Tag: Quantitative Easing

Shifting Gears on the cash spigot

Bloomberg – Quantitative Tightening to End as Central Banks Retreat – David Goodman & Liz McCormick 7/22/19

Net bond purchases by the Federal Reserve, European Central Bank and Bank of Japan will swing back above zero from September, according to an analysis of their balance sheets by Bloomberg Economics. That’s just eleven months since they collectively hit reverse having spent a decade pumping stimulus into their economies via quantitative easing.

The outlook shows how quickly central banks have been forced to turn tail after spending much of last year leaning toward tightening monetary policy, only to now be looking to loosen it as the world economy slows. It also underscores how their balance sheets are likely to remain permanently larger than the pre-crisis years.

For investors, the switch back, coupled with shifts toward lower interest rates, strengthens the case for buying bonds given the increased demand and shrinking supply of them. That could add fuel to a rally that’s already pushed average yields on global bonds down by almost 1 percentage point since November, left an almost $13 trillion pile of negative-yielding bonds and sparked predictions that U.S. 10-year borrowing costs could also hit zero. Those lower yields would tend to push investors back into stocks.

Since the Fed began reversing QE in October 2017, it has shed about $370 billion in Treasuries from its balance sheet which had hit $4.5 trillion in 2015. Those holdings will begin to rise later this year as the Fed ends the unwind and engineers plans to move back to pre-crisis norms of holding only government debt by slowly replacing its $1.5 trillion in mortgage-debt holdings with Treasuries.

“The Fed’s plans for the balance sheet are to shift out of MBS and into Treasuries and, given their guidance, they should be buying some bills,” said Mike Schumacher, strategist at Wells Fargo. “That will cause the curve to steepen.”

As for the European Central Bank, Bloomberg Economics is among those predicting it will announce in September that it will be purchasing bonds again. Its base case is that the ECB will start 45 billion euros of monthly net asset purchases to run for a year, starting in the fourth quarter.

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April 2, 2018

Perspective

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Worthy Insights / Opinion Pieces / Advice

FT – Tech stock woes threaten Wall Street bull market – Richard Waters, Gregory Meyer, and Barney Jopson 3/30

  • “Rising political anger, a worry that the Big Tech boom will soon have run its course and the sense that an economic turning point may have been reached in the US have combined this week to threaten one of the underpinnings of the stock market boom.”
  • “The wild two-week swing in tech stocks, which included a bloodbath on Tuesday, began with reports of a massive leak of personal data from Facebook, and was extended by fears of a White House vendetta against Amazon.”
  • “Since then, the social networking company’s shares have dropped 14%, losing about $75bn in stock market value and wiping $10bn from the personal fortune of co-founder Mark Zuckerberg. Amazon, which found itself on the receiving end of another tweet from President Donald Trump on Thursday, has shed $61bn, Apple $54bn, Alphabet, parent of Google, $62bn, and Microsoft $26bn.”
  • “Despite the volatility that crept into a group of stocks that have led the market higher, Big Tech’s loyal army of fans among Wall Street analysts remained bullish.”
  • “After years in which it has paid to have a ‘buy’ recommendation on Big Tech, stock market analysts have largely reiterated their confidence in the sector’s fundamentals, despite the ructions. For Facebook, 44 of 48 analysts recommend buying the stock, according to Bloomberg data. Forty-eight of the 51 analysts covering Amazon rate it a buy.”
  • “Investors have been nervous for months that the growing political backlash against Big Tech would lead to a new wave of regulations or taxes, though they did not have anything specific to attach their fears to.”
  • “Now they do. The news that the personal information of some 50m Facebook users had been leaked to a data analysis firm that helped the Trump presidential campaign added to a wave of anger against the social media company on both sides of the Atlantic.”
  • “The wave of bad news in tech has also reinvigorated Wall Street’s short sellers — investors who sell shares they do not own in the hopes that the price will fall. Ihor Dusaniwsky, head of predictive analytics at S3 Partners, a financial analytics company, said Facebook, Amazon, Apple, Netflix and Google are now among the top 10 most-shorted US stocks, as measured by market value. The total short position in the five stocks is worth $34.9bn.”

Britain

FT – Quantitative easing ‘reduced UK wealth inequality’, says BoE – Gavin Jackson 3/31

  • “Wealth inequality in the UK was reduced by quantitative easing after the financial crisis, according research by staff at the Bank of England, contradicting the widespread belief that the policy concentrated wealth in fewer hands.”
  • “In a working paper last week, researchers claimed the UK’s Gini coefficient, a commonly used measure of wealth inequality, declined slightly in comparison with a scenario where the central bank did not change its monetary policy following the crisis.”
  • “…the bank’s researchers said the effect on the housing market, which saw prices continue to rise, meant that those on lower and middle incomes saw a bigger proportional increase in their net worth than the wealthiest households did.”
  • “Housing wealth is the most equally distributed form of wealth and increases in financial and pension wealth, which are more unequally distributed, were not enough to offset the effect of higher house prices.”
  • “But the BoE also acknowledged that the cash gains for the wealthiest households were much larger than for poorer families.”
  • “Every age group and income group benefited from the policies compared to if it had not changed policy following the financial crisis, researchers said.”
  • “Younger workers earned more because lower interest rates helped to support economic growth and employment and avoid a deeper recession, while older families, who often rely on interest on savings, were more likely to see increases in their net worth.”
  • “The researchers estimated that a third of households were £500 worse off because of lower interest income but this fell to 4% once all effects on financial wealth, pension wealth and property values were included.”