If you’re watching the Fed, you better pay attention to this

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Everyone’s waiting for the Federal Reserve in the week ahead, but the real action may be coming out of Tokyo.

The Fed meets Tuesday and Wednesday, and so does the Bank of Japan. The Fed is expected to hold off on an interest rate hike until December, though more members of the Federal Open Market Committee clearly favor raising rates, so the Fed forecast on both rates and the economy will be important.

“I don’t think they’re going to go, particularly given the recent data that’s been softer. I think they’re going to wait until December,” said Rick Rieder, chief investment officer, global fixed income at BlackRock.

“Markets today are pricing in about an 18 percent chance that they go. But they’re also pricing in December at 50 percent. I think December is higher than that. I think it’s a 60 to 65 percent chance. I think they want to go.”

But the Bank of Japan is another story, and it’s expected to take some action, which will be announced in the early morning hours of Wednesday. Speculation points to a possible interest rate cut deeper into negative territory, tweaks to its assets purchase program or new rules on the duration of securities it will purchase in the bond market.

“I think the Bank of Japan is very important. They could change the amount [they purchase] to a range. I think people could view that as tapering, which I don’t think they’re going to do,” said Rieder. He said the BOJ could stop buying bonds at the long end of the yield curve, which means long end rates could rise while shorter term rates remain negative.

In the U.S., long end rates affect corporate borrowing, and 10-year yields affect corporate borrowers and mortgage rates.

Japan’s heavy use of policy has not delivered the desired results, and the stronger yen has defied the central bank’s efforts. So equally interesting to markets could be an appearance by Prime Minister Shinzo Abe, who will discuss his economics program with investors Monday morning in New York.

“I think the Bank of Japan is very comfortable with the yield curve steepening. The steepening helps their banking system, helps their insurance companies. I think they’re covered with the yield curve because it looks like their policies are working,” Rieder said. That type of move in Japan could spill over to a steeper curve in the U.S. too.

The BOJ and the European Central Bank, for that matter, have been key drivers of the long end of the U.S. Treasury market, which pulled in buyers from overseas as investors looked for alternatives to the low and negative yields in Europe and Japan.

Just reports that the Bank of Japan could stop buying longer duration securities drove Japanese bond prices lower, and that spilled into the U.S. bond market in the past week. Prices move inversely to yields. Before retreating, the U.S. 10-year note temporarily reached a high yield of 1.75 percent, and the 30-year hit 2.50 percent, both the highest levels since June.

Amherst Pierpont chief economist Stephen Stanley said he sees the Bank of Japan meeting this week as potentially more important than the Fed.

“The BOJ promised a major report on the course of monetary policy at this meeting, and market participants have been speculating wildly on what policymakers in Japan will do next. The BOJ faces a similar problem as the ECB, as QE is apparently not working very well in generating growth or inflation, and the central bank may be running out of government bonds to buy. If the BOJ decides, as the ECB did, to merely maintain the status quo, speculation that central banks globally have run out of ammunition will likely intensify,” Stanley wrote as a note.

Central banks have been criticized for potentially creating a bond bubble and over-inflating equities prices with all of their easing. But the Fed is expected to take very slow steps toward hiking, and the ECB and BOJ, still in easing mode, will not be moving off of easy monetary policies any time soon.

“Some of the correlations between rates and equities are changing. I think it’s a big deal if the Fed can start to move. You lose some of that benefits of rates being your ballast against risk assets,” Rieder said. He also said a move to raise rates by the Fed could affect the billions in risk parity trades, which are basically a bet that both stocks and bonds are going higher in a low rate environment.

The Fed has been stirring up markets with rate hike speculation in a big way since late August when key Fed officials said they could raise rates in September. But ultimately it was some dovish Fed members and a string of soft economic data that convinced markets the Fed will stay on the sidelines.

“I think what makes it difficult for everybody is if you go through the speeches, and see who has come out among the voters and said they’re ready to raise rates, the majority of the voters have articulated that they are comfortable with rates going higher, but I still think the committee will not do that,” Rieder said.

Stocks in the past week closed higher, with the S&P 500 up a half percent at 2,139, and the Dow was up 0.2 percent at 18,123. The Nasdaq outperformed, gaining 2.3 percent for the week, the most since July, thanks to a more than 11 percent gain in Apple and strength in the semiconductor sector.

Don Townswick, the Director of Equities at Conning, said he’s looking past the Fed in the coming week.

