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Sun, 04th December 2016

Anirudh Sethi Report

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Archives of “central banks” Tag

India : Credit and deposit ratios in banks falls to 6-year low at 72.7 per cent

The credit-deposit ratio (CDR) of the banking system, or the proportion of deposits deployed as loans, dropped 155 basis points to 72.7%, the lowest in six years, in the fortnight ended November 11, data released by the Reserve Bank of India (RBI) showed.

The non-food credit growth during the fortnight hit an at least four-year low of 8.25% on a year-on-year basis, while food credit fell 14.3%.

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The last time the CDR had seen a sharper drop was during the fortnight ended April 29, when it fell by 1.65% from the fortnight ago to 75.93%.

The sharp fall in the ratio was primarily because of a jump in the denominator, or a sharp increase in deposits with the banking system, which negated a fall in the credit outgo. During the fortnight under review, total deposits with banks rose by Rs 1.3 lakh crore, or 1.3%, whereas bank credit declined 0.8% to Rs 73.53 lakh crore.

The cash in hand with banks rose nearly 275% from the end of the previous fortnight to Rs 2.47 lakh crore, the highest in at least seven years.

The money parked by banks with the RBI through reverse repo operations under the central bank’s liquidity adjustment facility hit a record high of Rs 4.3 lakh crore as on November 22.

Bank of Japan plays trump card early to shock markets straight

The Bank of Japan last week offered to buy bonds at a fixed yield to curb rising interest rates, playing what was seen as an ultimate trump card far earlier than many expected.

The BOJ announced its first-ever fixed-rate purchase operation on the morning of Nov. 17 to counter mounting fears of an upswing in interest rates. Yields on 10-year Japanese government bonds had climbed steadily since the U.S. presidential election, rising as high as 0.035% the day ahead of the move. The fixed-rated option was introduced only two months ago as part of a monetary policy overhaul in late September that set a target of around zero for long-term yields.

 A call went out for two- and five-year JGBs to address the rapid surge in short- and medium-term bond yields, according to the BOJ’s Financial Markets Department. There were no takers: The offered yields were higher than going market rates, meaning the offered prices were lower, sending wise traders elsewhere. But the conditions of the operation sent a strong signal as to how high the central bank will let rates go before stepping in. Yields slid across all maturities after the move was announced.
 Since then, “interest rates’ upward climb has been weakened somewhat,” Takako Masai, a member of the bank’s policy board, told reporters after a speech Monday. “I get the sense that the purpose of fixed-rate operations has been well conveyed to markets.”

Putin “Buys The Dip” – Russia’s Gold Buying In October Largest This Millenium

Russia gold buying accelerated in October with the Russian central bank buying a very large 48 metric tonnes or 1.3 million ounces of gold bullion.

 

This is the largest addition of gold to the Russian monetary reserves since 1998 and could be seen as a parting ‘gift’ by Putin to his rival ex-President Obama.

The Russian central bank gold purchase is the biggest monthly gold purchase of this millennium.

Concerns about systemic risk, currency wars and the devaluation of the dollar, euro and other major currencies has led to ongoing diversification into gold bullion purchases by large creditor nation central banks such as Russia and China.

Commerzbank went with the simple explanation: 

“Clearly the central bank was taking advantage of the stronger ruble – which has made gold cheaper in local currency – to buy more gold.”

“By contrast, the Chinese central bank bought only around four tons of gold last month – the second-lowest gold purchases since China began publishing monthly figures back in June 2015. The currency is likely to have played a role here, too – the yuan has been depreciating noticeably since the end of September.”

However, the Russian Central Bank has quietly been buying huge volumes of gold over the last 10 years. This diversification into gold accelerated since the financial crisis and since relations with the U.S. deteriorated in recent years. Russia bought gold systematically both when the ruble was strong and when it was weak.

In 2015, Russia added a record 208 tons of gold to her reserves compared with 172 tons for 2014.

According to the World Gold Council, only the central banks of the U.S., Germany, Italy, France and China currently hold larger gold reserves than Russia.

The Global Cash Ban is Not Over… It’s About To Intensify

The War on Cash is not over… it is about to intensify.

The Trump Presidency has distracted from the next major move to be implemented by Financial Elite.

 That move is a cash ban.

Cash, particularly physical cash (as in bills and coins) is a huge problem for insolvent banks.

Indeed, it is the ONLY problem they have yet to address.

If you’re a large bank and you’re overleveraged due to excessive assets to capital ratios (particularly assets that are at risk of losing value or default) there are three key issues you need to control.

 1)   You need to be able to value your assets however you please.

2)   You need access to liquidity without lowering you asset to capital ratios.

3)   You need to be able to stop bank runs or capital flights.

The Central Banks have already fixed #1 and #2 by suspending “mark to market” accounting standards and implementing QE, respectively. And thanks to rehypothecation, banks can sell assets to Central Banks via QE and still use those same assets as collateral on their derivatives trades.

