Thoughts on Greece

by Michael J. Howell25. June 2015 23:19
A deal will be done (1) This is not a bailout. The bailout was in 2010 and private creditors effectively got out then. The big lenders now are Governments and we are talking about robbing Peter to pay Peter. In short, the IMF/ EU will lend to Greece, so that Greece can pay them back. This is about debt roll-over, not new lending. (2) Debt roll-overs can be tricky, but in this one only Governments are involved. The lesson of Lehman (where a private sector solution was sought) is a clear one. Don't let it happen again. If Greece were raced out of the Euro, markets would ask 'who is next?' (3) Zimbabwe and Argentina are not good models to follow, i.e. devaluation failed. This is why Greece will stay in the Euro, even if she technically defaults. (4) Greece needs incentives e.g. low tax zones, not austerity, to make itself grow. (5) Europe needs a pan-European banking system. This crisis is trickier because local banks, holding local debt are involved. If Deutsche Bank were the only bank in Greece, there would be fewer issues. Politicians will encourage M&A and consolidation. Investment conclusion: bearish for Euro near-term (US$ bullish). Bullish for Eurozone banks long-term.

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TSS - Emerging Markets Report, June 2015

by Michael J. Howell19. June 2015 15:38

Emerging Market liquidity is rebounding across many fronts, driven largely by rising Chinese Liquidity. Our view is that the reality of Chinese monetary easing in 2015 will prove more important than the reduced prospects of US tightening.

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TSS - Major Markets Report, June 2015

by Michael J. Howell19. June 2015 15:34

The major change in the last few weeks has been a pick-up in Global Liquidity conditions, driven largely by Emerging Markets and notably China. China is large, accounting now for one quarter of Global Liquidity. The three-year monetary squeeze by the PBoC can explain the drop in our GLI™ (Global Liquidity Index) through 2014 and the consequent sharp outperformance of bonds. This is now reversing as Chinese Liquidity levels rise, forcing up over-extended (on the downside) bond term premia. On top, the Eurozone continues to pump in cash, thereby improving the outlook for risk assets, but souring prospects for ‘safe asset’ like bonds.

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Emerging Markets Latest GLI June 2015: EM Liquidity at 4-year Highs

by Michael J. Howell16. June 2015 12:32

May 2015 proved another positive month for Emerging Market Liquidity with the EM component of our GLI™ (Global Liquidity Index) hitting 48.8 (‘normal’ range 0-100) from 46.7 at end-April and 21.9 a year ago. Although the index lies a tad below the neutral threshold of 50, the EM Liquidity trend is plainly upwards.

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Global Liquidity Latest June 2015: Chinese Liquidity at 5-Year High

by Michael J. Howell16. June 2015 12:28

Our aggregate measure of Global Liquidity conditions, the GLI(Global Liquidity Index) rebounded to an index value of 56.3 in May 2015 ('normal' range 0-100). Global Liquidity has zig-zagged over recent months: a backdrop subsequently reflected in similar fluctuations in world bond and forex markets, in business activity, but not so far in equities. As in the mid-1980s, market volatility looks to be rising sequentially from the ‘safe assets’ outwards.

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Global View June 2015 - Another 'Conundrum': A Brave New (and Ugly) World For Bonds

by Michael J. Howell10. June 2015 17:24

A constant theme in our research is the role of China in setting World interest rates. Western Central Banks affect the short-end of the term structure, but they have an increasingly limited impact on the long-end where liquidity matters most. US Treasuries and Bunds are the ‘safe assets’ for the World financial system, and the major fault-line is the Chinese financial system. In its latest battle to reduce domestic credit risk, China’s People’s Bank is sending tremors through global bond markets. This looks similar to the impact of Japanese buying on US yields in the mid-1980s.

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Global View May 2015: What Every Emerging Market Investor Needs to Know - It's Time To Raise EM Exposure

by Michael J. Howell2. June 2015 16:28

Emerging Market (EM) investing has fallen out of fashion after several years of underperformance (50% down against World stocks since late-2010). There are two broad reasons for this slump. First and most important, the policy mix in EM has been far less favourable than the QE-driven backdrop that supported the Developed Markets and, particularly, Wall Street. Since a large part of the EM liquidity squeeze arose in China over the 2011-2014 period, the dominant position of China's economy also gave this spill-over an added economic dimension. Second, Developed Market corporations have faced up more quickly to competitive pressures and cost control than their EM counterparts, so helping them sustain high profit margins and generate more cash flow growth.

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Global View May 2015 - The Most Important Question in the World: Have the Chinese Translated Bagehot?

by Michael J. Howell22. May 2015 16:39

Financial crises are different from economic crises insofar that they are often triggered by a jump in contingent liabilities, such as short forex positions and mismatched duration. Walter Bagehot, the nineteenth century doyen of Central Bankers, invented the Lender of the Last Resort role to flood markets with liquidity. Bagehot argued that more liquidity was enough. With China perhaps suffering its equivalent of the 2008 Financial Crisis, we venture that a further sizeable easing of PBoC liquidity is both needed and likely. This will not only reduce domestic Chinese investment risk, but it will have global implications. Foremost are a sell-off in global bond markets ('safe assets'), a revival in cross-border flows to EM and a rebound in gold and commodity markets.

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The Hidden Easing? BoJ boosts cash injections again and Fed reverses uphill!

by Angela Cozzini22. May 2015 14:51

Our Weekly Liquidity Conditions report has just been published. 

  • BoJ liquidity expansion is gathering pace. Net liquidity provision has hit a record Y213.3tr and monetary base is expanding at a 53.2% 3m annualised clip
  • Expansionary BoJ and ECB are leading the latest round of QE
  • Fed tightening not happening as quickly as anticipated: we expect the Fed to resume QE later in 2015 in face of a weaker economy
  • BoE liquidity provision has increased in recent weeks

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TSS - Emerging Markets Report, May 2015

by Michael J. Howell21. May 2015 17:22

The World is split between those markets where liquidity is rising – Eurozone, China, EM and Japan – and those markets where liquidity is falling or low – US and UK. Prospects for the former group is positive. Emerging Market liquidity is rebounding across many fronts, but the single catalyst appears to be rising Chinese Liquidity. We have argued for 2015 that the reality of Chinese monetary easing will prove more important than the diminishing prospects of US tightening.

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