“I think the focus on the Fed and interest rates borders on mania. There are a couple of different things we should be focused on as we approach the election. The candidates’ economic programs are coming into more focus,” he said. Townswick said the market favors Democrat Hillary Clinton because she is more predictable than Republican Donald Trump.

“The election, I think, will be good news in the sense that it will take away the uncertainty, no matter who wins. I think in terms of purely policies, the latest stuff I’ve heard sounds like for the economy, Trump’s fiscal proposals are better, but if he starts a trade war, that’s not good,” said Townswick.

Townswick said he’s focused on the release of second-quarter GDP in the following week, and also earnings warning season.

“I hope we get an upside surprise and upward [GDP] revision the week after next, but I fear we won’t. If earnings are supposed to strengthen, and we’re supposed to see more strength in the second half of the year, that’s going to be a critical report,” he said.

“The market right now, at these levels, with earnings where they are, and interest rates whey they are, I think that the market’s going to trade in a range for the next several months, almost no matter what data comes out,” he said. But the market could break out if there’s a solid revision to GDP, followed by better earnings.

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Asia higher; ASX up 0.9%, Nikkei up 0.3%, China, Taiwan closed

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Asia markets opened higher on the final trading day of the week, ahead of next week’s key central bank meetings in the US and Japan.

In Australia, the ASX 200 advanced 0.85 percent, with most sectors trading higher. The energy sector was up 0.95 percent, while the heavily-weighted financials sub-index added 0.91 percent.

Japan’s Nikkei 225 gained 0.25 percent, while the Topix index was up 0.34 percent with major banking stocks gaining more than 1 percent each.

Shares of Mitsubishi UFJ was up 1.67 percent, SMFG added 1.79 percent and Mizuho Financial was higher by 1.47 percent.

Markets in China, Taiwan and South Korea are closed on Friday for public holidays.

The Asian session followed gains in US equities on Thursday, where the Dow Jones industrial average rose 177.71 points, or 0.99 percent, to 18,212.48. The S&P 500 gained 21.49 points, or 1.01 percent, to 2,147.26, while the Nasdaq advanced 75.92 points, or 1.47 percent, to 5,249.69.

“The bulls have wrestled some sort of control back in U.S. equity indices, but … there is still a good amount of technical work to be done for the bulls to fully be in control,” Chris Weston, chief market strategist at brokerage firm IG, said.

The dollar moved little against a basket of currencies, with the dollar index at 95.261 as of 8:40 a.m. HK/SIN. This was only a touch lower than the 95.499 level it traded at on Thursday afternoon Asia time.

The lack of movement in the dollar followed soft economic data stateside: initial jobless claims came in at 260,000 for the week ended September 10, which was below expectations. The producer price index for August was unchanged and retail sales fell more than expected.

“These disappointing reports should have driven the US dollar sharply lower, but instead the greenback ended the day higher versus the British pound and unchanged against the euro and the Japanese yen,” said Kathy Lien, managing director for foreign exchange strategy at BK Asset Management.

The slew of disappointing US data may make the case for the Federal Reserve to raise interest rates at its September policy meeting much harder to make. Fed officials have previously said their decision was data-dependent.

“The economy seems to be unable to sustain without central bank support,” said Naeem Aslam, chief market analyst at spreadbettor ThinkMarkets. “This could become a serious problem for the Fed and they can soon start paddling backwards.”

Oil prices retreated Friday morning Asia time, after seeing some rebound overnight. US crude futures fell 0.61 percent to USD 43.64 a barrel, after climbing 0.8 percent in the US session. Global benchmark Brent fell 0.64 percent to USD 46.27, after adding 1.6 percent overnight.

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Bank of England hikes growth forecasts, keeps rates unchanged

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Bank of England opted to hold base interest rates at record lows on Thursday and to maintain the size of its newly enlarged asset-purchasing program.

The bank’s Monetary Policy Committee (MPC) voted unanimously in September to hold the base rate at 0.25 percent, which was cut in August. It also voted unanimously to maintain the size of its corporate bonds purchases at up to £10 billion ($13.2 billion) and government bond purchases at £435 billion.

In addition, it upgraded its growth forecast for the third quarter to 0.3 percent from 0.1 percent, which it predicted last month.

“Since the August inflation report, a number of indicators of near-term economic activity have been somewhat stronger than expected. The committee now expect less of a slowing in UK GDP (gross domestic product) growth in the second half of 2016,” the bank said in the minutes from its latest meeting.

It added that so far there had been no sign of a major hit to the global economy from the UK ‘s vote to leave the European Union in June.

