Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

World’s $150 trillion debt edifice shaken by Trump victory

Posted by hkarner - 14. November 2016

trump-ccDonald Trump has entirely changed the thinking of the world’s debt markets, leaving carnage along the way 

The spectacular sell-off in the global bond and credit markets since the election of Donald Trump has left a trail of carnage among hedge funds and revived gnawing doubts about the fragility of the eurozone’s financial system.

Bank of America warned that there has been ‚violent rotation‘ within the structure of the bond market over the last week, with powerful implications.

Traders switched overnight from worries about deflation to an entirely different bet on surging reflation driven by Mr Trump’s expansionary policies. This has instantly shaved $1.14 trillion off Bank of America’s Global Broad Market Index.

The gauge captures roughly a third all debt contracts. The International Monetary Fund said the total outstanding stock of bonds and loans worldwide was $152 trillion at the end of 2015, far greater than the $69 trillion store of global wealth in equities.

„There are a lot of bad positions out there and we don’t know how much leverage there is,“ said Marc Ostwald from ADM.

„Once the dust settles, people who have been caught are going to try desperately to get out. We may start to see where the damage is by the middle of this week,“ he said.

Some debt is in the form of non-tradable loans. A large block is held by central banks, sovereign wealth funds, pension funds, and insurers, mostly patient investors who ride out bouts of turbulence. But vast sums trade openly and  these instruments have racked up nose-bleed losses, some of which will have to be ‚marked to market‘.

World leaders on Trump win Play! 02:31

The shock to the international credit system is not as severe as  ‚taper tantrum‘ in May 2013, which forced the US Federal Reserve to back away from monetary tightening. But it is getting close, and it has offered a foretaste of what will happen to the unreformed eurozone when the next global downturn hits.

„We have just seen a repricing of capital in an environment where people’s sensitivity is very high. It is a squeeze,“ said Steen Jakobsen from Saxo Bank.

The moves have been dramatic. The SPDR dollar fund of US Treasuries with maturities over 10 years has crashed 6.39pc. Its equivalent for the eurozone is down 3.83pc, and cumulatively down 9pc over the last three months.

JP Morgan’s emerging market bond fund has dropped by 6pc, and Pimco’s local government variant is down 7pc. Investors that gobbled up a AAA-rated 70-year bond issued by Austria in late October have already lost over 6pc in paper terms.

The vicious sting in the tail is that global borrowing costs are not going up because growth is accelerating, that is to say for benign reasons. They are rising in Europe, Asia, Latin America, the Middle East, and Africa because the whole world is importing monetary tightening from the US.

Markets seem to be attaching a greater probability of a renewed flare up of a crisis in EuropePeter Schaffrik, RBC

These regions are collateral casualties of Mr Trump’s plans for tax cuts, higher spending, and ‚America First‘ protectionist measures, which have radically altered inflation expectations in the US but have not – on balance – improved conditions for the global economy.

Credit veterans are watching the surge in yields in Italy, Portugal, and the eurozone periphery with a sense of deja vu. „Markets seem to be attaching a greater probability of a renewed flare up of a crisis in Europe,“ said Peter Schaffrik from RBC.

„There is an element of stress here. Everybody who wants to borrow in these countries faces tightening conditions. Corporate yields are going up in tandem with sovereign yields,“ he said. This undermines the central purpose of quantitative easing by the European Central Bank.

Yields on Italian 10-year bonds have almost doubled since mid-August, rocketing at the end of last week to 2.03pc. The spread over German Bunds has jumped to 171 basis points – the highest since 2014.

These yields are rising at a time when the eurozone’s anemic recovery is already losing steam. European Commission has cut its forecast for Italy to 0.9c next year, and downgraded the eurozone as a whole to a lacklustre 1.5pc.

Mr Schaffrik said the spread between 5-year German Bunds and the asset swap rate – a stress marker tracked by specialists – has suddenly blown out. „It indicates a flight to safety. So far there is nothing to be alarmed about but prudence demands close attention,“ he said.

Mr Ostwald said the sell-off in southern Europe is a warning of what will happen once the ECB starts to slow its purchases of bonds next year, if it ever dares to try. „The moment they taper, there will be a cascade risk in the periphery. It is something they are going to have to ponder very carefully,“ he said.

The fear is that Mr Trump’s fiscal stimulus will do little to boost genuine growth, instead spilling into inflation and causing higher rates for the globalized financial system

So far, it is emerging markets that have faced the full brunt of Trump turmoil. Yields on Mexico’s 10-year peso bonds have jumped 100 basis points to 7.24pc. The tremors have shaken most of Latin America. Brazil’s borrowing costs have gone up by almost as much.

Neil Shearing from Capital Economics said these countries now have to tighten pro-cyclically into the shock. Mexico’s central bank will be forced to raise rates sharply, and its counterpart in Brazil will have to abandon rate cuts that were expected.

The fear is that Mr Trump’s fiscal stimulus at this late stage of the economic cycle will do little to boost genuine growth, instead spilling into inflation and causing higher rates for the globalized financial system.

This could combine with a lurch toward protectionism under Mr Trump that undermines the fundamental business model of export-led emerging markets. „They could be hit on every front at once. If you want to be bearish, that is the nightmare scenario,“ he said.

Hammond hopes Trump won’t put UK to back of queue for trade deal Play! 01:07

Hopes of a Trump-driven fiscal boom are for now driving stock markets to new highs, reducing the ‚equity risk premium‘ over benchmark bonds to almost zero on some bourses. The break-down in the normal relationship between equities and bonds is anomalous, and is unlikely to last.

The market gyrations come at a time when the trading system is partially frozen due to ill-drafted regulations since the financial crisis. „It is very clear that liquidity in the market is declining,“ said Andy Hall, a director of the International Capital Market Association.

He warned that crucial parts of the credit default swap market had „pretty much disintegrated“, making it hard for market-makers to hedge operational risk. „Dealers are taking on fewer positions, and smaller inventories. They are looking at counter-party risk and picking the clients they will do business with. It is more difficult to execute large tickets, and it takes much longer,“ he said.

The credit chief for one large City bank said this evaporation of liquidity is a nuclear accident waiting to happen. „Sooner or later everybody will try to get out at once and we are going to find out how small exit door really is,“ he said.

 

Schreibe einen Kommentar

Bitte logge dich mit einer dieser Methoden ein, um deinen Kommentar zu veröffentlichen:

WordPress.com-Logo

Du kommentierst mit Deinem WordPress.com-Konto. Abmelden / Ändern )

Twitter-Bild

Du kommentierst mit Deinem Twitter-Konto. Abmelden / Ändern )

Facebook-Foto

Du kommentierst mit Deinem Facebook-Konto. Abmelden / Ändern )

Google+ Foto

Du kommentierst mit Deinem Google+-Konto. Abmelden / Ändern )

Verbinde mit %s