Markets not braced for Japanese, Swiss cenbank liquidity drain: McGeever - Financial Daily News Site

Markets not braced for Japanese, Swiss cenbank liquidity drain: McGeever

ORLANDO, Fla., June 23 (Reuters) – If estimates that world
markets face a record $4 trillion liquidity drain over the next
18 months are even close to accurate, hold on to your hats.

That’s how much analysts at Morgan Stanley reckon G4 central
banks – the U.S. Federal Reserve, European Central Bank, Bank of
Japan and Bank of England – will shrink their balance sheets by,
via quantitative tightening (QT), by the end of next year.

The estimate does not include the Swiss National Bank (SNB),
one of the world’s biggest liquidity providers of the last

Perhaps even more significant than the SNB’s 50 basis point
interest rate increase last week was its admission that the
franc is reasonably valued, suggesting that currency market
intervention of recent years has ended.

If this is the case, the SNB’s role as a marginal but steady
buyer of U.S. and euro zone bonds, and mega-cap Wall Street
stocks, may be over.

The SNB’s balance sheet stands at around $1 trillion, up
from around $200 billion in 2010. That’s an average of around
$70 billion injected annually into world markets that could now

This is a strong signal that even the world’s most dovish
central banks are changing tack. While we’re not there yet, an
even bigger shock would be the Bank of Japan (BOJ) calling a day
on its ‘yield curve control’ policy of buying unlimited
government bonds to cap the 10-year yield at 0.25%.

In some ways, Morgan Stanley’s $4 trillion liquidity drain
estimate is even more remarkable in that it predicts the BOJ’s
contribution will essentially be zero.

“The SNB and BOJ have contributed a very significant
liquidity injection over the years that has led to large inflows
into asset markets. If it were to stop, for whatever reason,
that would be very dramatic,” said Jens Nordvig, founder and CEO
of Exante Data.


Japan’s contribution to global market liquidity – via the
BOJ’s unparalleled balance sheet expansion, and Japanese
investors’ purchases of overseas assets – cannot be overstated.

The BOJ has employed zero interest rate policy (ZIRP) and
quantitative easing (QE) for years, and the country’s large,
accumulated current account surpluses have been plowed back into
higher-yielding assets abroad.

Japan has long been the world’s largest creditor nation and
its net stock of foreign assets, accumulated over the last few
decades, especially, hit a record $3.24 trillion last year.

The SNB, meanwhile, has gone one better on rates and pushed
them below zero – ‘NIRP’, or negative interest rate policy – and
has pumped hundreds of billions of dollars of cash accrued in
sustained currency market intervention across swathes of the
world’s major bond and equity markets.

Unique among major central banks, the SNB is a
publicly-traded company, and also a huge investor in overseas
stock markets. A quarter of its balance sheet is in foreign
stocks, – a record share – much of it on Wall Street in
multi-billion dollar stakes in companies like Apple ,
Microsoft and Amazon.


Some of the world’s major stocks and bond markets are having
one of their worst first-half-of-the-year performances since the
Great Depression, as the Fed has raised rates, signaled more to
come and just started reducing its balance sheet via QT.

As the following chart from Exante Data shows, the total
amount of bank reserves created by the BOJ and SNB to purchase
financial assets towers over all others, as a share of GDP. The
BOJ’s bank reserves amount to 104% of GDP, and the SNB’s 88%.

The SNB’s hawkish pivot will ultimately halt the build up of
‘sight deposits’ via franc-weakening currency intervention, and
the Nasdaq’s 30% slump this year could dampen its appetite for
adding to its $177 billion equity portfolio.

As far as Japan goes, investors’ purchases of foreign stocks
and bonds since ‘Abenomics’ was launched in 2013 have totaled
around $15-$20 billion a month on a 12-month moving average
basis, peaking in 2016.

Last year, however, they were sellers of foreign stocks and
their bond purchases slowed further. As Exante Data notes, they
have resumed modest purchases of foreign equities again this
year, but have become sellers of foreign bonds.

But the yen has just hit a 24-year low against the dollar
around 136 yen, and by some measures is the weakest in 50
years on a real effective exchange rate measure. If inflation
pressures in Japan finally become embedded, the impact of a
potential BOJ pivot would be huge.

“At some point, they are going to have to exit, and when
they do it is going to be like one of these days that people
remember in their careers, like Brexit, or for the older bears
out there, Plaza,” said Marc Chandler, managing director at
Bannockburn Global Forex, referring to Britain’s departure from
the European Union in 2016 and the G5 coordinated effort to
weaken the dollar in 1985.

Related columns:

– Full force of central banks siphoning world liquidity
(June 17)

– Nowhere to run, nowhere to hide as ‘stagflation’ bites
(June 13)

(By Jamie McGeever; Editing by Susan Fenton)

Tags: #Markets #braced #Japanese #Swiss #cenbank #liquidity #drain #McGeever

Leave a Comment