UK data has improved since the bank introduced the large batch of stimulus measures last month to boost the economy following the shock of the leave vote. Official retails sales data for August came in stronger than expected on Thursday and last month’s Markit/CIPS UK services Purchasing Managers Index (PMI) rebounded sharply from July’s 89-month low. However, it is unclear how long the upbeat data trend will last.

The minutes showed that the majority of members expected to vote for a further cut in the base rate before the end of the year. This would likely take the rate to just above zero.

Economists polled by Reuters on Thursday forecast that the bank would cut the base rate to 0.1 percent in the fourth quarter of 2016. However, David Miles, a former member of the MPC, warned on Thursday that markets should not bank on rates remaining at ultra-low levels for a prolonged period.

The UK economy has also been boosted by the weaker pound, which slumped after the vote to leave the European Union on June 23. At $1.32 to the pound, sterling is down around 12 percent from the peak it hit just prior the referendum.

“Sterling has been trading very well, it has been very stable, but actually I wouldn’t attribute so much of that to the Bank of England. Carney has been, in the last week or so, trying to recover a bit of credibility and suggest that it is down to their messages. But the market view is that is a little tenuous,” Richard de Meo, founder of Foenix Partners, told CNBC on Thursday.

The Bank of England has published a list of senior secured corporate bonds that are eligible for purchase. Issuers include FTSE 100-listed AstraZeneca, BAE Systems, BAT, British Telecom, Centric and GlaxoSmithKline. The Dow companies with eligible bonds are McDonald’s, General Electric, IBM, Pfizer, Procter & Gamble, Apple and Wal-Mart.

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Have we learned anything from the Lehman Brothers collapse?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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On this day, eight years ago, US banking giant Lehman Brothers filed for bankruptcy, sending shockwaves across the global financial markets. Now in 2016, has the world learned anything from the worst day in the history of banking?

“The banking sector has still not recovered,” David Buik, a market commentator at Panmure Gordon told CNBC via email. “Though the market is grateful for small mercies – massive quantitative easing, which bought time and restored confidence, regulation’s hob-nailed boots left their prints across the backs of every bank in the world.”

The investment bank filed for bankruptcy in the early hours of September 15 and by afternoon central banks across the globe had started putting together a plan of action to put a brake on plummeting financial markets. By end of the day, more than 25,000 staff members at Lehman prepared for redundancy.

“The Lehman Brothers collapse made financial institutions realise that the most precious thing they are entrusted with is trust – and that winning that back was going to take both structural and cultural change that would have been unimaginable just a few years before,” Michael Cole-Fontayn, EMEA Chairman at BNY Mellon told CNBC via email. “Since 2008, banks around the world have strengthened their balance sheets, held more capital and more liquid assets. They’ve invested heavily in risk management. “

Fontayn adds that banks have gone back to basics, stepping away from high-risk activities such as repackaging and reselling loans.

However, the state of the banking system still remains fragile. A number of analysts have said that the US banking system is in a better state than the European banking system. The reasons for these have been a low interest rate environment, sluggish economic growth and uncertainties surrounding Brexit.

Deutsche Bank vs Lehman Brothers

Big European banks like Deutsche Bank and Credit Suisse saw their shares plunge to an all-time low after results of the U.K.’s referendum on remaining in Europe on June 23. While the fall in Deutsche Bank’s share price is not very different from some other banks like the Royal Bank of Scotland, down nearly 35 percent since the beginning of the year, it faces regular comparisons with the ill-fated Lehman Brothers.

The cost of insuring exposure to Deutsche Bank debt has risen sharply, signaling it as a risky asset and inviting further comparisons with Lehman Brothers. Five-year credit default swaps (CDS) rose to 235 basis points last month, currently at its highest among all investment banks, and a massive jump from 95 basis points at the start of the year, according to data from Markit. Reports have also pointed to Deutsche Bank’s global derivatives risk in the range of $75 trillion which is 20 times greater than the German gross domestic product (GDP). Shares in Deutsche Bank fell further after the bank’s US unit failed stress tests this year.

Add to that the bank’s falling market valuation, currently pegged at $18 billion, similar to that of social network company Snapchat, and investors are increasingly worried.

“Deutsche Bank unlike Lehman will not be allowed to fail,” Alastair Winter, chief economist at Daniel Stewart told CNBC via email. “It is also likely that they are much more aware of their problems even if they are unable or unwilling to quantify them properly.”

