Weekly Insight: Markets Wary Despite Better Macro Data
- Higher bond yields, weaker stock markets
- More growth and more tapering in the U.S.
- Lending conditions eased in Q2, in both EMs and the Euro Area
- EM currencies?low returns, still-low volatility
- Argentina in selective default
July-August 2014 Capital Markets Monitor and Teleconference
Monetary Policy Uncertainty and Low VolatilityA striking feature of the current global economic recovery, particularly since mid-2012, has been the substantial increase in asset valuation—to record highs—amid a fall in volatility, to the lowest levels since 1993.
Against a backdrop of subdued economic and earnings growth, this buoyant financial market performance can be attributed to near-zero interest rates and plentiful central bank liquidity. In addition, as noted in the June 17-18 FOMC meeting, market participants “may not factor in sufficient uncertainty about the path of the economy and monetary policy.” In other words, risk aversion has fallen to remarkably low levels, helping drive a pronounced compression of credit spreads and a marked rise in equity market valuations.
Going forward, with uncertainty likely to increase on both fronts, a correction from current ultra-low levels of volatility could continue, accompanied by a correction in asset valuation—particularly in the corporate sector, where leverage has increased substantially.
Catching Up with the Renminbi
As China’s weight in the world economy continues to rise, international use of the renminbi (RMB) has grown. While true internationalization would require much greater capital account liberalization, the Chinese government continues to take measured steps towards opening China’s financial markets. These steps include encouraging the use of RMB to invoice and settle foreign trade, facilitating the development of offshore RMB centers, supporting the dim sum bond markets, and reducing restrictions on access to China’s capital markets for foreign investors. Further gradual steps to widen the currency trading band—and a more market-determined exchange rate—will help this process.
IIF CAIM Comments on ECB-Bank of England Securitization Paper
July 4, 2014 — The IIF’s Council on Asset and Investment Management (CAIM) today released a position paper on the joint ECB and Bank of England discussion paper “The case for a better functioning securitisation market in the European Union.” CAIM comments on the needs and requirements of investors for market liquidity and depth, prudent underwriting and servicing standards, retaining credit risk of junior tranches, improved transparency, and a comprehensive regulatory framework. CAIM commends this very substantive effort towards enhancing the functioning of the European securitization market.
IIF Identifies Top 10 Impediments to Long-Term Infrastructure Financing and Investment
July 1, 2014 — The Institute of International Finance today released a top 10 list of impediments to long-term infrastructure financing and investment, accompanied by potential solutions. The list was developed by the IIF’s Council for Asset and Investment Management, representing investors with nearly $20 trillion in assets under management.
“The G20 has made the promotion of infrastructure investment one of its top priorities for 2014, and institutional investors have been strong supporters of this effort,” said Hung Tran, executive managing director at the IIF. “Identifying these impediments and providing practical suggestions for solutions will aid policymakers in developing policy frameworks that promote infrastructure investment.”
International Expansion of Chinese Banks
Chinese bank assets have grown more than five-fold over the last decade, dwarfing the 40-50% increase in U.S., Euro Area and Japanese bank assets. This strong growth in Chinese bank balance sheets reflects not only domestic lending, but a notable expansion in Chinese banks’ lending to companies active and/or domiciled overseas. Chinese activity in international syndicated loan markets has almost doubled since 2011, and the customer base for Chinese banks overseas includes a growing number of major international firms in both mature and emerging markets. Increased activity by Chinese banks abroad helps facilitate the rising use of the renminbi (RMB) in international transactions.
Infrastructure Investing. It Matters.
February 25, 2014 — IIF and Swiss Re released today a joint report emphasizing the importance of long term investments to support infrastructure growth and development—a key topic of discussion at the G20 Meeting in Sydney earlier this month. With annual infrastructure spending of $2.6 trillion expected to grow to $4 trillion annually by 2030, diversifying long-term investment funding sources for the real economy is essential. As the public sector struggles to meet these financing needs, institutional investors play an increasingly important role in providing long-term capital. The report recommends a specific set of actions to address existing impediments to long-term investing, and sets forth a proposal for private-public partnerships with the goal of further developing infrastructure as an asset class.
IIF Special Committee on Financial Crisis Prevention and Resolution
Views on the Way Forward for Strengthening the Framework for Sovereign Debt Restructuring
This note highlights the Special Committee’s views on the way forward for strengthening further the sovereign debt restructuring framework, including the Committee’s reactions to the International Capital Markets Association’s (ICMA) draft new guidelines for aggregation clauses and to the IMF staff’s key points and suggestions included in the April 2013 IMF Staff Report on possible changes to the IMF policy and legal framework for sovereign debt restructuring that could be considered. The Special Committee comprises 43 senior officials from major IIF-member financial institutions that represent the private creditor and investor community. This note summarizes the views of the Special Committee expressed in a number of forums. The note is intended to contribute constructively to the ongoing discussions on possible refinements to the existing contractual, market-based approach to sovereign debt restructuring.
