The CrossBorder Capital Blog

Bank of England Liquidity Growth Speeds Up   Latest weekly balance sheet data from major Central Banks show aggregate liquidity growth edging higher to 30% ( 3m ann.). The G4 (exc. China) equivalent has seen a similar uptick to 37%. The Fed, Bank of Japan and Bank of England are behind the improvement. ECB liquidity growth remains strong, albeit off the pace recorded at the start of the month. PBoC liquidity injections have faltered once again.      

Chinese Monetary Policy – No Thunder ‘Crost The Bay!   Warnings persist about China’s monetary tightening threat. China is unquestionably important, but a close examination of monetary data finds no compelling evidence that they are tightening policy. The most that can be said is that open-market operations have recently stalled, but liquidity levels seem adequate. We think that too much has been read into the weak stock market and too much extrapolated from seasonally distorted official monthly liquidity data. In reality, China looks remarkably stable.    

Where Do Treasury Yields Go Now?   Government bond yields have two moving parts – rate expectations and term premia. We argue here that rate expectations are strongly influenced by break-even inflation, whereas term premia and, by association, real interest rates, reflect the supply and demand backdrop for 'safe' assets. Latest data suggest that break-even inflation rates are likely near their highs. In other words, term premia and real interest rates will start to dominate World bond markets. This requires understanding the net supply of 'safe' assets. Together abundant liquidity, accelerating economic activity and a sharp drop in foreign appetite for US paper all mean that nominal Treasury yields should rise by more. Indeed, a straightforward regression model based on these factors still suggests a 10-year yield target of 2-2½%. But….    

The Bank of Japan Steps Up Latest weekly balance sheet data from major Central Banks reveal a “slowdown” in liquidity growth: now at 29% compared to the previous two weeks’ circa 34% average ( 3m ann.). The G4 (exc. China) equivalent has seen a similar dip to 35%, vs. near-40%. PBoC liquidity injections have faltered once again, and the US Fed and ECB have tempered liquidity growth. In contrast, there has been a step-up by the Bank of Japan.    

Emerging Market Liquidity Update: Red and Orange!   ·                      Cross-border capital inflows to Emerging Markets still remain well-below their pre-2008 heights and in March 2021 large outflows got the upper-hand   ·                      The quality mix of liquidity relies heavily on the generosity of Central Bank policy-makers than on private sector cash generation. This skew reflects still weak corporate profitability, and it is likely to keep EM currency markets soft      

Was the Mid-March Wobble in Economic Momentum the Trigger?   Major Central Banks’ weekly balance sheet data evidence a clear acceleration in aggregate liquidity growth in the past two weeks: now at 34% compared to a year-to-date average of circa 20% ( 3m ann.). The G4 (exc. China) equivalent is even higher at 39%, driven by the Fed, ECB and Bank of Japan. The Fed is leading the way at 76%, paced by the ECB at 59%. And early-April data from the Bank of Japan confirms a looser stance rather than an isolated year-end boost. Generally, global economies (as measured by CrossBorder’s economic momentum indicator) have regained composure following a mid-March dip and look on track to deliver good growth, but Central Bankers are taking no chances.        

Global Liquidity Update: This Bull Market Ain't Over Until…     ·                 The 'V'-shaped recovery is reality, but our concern is that strong economies rarely enjoy strong financial markets ·                 Watch the cycle: 82% of all World Central Banks are now easing compared to 88% in January, 2021 and only 32% in February, 2020      

More Fuel in the Tank: Fed, ECB and Bank of Japan Liquidity Growth Accelerates   Weekly balance sheet data from the World’s major Central Banks show a clear acceleration in aggregate liquidity growth: now close to 35% compared to a year-to-date average of circa 20% ( 3m ann.). The G4 (exc. China) equivalent is even higher at 40%, highlighting that this renewed impetus is coming from the Fed, ECB and Bank of Japan. Fed liquidity growth has jumped to 78%, paced by the ECB at 63%. And the Bank of Japan, which has lagged for some time, has also picked up the pace.  

Bitcoin US$341,250? This Is Not A Forecast….Well Not Yet!   Gold has been a disappointing investment of late. Part of the reason may be timing, but equally it may also be the growing presence of cryptocurrencies, like Bitcoin (BTC), as rival monetary inflation hedges? We argue that gold still lies below its adjusted 'fair value', even allowing for Bitcoin. But, turning the tables, if investors switched entirely to Bitcoin as their future monetary inflation hedge, the price of BTC could skyrocket through US$300,000! We conclude: hold both.  

Get Ready For Some Bad News? – An Economic Growth Warning From Bonds   Global bond markets, led by US Treasuries, are suffering their worst performance for years. In fact, in terms of length, investors are experiencing the biggest negative run since the 1950s. However, markets never move in straight lines, and the importance of the bond markets, both in the pricing of other assets and in providing collateral for liquidity creation, surely means this bond sell-off will have negative feedback effects? In other words, an economic law of gravity exists where rising yields ultimately trigger falling yields. The transmission is via the ‘safe asset’ feature of bonds and occurs when either risk appetite outpaces economic prospects and/ or liquidity tightens sufficiently to hurt the economy. We are getting closer.  

The New Asian ‘Euro’? Could It Signal A Coming Decade Of Outperformance From Emerging Markets?   Asian forex volatility is close to all-time lows. This surely suggests deliberate currency management? It may even point to a de facto ‘Euro-like’ currency bloc? Of course, nothing has been formally announced, but this initiative may have evolved out of the 2016 Shanghai Accord between G-20 Leaders? If true, it has huge implications for Asia and Emerging Markets. First, collective actions to stabilise currencies will boost capital inflows. Second, shadowing the US dollar will allow these economies to import loose US fiscal and monetary policies. Third, it will reinforce existing uneven intra-regional development, which could possibly help to revitalise China’s giant BRI project?     See our latest published research, Global View - The New Asian ‘Euro’? Could It Signal A Coming Decade Of Outperformance From Emerging Markets? - April 2021   F or further information,