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Analysis – Concern about global financial stability escalates as central banks tighten policy By Reuters

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4 months ago

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© Reuters. Traders work on the trading floor of the New York Stock Exchange (NYSE) in Manhattan, New York City, US, August 2, 2022. REUTERS/Andrew Kelly

By David Barbuscia and Louis Krauskoff

(Reuters) – Signs of stress are growing in the global financial system, raising concerns about everything from contagion between markets to ruptures in financial products.

These concerns come as central banks around the world are tightening monetary policy sharply in their battle to tame inflation, creating an environment that investors and policymakers say is a breeding ground for periods of financial instability.

Investors got a taste of the striking volatility that such events can bring last month, when the UK’s debt explosion reverberated around the world. Despite the BoE’s intervention to stabilize the markets, a number of closely watched indicators such as global dollar demand and risk aversion in credit markets continue to show increasing financial stress.

Meanwhile, warnings of more disruptions to come are mounting. This week alone, a dismal report from the International Monetary Fund pointed to the risks of “disruptive asset repricing” and “financial market contagion” while the head of JPMorgan (NYSE: NYSE: Jamie Dimon) predicted a looming recession. Ray Dalio, founder of Bridgewater, the world’s largest hedge fund, said Tuesday that a “perfect storm” is coming for the US economy.

An index compiled by Goldman Sachs (NYSE: NYSE) showed that global financial conditions, which reflect the availability of funding, touched their lowest levels since 2009 in late September, buoyed by higher interest rates, falling stocks and a stronger dollar.

Susan Hutchins, global fund investment manager at Newton Investment Management, said the current environment increases the risk of so-called black swan events – unanticipated incidents that usually have catastrophic consequences.

“We know that the market is very illiquid at the moment,” she said. “There is a huge amount of leverage in the financial system and the rates are now much higher, so there will definitely be some casualties there.”

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Among the indicators to gauge the pressure in the global economy is the global demand for the dollar, which rose as investors sought refuge in the US currency from volatile asset markets.

The three-month euro-dollar currency-based swap spreads, which measures the demand for dollars in the currency derivatives market, widened this month to their highest level since March 2020 as volatility in British bond prices rattled asset prices. It has remained at high levels since late September.

A similar dynamic has played out in the spreads of the dollar/yen swap, indicating that borrowers outside the US are willing to pay a premium on the dollar funds.

“The scale (of the moves) is quite unusual,” said Tobias Adrian, director of the IMF’s Money and Capital Markets Department. “There is a shortage of dollars in funding.”

The International Monetary Fund’s Global Financial Stability Report, released on Tuesday, also highlighted specific risks in open-ended investment funds and the leveraged loan market.

Meanwhile, the corporate debt market is showing the highest levels of risk aversion in years. The ICE (NYSE:BofA) US Corporate Index yield spread, which indicates demand for premium investors to hold corporate bonds over Treasuries, rose to its highest level since June 2020 last month and has fallen only marginally.

Ed Birx, CIO at Franklin Income Investors, said the UK’s sudden rise last month in global volatility showed how easy it can be for risks to resonate in markets when monetary policy tightens around the world.

“I think what it really highlights is that when you do tightening cycles, let alone at that volume… he feels stressed,” he said.

Of course, the systematic crisis is by no means guaranteed. US Treasury Secretary Janet Yellen said on Tuesday that she saw no signs of financial instability in US financial markets despite the high volatility.

Michele Verner, Head of Fixed Income Strategy at Barclays (LON): A private bank. “We have hyperinflation, but we have been given time to prepare on the family, business and government side.”

However, few believe that volatility in global markets will calm down soon. Bank of England Governor Andrew Bailey threw another curveball on Tuesday when he said British pension funds hit by falling bond prices had only three days to fix their problems before the central bank pulled support.

Meanwhile, volatility in US stocks and Treasuries rose ahead of Thursday’s inflation data, which corresponds to levels associated with “extremely tense events,” said Adrian of the International Monetary Fund.

Financial stability is “another type of risk that clients are now more in line with,” Vasiliki Patchatoridy, head of fixed income strategy at the New York Stock Exchange, Middle East and Africa, Vasiliki Pachaturidy, told Reuters based on recent meetings with clients. “I would say classic inflation is at the top of the list, then geopolitics and financial stability.”

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Economic

We need to pay more attention to skewed economic signals

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3 weeks ago

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January 11, 2023

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

Video: Divided Markets: The Great Threats to the Financial System

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Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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3 weeks ago

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January 10, 2023

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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Economic

German automakers point to easing supply chain problems

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3 weeks ago

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January 10, 2023

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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