Tagged: Eurozone

A word on Greece….

Markets tend not to repeat the same panic twice, and “Grexit” has been done to death over the past few years. The markets think they have now wised up to politicians, particularly European ones, as a deal always gets done in the end, doesn’t it? Even the ECB got there in the end with QE. So there has been relatively little concern over Syriza’s negotiations with the Troika.

Two points on this:

1. “Syriza must fail and be seen to fail” – an excellent article on this here. This isn’t just about Greece, it is about the message it sends to the rest of the Eurozone, and even the rest of the world. The way that Syriza are treated sets a precedent for how everyone else must be treated. It creates an incentive and the incentive must be that you have to play by the rules if you want to succeed.

2. Tspiras is playing a high-stakes game with his own government, which he ramped up by going into coalition with the other big anti-bailout (yet ideologically right-wing) ANEL. He felt the electorate had dealt him a strong hand, so he chose ANEL in order to go all-in at the negotiations. The trouble is, this binds him on any backflips. Any U-turns, and he not only has to sell them back to his party, but also his coalition partner. Choosing an uncomfortable bedfellow makes this harder. Even worse, the scale of the election victory strengthens the resolve of those bedfellows – and of the more extremist element of his own party. So even if a deal is done, will the Greek government survive it?


So the market isn’t particularly worried, which means it’s not massively hedged for some kind of blow-up. They may be right over the immediate negotiation. But what if the risks of a wobble increase precisely because a deal is done? Could Greece be plunged back into elections or at least a negotiation over a new government if this one should fall?


Lessons from Japan

This week Blondemoney attended a presentation by a former BOJ official (Chatham House rules prevent full disclosure) and left feeling gloomy about the prospects for the Eurozone. Here’s a summary of his key points:

1. Stop talking about “Japanisation” as if Japan’s experiences were disastrous

– Japan GDP per capita is average for developed economies, and on GDP per working age population, they are ahead
– Business investment in Japan over the past 15 years is at very similar levels to that of the US
– The savings rate has been declining and just turned negative
Japan dissaving
– Unemployment has remained low, only moving up towards 6% during the financial crisis, compared to 10% for the US

Japan unemployment united-states-unemployment-rate

2. QE works… sometimes

– If there has been a massive banking crisis, you need QE to prevent a Depression
– But it’s not a panacea for deflation. Japan’s deflation now is nothing like the 1930s, when inflation fell 25% in the US. Japan has experienced cumulative deflation of just -3.3% since 1997
– Japan’s issues are demographic – the older population means a declining potential growth rate and a tight labour market that negotiate their wages downwards rather than be unemployed

3. Why are views so different?

– Deflation is a symptom, not something to be solved in and of itself
– Is it caused by insufficient supply or demand? If it’s supply, then you need to boost potential growth rate and you can’t do that through QE.
– If there is complete disintegration of the economy – then QE can’t help
– Incentive for fiscal reform – without it, QE might not work

4. There are similarities between the Eurozone and Japan 

– The central bank becomes the “only game in town”
– There is a tendency to frame the debate as deflation rather than growth.
– There is an obsessive focus on the exchange rate.
– Constant call for more easing.
– There is a “Do Something” psychology

5. But the answer is structural reform

– If many are indulging in QE at once, then there is a race to the bottom to get your currency the most devalued. Japan was lucky in the 2000s they were the only ones doing it and so they could engineer a weaker currency. But the flipside of that was that in 2008 their currency strengthened significantly, hurting the economy when it was in most need of some help
– Can QE raise inflation expectations? There is a disagreement between the ECB and the Fed on this:
Draghi (4th Dec 2014, ECB Press Conference): ‘There is a quite well-documented relationship between the size of the balance sheet of a central bank and inflation expectations’
Bernanke (12th Dec 2012, FOMC Press Conference): ‘Remember, I talked earlier about the potential costs of a large balance sheet. We want to be sure that there’s no misunderstanding, that there’s no effect on inflation expectations from the size of our balance sheet. That’s one of the things we have to look at, but as to this point, there just really is no evidence that people are taking it that way’

In conclusion… QE only buys you time, and very quickly “tomorrow” becomes today!


At the end of last week, everyone was astonished to find that EUR/USD was about to hit its end of year targets within the first month of the year (well, perhaps except Gene Wilder). So it’s no surprise that we are seeing some profit-taking right now. The trouble is, in our new higher volatility environment, corrections can be more violent. Just look at the currency that fell the most yesterday versus the Euro – it’s our old friend, the Swiss Franc:

EUR 1 day return


And by some margin! Given that it moved more than 30% in a day just under two weeks ago, it should be no surprise that it remains so volatile. This is important when it comes to the concept of a ‘safe haven’ currency – the move by the SNB has significantly undermined, if not destroyed, that. We need to get used to moves of 2-3% a day in this currency.

