“…Lorie Logan, the interim manager of the New York Fed’s open market trading desk, put out a note [re the Fed’s repo injections] assuring people that the Fed “intends to implement monetary policy in a framework based on ‘an ample supply of reserves’”.
“This Halloween season though, the real menace in the attic may be foreign exchange derivatives, or the FX swaps market. The BIS put out a useful paper on this black hole, called “FX swaps and forwards: missing global debt?”, by Claudio Borio, Robert McCauley and Patrick McGuire.
“The authors say: “A key finding is that non-banks outside the US owe large sums of dollars through these instruments. The total is of a size similar to, and probably exceeding, the $10.7tn of on-balance-sheet dollar debt.”
“FX swaps contracts allow a non-US entity to exchange non-dollar cash flows for dollar cash flows. Thanks to the magic of derivatives accounting, only the variances in the relative value of the exchanged currencies (or “replacement cost values”) need to be disclosed by the banks mediating these transactions.
““These transactions,” the authors explain, “are functionally equivalent to borrowing and lending in the cash market. Yet the corresponding debt is not shown on the balance sheet and thus remains obscured.”
“Just one little problem. “Unlike most derivatives, the full notional amount, not the net amount as in a contract for differences, is exchanged at maturity.” So the borrower, such as, say, a Japanese bank or a Chinese corporation, has to settle the full value before entering into a new FX swap transaction.
“Not an issue most of the time. But as the authors note, “the short maturity of most FX swaps and forwards can create big maturity mismatches and hence generate large liquidity demands, especially during times of stress. Most spectacular was the funding squeeze suffered by European banks during the GFC.”
“Today the FX swaps market is much bigger than it was in 2008.”
“The record U.S. corporate debt boom is about to be put to the test.
“Companies that loaded up on cheap and abundant debt during the past decade will face their first significant hurdle of the cycle as a $4 trillion mound of maturing bonds come due over the next five years, analysts from Oxford Economics warned on Thursday.
“U.S. companies already are seeing declining profits and rising leverage…”
“…few economists expect the housing market to take off in response to this week’s rate cut, because rates aren’t what was holding back housing in the first place. Instead, they point to other factors. Interest rates don’t matter if no one will give you a loan in the first place. And a lot of would-be buyers are in that situation.”
“Fresh evidence of the impact of global trade wars on the eurozone has emerged with official figures revealing growth in the 19-nation single currency bloc was 0.2% in the three months to September.
“Data from the EU’s statistical agency, Eurostat, showed activity expanded by 0.2% in the latest quarter – unchanged on the three months to June.”
“Hundreds of migrants from the Middle East and Asia living in a freezing camp in the forests of Bosnia are short of food and bedding and at growing risk as the bitter Balkan winter approaches, aid workers say.
“Bosnia has faced an upsurge in migrant numbers since Croatia, Hungary and Slovenia closed their borders against undocumented immigration.”
“The Council of Europe has slammed Greece for the conditions migrants are living under on the Aegean islands, with the Commissioner for Human Rights saying people are now in a “struggle for survival”. Dunja Mijatović spoke of the dramatic deterioration in the living conditions for the people who have been living on the islands over the past 12 months.
“Calling it “an explosive situation”, she highlighted the unhygienic conditions in which migrants are being kept, in vastly overcrowded camps.”
“Gross domestic product (GDP) is seen contracting by as much as 10% by the end of the 2019 financial year owing to bad weather and power shortages as the economic crisis besetting the economy worsens.
“Well-placed sources this week said Zimbabwe’s debt rescheduling plan — initially expected in March next year — is not succeeding in the manner envisaged by Finance minister Mthuli Ncube.”
“South Africa’s state power utility Eskom is the biggest challenge facing the country. Mess up Eskom, and you mess up the country. And it looks as though key players are doing just that…
“What we see in Chile,where public angerhas spilled out onto the streets, is what can be expected to emerge as ordinary South Africans experience the true implications of this failure to decisively resolve the crisis.”
“Thousands of anti-government protesters demanding Prime Minister Imran Khan resign over worsening economic conditions and alleged election rigging have gathered in the Pakistani capital awaiting the arrival of a right-wing religious political leader.”
“Foreign investors’ net sales of Indian rupee company bonds rose to the highest in five months, as the slowest economic growth in six years and credit market strains weighed on sentiment.
“Overseas funds pulled 26.4 billion rupees ($372.2 million) in October, making it the seventh straight month of outflow…”
“The bad news on the Indian economy just got worse. The core infrastructure industries’ output—measuring a basket of eight sectors accounting for two-fifth of India’s factory output—contracted to the lowest in at least 14 years, pointing to a deepening industrial slowdown.”
“Nowadays, China is still trying to build wealth, but it’s doing the wrong way… by pursuing investments that do not raise the country’s productive capacity and growth potential.
“Like bridges and roads to nowhere; like factories that no longer produce competitive products. Like apartments where nobody lives.”
“Prolonged city-wide protests plunged Hong Kong into its first recession since the global financial crisis, as economic growth shrank more than expected between July and September, latest government figures show.
“Compared with the previous three months, GDP – the total of all the finished goods and services produced in an economy – sank 3.2 percent in the third quarter of 2019.”
“Asia’s export powerhouses saw factory activity shrink further in October, as cooling global demand and trade tensions keep policymakers busy ramping up support for their fragile economies to help dodge recession.
“Fresh concerns over whether Washington and Beijing can iron out their difference resurfaced on Friday…”
“Since Venezuela’s economic collapse began under the presidency of Nicolás Maduro in 2016, violence, insecurity and a severe lack of basic food and medicine have caused more than 4 million people to flee. An estimated 1.5 million have settled in Colombia.
“About 59,500 have settled in Maicao, smaller in size and with less public infrastructure than the more popular migrant entry point of Cúcuta, and it’s struggling to cope.”
“At least 23 people have been killed during protests in Chile against the government’s economic policies. In a statement on social media Thursday, the Chilean Prosecutor’s Office said the deaths occurred between Oct. 19, when a state of emergency was declared, and Oct. 26…
“…the identity of a protestor who was burnt to death has not been determined, but an investigation is underway.”
“After several bumper years for the auto sector, car sales are slowing down, and in some markets, plunging. Carmakers and their suppliers are already warning that thousands of jobs are at risk…
“…we look at how the industry is coping with a slowdown. Also, our correspondent in Beijing reports on how the Chinese market fell off a cliff.” [Video]
“China’s official manufacturing PMI suggested the sector was in contraction. So even as stock markets remain virtually at all-time highs, we appear to be locked in a world of low yields (which prop up share prices but inhibit everything else), and an intractable global economic standoff. It’s like a continuous loop, and it’s easy to attach a narrative of disaster to it.”
“Peter Boockvar, Bleakley Advisory Group CIO, joins ‘The Exchange’ to discuss the Fed’s decision to cut rates for the third time this year and what it could mean for the markets.”