Why are central bankers around the world in a panic?
From Bloomberg: (bold mine)
The Riksbank expanded its bond-purchase plan for a fourth time since February as policy makers in Sweden struggle to keep pace with stimulus measures in the euro zone.
The quantitative easing program was raised by 65 billion kronor ($7.6 billion). The bank opted to keep the benchmark repo rate at minus 0.35 percent, as estimated by 13 of the 15 analysts surveyed by Bloomberg. Two had foreseen a cut.
“There is still considerable uncertainty regarding the strength of the global economy and central banks abroad are expected to pursue an expansionary monetary policy for a longer time,” the Riksbank said in a statement on Wednesday. “An initial raise in the rate will be deferred by approximately six months compared with the previous assessment.”
How low can the Riksbank go?
Since the European Central Bank signaled last week it may expand an already historic stimulus program as early as December, policy makers outside the euro zone have girded for the next stage of a currency war that few have adequate tools to fight. The Riksbank’s expanded QE program means it will have purchased 200 billion kronor in bonds by the end of June 2016, it said.
“The Riksbank is haunted by the krona and a soft ECB,” Torbjoern Isaksson, an economist at Nordea, said by phone. Nordea will probably stick to its forecast that the Riksbank will lower its repo rate further in December, Isaksson says.
When central banks panic, this represents a Pavlovian classical conditioning signal for the greater fools to indulge in a buying mania of risk assets
Aside from stocks, the previous easing by the Riksbank has only been inflating Sweden’s incredible housing bubble.
Yet all the easing by the central bankers seem to have failed to do its wonders even in stocks. One of the unfortunate casualty is a government fund.
Norway’s sovereign wealth fund reportedly suffered its biggest loss in four years. From another Bloomberg report (bold mine)
The world’s largest sovereign wealth fund posted its biggest loss in four years, dragged down by Chinese stocks and Volkswagen AG, just as the Norwegian government prepares to make its first ever withdrawals to plug budget deficits.
The $860 billion fund lost 273 billion kroner ($32 billion) in the third quarter, or 4.9 percent, the Oslo-based investor said on Wednesday. Its stock holdings declined 8.6 percent, while it posted a 0.9 percent gain on bonds and a 3 percent return on real estate. It was the first back-to-back quarterly loss in six years.
“We have to expect fluctuations in the value of the fund when there are large movements in the market,” said Yngve Slyngstad, its chief executive officer. “With the fund as big as it is today, this can have a considerable impact in the short term. The fund has a long-term horizon, however, and is in a good position to ride out short-term volatility.”
The period was marked by turbulence as worries of a China slowdown and prospects of a U.S. rate increase wiped trillions of dollars off the value of global markets. The MSCI World Index lost 9 percent while the MSCI Emerging Markets Index plunged 19 percent in the quarter. The selloff was exacerbated by a rout in commodities.
The fund had a loss of 21.3 percent on Chinese stocks in the period and 16.6 percent on its emerging market equities.
To compound on the woes of the Norwegian government, the growing budget gap as consequence of low oil prices and high social spending would probably lead to a drawdown by the government on her wealth fund. So the fund's 'long term horizon' may never occur.
From CNBC:
The signs are worrying: For the first time ever, Norway announced plans to tap its fund to make up for lost oil revenues earlier this month.
The country plans on withdrawing around $450 million from the fund which had $820 billion under management as of the end of June of this year.
While this is not a massive slice of the pie, analysts are worried that the behemoth fund's days of stellar growth may be numbered especially with oil prices predicted to stay low for longer and the $100 per barrel price tag something of a distant memory.
The fund, officially called the Government Pension Fund Global, has accumulated over 25 years of investing oil revenues, making headlines at the start of last year when it rose to 5.11 trillion Norwegian crowns, which at the time was worth $828.66 billion. This meant every person in Norway became a theoretical crown millionaire for the first time thanks to strong oil and gas prices.
Sovereign wealth funds control around $7 trillion of assets, largely created through investing natural resource revenues. After Norway, oil rich Abu Dhabi and Saudi Arabia manage in the region of $770 billion and $670 billion respectively, according to data from Sovereign Wealth Fund Institute.
Norway's economy is currently not under any strain due to soundly managed finances according to economists. But with 40 percent of Norway's exports coming from oil and gas and oil prices down 60 percent since last summer, the fund has come under pressure.
Everything is interconnected.
The losses of Norway’s sovereign wealth fund has been partly due to her exposure on Chinese risk assets. The Riksbank’s QE has been in response to the global economy also due to the rapid slowing of Chinese economy.
Yet deepening economic troubles continue haunt China.
The losses of Norway’s sovereign wealth fund has been partly due to her exposure on Chinese risk assets. The Riksbank’s QE has been in response to the global economy also due to the rapid slowing of Chinese economy.
Yet deepening economic troubles continue haunt China.
According to a honcho of a big Chinese steel firms, demand for steel has slumped at an ‘unprecedented’ rate.
From another Bloomberg report (bold mine)
If anyone doubted the magnitude of the crisis facing the world’s largest steel industry, listening to Zhu Jimin would put them right, fast.
Demand is collapsing along with prices, banks are tightening lending and losses are stacking up, the deputy head of the China Iron & Steel Association said on Wednesday.
“Production cuts are slower than the contraction in demand, therefore oversupply is worsening,” said Zhu at a quarterly briefing in Beijing by the main producers’ group. “Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”
Behold the central bank magic! Instead of easing, funding costs goes up!
More…
China’s mills -- which produce about half of worldwide output -- are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas. Shanghai Baosteel Group Corp. forecast last week that China’s steel production may eventually shrink 20 percent, matching the experience seen in the U.S. and elsewhere.
“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”
Making Losses
Medium- and large-sized mills incurred losses of 28.1 billion yuan ($4.4 billion) in the first nine months of this year, according to a statement from CISA. Steel demand in China shrank 8.7 percent in September on-year, it said.
Signs of corporate difficulties are mounting. Producer Angang Steel Co. warned this month it expects to swing to a loss in the third quarter on lower product prices and foreign-exchange losses. The company’s Hong Kong stock has lost more than half its value this year. Last week, Sinosteel Co., a state-owned steel trader, failed to pay interest due on bonds maturing in 2017.
Crude steel output in the country fell 2.1 percent to 608.9 million tons in the first nine months of this year, while exports jumped 27 percent to 83.1 million tons, official data show. Steel rebar futures in Shanghai sank to a record on Wednesday as local iron ore prices fell to a three-month low.
Losses and unwieldy debt will have a feedback mechanism that escalates on the already dire conditions.
And more of China’s ‘epic bubble’ as shown in charts from the Bloomberg… (bold mine)
And more of China’s ‘epic bubble’ as shown in charts from the Bloomberg… (bold mine)
Companies with less cash than short-term debt, net losses and contracting revenue have jumped to 200, according to the filings through June 30 compiled by Bloomberg from firms listed on the Shanghai and Shenzhen stock exchanges. About half are in the commodities sector while about 20 percent are industrial companies. A maker of carbon materials used in batteries is among borrowers that may have trouble repaying obligations by year end, Guotai Junan Securities Co. said….
Desperate for yield, the mania on bonds intensifies
Investors are chasing lower-rated bonds after the central bank cut interest rates six times in a year. That’s dragged down the extra yield on five-year AA graded corporate securities over government notes to 196 basis points, near the lowest in five years. Brokerages including Oversea-Chinese Banking Corp. and Industrial Securities have warned that the exuberance may be creating a bubble.
The rise in corporate debt loads is outpacing economic expansion. Borrowings by companies listed on the Shanghai and Shenzhen stock exchanges jumped 22.7 percent in the most recent filings compared with the end of last year, exceeding the 6.8 percent economic growth for 2015 that analysts surveyed by Bloomberg forecast.
You see, these are great reasons to panic buy risk assets. Who knows, these frantic measures by central banks may just spark the much awaited miracle. It’s been a long wait since though. Central banks have been easing since late 2008. And in nearly 7 years, instead of stability, we see more signs of instability which is why we go back to square: Central banks freaking out!
Of course, if central banks fail, well then, the fool and his money are soon parted.