That leaves #3: capital flights.

At the end of the day, no matter how many tricks the Financial Elites employ via accounting gimmicks and QE programs, depositors can still choose to take their money out of the banks and transfer it to physical cash.

Hence the call for cash bans, particularly of large bills.

The Elites claim that they want to do away with $100 bills (or greater denominations) to stop money laundering or other illicit practices.

The reality is that banning large bills makes it much more difficult for depositors to move their money into cash. Taking out $20,000 or more in deposits when it’s broken down into $100 bills isn’t too difficult.

Taking out $20,000 in $20 bills or smaller denominations IS.

Emerging Markets -An Update

EM FX ended the week on a soft note, as higher US rates continue to take a toll. EM policymakers are getting more concerned about currency weakness, with Brazil, Malaysia, Korea, India, and Indonesia all taking action to help support their currencies. If the EM sell-off continues as we expect, more EM central banks are likely to act to slow the moves.
Several EM central banks (Hungary, Malaysia, South Africa, Turkey, and Colombia) meet. Most are struggling with sluggish growth, but FX weakness is likely to keep all of them on hold for now. We do not think individual country themes will be very important to investors in this current environment.
Korea reports trade data for the first 20 days of November on Monday. Both exports and imports continue to contract. While the external accounts have been worsening a bit in recent months, the current account surplus is still expected to end the year at around 8% of GDP. Yet the economy remains weak even as political tensions rise. 
Thailand reports Q3 GDP Monday. Growth is expected to slow to 3.3% from 3.5% in Q2. For now, the central bank is likely to remain on hold, but low inflation should allow for easing next year if the economy slows further. Next policy meeting is December 21, no change seen then.

Saudis, China Dump Treasuries; Foreign Central Banks Liquidate A Record $375 Billion In US Paper

One month ago, when we last looked at the Fed’s update of Treasuries held in custody, we noted something troubling: the number had dropped sharply, declining by over $22 billion in one week, one of the the biggest weekly declines since January 2015, pushing the total amount of custodial paper to $2.805 trillion, the lowest since 2012. One month later, we refresh this chart and find that in last week’s update, foreign central banks continued their relentless liquidation of US paper held in the Fed’s custody account, which tumbled by another $14 billion over the course of a week, pushing the total amount of custodial paper to $2.788 trillion, a new post-2012 low.

 

Today, to corroborate the disturbing weekly slide in the Fed’s custody data, we also got the latest monthly Treasury International Capital data for the month of September, which showed that the troubling trend presented one month ago, has accelerated to an unprecedented degree.

Recall that a month ago,  we reported that in the latest 12 months we have observed a not so stealthy, actually make that a massive $343 billion in Treasury selling by foreign central banks in the period July 2015- August 2016, something unprecedented in size.

Fast forward to today when in the latest monthly update for the month of September, we find that what until a month ago was “merely” a record $346.4 billion in offshore central bank sales in the LTM period ending  August 31 has – one month later – risen to a new all time high $374.7 billion, or well over a third of a trillion in Treasuries sold in the past 12 months. 

Subbarao warns RBI against taking unclaimed notes as profit

Any move by the Indian government to treat currency that is not surrendered during the ongoing demonetization process as a profit will be “ill-advised,” former Reserve Bank of India (RBI) governor D. Subbarao has warned.

Speaking at MintAsia’s global banking conclave in Singapore, Subbarao cited speculation that the Indian government could use the currency that is not returned to solve its fiscal problems or to recapitalize banks, but pointed out that such a step would send out the wrong message.

“Then demonetization will be viewed as being done with other motives, rather than fighting black money,” Subbarao said.

“For argument’s sake, let us assume that a quarter of the Rs500 and Rs1,000 currency notes in circulation does not come back—this is equivalent to about Rs3.5 trillion, and can be considered as a windfall profit for the RBI. By law, the central bank has to transfer all its profit to the government. If RBI treats this as a profit, and the Centre demands that this be transferred to it, and they use this to play Robin Hood or to recapitalize the banks, or for whatever other purposes, this will send out the wrong message. I don’t believe that this is the intention of the current government, but if they were to do such a thing, it will be highly ill-advised,” he said.

Subbarao also said that he was unsure about the legal position on whether the RBI could claim unreturned currency as profit.

According to him, all currency notes carry a legal obligation, as the “RBI has guaranteed that it will pay the bearer the sum or the value of the denomination that is printed on that note.”

Central Banks Become World’s Biggest Stock Speculators

At first, the idea of central banks intervening in the equity markets was probably seen even by its fans as a temporary measure. But that’s not how government power grabs work. Control once acquired is hard for politicians and their bureaucrats to give up. Which means recent events are completely predictable:

(Bloomberg) – The value of the Swiss National Bank’s portfolio of U.S. equities rose nearly 1 percent to a record in the three months through September on the back of rallying share prices.

The holdings increased to $62.4 billion from $61.8 billion at the end of June, according to calculations by Bloomberg based on the central bank’s regulatory filing to the U.S. Securities and Exchange Commission and published on Monday.

