The markets adjust their Brexit calculations
Sterling has risen because investors think a Conservative victory will allow a softer approach to Brexit. But that may not be the right call
Buttonwood’s notebook
Apr 19th 2017by Buttonwood
SOMETIMES the markets are genuinely surprised. On the morning of April 18th, news that the British prime minister was to make an announcement at 11.15am caused the pound to dip. What could the news be? Retirement due to ill health? Several pundits went on Twitter to proclaim their belief that it would not be an early election; after all, Theresa May, the prime minister, has said repeatedly that the poll would not occur until 2020. But the news was indeed that an election will happen on June 8th. The pound then stormed higher and is now more than $1.28, around its strongest level this year (but well below the $1.50 touched on the day of the Brexit referendum).
So what explains the switcharound? The hope is that the election will lead to a softer Brexit result and thus be better news for the British economy. Deutsche Bank, previously bearish on sterling, was the most prominent convert to this view.
First, it makes the deadline to deliver a “clean” Brexit, without a lengthy transitional arrangement, by 2019 far less pressing given that no general election will be due the year after. Second, it will dilute the influence of MPs pushing for hard Brexit, strengthening the government’s domestic political position and allowing earlier compromise over key EU demands for a transitional arrangement. Third, it strengthens the PM’s overall negotiating stance who in recent weeks has clearly fallen in line with the European approach. This will involve a settlement of the Brexit payments and other divorce aspects first to be followed by a lengthy transitional period during which the final outcome of Brexit will emerge. This sequenced approach materially reduces the “crash risk” of Brexit negotiations and…reduces downside risks for the UK growth outlook.
This may turn out to be right but it is quite a bold call. The situation is pretty complex. First, one must discount the view that the government is calling an election because their Brexit negotiations are being hampered by the hapless Labour opposition and nine Liberal Democrat MPs. The government has not been defeated on the issue in Parliament; its margin for triggering Article 50, the key clause for leaving the EU, was 384 votes. Instead, Mrs May had to worry about her own backbenchers, many of whom will resist any compromise with the EU, on continuing payments, jurisdiction of the European Court of Justice, migration and the rest. Will there be more hardliners if the Conservatives increase their majority, or fewer? It all depends on the attitude of the new MPs that will come through in June; one doubts that Deutsche has analysed this. Europhile Tories like Ken Clarke are few these days; although the former Chancellor is standing again for Parliament, having previously announced he would step down. One local party chairman has written an article on the Conservative Home website with the headline
Let’s seize our chance to purge our Party and deselect the Remainers
We also know that Mrs May will face consistent pressure from the right-wing press, which is highly Eurosceptic. The Daily Mail’s headline the day following the announcement was “Crush the saboteurs”, which rather puts the PM’s rhetoric about “the country coming together” into context (the Mail's phrase was originally used by Lenin). A lot may depend on how a “hard” and “soft” Brexit is defined; the government seems to have ruled out membership of the single markets and the customs union. This would have been regarded as a very hard Brexit only a year ago. If the EU sticks to its guns, that surely means a less satisfactory trading position for UK companies than before, particularly in the financial sector. Unicredit takes a different view from Deutsche suggesting that
The Conservatives would very likely significantly increase their majority of seats and strengthen their negotiating position for a “hard” Brexit
Indeed, some opinion polls have the Conservatives 20 points ahead of opposition Labour. This surely is the real motivation for the early election; chances to crush your opponents do not come that often. Under its Eurosceptic leader, Jeremy Corbyn, Labour has been ineffective on the Brexit issue. Speaking on the Today programme this morning, John McDonnell, the shadow chancellor, outlines a position that seemed very similar to that of Mrs May; he wants access to the single market, not membership, managed migration, not free movement and so on. He suggested a proposal for a salary cap via a ratio of bosses’ pay to employees’ pay that makes little sense. How would it be enforced? Differential tax rates for different people? What happens if companies simply outsource their lowest-paid jobs?
Labour is deemed to be so hopeless that the Conservatives are 1/12 with many bookies to win the election; you have to bet £12 to gain £1 if Mrs May is re-elected. But it is worth remembering that the same bookies had Remain as a 1/12 bet on the morning of the Brexit referendum.
Things could go wrong. Voters have been through the 2014 Scottish independence poll, the 2015 election and last year’s Brexit vote; they may be weary of another election and resent the prime minister for calling it (see the reaction of Brenda from Bristol, a voter who went viral after Mrs May’s announcement).
Lib Dems may gain votes and seats from the 48% of the public that voted Remain and is otherwise unrepresented. Labour may manage to move the campaign onto issues such as austerity and the National Health Service, where the Tory appeal is weaker. There is always the risk of bad news; a scandal over expenses in the last election is still rumbling along. Indeed, the current electoral system does not make it easy for the Conservatives to gain seats; in the 2015 election, they were 6.5 percentage points ahead of Labour but only had a 12-seat majority. There are only 21 seats where the Opposition majority is under five percentage points.
