Collared Green
Courtesy of Philip Grant, Almost Daily Grant's
The Securities and Exchange Commission and Department of Justice separately announced insider trading charges this afternoon against Yinghang “James” Yang, a senior index manager at S&P Dow Jones, along with his friend and alleged co-conspirator, sushi restaurant manager Yuanbiao Chen. Details of the allegations, from the SEC press release:
Between June and October of 2019, Yang and Chen repeatedly purchased call or put options of publicly traded companies hours before public announcements that those companies would be added to or removed from a popular stock market index that Yang helped his employer manage.
Bringing new meaning to the term: Index arbitrage.
Central Command
As the pandemic and lockdowns continue to crimp the world economy, central banks across the Old Continent look to respond with an extra dose of the dual pillars of post-2008 monetary policy: ever-lower interest rates and more ambitious forays into financial markets. Now follows a review of recent happenings.
Last week’s minutes from the most recent Bank of England policy meeting included hints that negative interest rates could be on the way, as the Monetary Policy Committee was briefed on how negative rates “could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates.” The BoE declared it will “begin structured engagement on the operational considerations” related to negative rates during the fourth quarter.
Some observers believe that the move below zero is now a fait accompli. “The more [the BoE] talks about this option the more it looks as if it has all but made up its mind,” Allan Monks, economist at J.P. Morgan, commented to the U.K. Telegraph on Friday.
It’s a notable change in tack for BoE governor Andrew Bailey, who succeeded the Brookfield Asset Management-bound Mark Carney six months ago. Asked about the prospect of sub-zero rates in March, he replied: “It’s not an area I would want to go to.” That was then. The BoE’s next meeting is scheduled for Nov. 5.
Of course, negative rates are old hat across the Channel, with the European Central Bank taking its benchmark deposit rate below zero in 2014 and cutting it to a record-low minus 50 basis points last fall. The excursion below zero has evidently done little to revive dormant inflation, as core CPI rose just 0.4% in August from a year ago, down from a 1.2% annual rate in July. That’s the lowest reading on record going back to 2001.
Rather than force rates deeper into negative territory, the monetary mandarins consider further ramping up asset purchases. The Financial Times reports that the European Central Bank is conducting “a sweeping review” of its Pandemic Emergency Purchase Programme (PEPP), “as debate is intensifying on the [governing] council over whether it should start drawing up plans to wind down the PEPP or consider expanding it further.”
The PEPP, which was initially slated to buy €750 billion ($878 billion) worth of corporate and sovereign bonds in March and expanded to €1.35 trillion in June, allows the ECB to bypass prior restriction on buying speculative-grade debt and accumulating more than one-third of a given country’s sovereign debt stock. The program, which has some €823 billion in remaining capacity as of last week, is scheduled to run through June of 2021.
Total assets at the ECB footed to €6.48 trillion as of last week. That’s up 38% from a year ago, well below the 87% year-over-year jump in Reserve Bank credit at the Federal Reserve over that period. However, the ECB has been far more aggressive relative to the size of the underlying European economy, as balance sheet holdings stand at 49% of 2019 nominal GDP for the euro area. By comparison, Reserve Bank credit equates to about 33% of U.S. output following that spring shopping spree.
The powers that be at the ECB have no compunction about taking that figure higher. Speaking to French and German parliaments today from Frankfurt, president Christine Lagarde declared that she is “not at all aligned with this idea of the exhaustion of the toolbox.” Transitioning from mechanic to military analogies, Lagarde reiterated: “Has the ECB fired its last cartridges? No, not at all, not at all. We can find answers to help economies.”
Meanwhile, Sweden’s Riksbank, the world’s oldest central bank, recently commissioned Wall Street behemoth BlackRock to conduct an assessment of its own corporate bond-buying scheme, which began on Sept. 1 and is scheduled to run through June. The consultant’s findings are shrouded in mystery, as reporters from Bloomberg received the following response to a request for information:
[The Riksbank] sent a heavily redacted document consisting of 19 pages. “The Swedish corporate bond market exhibits a number of singularities when compared to other Anglo-Saxon markets,” the document showed. Almost everything else was blacked out.
Some were less than pleased with the lack of candor. “It becomes a black box, run by the Riksbank, with highly unclear working methods and motives,” comments Andreas Halldahl, head of Swedish fixed income at Storebrand Asset Management. “It only brings more uncertainty and destroys another market that worked just fine without them.”
Recap Sept. 21
Stocks took a fall on the last official day of summer, with the S&P 500 losing more than 1%, though the broad index managed to finish well off its worst levels of the day. Similarly, the VIX rose to 27.5, a 6.5% advance on the day but far below its intraday peak of 31.
Treasurys caught a bid with the 30-year yield slipping to 1.42%, while a strong rally from the greenback helped put the hurt on the commodity complex, with gold, WTI crude and natural gas clobbered by 2%, 3.5% and 10%, respectively.
– Philip Grant