 

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The central bank had stakes in some 2,500 companies listed in the U.S., according to the SEC filing. Its biggest holdings were Apple Inc., Microsoft Corp. and Exxon Mobil Corp., according to data compiled by Bloomberg.———————-

The Bank of Japan’s Unstoppable Rise to Shareholder No. 1

(Bloomberg) – The Bank of Japan’s controversial march to the top of shareholder rankings in the world’s third-largest equity market is picking up pace.

Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy.

While the BOJ doesn’t acquire individual shares directly, it’s the ultimate buyer of stakes purchased through ETFs. Estimates of the central bank’s underlying holdings can be gleaned from the BOJ’s public records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. Forecasts of the BOJ’s future shareholder rankings assume that other major investors keep their positions stable and that policy makers maintain the historical composition of their purchases.

The central bank’s influence on Japanese stocks already rivals that of the biggest traders, often called “whales” in the industry jargon. It’s the No. 1 shareholder in piano maker Yamaha Corp., Bloomberg estimates show, after its ownership stake via ETFs climbed to about 5.9 percent.

boj-stock-buying-nov-16

The BOJ is set to become the top holder of about five other Nikkei 225 companies by year-end, after boosting its annual ETF buying target to 6 trillion yen last month. By 2017, the central bank will rank No. 1 in about a quarter of the index’s members, including Olympus Corp., the world’s biggest maker of endoscopes; Fanuc Corp., the largest producer of industrial robots; and Advantest Corp., one of the top manufacturers of semiconductor-testing devices.

The central bank owned about 60 percent of Japan’s domestic ETFs at the end of June, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. Based on a report released on Friday by the Investment Trusts Association, that figure rose to about 62 percent in July.

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Yellen says Fed purchases of stocks, corporate bonds could help in a downturn

(Reuters) – The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said on Thursday.

Speaking via video conference with bankers in Kansas City, Yellen said the issue was not a pressing one right now and pointed out the U.S. central bank is currently barred by law from buying corporate assets.

But the Fed’s current toolkit might be insufficient in a downturn if it were to “reach the limits in terms of purchasing safe assets like longer-term government bonds.”

“It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions,” she said. If your first reaction to the above (especially Yellen’s clear misunderstanding of the respective roles of central banks and stock markets) is “these guys are idiots,” you’re probably in the minority. Most modern citizens see government intervention of any kind as at least a potentially good thing, depending on the situation. They’re wrong in this case, for the following reasons:

Emerging Markets :An Update

EM should trade firmer this week on news over the weekend that the FBI said its conclusion on Clinton’s emails remained unchanged.  That should lift the cloud of suspicion that grew when the FBI said new emails had been uncovered.   With risk appetite likely to rebound a bit, the Mexican peso should benefit the most as the week gets under way.  

The central banks of Korea, the Philippines, Thailand, Poland, and Peru all meet, and none are expected to change policy.  Still, individual country risk matters.  The Turkish lira hit a record low last week on intensifying political risks, and weakness should continue.  More China data for October should confirm that the economy is stabilizing in Q4.  

 
Taiwan reports October trade Monday Exports are expected to rise 2.6% y/y, while imports are expected to rise 5.7% y/y.  Taiwan reports October CPI Tuesday, which is expected to rise 0.5% y/y vs. 0.3% in September.  The central bank does not have an explicit inflation target.  However, low inflation will allow the central bank to ease again if needed.
Czech Republic reports September retail sales Monday, which are expected to rise 6.0% y/y vs. 11.1% in August.  It then reports September industrial and construction output as well as trade Tuesday.  October CPI will be reported Wednesday, which is expected to rise 0.7% y/y vs. 0.5% in September.  While this remains below the 1-3% target range, inflation has been creeping higher and has led the central bank to become more confident that the CZK floor will end around mid-2017.

Central Banks Have Broadcast What is About to Hit…

The biggest problem for the financial markets is not stocks nor is it the economy.

It’s the Bond Bubble.

Globally the bond bubble is now over $199 trillion in size. The world taken as a whole is sporting a Debt to GDP ratio of over 250%.

This is a systemic issue.

Once the bond bubble became large enough, Governments themselves are at risk of beingCentral insolvent. At that point, there were only three options:

1)   Stop spending as much money.

2)   Increase revenues (more on this shortly).

3)   Make the debt loads easier to service.

Governments/ politicians will never push #1 because it is political suicide (the minute someone pushes for a budget cut the media and his/ her political opponents begin attacking the candidate for being “heartless” about some issue or other).

Option #2 is the so-called “growth” option. When Central Banks talk about focusing on “growth” what they’re really hoping to do is increase taxes (higher incomes, higher GDP growth=more tax money).

Remember, taxes=revenues for Governments. And revenues are what the Government uses to make debt payments. However, at some point, once you are deep enough in debt, the growth option becomes impossible.