本文发表在 rolia.net 枫下论坛The points below briefly summarise our initial thoughts as regards the policy and market implications of the weekend's developments.
Policy perspective
The pressure on the Fed to deliver a confidence-boosting rate cut tomorrow has intensified (Fed Funds pricing in a 70% chance of a 25bp cut vs. 12% on Friday). We have some sympathy with the argument that, having front-loaded its policy response, the hurdle to cut further (and to edge toward a BoJ-style scenario of 0% rates) is high and, given the cost of money is the result and not the cause of the ongoing crisis, the FOMC might confine its actions to boosting its liquidity support programme. That said, the risk of exacerbating market uncertainty via a steady rate decision is high (i.e. a cut might not improve matters but no move will make them worse). By the same token, a "modest" 25bp ease will do little to shore up sentiment given this outcome is already largely priced in. In light of these concerns, the two most likely outcomes to the FOMC meeting we see now are no change or a 50bp cut (the latter possibly being delivered today should the market show yet further immediate weakness). The latter is, narrowly, our base case scenario.
There is every likelihood the Discount rate will be brought in line with the Fed Funds target rate (eliminating the current 25bp premium for borrowing via the discount window) regardless of whether a cut is delivered.
The odds on a co-ordinated rate cut have risen although we expect the ECB and the BoE to content themselves with liquidity provisioning. The risks to the "real" economy are, however, rising on the back of the weekend's developments and, as such, our base case of a November cut from the BoE looks increasingly probable while the risks are arguably slanted toward the ECB cutting before Q1 '09 as currently forecast.
Market view
From a market perspective, the US curve is somewhat difficult to call given the binary nature of our rate outlook highlighted above. A 50bp ease will see a clear further steepening of the curve as the market ups its bets on how much more rate action might be forthcoming. A steady rate decision, meanwhile, would, of course, prompt a bear flattening move. Near term, then, we narrowly favour a further steepening of the Treasury curve but with the risks, further out, tilted toward a flattening bias - and with recent events seeing us confident this flattening will be bullish in nature (the eventual normalisation of rates being deferred but the ongoing financial crisis and a "re-synchronisation" of global growth with the US-led slowdown prompting a softening of activity the Fed are largely powerless to prevent).
Look for a widening of US front-end swap spreads as the front end of the cash curve rallies and counterparty risk rises. The long end will be caught between supply-side concerns and the forces we see mounting in favour of a bull flattening of the cash curve. The former stand to dominate near term, the latter further out.
Elsewhere, the outlook is clearly biased toward steeper curves given the considerably greater degree of policy ammunition enjoyed by most other central banks (BoJ excluded). This is particularly true of the UK which is still very much at the early stages of this easing cycle and is similarly burdened by the housing and financial sector imbalances besetting the US.
The renewed financial market turbulence is prompting a further leg down in commodities which, in turn, arguably brings forward our long anticipated supply-side adjustment to the credit crunch which, in turn, underpins a bullish view of the Antipodes.
FX view
The knee-jerk reaction - sell USD - may well be the wrong one. FX markets are likely to be dominated by liquidation of positions and risk reduction in the short term. In recent sessions, this "deleveraging" has tended to be USD positive and if we see large scale repatriation - for example, through US mutual fund redemptions - there may well be a natural buyer of USD.
We closed our long USD exposure (via a EUR/USD put option) in Asia, but do not recommend establishing shorts at current levels.
The greater risk is in high/low yield currency pairs, particularly the JPY-crosses. Given the huge overhang of long AUD/JPY and NZD/JPY positions on the part of Japanese retail investors, and the fact that Tokyo was closed overnight, we see a significant risk of forced liquidation/margin calls in the these currency pairs in the next few sessions. The greater risk is in NZD/JPY where positioning is most extended and liquidly thinnest.
Elsewhere, other obvious risk proxies - GBP/CHF for example - are also likely to remain pressured, though without the overhang of positions that afflicts the JPY crosses, the risk of violent moves lower is more limited.
CAD is largely at the mercy of broader USD moves, with the CAD-crosses in particular likely to trade as the mirror image of DXY.
