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David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    Pound Drops as U.K. Lawmakers Back Brexit Deal, Reject Timetable

    This article by Charlotte Ryan for Bloomberg may be of interest to subscribers. Here it is in full:

    The pound weakened after U.K. lawmakers rejected Prime Minister Boris Johnson’s plan to fast-track his Brexit accord through parliament.

    Britain’s currency dropped against all of its major counterparts, but the losses were contained after the government won an initial vote on the deal. Johnson opened the door to a short extension to his Oct. 31 deadline, saying he would pause legislation and go back to the European Union, after earlier threatening to throw out the deal if lawmakers rejected his plans.

    “For now it seems the market is still generally expecting this is a setback, but not a fatal setback, to a negotiated Brexit,” said Jeremy Stretch, head of G-10 currency strategy at Canadian Imperial Bank of Commerce. “There hasn’t been a rapid uptick in no-deal pricing at this point,” he said, referring to a scenario where the U.K. would leave the EU with no divorce deal.

    The U.K. currency had rallied more than 8% from September’s low as Johnson secured an agreement with the EU and then lawmakers then forced him to request an extension to the Oct. 31 deadline, reducing that no-deal risk.

    Sterling dropped as much as 0.7% after the votes to $1.2869, after rallying Monday to touch $1.3013, the strongest level since May. Against the euro, it fell 0.4% to 86.39 pence.

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    Normal Yield Curve Doesn't Mean Everything's Normal

    This article by Mohamed A. El-Erian for Bloomberg may be of interest to subscribers. Here is a section:

    The more that markets internalize this shifting monetary policy sentiment inside central banks, the more that they will unwind the policy expectations that fueled several forces acting to invert the U.S. yield curve, including indirect ones such as the enormous pressure on foreign investors to flee negative yields in Europe and Japan and go into longer-dated U.S. bonds. Look for this phenomenon to also maintain the yield spread between German and U.S. bonds at its current lower range despite what will continue to be relative economic outperformance by the U.S.

    Just as I argued in March that it was unwise to react to the inversion of the Treasury yield curve with extreme anxiety about a U.S. recession, it would be premature to celebrate the recent partial reversion as an indicator of significant strengthening of U.S. economic prospects. Instead, both are reminders of the extent to which traditional economic signals have been distorted by a prolonged period of extraordinary central bank policies. And they should also been seen as just one of the unusual consequences of a monetary stance that, imposed for several years on central banks by the lack of proper policy action elsewhere, will now see the hoped-for benefits give way to a broadening and deepening recognition of the unintended consequences and collateral risks.  

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    Fed to Increase Supply of Bank Reserves

    This article by Nikc Timiraos for the Wall Street Journal may be of interest to subscribers. Here is a section:

    Rather than purchase longer-dated securities, Mr. Powell said officials are now contemplating buying shorter-dated Treasury bills. Officials believe holding long-term securities boosts the economy and financial markets by lowering long-term rates and driving investors into stocks and bonds. They think a portfolio weighted toward shorter-term securities provides less or no stimulus.

    The Fed’s plan hasn’t been finalized, but Mr. Powell suggested would be ready by or before officials’ Oct. 29-30 policy meeting. The goal would be to rebuild the level of reserves in the system sufficiently above the low point of less than $1.4 trillion reached last month.

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    New Kind of Recession Threat Presents Problem for Powell and Fed

    This article by Rich Miller for Bloomberg may be of interest to subscribers. Here is a section:

    The unusual nature of the forces at play -- and the fact that many of them are geopolitical and emanate from abroad -- makes it more difficult for policy makers to decide how far to go in easing credit.

    There’s even a question of how effective rate cuts will be in an economy where business executives fear such dire developments as the breakup of global supply chains.

    Powell is expected to deliver his latest thinking on the outlook when he speaks to the National Association for Business Economics in Denver at 2:30 p.m. U.S. East Coast time on Tuesday. He said last week that despite some risks, the U.S. economy is in a “good place,’’ and that the Fed’s job is “to keep it there.’’

