Category: Market Action

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts off 17bp, FixedResets up 10bp and DeemedRetractibles gaining 6bp. The Performance Highlights table is dominated by losing Floating Rate issues. Volume was extremely low.

Golly, what a surprise:

Bank of England officials told currency traders it wasn’t improper to share impending customer orders with counterparts at other firms, a practice at the heart of a widening probe into alleged market manipulation, according to a person who has seen notes turned over to regulators.

A senior trader gave his notes from a private April 2012 meeting of currency dealers and two central bank staff members to the Financial Conduct Authority about six weeks ago because of mounting media coverage of the investigation, said the person, who asked not to be named while probes are under way.

Traders representing some of the world’s biggest banks told officials at the meeting that they shared information about aggregate orders before currency benchmarks were set, three people with knowledge of the discussion said. The officials said there wasn’t a policy on such communications and that banks should make their own rules, according to the people.

I don’t see anything wrong with sharing this information, anyway. To me, it’s all part of the ‘beat bankers up’ hysteria, led by people who act as if they do not understand what it is that institutional desks do – though I’m quite sure this is disingenuous.

It will be interesting to see how Danish mortgages turn out:

Denmark, which in 2010 became the first European nation to pass a law preventing bank bailouts, is now signaling it will take an equally hard line with its mortgage industry. The stance comes from a country whose $550 billion home-loan market — the world’s biggest per capita — is more than 1 1/2 times gross domestic product.

About a third of Danish mortgages are refinanced annually in bond auctions. The government has proposed a law that seeks to address refinancing risks by forcing bond investors to accept 12-month maturity extensions if an auction fails or if interest rates jump more than 5 percentage points.

The Danish mortgage industry’s size and systemic importance this week led Standard & Poor’s to conclude that the government would have to step in should auctions fail. According to the rating company, Denmark’s economy will already be in a crisis warranting some form of intervention if mortgage banks can’t sell their bonds.

From an investor’s perspective, the law brings a lot of wrong-way risk with it (i.e., bad news is correlated). What effect will this have on mortgage rates?

Crumby jobs number in the US:

Payrolls rose less than projected in January and the jobless rate unexpectedly dropped to the lowest level in more than five years, clouding the outlook for the U.S. economy and Federal Reserve.

The 113,000 gain in hiring fell short of the 180,000 advance that was the median forecast of economists surveyed by Bloomberg and followed a 75,000 increase the prior month, Labor Department data showed today in Washington. Unemployment declined to 6.6 percent, the least since October 2008, from 6.7 percent in December.

Contrariwise, the the Canadian number looked OK…

The Canadian economy added 29,400 jobs in January after a month-earlier drop, led by gains in self employment and in the public sector.

The employment gain and a drop in the number of people looking for work sent country’s jobless rate down two notches to 7 per cent in January. The increase comes after employers shed 44,000 positions in December, Statistics Canada said Friday.

… but has been criticized:

“The January Canadian jobs report was good on the headline but weak in the details,” said senior economist Krishen Rangasamy of National Bank Financial.

“The job gains were driven by self-employment and the number of paid jobs grew a meagre 1,000 as gains in government offset further declines in the private sector,” he added, referring to a loss of 14,000 jobs among corporations.

“After the weather wreaked havoc in the prior month, causing a massive 44,000 drop, employment bounced back in affected sectors such as agriculture, construction, and accommodation services.”

He cited the “more reliable” six-month moving average, which shows employment up 15,000 a month since August, with 12,000 of them in the private sector.

That, he added, is “not a bad performance, and consistent with the pick-up in economic growth in the second half of 2013.”

Meanwhile, the Toronto Exchange is losing subscribers:

TMX Group Inc. disclosed on Wednesday that there was an 8 per cent slump “in the average number of professional and equivalent real-time market data subscriptions to Toronto Stock Exchange and TSX Venture Exchange products.” That is by far the steepest drop in the past eight years, and takes the number down to 139,939 from 151,799 in 2012.

Maybe they’ll cut the price to increase subscriptions. Ha-ha.

The hot new topic is flexible exchange rates:

In October 2001, [Fed vice-governor nominee] Stanley Fischer traveled to the London School of Economics to speak on the lessons of his seven years battling turmoil in emerging markets as the International Monetary Fund’s No. 2 official.

Lecturing in the Old Theatre at the university where he studied in the 1960s, Fischer posed a question: What would he have done differently to thwart the Asian financial crisis of 1997-1998? Among his answers: Pushing harder for exchange-rate flexibility.
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Emerging-market stocks and exchange rates have had the worst start to a year since 2010. Even so, said Dominic Wilson, chief markets economist at Goldman Sachs Group Inc. in New York, “currency weakness itself is unlikely to be as sharply disruptive as it was in the late 1990s.”

That’s when Asian nations including South Korea and Thailand spent reserves trying to defend exchange-rate pegs, only to eventually devalue and seek IMF bailouts. As one currency after another became delinked from the U.S. dollar, investors attacked in waves that would culminate in Russia’s debt default and the collapse of Long Term Capital Management.
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Following Fischer’s prescriptions, emerging markets have made other changes to ensure they are less vulnerable than they were in the late 1990s, [former IMF economist Eswar] Prasad said. Their external debt as a share of exports has fallen to 70 percent from about 160 percent in 1998; interest payments on foreign debt have declined to less than 3 percent of exports from 8 percent; and reserves as a percentage of total debt have doubled to more than 100 percent, according to Goldman Sachs.

… and it was also Tiff Macklem’s swan-song:

Since 1995, the target has been to achieve an annual total rate of inflation of 2 per cent – the midpoint of our control range of 1 to 3 per cent – as measured by the consumer price index (CPI). The target is reviewed jointly with the federal government approximately every five years, and was last renewed in 2011.3

To achieve that target, an essential component of our monetary policy framework is a flexible exchange rate. The floating exchange rate is part of the monetary transmission mechanism. It allows the Bank to pursue its own “made-in-Canada” monetary policy that is directed at achieving 2 per cent inflation in Canada and stabilizing our economy. The flexible exchange rate also serves as a kind of shock absorber for the Canadian economy, helping it absorb and adjust to shifts in the global economy. [Conference reference]

In light of the recent depreciation of the Canadian dollar, it bears stressing that the Bank does not have a target for the exchange rate – it has an inflation target. The exchange rate is determined in markets, and we neither promote any specific value for the Canadian dollar, nor thwart its movements.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets down 10bp and DeemedRetractibles gaining 5bp. Floaters bounced back after getting hit in the past few days and dominated the good part of the Performance Highlights table. Volume was below average, but the highlights were exclusively FixedResets – probably due to the new issue.

Hands up, everybody who didn’t see this coming! Suing CRAs is fashionable!

Today’s looniest financial story is surely that Italy’s state auditor, the Corte dei Conti, has opened an investigation into Standard & Poor’s, Moody’s and Fitch for downgrading Italy’s debt over the past couple of years. Loony first of all for the reasoning:

Notifying S&P that it was considering legal action, the Corte dei Conti wrote: “S&P never in its ratings pointed out Italy’s history, art or landscape which, as universally recognised, are the basis of its economic strength.”

But also for the size of the claim: “Standard & Poor’s revealed on Tuesday it had been notified by Corte dei Conti that credit rating agencies may have acted illegally and opened themselves up to damages of €234bn.”

It was another mildly poor day for the Canadian preferred share market, with PerpetualDiscounts off 6bp, FixedResets down 12bp and DeemedRetractibles losing 14bp. The surprisingly lengthy performance highlights table is dominated by losers. Volume was high.

DBRS doesn’t like the New Brunswick budget:

DBRS notes that the Province of New Brunswick (the Province or New Brunswick; rated A (high) with a Stable trend) kicked off the provincial budget season with its 2014 budget on February 4, 2014, which calls for a slow and protracted path back to balance by 2017-18. Although last year’s budget incorporated no firm time commitment to restore balance, the plan presented in 2012-13 did point to a balanced budget by 2014-15. DBRS was aware that some slippage had been incurred in light of weak economic performance but did not expect the full extent of deterioration revealed in yesterday’s budget. As a result, the revised fiscal targets raise the possibility of as much as $400 million to $500 million in additional debt over the next four fiscal years, which was not factored into last year’s rating review. While the revised outlook is potentially manageable for the credit profile, DBRS remains concerned that continued sluggish economic growth for an extended period of time or weakening fiscal resolve could push credit metrics to levels no longer consistent with the current ratings.
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Based on the revised fiscal forecasts, DBRS-adjusted debt is estimated to have risen by 5% in 2013-14 to $12.5 billion. As a result of Statistics Canada’s downward revisions to historical GDP figures in December 2013 combined with very slow nominal GDP growth in 2013, debt-to-GDP is forecast to reach almost 40% at March 31, 2014. The Province’s debt burden is expected to peak around 41% in 2015-16. This exceeds the peak at the time of last year’s review and, more importantly, is well above pre-recession levels of less than 30%. As a result, even if the Province successfully executes its fiscal recovery plan as currently envisioned, DBRS believes little flexibility will be left within the current rating for further erosion. Additional fiscal slippage pushing the debt-to-GDP ratio toward 45% would be cause for concern for DBRS and could result in downward pressure on the rating.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 7bp, FixedResets off 3bp and DeemedRetractibles losing 9bp. A surprisingly lengthy Performance Highlights table is notable for the presence of losing Floating Rate issues. Volume was below average.