Winter also explains that while the outlook for the sector is poor, it will not end in a slump or a stock market crash. But he warns that European banks should deal with its problems of increasing non-performing loans that is affecting the ability of banks to lend. The biggest problem of non-performing loans in Europe can be seen in Italian banks with loans estimated to total around 360 billion euros ($401 billion).

So is it all gloomy?

However, a number of analysts have said that the situation is not as gloomy as it was eight years ago. While the global economy will take time to come out of the crisis, improvement can be seen in a number of sectors.

“We have had a sustained recovery in the US , UK., Canada and Germany – where unemployment has come down to pre-crisis levels, Andrew Sentance, ex-Bank of England Monetary Policy Committee (MPC) member told CNBC via email.

He further explained that the economies within the G-7 countries that are struggling are doing so due to their own structural problems, which are holding back growth.

On the banking front, analysts have pointed to banks putting safer practices in place in order to get a better understanding of risks.

“Much of the toxic asset exposure has been run down or run off,” Mark Peden, co-manager of Kames Global Equity Income told CNBC via email. He lists the NPLs in Italy and Deutsche Bank to be two problematic areas but doesn’t think they are of systemic nature.

Markets however continue to remain concerned about uncertainties surrounding Brexit and the impact it could have for banks with operations in London. “It’s a total red-herring,” Panmure Gordon’s Buik said. “London is the most influential center in Europe by far and having spent 70 years building infrastructure it is not going to be allowed to be usurped by Frankfurt, Paris, Dublin or anywhere else.”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

US stocks close mostly lower as energy falls more than 1%

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Fed should get rate hike over and done with: Mohamed El-Erian

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Federal Reserve should get its interest rate rise “over and done with” and reassert that this will not be a normal rate hike cycle, widely followed economist Mohamed El-Erian told CNBC on Tuesday.

However, the central bank needs to “reassure markets that the path is going to be very, very shallow going forward and reassure markets that this cycle is going to end well below the terminal values historically.”

The Fed’s policymaking committee meets next week and could possibly raise rates. However, the market hasn’t been pricing in a rate increase.

Several noted market experts have been warning about the impact of the central bank’s actions on the market. At the Delivering Alpha conference presented by CNBC and Institutional Investor on Tuesday, Paul Singer of Elliott Management faulted the Fed and others for creating unusual dangers and a “tremendous increase in hidden risk.”

El-Erian said the Fed has been pushed into a corner.

“Because others haven’t stepped up to their responsibilities, central banks have had to do too much for too long,” he said.

“Central banks cannot be the only game in town. They cannot compensate for other policymakers. There are much better tools on the fiscal side and on the structural reform side that are much better suited for what’s needed.”

Meanwhile, the fact there has been so much “obsessing” over a quarter-point rate hike is “absolutely absurd,” he added.

However, El-Erian said it shows the extent to which the markets have relied on the injections of liquidity — which have delivered the “perfect trifecta” of higher returns, lower volatility and correlations where everything goes up.

“We’ve become so sensitive to these tiny moves because we are overdependent on the Fed,” he said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Oil prices fall on profit taking, eyes on China data

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Oil prices fell in early trade on Tuesday on concerns over increased drilling in the United States and as investors took profits after oil prices rose close to 1 percent in the previous session.

Markets will also be keeping a close eye on Chinese activity data due for release later in the day for clues on the demand strength for crude.

Brent crude futures were trading at USD47.98 per barrel at 0109 GMT, down 34 cents, or 0.7 percent, from their last settlement.

US West Texas Intermediate futures were down 41 cents, or 0.9 percent, at USD45.88 a barrel.

Traders said the price falls on Tuesday were an indication that increasing oil drilling activity in the United States was still a concern even as crude prices closed higher on Monday because of a weaker dollar.

“People are seeing that rally we had on a very big decline in (US) inventories last week is a bit of a selling opportunity,” said CMC Market chief market analyst Ric Spooner.

Oil’s 4 percent price decline since Sept. 8 partly reverses a 10 percent rally early in the month, which was fuelled by speculation that oil exporters could cap production.

“Investor appetite (for commodities) remains subdued,” Australian bank ANZ said in a note. “Any disappointment in economic data released in China today will see prices come under further downward pressure.”

China is due to release August monthly industrial output and retail sales data, as well fixed-asset investment figures.

China’s state oil refiners are readying to export more diesel and gasoline in coming months as a bleak outlook for what is typically the nation’s period of greatest consumption sends shivers through an already saturated global market.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow