Tag: FINANCE

THE Hong Kong dollar is one of the most and least manipulated monies in the world. For over 34 years the territory’s monetary authority, the HKMA, has kept it pegged to America’s currency at around HK$7.80 to the dollar, resisting all temptations to let it fall or rise. In 2005 it refined the peg with two promises: to buy dollars at the price of HK$7.75 and to sell them for HK$7.85.

The strength of the Hong Kong dollar has obliged the HKMA to keep the first promise many times since. Its purchases of American dollars have even drawn the accusation that it manipulates its currency for competitive advantage.

In fact, the HKMA has always been ready to manipulate its currency upwards, too. But since 2005 it has had no occasion to, until last week. On April 12th the Hong Kong dollar weakened to HK$7.85, forcing the authority to buy HK$51bn over the next few days in exchange for American dollars.

The Hong Kong dollar’s weakness reflects the gap between rising American interest rates and…Continue reading

WATCHING financial markets can be like watching a horror film. A character walks into the darkness alone. A floorboard creaks. The latest spooky sign is the spread between the three-month dollar London interbank offered rate (LIBOR) and the overnight index swap (OIS) rate. It usually hovers at around 0.1%, but has recently climbed to 0.6% (see chart). As it widens, bankers are bracing for a jump scare.

To see why, consider what each rate represents. LIBOR is the rate that banks charge other banks for unsecured loans. The OIS rate measures expectations for the federal funds rate, which is set by the central bank. As LIBOR rises above the OIS rate, that suggests banks fear it is getting riskier to lend to each other. (The gap was 3.65 percentage points in the depths of the crisis, after Lehman Brothers filed for bankruptcy.)

Market-watchers were already twitchy. Last November they shuddered as the yield curve, which plots the yields of Treasury bonds of different maturities, abruptly flattened….Continue reading

THE aftermath of the 2007-08 financial crisis ought to have been a moment of triumph for economics. Lessons learned from the 1930s prevented the collapse of global finance and trade, and resulted in a downturn far shorter and less severe than the Depression. But even as the policy remedies were helpful, the crisis exposed the economic profession’s continued ignorance of the business cycle. That is bad news not just for the discipline, but for everyone.

The aim of those studying the macroeconomy has always been to understand the economy’s wobbles, and to work out when governments should intervene. That is not easy. Downturns come often enough to be a serious irritant, but not often enough to give economists sufficient data for rigorous statistical analysis. It is hard to distinguish between short-run swings and structural economic changes resulting from demography or technology. Most classical economists were sceptical of the idea that the macroeconomy needed much oversight at all.

By…Continue reading

ON APRIL 6th America imposed harsh new sanctions on Russia in response to its “malign activity” abroad. Rattled investors sent stocks tumbling when the Moscow exchange reopened on April 9th. The principal stockmarket index fell by 8.3% that day. The rouble sank sharply. Oleg Tinkov, a banker, lost $250m, but brushed it off with reference to a previous daily loss of $1bn. “Being on the Russian stockmarket is like living on a volcano,” he said.

Geopolitics drove markets through the week. Tensions over Syria (see article) and talk of potential sanctions on Russian government bonds weakened the rouble further. A fiery morning tweet from Donald Trump threatening Russia sent stocks tumbling again on April 11th. But when the treasury secretary came out against sanctions on bonds later that day, the rouble and the stockmarket perked…Continue reading

THE supervisory board at Deutsche Bank, Germany’s biggest lender, has been sounding out replacements for its chief executive for weeks. On April 8th it made its choice: Christian Sewing, an experienced insider. He starts with immediate effect, replacing John Cryan, who became joint chief executive in 2015 and sole boss a year later. It is the latest in a series of quick changes for the bank.

Mr Sewing is the first German in 16 years to serve as Deutsche’s sole boss. He is also the first in many years without a career in investment banking. In his 25 years at the bank he has worked in commercial banking, auditing and risk management, most recently as joint head of the retail division, which he successfully slimmed down. The appointment is seen by many as heralding a shift in favour of retail banking, especially since Marcus Schenck, joint head of investment banking, is also leaving after being rebuffed in his efforts to expand his division.

