Guy Haselmann: Market Liquidity Will Be Difficult

January 9, 2015

4 minute read

by Guy Haselmann, Director, Capital Markets Strategy, Scotiabank GBM

Liquidity has been decimated. Central bank's regulatory intrusion has forced primary dealers in the US and Canada to hoard collateral in order to fulfill their primary dealership obligations. See Bloomberg article below. Liquidity is suffering mainly due to the massive intrusiveness of regulators (particularly the Fed).

Curve is steepening due to unwinds. Many Europeans I speak with believe that the US will not raise rates this year. Some others in the US, are hearing Evans, Rosengren and Kocherlakota yammer about no hike until 2016. The weak earnings number makes some believe this chatter, which has pushed some to unwind Flatteners. I believe this is one big distraction. Only Yellen and Fischer's opinions really matter. In my opinion, the Fed is still on target to raise rates in March, April or latest June in my opinion. Today's number does not change that regardless of what Evans says. Evans, on CNBC this morning, will have some egg on his face when the Fed hikes in next few months.

Much noise in today's trading. I expect the Treasury curve to resume flattening soon. I believe it makes sense for traders to use next week's backend supply to put on, or add to, flatteners to set up for the following week's FOMC meeting on 1/28.

In the meantime, market liquidity will be difficult. It feels at times that markets are coming apart from too many cross-currents globally and mixed-messages domestically. Volatility will remain high and get gappy at times. Fed action will be based on domestic matters, not international concerns (some of which I outlined below). The FOMC needs to be careful not to miss their window of opportunity to hike rates.

JGB 10's are 0.25%. German 10's are 0.51%. China PPI printed -3.3% last night. Oil continues to trade heavy. Ukraine and Russian financial problems are growing severe. Extreme Islam is expanding and getting more bold. China is slowing dramatically and under increasing pressure due to the strengthening USD; and particularly by the weak Yen.

Story overnight on the ECB suggests that they will disappoint on the structure and/or size of QE (talk of only 500 billion Euros) . The ECB will probably just continue to promise to do QE at the meeting on 1/22 without actually implementing anything new. If the ECB ultimately decides that QE will be done via guarantee by National Central Banks, then I believe this would a step backward away from "UNION". Since sovereign spreads are binary and will either converge (union) or diverge (anti-union), I believe this type of QE structure would be counter-productive. If they choice this path, traders should use the announcement to sell the periphery and play for divergence (much wider spreads to bunds).

As I wrote yesterday, the 'risk-on' was suspect. Today is a good day to fade yesterday's move. Have a nice weekend.

(BN) Bond Trading Seen Drying Up in Europe as Investors Hoard Notes

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Bond Trading Seen Drying Up in Europe as Investors Hoard Notes
2015-01-09 12:22:04.395 GMT

By Katie Linsell
(Bloomberg) -- Liquidity in European bond markets has all but disappeared as investors hoard securities that are easier to sell in times of stress and banks reduce inventories, according to the International Capital Market Association.
“As the intrusive nature of many regulatory initiatives begins to bite, market participants are anxiously holding onto their stock,” Godfried de Vidts, chairman of ICMA’s European Repo Council, wrote in the organization’s quarterly report.
“Market making activities have all but stopped as the holding of trading securities is now punitive from a capital point of view.”
Bond trading is falling as holdings are concentrated in a shrinking number of fund managers and banks cut inventories to preserve capital in response to regulations. Investors are reluctant to sell securities amid concern that rules to make the credit market more transparent will increase costs and worsen liquidity.
There’s been about a 70 percent drop in trading since 2008, according to Royal Bank of Scotland Group Plc. Liquidity is drying up even as issuance rises, with companies selling 866 billion euros ($1.02 trillion) of bonds in Europe last year, compared with 757 billion euros in 2013, according to data compiled by Bloomberg.
“The danger market participants now face is that the cumulative effect of collateral demands may produce temporary shortages of a wide range of securities,” de Vidts wrote. “We see the emergence of systemic risk of a nature that very few policy makers ever realised.”

For Related News and Information:

Europe Bond Overhaul to Show Prices on $233 Billion of Debt Bond Market Seen Critically Impaired as Europe Trading Falls Bond Liquidity Falls 70% in Europe as Sales Soar: Credit Markets

To contact the reporter on this story:

Katie Linsell in Madrid at +34-91-700-9631 or klinsell@bloomberg.net

To contact the editors responsible for this story:

Shelley Smith at +44-20-3525-2020 or
ssmith118@bloomberg.net
Abigail Moses, Michael Shanahan

Author

Guy Haselmann

Mr. Haselmann has 30 years of diverse capital markets experience, including 14 years building and managing assets at 2 well-known macro hedge funds. During his career, Mr. Haselmann traded numerous capital market securities. He has developed risk management strategies and trading procedure guidelines.

Previously, Mr Haselmann was Director of Capital Markets strategy, at Scotiabank GBM, where he incorporated a global macro approach. Mr. Haselmann has been published in academic journals, newspapers, and has written countless strategy pieces. He has appeared on various TV and Radio programs, such as BNN Bloomberg and Bloomberg. Mr. Haselmann is a guest lecturer at several universities, including his alma mater the University of Delaware Lerner College of Business and Economics. He is a frequent panelist at industry conferences.

In addition, Mr. Haselmann was a gubernatorial appointee to the NJ State Investment Council and was appointed by the chair to the Investment Policy, Executive, and Nomination subcommittees. Mr. Haselmann is President, and a member of the Board of Governors, of the NY Money Marketeers.

Specialties: Analyzing global macroeconomic policies and capital market interconnections to strengthen investment and strategic decision-making in financial markets. Providing portfolio construction solutions to enhance risk-adjusted returns. Macro trading and strategy. Risk management. Alternatives advisory services. Hedge funds and other alternative investments. Funds of Hedge Funds. Analysis for optimizing position sizes. Capital market products. Options.