Global Markets pull back
The Telegraph reports - “Global markets are bracing for turmoil today after an ominous slide in the US dollar and a slump in equity and bond prices late last week sent tremors through the global financial system, evoking memories of the 1987 crash.”
The Brazilian Real, Mexican Peso, and South African Rand have all seen very steep declines.
Gold also saw a pullback in US Dollars from $710 Friday to the low $680s by noon Monday.
June 20th, 2006 at 5:24 am
aj,
I’ve been thinking some more about the global equity market declines. As a lay person from an economics perspective, let me posit that there are two types of liquidity: monetary liquidity and market liquidity. Monetary liquidity is affected by central banks expanding or contracting money supply. Market liquidity is affected by investor risk affinity or risk aversion to a particular asset or asset class.
Did the global equity market declines occur because of decreasing monetary liquidity or decreasing market liquidity? Yes, I know that the stated reason for the declines were inflation fears causing central banks to raise interest rates. But, I still don’t have a factual basis for asserting that global money supply in the aggregate is shrinking. I don’t have the latest Economist figures. But, according to 6/3/06 FinancialSense’s 2nd Hour with Jim & John Loeffler and 6/3/06 FinancialSense’s 3rd Hour with Jim & John Loeffler, money supply growth rates in a number of countries (per the current issue of The Economist) are as follows:
Australia - 10%
U.K. - 7%
Canada - 12%
Denmark - 18%
Japan - 6%
Euro region - 10%
Additionally, Nowandfutures’ reconstructed M3 money supply figures still appears to show positive U.S. money supply growth.
So, what is actually happening? Is the global money supply contracting or expanding? The Economist figures and Nowandfutures chart makes it appear that global money supply is still expanding. If that is the case, then the global equity market declines were caused by decreasing market liquidity, not decreasing monetary liquidity.
Any thoughts?
June 20th, 2006 at 8:09 am
As I pointed out in a more recent post, George Soros attributed the recent pullback to the Bank of Japan’s raising rates pulling several hundred billion in liquidity out of the markets. Across the board countries around the world and raising rates making many investments less profitable or unprofitable. Additionally an anticipation in a global economic slowdown means many other investors and shifting thier financial holdings around. In other words, I think this is an issue of the cost of money, not how much is available.
June 21st, 2006 at 11:25 am
Good distinction, aj: cost of money versus availability of money. As the cost of money goes up, speculators will seek ever more risky investments in developed countries, and then in emerging markets to eek out an acceptable return on investment.
So, is a rise from 0% to 0.1% sufficient to shut off the yen carry trade tap? There are no risky investments in emerging markets that would compensate for a .1% rate differential?
I also question the Bank of Japan’s long term fortitude when it comes to money supply contraction. See, e.g., http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=google&guid=%7B1772F6FA-3132-44FA-B524-25F38A655E08%7D&keyword=
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The Bank of Japan pumped a record 1.5 trillion yen into the money market Monday in an effort to curb the sharp increase in unsecured overnight call rates, according to a report in the Tuesday edition of the Nikkei Financial Daily.
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Uncollateralized overnight call rates opened Monday morning at 0.1%, the de facto upper limit for the BOJ’s zero interest rate policy, the Nikkei reported. In response, the BOJ immediately began its largest ever bill-buying operation for a single day.
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The rise in short-term rates was due to a decline in excess liquidity following a drop in the balance of accounts deposited at the central bank, an indicator of the amount of cash held by financial institutions, according to the Nikkei report. The BOJ put 500 billion yen into the market Thursday through funds-supplying operations, but unsecured overnight call rates still rose Friday.
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June 21st, 2006 at 12:16 pm
I think you are correct to question whether this is a long term strategy for the BoJ. Given their history, probably not. I wish I had a better understanding of all the dynamics at play here.
June 22nd, 2006 at 5:20 am
aj, would you check out Morgan Stanley currency analyst Stephen Jen’s commentary entitled “Currencies: Don’t Blame the BoJ for the Bloated Global Asset Prices” at http://www.morganstanley.com/GEFdata/digests/20060619-mon.html#anchor2?
There, he wrote, “Since the adoption of QE in early 2003, total Japanese portfolio outflows have been around US$170 billion a year. Compared to the US’ gross annual securities inflows of US$7 trillion a year, Japanese outflows should not be so important that they have supported US or global asset prices….I am not arguing that the BoJ policy has no effect on global asset prices. Rather, I am refuting the view that there is something extra special about JPY carry trades. When interest rates rise in Japan, capital outflows from Japan would clearly be adversely affected, ceteris paribus, and some risky assets could be hurt. I do not challenge this point. But it is unreasonable, in my view, to think that BoJ tightening would trigger a collapse in global equities, most commodity prices, etc. Even massive money printing by the BoJ failed to support the Nikkei for years and so I don’t see how money from Japan could have such a big impact on the world.”
Any thoughts on Mr. Jen’s commentary?
June 22nd, 2006 at 8:45 am
That makes sense; I don’t think I have seen anyone say that Japan could “trigger a collapse in global equities, most commodity prices, etc.” A pullback/correction as George Soros indicated, yes.