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Specials

Why QE Doesn’t Really work (4 min read)

By John Tierney | August 15, 2019

The ECB is signalling that it may resume Quantitative Easing (QE) via bond purchases. And there is growing speculation that other central banks including the Fed could follow suit. Meanwhile, a growing chorus of analysts including Macro Hive’s own Salomon

The Climate Change Challenge: A Capitalist Solution (4 min read)

By Macro Dilettante | August 15, 2019

This is a mea culpa. It’s my fault – I’ve only just got the joke on climate change. And not, I might add, because this summer the UK suffered its highest temperature on record. I might be daft, but thanks to

What Argentina and Macri can teach Zelensky and Ukraine (4 min read)

By Gary Licht | August 12, 2019

Ukrainian assets are on fire. The 10-year Eurobond has returned nearly 30%, the local currency has delivered well over 20% (including carry), and even the obscure GDP warrants have rallied 45% (see Fig. below). This surge is down to the

Best of the Web

The IMF’s Latest Victims (Project Syndicate, 3 min read)

August 16, 2019

(You can read the article by clicking here) Continuing our recent discussion of Argentina’s woes from our specials this week, we picked this piece by Jayati Ghosh, a Professor of Economics at Jawaharlal Nehru University in New Delhi, who blames the International

Tracking Foreign Capital (Bank Underground, 4 min read)

August 16, 2019

(You can read the article by clicking here) A new paper by the Bank of England explores how foreign capital inflows specifically aimed at UK banks and financial institutions are channeled at home. Such flows can be large (they reached 100% of

Why we can’t just blame rising inequality for the growth of populism around the world (The Conversation, 4 min read)

August 16, 2019

(You can read the article by clicking here) Trump’s triumph is commonly attributed to the marginalised voters favouring his populism, fuelled by a rage against rising income inequality. This research by Brian Nolan, Professor of Social Policy at Oxford University,

China Digest from the Web

Smart home tech makes inroads into China’s emerging elderly care market (Reuters, 4 min read)

August 16, 2019

(You can read the article by clicking here) China, similarly to Japan and many Western countries, has an aging population and start-ups are waking up to huge market potential. With millennials too busy to look after their parents and retirement

Stimulus Prep or Prelude to Deflationary Crisis: China Tightening Screws on Real Estate (Investing in Chinese stocks, 4 min read)

August 16, 2019

(You can read the article by clicking here) Real estate prices are rallying due to loose buying restrictions in Chinese localities and Central Government stimulus. Meanwhile, credit has failed to flow to SMEs and other industries. But the situation may

Inside China’s vast influence network – how it works, and its reach in Australia (The Conversation, 4 min read)

August 16, 2019

(You can read the article by clicking here) Garry Groot, a Senior Lecturer in Chinese Studies at the University of Adelaide, outlines the little-known Chinese United Front Work Department within the Communist Party, designed to reach out to and influence

Podcasts

Danny Blanchflower Discusses Labor Economics (Masters in Business, 75 mins)

August 21, 2019

(You can listen to the podcast by clicking here) Danny Blanchflower, former Bank of England MPC member attempts to decipher the puzzle of muted wage growth despite unemployment nearing its natural rate. He states that income inequality disincentivizes the working

He Begs to Differ (Grant’s Current Yield Podcast, 22 mins)

August 21, 2019

(You can listen to the podcast by clicking here) Tuomas Malinen, CEO of GnS Economics and an Adjunct Professor of Economics at the University of Helsinki argues that an extremely low-interest-rate environment and QE don’t work as intended (in an

Kashmir Is the 72-Year ‘Wound’ between India and Pakistan (Deep Dish on Global Affairs, 29 mins)

August 21, 2019

(You can listen to the podcast by clicking here) We recently observed Prime Minister Modi and his government’s historic announcement to alter the Indian Constitution and diminish Kashmir’s autonomy. In this podcast, Nisid Hajari from Bloomberg and academic Paul Stainland analyse

Freshly Squeezed Working Papers

Alternative Data to Generate Alpha (3 min read)

June 20, 2019

In recent years the availability of new alternative datasets for financial markets has expanded enormously, potentially giving investors an informational edge. These can range from consumer transaction data to satellite

Give Credit Where Credit Is Due: What Explains Corporate Bond Returns?

May 21, 2019

Give Credit Where Credit Is Due: What Explains Corporate Bond Returns? AQR paper finds finds that options markets explain a great deal of credit returns. Two features of corporate bonds

The Risk of Returning to the Zero Lower Bound

May 21, 2019

The Risk of Returning to the Zero Lower Bound San Fran Fed writes “that there currently appears to be a low risk of the economy returning to the zero lower bound

Investor Positioning

August 20, 2019

August Curse Hits FX Carry, So Watch Trade (2 min read)

August 22, 2019

FX carry trades are down almost 4% so far in August. This is their worst performance since last August (see first chart). Perhaps the summer month is cursed – more probable, though, is that vacationing traders leave the market prone to bouts of volatility. It hasn’t helped that the US-China trade war recently escalated (though President Trump seems to be backing down once more), and that the Fed was not as dovish as the markets were pricing.

Last year, the trade war (and the Fed) also had a major, negative impact on carry trades. Looking at a measure of trade policy uncertainty appears to show an inverse relationship with the performance of FX carry trades (uncertainty up, carry down: see second chart). Therefore, we will need to see a de-escalation for the performance of  FX carry to improve. Early signs indicate that this is happening.

As for the Fed, this week’s Jackson Hole conference will give us some signs of how many cuts we will see this year. A dovish stance would certainly help carry. Importantly, it’s not just US policy that matters – a dovish ECB and BoJ also matter. And they have ultra-low rates.

So, watch trade and Fed for a possible post-summer bounce in FX carry trades.

FX Carry Performance FX Carry Performance Trade War and FX Carry Trade War and FX Carry

Bilal Hafeez is the Editor of Macro Hive and can be contacted here

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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