February, 23 2016 by lsr team

With the prospect of a June referendum hanging over the markets, interest in Brexit trades has heightened. There is currency-market evidence showing that speculative investors have been positioning for a possible Brexit principally in the FX options markets. Indeed, a chunk of decline in sterling during late December and January may be related to the build-up of option-market positioning, since spot market positioning indicators do not show evidence of extreme short positioning so far (see chart above). Our central view is that sterling will remain the main shock-absorbi...

February, 10 2016 by lsr team

It was almost exactly a year ago that various bond yields in Europe turned negative, unleashing a wave of questions from our readers. Clients wanted to know what this strange phenomenon meant and how long it would last. Twelve months on, far from proving to be a temporary aberration, central banks in Europe have taken their policy rates deeper into negative territory. Now the Bank of Japan has joined in and helped push the 10-year government bond yield to almost zero today. With risks to the global economy intensifying, there is even speculation that US and UK rates coul...

February, 02 2016 by lsr team

The BoJ followed through on recent threats to loosen policy by cutting its interest rate on new reserves to -0.1% last Friday. A comparison to Europe pushing into negative territory is misguided at best. Japan has a government deficit of 6% of GDP to finance and a huge pile of public debt to service so it needs to keep its investor audience captive. The increase in reserves each year is huge because of the BoJ’s asset purchase programme. If a central bank buys 80trn yen of JGBs then by definition, this eventually creates 80trn yen of reserves. Reserves at the BoJ incr...

October, 27 2015 by lsr team

China’s economy has entered a critical period in its post-crisis adjustment, posing serious risks for the rest of the world. Our final GDP estimate shows Chinese growth at just 0.4% QoQ in Q3, the weakest since the Global Financial Crisis. Its sharp growth slowdown, feeding through into a deterioration in the labour market, will be a stern test of Beijing’s resolve to reform in coming quarters.  So far policymakers have stayed firm. The central bank cut interest rates and banks’ required reserve ratio (RRR) last Friday in a bid to support grow...

September, 18 2015 by lsr team

After weeks of speculation, the FOMC decided to keep interest rates on hold, once again postponing policy lift-off. Given recent events, the decision shouldn’t have been a surprise to most investors. Fed officials were clearly worried about unsettling already nervous markets and wanted more time to assess the impact of what some commentators are calling a global economic downturn. While the outcome of yesterday’s decision was perhaps never in question, the committee’s debate was surely still intense. Despite uncertainty about the short-term rate outlook...