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Insights and Analysis
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21 июня, 00:00

Fed Sets Out To Shrink Balance Sheet by Half

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Off The Charts! examines the pertinent economic issues of the day, providing a deeper dive into complex topics and framing the issues in a way that can lead to a better understanding of the financial and commodities markets.

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19 июня, 19:31

Are U.S. Treasuries Undervalued?

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Are U.S. Treasuries undervalued? That might sound like an absurd question if you consider: the 10-year Note has a yield of not far above 2% and the 30-year bond is yielding just less than 3%; the Federal Reserve (Fed) is in the middle of a tightening cycle that involves both raising interest rates and soon, perhaps, curtailing reinvestment of its massive balance sheet.  Even if yields returned to their early 2014 levels, they would be 90 basis points (bps) higher on 10-year notes and 115 bps higher on 30-year bonds.  So, can a case be made that U.S. Treasuries are undervalued?  First, compared to their equivalent in other developed economies, U.S. Treasuries remain among the highest yielding, especially among AAA-composite rated bonds.  Second, despite an eight-year equity bull market, U.S. Treasuries have performed decently for investors, and have exhibited negative correlations to equity markets during that time.  Third, as equities continue to rise, they are decoupling from corporate earnings, which might signal either a period of higher volatility or eventually lead to a sharp correction/bear market that could generate a massive flight to quality towards Treasuries.  Fourth, corporate bonds are also trading splendidly and represent a less attractive alternative than in the past.  Lastly, it is not just U.S. Treasuries that might represent good value: options on U.S. Treasuries are trading near historic lows and could also be in for a bull market if volatility increases.

15 июня, 00:45

Fed to Shrink Bloated Balance Sheet Gradually

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The U.S. Federal Reserve (Fed) is finally ready to shrink its balance sheet gradually.  For a little perspective, back in the days before the 2008 financial panic and the subsequent introduction of Fed asset purchases, known as Quantitative Easing or QE, the Fed’s balance sheet was about 6% of GDP, or less than a trillion dollars back in 2007.  As of June 2017, the Fed’s balance sheet has swollen to almost 25% of GDP or $4.5 trillion dollars.

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14 июня, 16:00

Could Australian Dollar Fall to Historic Lows?

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Over the past four decades, the Australian dollar (AUD) has traded in a range versus the U.S. dollar (USD) from 0.48 to 1.20 (Figure 1).  After spending most of the period from 2011-2013 above parity, AUD has returned towards the middle of its historic range, having fallen as much as 38% from its recent highs.  Given how much it declined between early 2013 and the end of 2015, it is tempting, but possibly wrong, to conclude that AUD’s bear market might be over.  Given Australia’s dependence on the export of raw materials to China and the country’s rising debt burden, we wonder if AUD risks retesting its lows of around 0.5 AUD per dollar this decade.

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12 июня, 14:00

UK Elections: Will Theresa May Coalition Hold Up?

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British Prime Minister Theresa May was dealt a severe blow in the snap election she called to strengthen her hand. Will her coalition be strong and stable?

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23 мая, 14:20

High U.S. Debt Could Put Fed on Cautious Footing

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The U.S. economy is humming along at 2% GDP growth but the high level of public and private debt could temper the pace of the Fed's rate hikes.

18 мая, 22:00

Oil: OPEC Output Cuts vs. Rising U.S. Rig Count

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Saudi Arabia, the top exporter among oil producers grouped under the Organization of Petroleum Exporting Countries (OPEC), and Russia announced on May 15 that they favored extending production cuts for an additional nine months into 2018, rallying oil prices.  The celebrations, however, might be short-lived.  As we have pointed out on several occasions, fracking technology has made the United States a major swing producer in energy markets, diminishing the influence of Saudi Arabia and other OPEC members.  OPEC members will meet on May 25 in Vienna to decide on renewing production cuts.  From just the end of October 2016, U.S. producers have added nearly 900,000 barrels per day (bpd) to their production, largely offsetting OPEC’s current production cuts.  The rise in U.S. production has contributed to an extraordinarily flat futures curve for West Texas Intermediate crude oil, hugging $50 per barrel far into the landscape (Figure 1).   And, the ability of U.S. producers to offset changes in production from OPEC countries may be contributing to a decline in both realized and implied volatility in crude oil (Figure 2). View our video on this topic here.  

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09 мая, 18:56

Canada: Is Debt, Real Estate Sinking the Loonie?

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For most of the past six years, the Canadian dollar (CAD) closely tracked movements in West Texas Intermediate (WTI) crude oil.  But from mid-2016, CAD began diverging, underperforming WTI significantly (Figure 1).  And the parting of ways was not the result of a generally stronger U.S. dollar (USD).  The Russian ruble, which also correlates highly with oil prices, has outperformed WTI over the same period (Figure 2).  Both Canada and Russia are major producers of crude oil.  CAD’s divergence from oil may have to do with deeper economic problems: the country’s extremely high levels of debt and overvalued real estate prices.

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05 мая, 18:06

Oil: Battle of the Swing Producers Heats Up

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As OPEC members meet in Vienna on May 25 to discuss extending their production cuts for another six months, U.S. shale producers have been ramping up supplies.

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02 мая, 19:16

Britain, France: A Tale of Two Discordant Elections

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Unlike the first round of the French presidential elections on April 23, which saw an exciting four-horse race, the upcoming parliamentary elections in the United Kingdom appear to be a one-sided affair. 

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02 мая, 14:00

French Election: Outcome Could Impact Euro, EU

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Off The Charts! examines the pertinent economic issues of the day, providing a deeper dive into complex topics and framing the issues in a way that can lead to a better understanding of the financial and commodities markets.

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27 апреля, 14:00

Gold Options: Breaking Out of the Doldrums

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In the one-and-a-half months after the U.S. elections on November 8, gold prices plunged 12% on the assumption that the incoming president’s fiscal stimulus would boost the economy and lead to higher interest rates.  However, with the Trump agenda running into numerous roadblocks since then, the yellow metal has rebounded, recouping nearly all its post-election losses.  Gold options, meanwhile, have perked up from their recent lows, but with implied volatility at less than 14% they remain historically inexpensive (Figure 1).  A podcast on this topic can be found here.