1990. Read the rest of this entry »

Written by Jonathan Davis

March 27, 2013 at 5:42 PM

Cyprus and beyond: more thoughts

As usual it will take a day or two for the markets to decide which of their initial reactions to the Cyprus bailout – relief that a deal has been struck, or concern at the implications of the terms imposed by the troika – will prove dominant. Some things do seem clear from what we have learnt already:

  • This was the most acrimonious bailout negotiation yet, with little love lost between the Cypriot negotiators and the troika representatives on the other. Talks came close to breakdown on several occasions over the course of the past week. Apparently tipped off in advance that the Russians would not come riding to the rescue, the troika played hardball – and eventually won, although not before the Cypriot President had threatened to resign and/or take Cyprus out of the euro – a desperate course of action which the influential Archbishop of Cyprus, for one, has openly advocated.
  • Although the deal will avoid the outcome of Cyprus leaving the euro for now, that still remains a possibility. The bailout creates a number of important precedents, raising the possibility that bondholders and depositors in troubled banks elsewhere in the Eurozone could be forced to pick up the tab if their bank needs to be rescued in future. The Dutch finance minister who now heads the Eurogroup said as much yesterday, and subsequent attempts to smooth over his remarks – which were remarkably explicit – have been less than convincing.

Read the rest of this entry »

Written by Jonathan Davis

March 26, 2013 at 2:01 PM