EM view
Renewed financial pressures adding to cyclical downswing in the world economy. This is negative for EM assets particularly given current high valuations
Most EM currencies are seen as high risk, with high yielders and commodity currencies under greatest threat. Traditional safe havens like the CZK in Europe and SGD in Asia should outperform
Global financial problems likely to lead to less aggressive monetary policies in EM and accelerate the trend towards yield curve steepening
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Policy perspective
The pressure on the Fed to deliver a confidence-boosting rate cut tomorrow has intensified (Fed Funds pricing in a 70% chance of a 25bp cut vs. 12% on Friday). We have some sympathy with the argument that, having front-loaded its policy response, the hurdle to cut further (and to edge toward a BoJ-style scenario of 0% rates) is high and, given the cost of money is the result and not the cause of the ongoing crisis, the FOMC might confine its actions to boosting its liquidity support programme. That said, the risk of exacerbating market uncertainty via a steady rate decision is high (i.e. a cut might not improve matters but no move will make them worse). By the same token, a "modest" 25bp ease will do little to shore up sentiment given this outcome is already largely priced in. In light of these concerns, the two most likely outcomes to the FOMC meeting we see now are no change or a 50bp cut (the latter possibly being delivered today should the market show yet further immediate weakness). The latter is, narrowly, our base case scenario.
There is every likelihood the Discount rate will be brought in line with the Fed Funds target rate (eliminating the current 25bp premium for borrowing via the discount window) regardless of whether a cut is delivered.
The odds on a co-ordinated rate cut have risen although we expect the ECB and the BoE to content themselves with liquidity provisioning. The risks to the "real" economy are, however, rising on the back of the weekend's developments and, as such, our base case of a November cut from the BoE looks increasingly probable while the risks are arguably slanted toward the ECB cutting before Q1 '09 as currently forecast.
Market view
From a market perspective, the US curve is somewhat difficult to call given the binary nature of our rate outlook highlighted above. A 50bp ease will see a clear further steepening of the curve as the market ups its bets on how much more rate action might be forthcoming. A steady rate decision, meanwhile, would, of course, prompt a bear flattening move. Near term, then, we narrowly favour a further steepening of the Treasury curve but with the risks, further out, tilted toward a flattening bias - and with recent events seeing us confident this flattening will be bullish in nature (the eventual normalisation of rates being deferred but the ongoing financial crisis and a "re-synchronisation" of global growth with the US-led slowdown prompting a softening of activity the Fed are largely powerless to prevent).
Look for a widening of US front-end swap spreads as the front end of the cash curve rallies and counterparty risk rises. The long end will be caught between supply-side concerns and the forces we see mounting in favour of a bull flattening of the cash curve. The former stand to dominate near term, the latter further out.
Elsewhere, the outlook is clearly biased toward steeper curves given the considerably greater degree of policy ammunition enjoyed by most other central banks (BoJ excluded). This is particularly true of the UK which is still very much at the early stages of this easing cycle and is similarly burdened by the housing and financial sector imbalances besetting the US.
The renewed financial market turbulence is prompting a further leg down in commodities which, in turn, arguably brings forward our long anticipated supply-side adjustment to the credit crunch which, in turn, underpins a bullish view of the Antipodes.
FX view
The knee-jerk reaction - sell USD - may well be the wrong one. FX markets are likely to be dominated by liquidation of positions and risk reduction in the short term. In recent sessions, this "deleveraging" has tended to be USD positive and if we see large scale repatriation - for example, through US mutual fund redemptions - there may well be a natural buyer of USD.
We closed our long USD exposure (via a EUR/USD put option) in Asia, but do not recommend establishing shorts at current levels.
The greater risk is in high/low yield currency pairs, particularly the JPY-crosses. Given the huge overhang of long AUD/JPY and NZD/JPY positions on the part of Japanese retail investors, and the fact that Tokyo was closed overnight, we see a significant risk of forced liquidation/margin calls in the these currency pairs in the next few sessions. The greater risk is in NZD/JPY where positioning is most extended and liquidly thinnest.
Elsewhere, other obvious risk proxies - GBP/CHF for example - are also likely to remain pressured, though without the overhang of positions that afflicts the JPY crosses, the risk of violent moves lower is more limited.
CAD is largely at the mercy of broader USD moves, with the CAD-crosses in particular likely to trade as the mirror image of DXY.
EM view
Renewed financial pressures adding to cyclical downswing in the world economy. This is negative for EM assets particularly given current high valuations
Most EM currencies are seen as high risk, with high yielders and commodity currencies under greatest threat. Traditional safe havens like the CZK in Europe and SGD in Asia should outperform
Global financial problems likely to lead to less aggressive monetary policies in EM and accelerate the trend towards yield curve steepening
FIC Strategy Research更多精彩文章及讨论，请光临枫下论坛 rolia.net