The Big Taper Takes Off

The Big Taper Takes Off

As U.S. growth continues, the Fed began the first scheduled “run-off” of its $4 trillion balance sheet and the European Central Bank (ECB) announced details of its planned back-off of bond buying; end of an era in Hong Kong; Venezuela delays another payment for crude oil.

“[The central challenge] is quality of growth."
Yang Weimin, Deputy Director of China’s Office of the Central Leading Group on Financial and Economic Affairs, at an official press conference

The Fed: Looking good so far True to its word, the Federal Reserve began allowing some of its inventory of Treasuries to mature without reinvesting the proceeds.  The program calls for $6 billion to mature in October, November and December; the rest of the maturing inventory will be reinvested, or “rolled over” into similar bonds. That total of $18 billion over three months represents only 0.4% of the Fed’s $4.5 trillion balance sheet, evidence that the Fed wants to make this program as uneventful as possible – at least for now.

October also saw the Fed’s optimistic view of growth vindicated; the first estimate of Q3 GDP growth came in at a solidly better-than-expected 3.0% annualized rate. There was more good news in the composition of growth, with 2.4 percentage points of the 3.0% growth coming from personal consumption. Clearly, the U.S. consumers are alive and well. That also  means the rest came from improved growth in items like inventory build-outs and replacement auto sales due to the month’s terrible weather. The market for Fed Funds futures is now trading as if the odds for a Fed rate hike in December are just over 87%.1

European Central Bank (ECB): Draghi delivers As promised, this month saw the announcement of a definitive plan to begin the ECB’s own taper program, cutting its monthly bond-buying binge in half, to €30 billion. The program will continue until the end of September 2018, or possibly beyond; the remaining inventory will continue to be reinvested as it matures. The news pushed the trade-weighted euro down 1.3%, and just under 2% against the U.S. dollar; the euro now2 costs about $1.16 on the spot market.

Hong Kong: End of an era
The Hong Kong Exchanges & Clearing Ltd. closed its legendary Trading Hall on October 27, a casualty of computer-driven trading. Opening in 1986 and consolidating 4 smaller exchanges, the Hall outlasted the trading floors in Tokyo and Singapore, but became increasingly irrelevant in recent years, with 2014 (the most recent figures available) seeing just 0.2% of total trading turnover of eligible securities. In 2000, daily attendance was 600; a recent attendance figure was 30 persons. The closure came almost exactly 30 years after its worst trading days in the midst of the October 1987 Crash. Current plans are for the space to be reconfigured, then used for conferences, exhibitions and ceremonies.

Venezuela: Living on the float A sign of the desperate shortage of cash provoked, in part, by the recently enacted U.S. embargo: a tanker filled with U.S. crude oil has been floating near the Venezuela’s coast for five months or so, waiting for payment from the state-owned oil company PDVSA, which planned to import the crude oil into one of its refineries.

Ironically, the inability to pay is in part due to rapidly falling revenue from embargo-blocked U.S. refiners, which can no longer pay for oil imports from Venezuela. The country doesn’t process its own crude in part because its refineries are designed to use U.S. crude, which is different enough from Venezuela’s to make re-tooling necessary. And the refineries can’t afford to make the change-over. Venezuela’s shipments to U.S. refiners are down some 35% since last August. While PDVSA is receiving badly-needed loans from Russian and Chinese companies, it’s unclear how much longer these will continue.


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