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard conversion factor of 1.3x. Long Corporates now yield about 4.5% (maybe a little less), so the pre-tax interest-equivalent spread is now about 275bp, the same as that reported on January 29.

Nothing happened today.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 38bp, FixedResets gaining 11bp and DeemedRetractibles up 16bp. The performance highlights table is short, but comprised entirely of winning PerpetualDiscounts. Volume was average.

More blather about housing prices:

The price-to-rent ratio pegs the level at 60 per cent, [TD economist] Ms. [Diana] Petramala said, but is “skewed” by rent controls, and thus it’s hard to determine whether the prices are too high or if the rents are too low.

The price-to-income ratio puts overvaluation at up to 30 per cent, she added, but that really depends on what you consider income.

“A more encompassing definition of income, including government transfers and investment income, suggests the housing market is only 8 per cent overvalued.”

But it’s affordability that is key, she said, and various readings don’t factor in declining interest rates over the last 20 years. A “more normal interest rate environment” suggest 25 per cent, while current rates suggest fair value.

“However, current interest rates are likely unsustainable, nor are they expected to increase to more normal levels in the near future,” Ms. Petramala said.

“Over all, given the expectations of a modest increase in interest rates, home prices are likely 10-per-cent overvalued.”

Make of it what you will. Personally, I think forecasting the real estate market is about as useful an exercise as timing the financial markets. When I bought my place in 2000, I had lots of people tell me what an idiot I was; but I needed a place to live.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 20bp, FixedResets off 1bp and DeemedRetractibles gaining 3bp. Floaters got hammered, dominating the bad part of the Performance Highlights table. Volume was very extremely awfully low.

The blame game has begun:

India central bank Governor Raghuram Rajan warned of a breakdown in global policy coordination after the Federal Reserve further cut stimulus, weakening emerging-market currencies from the rupee to the Turkish lira.

Rajan, a former chief economist at the International Monetary Fund, called for greater cooperation among policy makers weeks before finance chiefs from the world’s top developed and emerging markets gather in Sydney.
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The Fed shouldn’t be blamed for turmoil in emerging markets, former Fed Governor Randall Kroszner, a professor at the University of Chicago where Rajan once lectured, said on Bloomberg Radio’s “The Hays Advantage.”

“Countries that are being hit tend to be ones that have high current-account deficits, high fiscal deficits and relatively high inflation, and the challenge is brought on by their own domestic policies,” Kroszner said. “It’s unfair to say it’s all the Fed’s fault.”
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In 2011, Rajan co-authored a report that called for the creation of an International Monetary Policy Committee composed of representatives from major central banks that would regularly report on the aggregate consequences of individual central bank policies. Central banks from bigger countries should be encouraged to internalize the spillover effects of their policies, it said.

Rajan said yesterday developed countries might not like adjustments emerging markets take to cope with the outflows, without elaborating on specific measures. His surprise Jan. 28 move to raise the benchmark repurchase rate by a quarter point – – adding to increases of 50 basis points since he took over the Reserve Bank of India in September — was to stem consumer-price inflation running at close to 10 percent, he said.

Some economists are taking a stab at quantifying the effects of quantitative easing:

The economists, Jing Cynthia Wu and Fan Dora Xia, used a concept known as the “shadow rate” to gauge the impact of quantitative easing and the Fed’s forward guidance on the likely path of interest rates.

Their findings: as of December, Fed policy was the equivalent of cutting the benchmark interest rate to minus 1.98 percent, according to Wu at the University of Chicago Booth School of Business and Xia at the University of California at San Diego.

Fan Dora Xia’s web page also shows his estimates for the ECB (-0.24% as of 2013-05-31) and the UK (-3.06% as of 2013-10-31).

Meanwhile, Argentinian bonds are doing what Argentinian bonds do best:

Argentine dollar bonds tumbled the most in emerging markets on concern government measures from devaluation to rate increases aren’t enough to improve the country’s deteriorating debt payment capacity.

