Category Archives: BIS

(ZH) BIS Warns Of “Perfect Storm” For Global Economy

(ZH) To those hoping for a quick resolution to the US-China trade war, Axios had some bad news earlier today, reporting that the trade feud is “likely to last much longer than originally thought — extending well into the second half of next year and perhaps beyond, experts say.” According to Axios, the main reason for the protracted conflict is that neither side is prepared to appear politically weak at home, and both are ready to absorb economic pain.

With few probable winners, the biggest losers would be farmers, users of steel, and consumers in the US, manufacturers of all types will see business leave to neighbors like Vietnam and Malaysia in China, while dampening economic growth in both nations and around the globe.

However, as the general manager of the Bank of International Settlements, Agustin Carstens warned, the greater risk is not how many points of GDP the rising tariffs will subtract from the US and China, but the growing danger to globalization itself, and on Saturday, Karstens delivered a scathing critique of rising protectionism, a not-so-subtle rebuke to Trump’s use of tariffs and trade talks to wring concessions from China, Mexico and many other countries.

Reversing globalization “could increase prices, raise unemployment and crimp growth,” Carstens, the former head of Mexico’s central bank, told fellow central bankers at the Jackson Hole annual economic symposium. Additionally, higher tariffs could (actually, just say would) drive up U.S. inflation and force the Fed to raise rates, driving up the dollar and hurting both U.S. exporters and emerging market economies in the process, Carstens said.

Protectionism also threatens “to unsettle financial markets and put a drag on firms’ capital spending, as investors take fright and financial conditions tighten,” he said.

“These real and financial risks could amplify each other, creating a perfect storm and exacting an even higher price”, the rotund central banker warned.

Bank for International Settlements General Manager Agustin Carstens

Alongside Carstens’ speech, the BIS released a research paper titled “Global market structures and the high price of protectionism” which that estimated that revoking NAFTA would mean a loss to GDP of $37 billion in Canada, $22 billion in Mexico, and $40 billion in the United States, with non-tariff trade barriers accounting for the lion’s share of the losses. Wages would also fall across North America, the research found according to Reuters.

The good news, is that as Bloomberg reported earlier, Mexican and U.S. negotiators have narrowed trade-pact differences in recent days and an agreement on bilateral trade may be announced as soon as tomorrow, with Canada expected to join trade talks once those have been resolved, but the overall future of NAFTA remains unclear.

The bad news is that last week, the United States and China ended two days of talks on Thursday with little progress as their trade war escalated with activation of another round of dueling tariffs on $16 billion worth of each country’s goods. According to Goldman Sachs, there is a 70% chance that Trump will levy an additional $200 billion in incremental tariffs over the next two weeks.

What is odd, is that despite the BIS’ dire warning, Fed Chair Powell and other central bankers have largely stepped around the effect of rising trade frictions on the U.S. economy and monetary policy, while signalling gradual rate hikes ahead. For now, they note that the impact of the tariffs themselves, and related currency gyrations in some countries including Turkey, are not slowing the U.S. economy, and therefore do not require a response.

Furthermore, while numerous business surveys indicate widespread concern about the impact of tariffs, the US economy has yet to be rattled by protectionism.

However, speaking at the final panel in the two-day meeting that examined market structures’ impact on inflation and other metrics that central bankers follow closely, Carstens warned that central bankers ignore trade skirmishes at their peril. And, as Reuters notes, “coming from a fellow former central banker who is now head of the bank for central bankers, the message may resonate.”

Additionally, Carstens highlighted the potential catalysts that could unleash the “perfect storm” he highlighted as the key risk resulting from the interaction of real and financial risks, namely: the trillions in outstanding dollar-denominated debt – whereby a dollar-shortage threatening to cripple international trade – and the growing risk of currency wars:

Consider that non-US banks provide the bulk of dollar-denominated letters of credit, which in turn account for more than 80% of this source of trade finance. The Great Financial Crisis highlighted the fragility of this setup, since non-US banks depend on wholesale markets to obtain dollars. Ten years on, we should not forget how the dramatic fall in trade finance in late 2008 played a key part in globalising the crisis. Any dollar shortage among non-US banks could cripple international trade.

On top of that, trade skirmishes can easily escalate into currency wars, although I hope that they will not. As we saw earlier with Mexico, imposing tariffs on imports tends to weaken the target country’s currency. The depreciation could then be construed as a currency “manipulation” that seemingly justifies further protectionist measures. If currency wars break out, countries may put financial markets off-limits to foreign investors or, on the other side, deliberately cut back foreign investment, politicising capital flows.

In addition, we must be mindful of long-observed knock-on effects from tighter US monetary conditions, given the large stock of dollar borrowing by non-banks outside the United States, which has now reached $11.5 trillion.

His conclusion: “Policymakers in advanced economies should not shrug off the growing evidence that abrupt exchange rate depreciations reduce investment and economic growth in emerging market economies. This has implications for everybody, in that weaker economic activity reduces demand for exports from advanced economies.”

“In the long term, protectionism will bring not gain but only pain,” Carstens said, echoing a familiar talking point of establishment economists. “Not just for the United States, but for us all.”

He may be right, but as long as the US stock market continues to ignore the growing danger of this pain, and hits new all time high, there is zero probability that the Trump administration will change course.

(BBC) No single factor behind sterling flash crash, BIS says

(BBC) October’s flash crash in sterling was caused by several factors – including the time of day – according to a report by the international banking body, the Bank for International Settlements.

In the early hours of 7 October, the pound fell by about 9% against the dollar – an abnormally large swing in two such widely traded currencies – before then largely recovering.

The BIS says there were no significant losses suffered by traders.

But it says lessons should be learned.

The BIS report, which drew on detailed analysis by the Bank of England, says the conditions for such a move were created by the lack of sterling dealers in the market at the time of day.

The trade took place in Asian markets, at a time of day when key sterling counter traders in London and other important Western markets are not operating.


The BIS does not point to an actual event or piece of news for causing the crash, but reports at the time suggested a headline in the Financial Times quoting French president Francois Hollande pressing for a “hard Brexit”, an outcome commonly thought to preclude a smooth transition, prompted some selling.

The flurry of trading, whatever the cause, included automatic deals.

Some of these were stop-loss orders – designed to simply sell a holding that has reached a price below which it will lose money for the investor – and algorithmic trades, which can be triggered by a host of factors, including, it is thought, certain types of news announcements.

The BIS said: “The report concludes that the time of day played a significant role in making the sterling foreign exchange market more vulnerable to imbalances in order flow.

Traders at BGXImage copyrightREUTERS

“Significant demand to sell sterling to hedge options positions and the execution of stop-loss orders as the currency depreciated also had an impact. The presence of staff with less expertise in the suitability of particular algorithms for the market conditions appears to have amplified the movement.”

When the sudden fall happened, one theory was that it was a mistake, a so-called “fat finger” trade.

Others blamed the automated nature of the market.

The BIS report says these sudden moves appear to be happening more frequently as the market becomes faster and more automated, and market participants should consider how to ride these out.

It says there are direct lessons from the flash event.

Its Foreign Exchange Working Group is developing the new code of conduct for currency markets, the FX Global Code.

It wants market participants to consider the disruptive consequences of their trading activity, governance around algorithmic execution of trades, and how market participants might best determine the low (or high) point of pricing in a flash event.

“Since such events have the potential to undermine confidence in financial markets and impact the real economy, it is important for policymakers to continue to develop a deeper understanding of modern market structure and its associated vulnerabilities,” said Guy Debelle, chairman of the BIS’s Markets Committee.

(BBC) Global banking watchdog warns over Chinese banks


100 YuanImage copyrightGETTY IMAGES

Risks of a Chinese banking crisis are mounting, according to a warning indicator from the banking industry’s global watchdog.

A key gauge of stress in the banking sector is now more than three times above the danger level, the Bank for International Settlements (BIS) said in its latest quarterly review.

China’s credit-to-GDP gap hit 30.1 in the first quarter of 2016, it said.

The BIS considers a credit-to-GDP gap of 10 to be a sign of potential danger.

A year ago the BIS quarterly review put the figure for China at 25.4.

The BIS calculates the gap by looking at borrowing in relation to the size of the economy, and comparing that with the long-term trend of that ratio.

When the two start to diverge, the BIS argues, a banking crisis could be on the way.

The BIS has a central position in global finance as it provides banking services to central banks and monitors the international flow of money and credit.

The health of China’s banking sector has long been a source of concern for financial markets.

Since the financial crisis of 2007-2008 there has been a boom in credit as the Chinese government has attempted to spur flagging growth.

But some of that lending has not been productive and the IMF estimates that loans worth $1.3 trillion are at risk of default.

However, as the Chinese banking system is largely owned or controlled by the government, analysts say the government would bail out the banking sector if necessary.

Brexit recovery

In its latest quarterly review, the BIS also said the markets has shown resilience following the UK’s vote to leave the European Union.

“The speed of the recovery took many by surprise, given the political and economic uncertainty that the vote had triggered,” said Claudio Borio, head of the Monetary and Economic Department at the BIS.

But he warned that, despite recent gains, global financial markets are in a sensitive state.

“There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull, more frustration than joy.

“This explains the nagging question of whether market prices fully reflect the risks ahead. Doubts about valuations seem to have taken hold in recent days. Only time will tell,” Mr Borio said.