Yet the circumstances surrounding…Continue reading

SOUP kitchens serve the needy for free; restaurants serve the hungry for money. In parts of South Asia, eateries near mosques sometimes fall into a third category. They feed the poor sitting patiently outside, whenever a pious or charitable passer-by pays them to do so. Alms-giving of this kind provides one traditional safety net for the destitute in developing countries. But it is, thankfully, not the only one.

According to a new report by the World Bank, developing countries spend an average of 1.5% of GDP on social safety nets designed to stop people hitting rock-bottom. (The rich countries in the OECD spend on average 2.7%.) Among these are workfare schemes, pensions, free school meals and cash handouts, sometimes conditional on recipients sending their children to school, getting them vaccinated and the like. This spending has reduced the number of people living in extreme poverty (less than $1.90 a day) by 36% on average in the countries examined by the World Bank.

South Asia’s…Continue reading

THE population of Uttar Pradesh is over 220m, enough to make the northern Indian state the world’s fifth-most populous country. But statistics still used by bureaucrats in New Delhi put it at less than 85m. Antiquated census data are used to split everything from federal funding to seats in the national parliament. A proposal to use up-to-date figures has created a political storm.

In the mid-1970s India’s southern states were doing better than northern ones at controlling population growth. That meant losing federal power and money, both doled out in proportion to population. The inelegant solution was to keep using census figures from 1971, an arrangement that became indefinite.

But buried in a recent government memo is a proposal to use figures from the most recent count, in 2011, for federal funding. Southern states are fuming. Their populations have risen since 1971, but nothing like as much as those of Uttar Pradesh and its neighbours (see map). They have also become much richer than…Continue reading

Trade warriors at work

AFTER weeks spent threatening tariffs on an ever-greater share of Chinese imports, President Donald Trump seems to be in a more conciliatory mood. On April 10th a speech by the Chinese president, Xi Jinping, prompted him to tweet a prediction: “We will make great progress together!”

Many besides Mr Trump share that hope. If China offers him a deal that he is willing to sign, a trade war may still be averted. Or sense may prevail, as it did last month, when American allies such as Canada and Mexico were exempted from tariffs on steel and aluminium. But such optimism shades into naivety. China hawks in the American administration have long seethed over aspects of the relationship with China that rarely feature on Mr Trump’s Twitter feed. Those problems predate his presidency. And they do not look easy to resolve.

The rules-based system of international trade works best for problems that are clearly defined, and when it is easy to…Continue reading

SINCE the heady days of late 2017 and January of this year, crypto-currencies have gone into retreat. Bitcoin, the best-known example, is now worth just a third of its value at its peak (see chart).

But there remain plenty of true believers in digital currencies. They point out that prices are still well above where they were in 2016. And interest from institutional investors is still strong enough for analysts to want to make sense of the crypto-phenomenon.

The latest bank to take a shot is Barclays, which devotes a lot more of its “Equity Gilt Study 2018” to the impact of technological change on finance and the economy than it does to either equities or gilts. Its report describes crypto-technology as “a solution still seeking a problem”.

It identifies four challenges in particular. The first is trust. In most countries, consumers and businesses have faith in the currencies issued by the government. The second is sovereignty: the potential for tax avoidance and loss of financial…Continue reading

THE bond market used to be the prime exhibit for those predicting low long-term economic growth. In the summer of 2016 the ten-year Treasury yield briefly dipped below 1.5%, as expectations for growth and inflation sagged. Things have changed. Earlier this year the ten-year yield briefly went higher than 2.9%. Even after recent share-price gyrations, it remains around 2.8%, well up since the start of 2018. The rebounding interest rate partly reflects higher confidence in global growth. Inevitably, a new set of pessimists now voice a fresh worry: that bond yields might go on rising for less welcome reasons.

They point to three threats. The first is monetary policy. The Federal Reserve has raised short-term interest rates by 1.5 percentage points since December 2015. At their March meeting, rate-setters slightly upgraded forecasts of how far rates should eventually rise. Last October the Fed began shrinking its $4.5trn portfolio of assets, mostly government debt, amassed since the start of…Continue reading