While it is hard to see anything but a Tory win, there is a chance that the majority may be 40 or 50: not enough to see off the backbench rebels. The equity market was not as buoyant as sterling; the FTSE 100 suffered its worst one-day loss since last June. Its multinationals are hit by a stronger pound but even the more domestically-focused FTSE 250 is no higher than it was before the election announcement. Equity investors may realise there are lot of Brexit-related risks ahead.
Why America’s Federal Reserve might make money disappear
The Fed has signalled that it will soon reduce the size of its balance-sheet
The Economist explains
Apr 17th 2017by M.J. and H.C.
BEFORE the financial crisis, America’s Federal Reserve held assets worth around $850bn. Today, the central bank’s balance-sheet is more than five times as large, at $4.5trn. It grew during and after the financial crisis as the Fed purchased vast quantities of government bonds and mortgage-backed securities using newly created money, most of it under a policy known as quantitative easing (QE). Now the Fed is preparing to sell some assets, and retire the corresponding money. Why and how will it do this?
The Fed resorted to QE to stimulate the economy after it had moved the short-term interest rate, its usual policy instrument, as low as it could go. Debate rages over how, exactly, QE worked; Ben Bernanke, the former Fed chairman, once quipped that the policy “works in practice but not in theory”. But it is clear enough that QE pushed up the price of long-term bonds. This put downward pressure on long-term interest rates (which move inversely to bond prices). Today, however, the Fed, now led by Janet Yellen (pictured), is raising short-term rates, as it tries to keep a lid on inflation. So—the logic goes—it should also shrink its balance-sheet, to push up long-term rates.
There are different ways to shrink the balance-sheet. The most aggressive approach would be to sell bonds. This would please QE’s critics, who claim a large balance-sheet distorts financial markets. But nobody is certain what the effects of unwinding QE will be, and the Fed wants its policies to be predictable. So it is more likely to let the balance sheet gradually “run off”, by ceasing to reinvest, in new securities, the money it receives when its bonds mature. That happens constantly. For example, $425bn of its Treasuries come due in 2018 and another $350bn in 2019. The Fed could stop reinvesting some proportion of this money. Or it could pick the simplest option, which is to halt reinvestments altogether.
How much will the balance-sheet shrink? Plentiful liquidity helps to keep the financial system stable. Some argue that this benefit is so large that the Fed shouldn’t shrink its balance-sheet at all, and instead should focus on holding the right mix of assets. These arguments are not yet prevailing. In any event, the balance-sheet will remain larger than it was before the financial crisis, because the economy needs more money than it did. For example, before the crisis, there was a little over $800bn of currency in circulation; today, the figure is over $1.5trn. All that cash appears as a liability on the Fed’s balance-sheet and must, therefore, be backed by assets. So, although the Fed may start to unwind QE, it will have to cling on to at least some of the securities it has bought.
為何聯準會可能會讓錢消失？
黃維德編譯2017-04-20 經濟學人
聯準會說要縮減資產負債表，是什麼意思？為何要這麼做？又要怎麼做？
金融危機之前，聯準會握有的資產總值約為8,500億美元；今日，聯準會資產負債表已膨脹超過5倍，達4.5兆美元。
金融危機之際，聯準會利用新創造的金錢收購大量公債和房貸擔保證券，其中大多數即為所謂的量化寬鬆。現在，聯準會準備出售部分資產，收回相應的金錢。
聯準會為何要這麼做？又要怎麼做？
聯準會最常使用的政策工具為短期利率，而在短期利率降至最低點之後，才轉而使用量化寬鬆來刺激經濟。量化寬鬆究竟如何發揮效用，各方爭辯不休；前聯準會主席柏南克（Ben Bernanke）曾言，此政策「理論上行不通，但實際上有用」。
不過，量化寬鬆推升長期債券價格的效應已相當明顯，這也會為長期利率帶來下降壓力。今日，葉倫（Janet Yellen）帶領的聯準會為了控制通膨，已開始抬升短期利率；因此，聯準會也應該縮減資產負債表，以推升長期利率。
縮減資產負債表的方式有數種，其中最積極的就是出售債券。這會讓量化寬鬆的批評者相當開心，因為他們認為巨大的資產負債表會扭曲金融市場。
然而，沒有人確知量化寬鬆退場會產生什麼樣的效應，聯準會也希望自身的政策具備可預期性。
因此，聯準會比較有可能會在債券到期、收到款項之時，不再投資新證券，讓資產負債表逐步「消退」。
舉例來說，聯準會有4,250億美元的公債將於2018年到期，另外3,500億將於2019年到期；聯準會可以不要再次投資部分金額，也可以選擇最簡單的做法，也就是完全停止再投資。
資產負債表會縮減多少？充足的流動性有助維持金融系統穩定，有人認為此利益極大，聯準會根本不該縮減資產負債表，而是將焦點放在握有合適的資產組合。
這類說法尚未成為主流，但無論如何，聯準會的資產負債表都會比金融危機前更大，因為經濟需要的金錢，比危機前更多；例如，危機之前，流通的美元約略超過8,000億，今日已超過1.5兆。在聯準會的資產負債表上，這些現金全都是負債，也必須以資產做擔保。因此，即使量化寬鬆開始退場，聯準會還是得繼續持有部分當時購入的證券。（黃維德編譯）
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