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    Markets Don't Want to Hear Goldman's Happy Talk

    This article by Robert Burgess for Bloomberg may be of interest to subscribers. Here is a section:

    Multiple surveys show that traders and investors see the U.S.-China trade war as the biggest risk facing markets. Bank of America Merrill Lynch’s latest monthly poll of global fund managers, released in mid-September, revealed that the number of respondents who said trade tensions were the biggest danger outstripped by far those who cited ineffective monetary policy and the potential bursting of the bond bubble. In her first major address as head of the International Monetary Fund, Kristalina Georgieva said Tuesday that the global economy is in a synchronized slowdown, in part due to trade uncertainty. Also on Tuesday, the National Federation of Independent Business said its small-business sentiment index fell to near the lowest level of Donald Trump’s presidency. Even more notable was that the part of the index measuring “uncertainty” plunged to its lowest since February 2016.  “More owners are unable to make a statement confidently, good or bad, about the future of economic conditions,” the group said, with 30% of respondents reporting “negative effects” from tariffs. To cut to the chase, if businesses can’t forecast with any confidence, how can investors or strategists?

    U.S. and China trade negotiators are scheduled to meet on Thursday to resume talks. What’s discouraging is that instead of making conciliatory comments, each side seems to be hardening their stances. Chinese officials said Monday that what isn’t on the table from China’s perspective — and never will be — are changes to its laws to protect foreign intellectual property. Later that day, the U.S. placed eight of China’s technology giants on a blacklist over alleged human rights violations against Muslim minorities. In response, China hinted that it might retaliate. Then the news broke that the Trump administration is moving ahead with discussions around possible restrictions on portfolio flows into China. None of this sounds like either side is ready to make a deal.

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    The Bond Market is the Biggest Bubble of our Lifetime

    Thanks to a subscriber for this interview of Louis-Vincent Gave which appeared in themarket.ch. Here is a section:

    On a global level, bonds with a value of about $15 trillion currently trade with a negative yield. What’s going on here?

    For every investor today, the starting point must be the bond market. Just a few weeks ago, we had $17 trillion of negative yielding debt. We’re now down to about 15, but even that is way too much. This is investment money that is guaranteed to produce a loss of capital. These extreme levels in today’s bond market can only have three possible explanations. One, the world faces an economic meltdown of epic proportions. Two, the bond market is the biggest bubble we have ever witnessed, and three, we have just experienced a massive buying panic in bonds.

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    California Dreamin'

    This note from Yardeni Research may be of interest to subscribers. Here is a section:

    German Fiscal Stimulus Already Creeping In, Whatever Merkel Says

    This article by Birgit Jennen for Bloomberg may be of interest to subscribers. Here is a section:

    The government considers it’s still not clear whether Germany will plunge into a full-blown recession and, as a result, the full array of remedies may not need to be deployed.

    Germany’s five leading research institutes slashed their forecasts for economic growth this year and next, citing trade tensions and Brexit weighing on German industry. GDP is to grow 1.1% in 2020 from a previous forecast of 1.8%, and 0.5% this year from an earlier prediction of 0.8%.

    Traditionally, Germany shifts to high alert whenever the global economy looks to be slowing -- the country’s dependence on exports means that it tends to head south with the rest of the world. But with the domestic market still relatively robust and the ECB renewing monetary stimulus, Merkel’s economic team judges that this time the path toward recession is less certain.

    On the down side, a prolonged trade war could eventually lead to a much bigger fallout than expected, according to another scenario being considered. That spurred the government to gradually increase investments and bolster the labor market as a preemptive and precautionary measure.

    Finance Minister Scholz told ARD TV on Wednesday that economic forecasts are pointing toward a recovery and that there is currently no need for a stimulus program.

    “We are well prepared because we have good financial resources and can react, should it really come to an economic crisis but so far it’s just slower growth,” Scholz said.

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    The History and Future of Debt

    This report by Jim Reid for Deutsche Bank may be of interest to subscribers. Here is a section: