We live in a big Global world ... when Trillions of dollars of expansion stops, reverses and then contracts it impacting all global markets.
ANALYSIS-Forex reserves unwind could reverse bond supercycle
Thompson Reuters Sept 2nd 2015
China's summer shock may mark the end of an era of globalization that helped define world markets for more than a decade. Investor anxiety about the consequences is well-founded.
Beijing's integration into the global economy since 2002 reshaped the financial as well as economic landscape - mainly by the way China itself and the economies it supercharged with outsize demand for raw materials banked the hard cash windfalls they earned over the following 12 years.
According to the International Monetary Fund, the dollar value of foreign currency reserves held by all developing nations ballooned by almost $7 trillion in just one decade to a peak of some $8.05 trillion by the middle of last year.
While China was the main driver, accounting for about half of that increase, its economic boom created a commodity supercycle that flooded the coffers of resource-rich nations from across Asia to Russia, Brazil and the Gulf.
As the vast bulk of this hard cash was banked in U.S. Treasury and other low risk, rich-country bonds, they were at least one critical factor in the halving of U.S. Treasury and other Group of Seven government borrowing costs over the same period.
Alongside the disinflationary impact of China's low cost labour on western goods imports and wages, this reserve stash helped extend what has now been a 20-year bull market in bonds.
What's more, the drop in yields, by skewing relative returns between stocks and bonds and also the relative cost of capital for companies, also at least partly underwrote a post-credit crisis surge in equity prices to successive records.
Reverse that bond buying, even at the margin, and world asset markets may have a major problem.
That's especially so at a time when the big other marginal bid for bonds, the U.S. Federal Reserve's quantitative easing programme, has ended and when western recoveries are pressuring the Fed and others to normalize near zero interest rates.
RESERVE GROWTH CRESTS
As China's economy slows to its weakest in 25 years this year and capital flows out of the country, pressure on the recently devalued and loosened yuan peg means the People's Bank of China has sold hundreds of billions of dollars to shore up its currency over the summer.
Dutch bank Rabobank estimated China's central bank sold $200 billion of reserves in the last weeks of August alone.
Along with the pressure of looming Fed tightening and a higher dollar, the ebb of Chinese demand for commodities and slump in energy and metals prices has seen emerging market currencies plummet everywhere. And just steadying the capital exit is starting to strain their coffers.
, and this Emerging market forex reserves fell by about half a trillion dollars between mid-2014 and the end of the first quarter of 2015, IMF data shows is likely far from the end.
Deutsche Bank estimated on Tuesday the high water-mark of almost two decades of reserve accumulation had now been reached and central banks will by the end of next year dump as much as $1.5 trillion to counter capital outflows.
(Editorial note by JJP.... this $1.5 to $2 Trillion reduction of global currency reserves was forecast by me as a sidebar statement in my April 5th 2015 post...these are the huge Global shifts that are game changers)
Message 30015282
Once Over $12 Trillion, the World’s Reserves Are Now Shrinking
(This is a big deal .. This is the global downshifting in the creation of what is already half a trillion dollars and will continue to trend downward with another 1 to 2 Trillion Dollars of Reserves leaving the system due to the change in momentum and the wildly wicked world of Negative interest rates which we are seeing in way too many places. such as Switzerland, Sweden Denmark and in other aspects of our Gobal Macro Financial Structure........JJP)
Bond investors are nervous of the fallout.
"The process of reserve reversal has only just started," said Chris Iggo, Chief Investment Officer, Fixed Income at Axa Investment Managers.
"We could be on the verge of a scenario that sees a reversal in the trend of declining global goods prices, a partial reversal in U.S. monetary policy and a reversal of the balance sheet expansion that allowed emerging market central banks to grow their foreign exchange reserves," he added. "The upshot? Significantly higher US Treasury yields."
DEFLATION OR RESERVE BUST?
For some, it may seem counter-intuitive that a China slowdown or financial shock lifts bond borrowing rates at all.
As the Shanghai stock bubble imploded in July, the yuan wobbled and the world's second-biggest economy shuddered, the first wave across markets was to sink commodity prices further, throw doubt on inflation targets and lower long-term interest rate horizons yet again.
It's not hard to see why. Crude oil prices, which had already halved over the previous 12 months, lost another 19 percent after midyear to six-year lows. Raw material prices more broadly, as captured by the Thomson Reuters Commodity Research Bureau's index, slumped to their lowest in 12 years.
The effect of international commodity price moves on already near-zero inflation rates was to push back the expected timing of interest rate rises in the United States, Britain and elsewhere. Suddenly, silver linings for investors reappeared.
But the parallel narrative of the decade-long reserve unwind could well neutralize much of that for bond pricing.
Iggo pointed out that even as China's emergence over the past 15 years fueled a trebling of the CRB commodity price index in just six years to 2008, it was disinflationary on balance for western economies - mainly due to low-cost labour and exports.
The flip side now is that the recent slump in the CRB to 2003's lows may not be enough to prevent cost pressures building in recovering western economies over time and may only stay central bank tightening temporarily as a result.
"The peak in bond demand is probably behind us," said Deutsche strategist George Saravelos.
---By Mike Dolan
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of 17241 | | Once Over $12 Trillion, the World’s Reserves Are Now Shrinking
(This is a big deal .. This is the global downshifting in the creation of what is already half a trillion dollars and will continue to trend downward with another 1 to 2 Trillion Dollars of Reserves leaving the system due to the change in momentum and the wildly wicked world of Negative interest rates which we are seeing in way too many places. such as Switzerland, Sweden Denmark and in other aspects of our Gobal Macro Financial Structure........JJP)
The decade-long surge in foreign-currency reserves held by the world’s central banks is coming to an end.
Global reserves declined to $11.6 trillion in March from a record $12.03 trillion in August 2014, halting a five-fold increase that began in 2004, according to data compiled by Bloomberg. While the drop may be overstated because the strengthening dollar reduced the value of other reserve currencies such as the euro, it still underlines a shift after central banks -- with most of them located in developing nations like China and Russia -- added an average $824 billion to reserves each year over the past decade.
Beyond being emblematic of the dollar’s return to its role as the world’s undisputed dominant currency, the drop in reserves has several potential implications for global markets. It could make it harder for emerging-market countries to boost their money supply and shore up faltering economic growth; it could add to declines in the euro; and it could damp demand for U.S. Treasury bonds.
“It’s a big challenge for emerging markets,” Stephen Jen, a former International Monetary Fund economist who’s co-founder of SLJ Macro Partners LLP in London, said by phone. They “now need more stimulus. The seed has been sowed for future volatility,” he said.
China Sells
Stripping out the effect from foreign-exchange fluctuations, Credit Suisse Group AG estimates that developing countries, which hold about two-thirds of global reserves, spent a net $54 billion of this stash in the fourth quarter, the most since the global financial crisis in 2008.
China, the world’s largest reserve holder, together with commodity producers contributed to most of the declines, as central banks sold dollars to offset capital outflows and shore up their currencies. A Bloomberg gauge of emerging-market currencies has lost 15 percent against the dollar over the past year.
China cut its stockpile to $3.8 trillion in December from a peak of $4 trillion in June, central bank data show. Russia’s supply tumbled 25 percent over the past year to $361 billion in March, while Saudi Arabia, the third-largest holder after China and Japan, has burned through $10 billion in reserves since August to $721 billion.
Euro’s Decline
The trend is likely to continue as oil prices stay low and growth in emerging markets remains weak, reducing the dollar inflows that central banks used to build reserves, according to Deutsche Bank AG.
Such a development is detrimental to the euro, which had benefited from purchases in recent years by central banks seeking to diversify their reserves, according to George Saravelos, co-head of foreign-exchange research at Deutsche Bank.
The euro’s share of global reserves dropped to 22 percent in 2014, the lowest since 2002, while the dollar’s rose to a five-year high of 63 percent, the International Monetary Fund reported March 31.
“The Middle East and China stand out as two regions that are likely to face ongoing pressures to run down reserves over the next few years,” Saravelos wrote in a note. The central banks there “need to sell euros,” he said.
The euro has declined against 29 of 31 major currencies this year as the European Central Bank stepped up monetary stimulus to avert deflation. The currency tumbled to a 12-year low of $1.0458 on March 16, before rebounding to $1.0981 at 11:11 a.m. on Monday in Tokyo.
Growth Slows
Central banks in emerging nations started to build up reserves in the wake of the Asian financial crisis in the late 1990s to safeguard their markets for periods when access to foreign capital dries up. They also bought dollars to limit appreciation in their own exchange rates, quadrupling reserves from 2003 and boosting their holdings of U.S. Treasuries to $4.1 trillion from $934 billion, data compiled by Bloomberg show.
The reserve accumulation adds money supply to the financial system -- each dollar purchase creates a corresponding amount of new local currency -- and helps stimulate the economy. Annual monetary base in China and Russia grew at an average 17 percent in the decade through 2013, data compiled by Bloomberg show. The expansion rate tumbled to 6 percent last year.
While central banks have other ways of pumping cash into the banking system, such moves without the backing of increased foreign reserves could end up weakening their currencies further -- an outcome they may want to avoid.
“The swing in global foreign exchange reserves is one key measure of the global liquidity tap being turned on and off,” Albert Edwards, a global strategist at Societe Generale SA, wrote in a note on March 6. “When a regime of loose money suddenly ends,” emerging-market asset prices “are usually one of the first casualties,” he said. |
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