December 2013 Joint CMM-GEM Conference Call
December 17, 2013 — IIF Managing Director and Chief Economist Charles Collyns and IIF Executive Managing Director Hung Tran present the key highlights of the December Capital Markets Monitor (CMM) and Global Economics Monitor (GEM). The GEM presents our latest assessment of the outlook, including 2015 for the first time, and discusses risks that could hold back the expected pick-up in global growth. The CMM focuses on changes in market landscape (demand for collateral, decline in market liquidity etc) following global regulatory changes and adjustment by market participants.
IIF Market Monitoring Group Warns on Impact of Regulatory Reforms on Financial Markets
December 5, 2013 — The IIF’s Market Monitoring Group released the following statement today after their quarterly meeting in New York, stating that some regulatory reforms aimed at stability may reduce financial market efficiency, and rising corporate debt levels pose risks for pockets of weaker firms and fragile economies.
International Debt Negotiation: Experiences and Lessons Learned
November 7, 2013 — Speaking at a Bertelsmann Foundation–OAS Conference in Grenada, IIF Executive Managing Director Hung Tran discussed how to strengthen sovereign debt crisis prevention and resolution, as well as the importance of adhering to the current contractual, market-based framework for sovereign debt restructuring.
Restoring Financing and Growth to Europe's SMEs
SMEs in Europe have been hard hit by Europe’s economic difficulties and have seen major declines in financing since 2008. To promote better understanding of the factors behind reduced financing, the IIF and Bain & Company held more than 140 interviews with a broad range of stakeholders in six Euro Area countries and with officials in key European institutions. The interviews made clear that progress is needed both to improve the availability of information and the financial health of SMEs and to broaden the base of financial institutions able to identify and fund promising SME activities. The report recommends the establishment of a coordinated European process focused on national task forces to develop tailored, technical, nonpolitical action plans to address each of these impediments in each national market.
Strengthening the Role of Markets in Sovereign Debt Crisis Prevention and Resolution
July 19, 2013 — IIF Executive Managing Director Hung Tran last week delivered a speech at the Banque de France’s Symposium on Sovereign Risk, Bank Risk and Central Banking in Paris (July 8-10, 2013). This text is based on those remarks. At this symposium, Tran discussed how to strengthen the role and efficacy of markets in sovereign debt crisis prevention and resolution and made several suggestions for improvement.
Euro Briefing: Looking for Traction
Prior to the recent shift in market sentiment, abundant liquidity and renewed efforts by the ECB to support growth (including a rate cut on May 2) had helped peripheral Euro Area sovereign yields drop to their lowest level since Q1 2011. Market appetite for Greek financial assets improved, contagion from Cyprus is under control, and Portugal held a 10-year bond auction—the first since its 2011 bailout. However, the selloff in risk assets and focus on Fed “tapering” since May 22 have shifted the focus to the potentially volatile corrections attendant on further increases in U.S. bond yields.
IIF Market Monitoring Group highlights risks of a liquidity-fueled rally: while fundamentals remain weak, parts of corporate sectors exposed
Warns of potential ripple effects as the U.S. moves closer to exit from accommodative monetary policyJune 4, 2013 — Following their recent meeting in Rome, members of the IIF’s Market Monitoring Group agreed today to release the following statement, noting: a lack of fundamental support for financial market rallies; risks associated with exit strategies and a potential rise in U.S. bond yields; a need to reconsider zero risk-weighting of domestic government bonds for members of a currency union; potential vulnerabilities exist in parts of the corporate sector; and restrictions on trading “naked” sovereign CDS might impair market efficiency.
IIF CAIM raises concerns that proposed EU Financial Transaction Tax could hurt savers and pensioners
April 23, 2013 — The IIF’s Council on Asset and Investment Management (CAIM) today released a position paper on the proposed EU Financial Transaction Tax (FTT). CAIM raised concerns that any revenue potentially generated by the proposed FTT would be considerably outweighed by the potential costs in terms of burden on end-users of financial services, potentially weaker economic growth and job losses.
Private Sector and Public Sector Leaders meet in Washington for a Roundtable on International Capital Markets and Emerging Markets
April 21, 2013 — Senior public officials from both mature and emerging market economies, leaders from the private finance sector, and representatives from international financial institutions participated in a Roundtable discussion on International Capital Markets and Emerging Markets in Washington DC. The Roundtable has become over the last few years a major annual event, and a key forum for the exchange of views among key decision makers in both the public and private sectors on global policy issues and sovereign debt market developments.
Strengthening the Role of Long-Term Investors
January 28, 2013 — The IIF and Swiss Re released today a joint report featuring eight short briefings on issues and challenges facing the long-term investment community, including financial repression, regulatory changes, the EU financial transaction tax and infrastructure investment. Long-term investors play a pivotal role for the real economy as providers of risk capital – but also for the financial markets as stabilizers and shock absorbers. This timely report is intended to raise awareness of the need to strengthen the role of long-term investors.