Buttonwood
A spike in the dollar has been a reliable signal of global panic
Are we due one?
There are two types of sellers in financial markets. The first kind sell because they want to.
They may need cash to meet a contingency; or they might coolly judge that the risks of holding an asset are not matched by the prospective rewards. The second kind sell because they have to.
The archetype is an investor who has borrowed to fund his purchase and has his loan called. If there are lots of forced sellers, as can happen in periods of stress, the result is a rout.
Involuntary selling can amplify any decline in asset prices. A called loan is not the only trigger. It might be a ratings downgrade; an order from a regulator; or a jump in volatility that breaches a risk limit. What happens in the markets then feeds back to the broader economy, making a bad situation worse.
This brings us to the dollar. An evergreen concern is the scale of dollar securities issued or held outside America. In the midst of the financial crisis of 2007-09, the Federal Reserve set up currency-swap lines with other central banks to deal with a lack of dollars, as borrowers outside America were caught short. In stressed markets a spike in the greenback is a tell. Investors sell what they own to buy the dollar not because they want to but because they have to.
So far the dollar has traded reasonably. In recent weeks it has rallied against a clutch of currencies hurt most by the slump in oil and commodity prices and lost ground against the yen and Swiss franc (the other havens in a storm) as well as the euro (see chart).
Perhaps there are stresses out there, but they are obscured by other factors weighing on the dollar. There has been a sense that it is due a fall. It looks expensive on yardsticks of value, such as purchasing-power parity. The Fed’s interest-rate cut earlier this month, with further reductions likely, means that holding dollars has become less appealing.
Yet it is easy to forget how bearish sentiment on the dollar was in 2008. Many expected it to fall in the teeth of a crisis that had, after all, originated in America. Instead it spiked as banks outside America scrambled to get hold of greenbacks in order to roll over the short-term dollar borrowings that funded their holdings of mortgage securities.
In 2015-16 China ran down its reserves by $1trn in part to meet demand for dollars from Chinese companies who had borrowed heavily offshore. And notwithstanding attempts by countries, such as Russia, to de-dollarise their economies, the greenback is as central to the world economy as it ever was.
If there are hidden strains in cross-border finance, they will eventually be revealed by spikes in the dollar.
It would be foolish to rule this out. No doubt pockets of stress will emerge in the coming weeks—a hedge fund, say, that has borrowed dollars to buy riskier sorts of assets and faces a cash crunch.
But the sort of aggressive borrow-short-to-lend-long bets that intensified the 2007-09 crisis have been much harder to make. Banks have tighter constraints on their lending. Panic by overborrowed foreigners does not seem a first-order concern.
Other plausible, but voluntary, changes in behaviour would affect the dollar in a variety of ways, or not at all. Foreign investors might simply choose to sell (or refrain from buying) American securities amid the current turmoil—a sort of financial self-quarantine. But surplus savings must be put to work somewhere.
Asian funds have been steady buyers of overseas debt securities. Japan’s Government Pension Investment Fund, a $1.6trn pool of retirement savings, had signalled that it will increase its holdings of foreign debt and equities in the coming financial year.
There is no sign that it is backing away from this, says Mansoor Mohi-uddin, of NatWest Markets in Singapore. Indeed there is a logic to its front-loading foreign-asset purchases, as a means of weakening the yen and helping Japan’s exporters.
Japanese funds have in recent years preferred to buy euro-denominated debt, because the costs of hedging euro currency risk is low.
But if the Fed keeps cutting rates, dollar hedges will become cheaper. Currency-hedged Asian investors might then tilt towards American assets.
That would be neutral for the dollar (because of the hedging) but a welcome fillip for issuers of corporate debt in America.
The dollar remains an unloved currency. Witness the surge in gold prices spurred by seekers of an alternative. It is the currency investors are forced to buy, not the one they want to buy. The dollar’s calmness is reassuring. A sudden spike in its value would be a bad sign indeed.
A SPIKE IN THE DOLLAR HAS BEEN A RELIABLE SIGNAL OF GLOBAL PANIC / THE ECONOMIST
CORONAVIRUS IS A GLOBAL CRISIS, NOT A CRISIS OF GLOBALIZATION / THE FINANCIAL TIMES OP EDITORIAL
Coronavirus is a global crisis, not a crisis of globalisation
The distinction matters as leaders will otherwise draw the wrong lessons
Robert Armstrong
© Ingram Pinn/Financial Times
There is no longer any doubting the seriousness of the coronavirus crisis. But we need to be clear about what kind of crisis this is. It has the potential to do worldwide economic and human harm.
But it is not the result of a flaw in the organisation of the world economy, in the way people, goods and money flow across the globe. It is a global crisis, not a crisis of globalisation.
The distinction is important, because if politicians and business leaders take the wrong lessons from this crisis, the world will be less prepared for the next.
It is not surprising that, when Covid-19 still looked like a Chinese rather than a global problem, US commerce secretary Wilbur Ross said that the virus, regrettable though it was, would “help accelerate” the return of jobs to North America. If you see the world economy as a zero-sum game, one country’s loss must be another’s gain.