Yesterday’s price action also tells us the other twist to the recent action by the ECB. Peripheral bonds continued to be in demand yesterday – Italy’s 30 year yield is now 2.5%, down from 3.15% before Draghi stood up at his press conference last week.

Italy 30yr

That’s 65bps cut in a heartbeat, and the ECB don’t start buying until March! How low can it go? Well Japan’s 30 year is around 1.3% for starters. At the end of last week this spiked up, suggesting re-allocation out of Japan and into Europe. “Japanification” is certainly alive and well if you’re a bond manager.

Japan 30 yr


It could be these kinds of flows that led the yen to be the second weakest currency against the Euro in our earlier chart. Bond flows are usually fully hedged however, and the FX impact tends to come from stockmarket flows. Here is where we could see even more support for the Euro, because European stockmarkets are unsurprisingly going gangbusters since the ECB’s decision, with the DAX up over 4% since then. In fact, European stock markets are now catching up US markets – here’s a chart of the Eurostoxx vs S&P500 since last June’s ECB meeting when they cut to negative rates:

Eustoxx vs S&P since ECB negative rates


As you can see, European stocks are racing back up towards the US stock market. We need something hawkish from the Fed tomorrow night to reinstate the monetary policy divergence that would take EUR/USD back lower.

The ECB Day Today 22 Jan 2015

* After the leak yesterday, ECB expected to announce EUR 50bn per month of QE, totalling EUR 1.2trn

* ECB approves Emergency Liquidity Assistance to Greek banks given deposit withdrawal ahead of election

* Italy’s PM Renzi says “my dream is parity” in EUR/USD [is he short like everyone else??]

* Margin traders short position in Yen is at a record, according to Tokyo Financial Exchange Inc

* Someone is hiking – Brazil continues its rate hikes, by another 50bp, now to 12.25% and leaves door open for more

* SNB’s Zurbruegg: “we are keeping all our monetary policy options open” [but you just ditched one!]

* Lombard Odier becomes first Swiss bank to charge private clients to hold cash over 100,000 CHF

* The National Futures Association raises minimum deposit on CHF positions to 5% from 2%, and on NOK and SEK to 3% – while a Democrat calls on the CFTC to introduce new regulations

* China’s Premier says economy faces ‘downward pressure’

* OPEC’s Secretary General says oil prices won’t go down to $20-25, will rebound instead

* After Canada’s surprise cut, expect more articles like this, suggesting the Fed won’t hike until 2016

* Malaysia – foreigners now own half of the MYR denominated debt (compared to 5% nine years ago), equivalent to one-third of FX reserves

* Remember Russia’s emergency rate hike to 17% to stem losses in the rouble? Now it looks set to be reversed

* Amex to cut 4,000 jobs

The Day Today 20 Jan 2015

* China data better than expected – the stock market rallies from the 7% loss of the previous trading day:
Q4 GDP 7.3% vs 7.2% exp
Dec Retail Sales 11.9% YoY vs 11.7 exp
Dec IP 7.9% vs 7.4 exp
Dec Fixed Asset Invmt 15.7% vs 15.7 exp

* France’s Hollande lets the cat out of the bag, appearing to pre-announce for the ECB!: “On Thursday, the ECB will take the decision to buy sovereign debt, which will provide significant liquidity to the European economy and create a movement that is favorable to growth”
* Germany’s leading tabloid Bild warns that QE risks unleashing a “dramatically devalued” Euro, reducing reform in the periphery countries
* Politicians are weighing in on the idea that ECB sovereign bond-buying will reside with national central banks rather than the ECB itself – Irish FinMin Noonan: “I believe that if it becomes the function of national central banks…then I think it will be ineffective”

* Mervyn King (remember him?) warns that more QE isn’t the answer: “We have had the biggest monetary stimulus that the world must have ever seen, and we still have not solved the problem of weak demand. The idea that monetary stimulus after six years … is the answer doesn’t seem (right) to me”

* European banks have fewer bad loans than the Japanese did before they began QE, but are not in as good shape as US banks before they did QE, according to JPM and MS

* Denmark cut rates back down to their 2012 lows, at -0.20% from -0.05%, and may do more after the ECB decision on Thursday

* Latest poll puts SYRIZA 6.5 pct pts ahead
* All you need to know about how Greece is going to pan out here – it’s the risk that Syriza falls apart that you need to worry about

* The Bundesbank is part way through its transfer of Gold from Paris and New York back to Frankfurt – they announced this plan in 2013, half of all gold reserves to be in FFT by 2020

* 3 reasons UK interest rates won’t rise this year: by Ernst & Young