Argentine government dollar bonds due 2015 fell 3.88 cents on the dollar to 85.75 cents, driving yields up to 19.12 percent, the highest since June 2012.
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Argentina is losing foreign currency reserves at the fastest pace in more than a decade as estimated 28 percent inflation and currency controls spur capital flight. The funds, which the country relies on to pay debt and finance energy imports, dropped to a seven-year low of $28.3 billion. The government devalued the peso 15 percent last week and raised benchmark interest rates as much as 6 percentage points. The moves, coupled with less risk appetite for emerging market assets, haven’t settled investor concerns.

The Canadian preferred share market closed the month on a happy note, with PerpetualDiscounts winning 20bp, FixedResets gaining 5bp and DeemedRetractibles up 8bp. BAM Floating Rate issues were notable on the downside of a relatively lengthy Performance Highlights table. Volume was above average.

I’m all in favour of ETFs (most of them, anyway. Not the silly ones). By reducing friction, they make it easier for small investors to construct a well diversified portfolio. Trouble ensues when all these small investors collectively become a tidal wave of dumb money:

Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record, as China’s slowing growth and cuts to central-bank stimulus sink currencies from Turkey to Brazil.

More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show. The iShares MSCI Emerging Markets ETF has seen its assets shrink by 11 percent, while the Vanguard FTSE Emerging Markets ETF is poised for the biggest monthly redemption since the fund was started in 2005. The WisdomTree Emerging Markets Local Debt Fund is on track for an eighth straight month of withdrawals.
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Withdrawals from the iShares fund and the Vanguard ETF, the largest such products by assets for emerging markets, totaled $1.9 billion on Jan. 27, the biggest one-day redemption since 2005, data compiled by Bloomberg show. About $58 million has been withdrawn from the WisdomTree debt fund this month, bringing the total redemption since June to $752 million.

It will be most interesting to see if any smaller, derivative-based ETFs get into trouble as a result of all this.

Assiduous Readers will remember that I am most interested in good statistics regarding actual default rates of AAA US RMBS, as opposed to downgrades. The politicians are always whimpering about downgrades and seek to make them sound like defaults in their speeches. Today I found – free! – S&P’s Global Structured Finance Default Study, 1978-2012: A Defining Moment For Credit Performance Stability. Yep, downgrades are awful! No less than 70.68% of US RMBS were downgraded in 2009, as shown in the table on page 19. More seriously, 57.3% of investment-grade global structured finance instruments issued in 2006 have defaulted (page 24) and, even more seriously the Global Structured Finance Five-Year Default Rate for AAA issues for the five years ending 2012-12-31 was 12.91% (page 35). Regrettably, it’s not clear to me whether the US agencies’ default is included in these figures, or what the recovery on default was. Still, it’s a fascinating topic and I continue to keep my eyes peeled for solid analysis.

David Parkinson of the Globe writes a good piece about wage inflation:

Average weekly earnings, including overtime, were up 2.5 per cent in November compared with a year earlier – the fastest pace in six months. In November alone, average weekly wages jumped 0.9 per cent.
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Statscan data show that average hourly earnings excluding overtime have barely moved in the past six months, but average earnings including overtime are up 1.2 per cent.

Curiously, though, the November wage growth came despite a drop in average weekly hours worked (to 33.1 from 32.8 a year earlier). This would seem to contradict the notion that overtime has been ramped up. However, given that most of the job growth in the past year has been in part-time positions, this could be a function of overtime shifts being spread among part-time workers.

It was a mildly negative day for the Canadian preferred share market, with both PerpetualDiscounts and FixedResets off 6bp and DeemedRetractibles flat. Volatility was very low. Volume was average.

The Fed is forging ahead with tapering:

The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.

And when the Fed speaks, Emerging Markets listen:

India’s central bank got the ball rolling with its surprise decision Tuesday to raise its main interest rate by a quarter of a percentage point to 8 per cent. Though it justified the move in terms of keeping a lid on inflation pressures, protecting the rupee is widely considered to have been a key motive.

Those considerations were clearly behind the decisions in Turkey and South Africa. The Central Bank of Turkey said it was raising its main overnight lending rate to 12 per cent from 7.75 per cent and more than doubling its one-week rate to 10 per cent from 4.5 per cent.
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South Africa’s central bank was clear that the falling rand had a key role in its decision to raise its main interest rate by a half percentage point to 5.50 per cent despite concerns over growth.
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“The history of using interest rates to defend a currency usually ends in tears,” said Neil MacKinnon, global macro strategist at VTB Capital.

MacKinnon pointed to the experience of Europe before the launch of the euro in 1999. Many currencies had been pegged to each other in the so-called Exchange Rate Mechanism and when markets became volatile in the early 1990s, central banks raised their interest rates to support their currencies.

However, that came at a cost, most notably in Britain. The government there left the currency pact after the Bank of England splashed out billions of pounds and raised its main interest rate a massive 5 per cent in one day in a last-ditch — and ultimately futile — effort to defeat the speculators.

The ERM example is not, I think, the best; there you had interest rate policy essentially being set in isolation with little regard for other problems:

Britain entered under conditions of high inflation, huge balance of payments deficits, a growing PSBR [Public Sector Borrowing Requirement, the government’s cash deficit], and political uncertainty.

Still, Black Wednesday remains vivid in my memory as one of the most fun days I’ve ever had in the market. The Canadian yield curve flattened like hell ‘n’ gone and I was trading all day in big size.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets down 15bp and DeemedRetractibles off 3bp. A surprisingly lengthy Performance Highlights table is dominated by losers. Volume was at the high end of average.

PerpetualDiscounts now yield 5.63%, equivalent to 7.32% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.55% (maybe a little bit more?) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, the same as in the January 22 report.

I always take heart from evidence that governments don’t really control economies:

When Argentina decided last week to ease limits on dollar purchases, it became the latest emerging-market nation to acknowledge that capital controls usually fail in masking an economy’s flaws.

Argentina allowed the peso to plunge 15 percent after the central bank began scaling back interventions in the foreign-exchange market on Jan. 22, spurring price increases of as much as 30 percent on consumer goods as international reserves fell to a seven-year low. The black-market price in Argentina rose last week to a record 12.75 pesos per dollar, compared with the official rate of about 8, according to Buenos Aires newspaper Ambito.
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Restrictions on capital flows, ranging from Argentina’s tax on vacations abroad to Malaysia’s stabilizing the ringgit after the 1997 Asian crisis, have had mixed results in boosting investor confidence in a country’s economy. Capital outflow restrictions can be effective “if they are sufficiently comprehensive to slow a sudden ‘rush to the exit,’” according to a report by four International Monetary Fund researchers released this month.
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In Venezuela, a decade of currency controls is fueling the world’s fastest inflation among the 114 economies tracked by Bloomberg and shortages of basic goods.

The official rate of 6.3 bolivars per dollar compares with the 75-bolivar rate on the black market. Official dollars therefore are the most profitable assets in the country, allowing people who have access to them enjoy a lifestyle far beyond the reach of an average Venezuelan.

The referenced paper by Christian Saborowski, Sarah Sanya, Hans Weisfeld and Juan Yepez has the abstract:

This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. We find that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.

Turkey’s done a lot of catching up!

Turkey’s central bank more than doubled its main interest rate at an emergency meeting, reversing years of policy after the lira slid to a record low.

The bank in Ankara raised the benchmark repo rate to 10 percent from 4.5 percent, according to a statement posted on its website at midnight. It also raised the overnight lending rate to 12 percent from 7.75 percent, and the overnight borrowing rate to 8 percent from 3.5 percent.
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While most investors advocate higher rates to bolster the lira, Prime Minister Recep Tayyip Erdogan has repeatedly railed against an “interest-rate lobby,” blaming it for a series of blows to his government, including last year’s wave of protests and the graft probe implicating his ministers.

Ignoring reality only makes it hit harder. But politicians never learn.

Sheila Bair has achieved the regulatory end-game:

Sheila Bair, the Federal Deposit Insurance Corp.’s chairman from 2006 to 2011, has been hired for a new gig as a board member at the Spanish lender Banco Santander SA. This seems to have gotten some people upset, even riled.
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The general rule in banking is that it’s OK to become a regulator, put in a few years playing nice with the industry, then take a cushy board seat. Bair didn’t follow that path exactly. Now and then she made some remarks criticizing the way huge banks were run. But she never said anything so piercing or harsh that it distracted them from blowing up the financial system while she was FDIC chairman. She didn’t interfere with anybody’s bailout checks. She kept the FDIC’s bank-financed insurance fund woefully undercapitalized for years. It’s hard to see why “many in the banking world” are upset with her.

It was an unevenly good day for the Canadian preferred share market, with PerpetualDiscounts up 28bp, FixedResets flat and DeemedRetractibles gaining 9bp. Volatility was minimal. Volume was above average.