For US president Donald Trump’s trade adviser, Peter Navarro, the virus shows “we cannot necessarily depend on other countries, even close allies, to supply us with needed items”. The best response to any threat, on his view, is to pull up the economic drawbridge.
What is more surprising is that the Trump administration is not alone. The virus has revealed the hidden costs and fragility of global supply chains, triggering a “backlash” to globalisation.
Happily, the backlash so far is only among politicians and pundits. Yes, some supply chains were shortening long before the virus hit, and this crisis will lead to changes in others. But companies still see the advantages of global trade, consumers still benefit from it, and it still makes the world a safer place.
Economically, coronavirus sits alongside the Fukushima earthquake and nuclear accident, US-China trade conflicts, and other recent global disruptions. What they have in common is that they demonstrate the dangers of highly concentrated, just-in-time supply chains — not international ones.
For too long, companies arranged their operations with only cost in mind, says Per Hong, a supply chain consultant at A T Kearney. Yet crises “underline the need for companies to design their supply chains around risk competitiveness” rather than cost alone. The companies he works with are not localising supply, but mitigating risk with regional diversification. “It is the exact opposite of unwinding the global nature of our supply chains,” he says.
Fukushima demonstrated how much of the global microchip supply chain passed through Japan, with many lower-tier suppliers clustered near the earthquake. But afterwards, as Willy Shih of Harvard Business School points out, big customers saw the risks and shifted some of their sourcing to Taiwan.
What they did not do was turn to domestic chip production. That would have been a mistake.
Microchips are the perfect example of how local specialisation, spread across the world, creates better products than is possible in any one place. The best chip manufacturing equipment comes from Holland; the strongest chip designs from the US; the best foundries are in Taiwan; and so on.
Nor can companies, with profits at stake, indulge in Mr Navarro’s fallacy that all threats originate abroad. The UK’s domestic coal supplies did not protect it during the 1980s miners’ strikes. America’s vulnerability to hurricanes and floods is demonstrated repeatedly. The next crisis might start anywhere.
This is not to deny the value of bringing production closer to demand. In the garment industry, responding quickly to changing tastes and advances in technology make a strong case for “nearshoring” production. Levi’s is deploying fully automated technology for finishing or “distressing” its jeans with lasers. This 90-second process, completed near the final market, used to take a worker in a low-cost country half an hour.
But companies such as Levi’s are nearshoring to give customers what they want, not to reduce the risks of international trade. Nor are they practising good global citizenship by “bringing jobs home”. What is home? Big, modern companies have customers, employees, and shareholders all over the world.
That global companies are not creatures of any one country is a point of attack for globalisation’s critics. But if we believe that companies have responsibilities to all their stakeholders, do we really want those responsibilities to vary depending on where those stakeholders happen to have been born?
That would be immoral. It is a virtue, not a vice, of global companies that they build relationships of mutual advantage that do not respect borders. Globalisation binds our fortunes together.
That these bonds makes us collectively richer is clear, given that the countries which have embraced global trade, along with education and investment, are the most prosperous. The rise of globalisation since 1990 coincides with more than a billion people rising out of extreme poverty. Neither governments nor companies should turn their back on that legacy because of coronavirus.
Even in the current crisis, globalisation can make the world safer. That national economies are fused by the connective tissue of global companies means each country has a selfish interest in helping others. That is a source of stability that anti-globalist rhetoric can only serve to dilute.
HIGH-FREQUENCY TRADERS FEAST ON VOLATILE MARKETS / THE WALL STREET JOURNAL
High-Frequency Traders Feast on Volatile Market
Profits climb sharply with help from sophisticated computer algorithms and strategies that take advantage of rips and dips; ‘a quarter for the record books’
By Scott Patterson and Alexander Osipovich
Photo Illustration by Emil Lendof/The Wall Street Journal; Photos: iStock
Fast-trading investors have made big profits during the market’s volatility, with strategies ranging from sophisticated computer algorithms to ones as simple as “selling the rips and buying the dips.”
High-frequency traders, which typically deploy sophisticated algorithms and powerful computers to move in and out of markets at lightning speeds, tend to do well when markets are volatile.
Virtu Financial Inc.,one of the largest high-speed traders, last week said it expects to post trading income of between $509 million and $519 million in the first quarter, more than double the amount from the same period last year and its highest quarterly trading income since the company went public in 2015.
High-frequency firms have struggled in recent years amid a period of low volatility and steadily rising markets. Still, they are estimated to account for around half the trading volume of the U.S. stock market, having largely replaced the floor traders who once controlled exchanges’ ebb and flow. Virtu is a designated market maker for the New York Stock Exchange.
Like market makers, high-speed traders often make money on the difference between buy and sell orders, known as the spread, by selling high and buying low as stocks tick up and down.
Spreads in heavily traded stocks, such as Apple Inc.,which are typically 1 or 2 cents, have ballooned to 30 cents or more in recent weeks because of the highly volatile, fast-moving markets. While wide spreads indicate riskier market conditions, firms that can exploit the difference can earn sizable profits.
Some plain-vanilla rapid-trading strategies are also faring well, traders said.
“Our traders are having some of their best months in years,” said Dennis Dick, a trader at Bright Trading, a Las Vegas broker dealer that provides computer-driven trading platforms for day traders. He said one of the strategies that has worked best is “selling the rips and buying the dips”—selling stocks after big moves higher and buying after sharp downturns.
Mr. Dick said traders are looking for stocks that get pushed too low or too high during big market swings that drag the entire market up or down. Right now, he said, many are buying stocks that are low in debt and selling stocks with lots of debt that will likely suffer as the economy deteriorates. If a low-debt stock gets pummeled during a big selloff, traders will swoop in and buy, expecting it to rebound.
Thomas Peterffy, chief executive of Interactive Brokers Group, an electronic brokerage popular among day traders, said daily volume handled by his firm has more than doubled to more than two million trades a day in the past three weeks. New accounts are also surging, he said, a sign that people confined to their homes might be turning to trading.
The losers among the computerized trading strategies, at least so far, are those that bet on longstanding correlations between different financial instruments. Such dislocations can cause losses in statistical arbitrage, or stat arb, strategies.
Among the correlations that broke down during the worst of the selloff last week were between stocks and Treasury-bond prices, which usually move in opposite directions. But during the recent selloff, investors fled both. “Treasury selloffs on big down equity days mean that correlation is finally getting challenged,” said Pav Sethi, chief investment officer at Gladius Capital Management, a Chicago trading firm.

Mr. Sethi said another breakdown in correlations has been between stocks and a broad measure of market volatility, the Cboe Volatility Index, or VIX, known as the fear index.
Typically the VIX rises when stocks fall as fear spreads through Wall Street, and vice versa.
While the VIX soared to record levels as the market plunged in recent weeks, the link hasn’t always worked as expected.
Such haywire trading patterns mean trouble for quantitative investment firms, said David Magerman, a former executive at Renaissance Technologies, one of the biggest and most successful of what are known as quant firms. The models the firms deploy, often based on years of returns, get scrambled as investors head for the exits all at once.
“The big jolts to the markets are a coin flip for quant funds,” Mr. Magerman said. “Once the markets calm…quant funds that are still around should clean up.”
Although volatility has mostly benefited electronic trading firms, “you can still be caught by surprise,” said Rob Creamer, CEO of Chicago-based firm Geneva Trading. “There are a lot of markets that have been so dislocated that it’s been incredibly challenging.”
One victim of the extreme moves was Ronin Capital LLC, a Chicago-based trading firm that incurred hundreds of millions of dollars in losses on strategies tied to the VIX, people familiar with the matter said. Futures-exchange operator CME Group Inc. said March 20 that it auctioned off some of Ronin’s portfolios after it failed to meet capital requirements.
A person reached at Ronin’s office didn’t respond to requests for comment.
Some quick-draw traders that don’t use complex algorithms are also benefiting from the market’s swings. Daniel Schlaepfer, CEO of Select Vantage, which has more than 2,000 day traders world-wide, said his firm’s top 10 record days have occurred this month. Daily trading volumes across the firm have doubled since markets began their slide, he said.
Traders at Select Vantage typically hold stocks for less than 15 minutes and never sit on positions overnight, he said. In ways, the firm acts like a vast, human-driven high-frequency firm that rapidly buys and sells stocks throughout the day.
“We’re way up. We’re up full-force,” Mr. Schlaepfer said.
THIS IS THE END: THE MYTH OF A RETURN TO NORMAL / SEEKING ALPHA
This Is The End: The Myth Of A Return To Normal
by: Mark DeWeaver, CFA
- A golden age of globalization, laissez-faire policy, and high corporate profitability is over.
- There will be no ‘V’-shaped recovery.
Those who expected lightning and thunder
Are disappointed.
And those who expected signs and archangels' trumps
Do not believe it is happening now.
- Czeslaw Milosz
RUSSIA EXPLAINS WHY IT KILLED THE OPEC DEAL / SEEKING ALPHA
Russia Explains Why It Killed The OPEC Deal
- Russia's deputy energy minister provides his rational for Russia's decision and sends signals to the market.
- Russia looks serious about tolerating pain from low oil to gain market share and deal a blow to U.S. shale for both political and economic reasons.
- Russia believes that it is impossible to combat a situation when the demand is constantly falling, and the bottom is unclear.
- Moscow's initial position was to extend the agreement without additional cuts for the second quarter. Also, Moscow did not exclude the possibility of extending the OPEC deal even further.
- For Russia, the new cuts would have meant cuts of additional 300,000 bbl/day, bringing the total cuts to 600,000 bbl/day, which is technologically challenging.
- Sorokin stated that oil prices in the range of $45-55 per barrel are fair and will allow to invest in projects and keep supply coming.
- He believes that oil prices will increase to $40-45 per barrel in the second half of 2020 and continue their upside to $45-50 in 2021.
- In a Russian-language version of the interview (you can run it through Google translate), he added that while the ruble-denominated price of 3,000 per barrel is very comfortable, prices in the range of 2,100-2,500 rubles per barrel are satisfactory. I don't know why the authors of the interview decided to omit this information from the English version as I believe it also sends an important signal.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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