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Choppy Waters Ahead
By admin June 24, 2014

 

What is going to happen when the Federal Reserve has completely stopped purchasing asset backed securities through its quantitative easing program? That is the $2 trillion dollar question! As the Financial Times reported this past weekend “central banks are planning to cut their exposure to longer-term debt to protect themselves from losses when the Federal Reserve ends its bond-buying this autumn, increasing the risk of instability in global markets.” This might seem like the logical move by central banks since US Treasury prices will fall (yields should rise) due to the lack of demand. However, if central banks, which control assets north of $13.2 trillion, take their money out of the bond market, where will that money go?

Currently, the IMF tracks reserve data for 71 countries through the Special Data Dissemination Standard (SDDS) template, the international standard for public reporting of reserves data. As it is, central banks are typically secretive managers of official reserves; therefore, getting a picture of where the money is being invested is rather difficult. For example, China and South Korea are the only two countries out of the G20 that refuse to share their data. Though the IMF has been trying to increase transparency, the international community is still very much in the dark on where all the money is going.

Luckily, a recent report by the Official Monetary and Financial Institutions Forum (OMFIF), a global research and advisory group, has shed some light on this subject. OMFIF reported that there are $29.1 trillion worth of investments in 157 central banks, 156 public pension funds, and 87 sovereign funds across 162 countries. The central banks comprise just over 45% of the total amount.   The OMFIF reported that investments in publicly quoted equities increased by “at least $1 trillion in recent years,” without detailing from what level or breakdown among investment players. Going forward, investors will need to be cognizant of the increased capital flows coming from not only private institutions but from central banks as well. As we experienced last year, when Chairman Bernanke announced the idea of tapering, huge outflows from emerging economies occurred. Since then, over a quarter of a trillion dollars have been added to the Federal Reserve’s balance sheet. As US Treasuries become unattractive the increased flows to equities will not only help promote an already frothy bull market but will make for a more volatile ride on the way down.

 

For more information:

Atkins, Ralph. “Central banks shift into shares as low rates hit revenues – FT.com.” Financial Times. N.p., 15 June 2014. Web. 23 June 2014. <http://www.ft.com/intl/cms/s/0/d9dfad02-f462-11e3-a143-00144feabdc0.html#axzz35PjRCWw4>.

Brown, Ellen. “OpEdNews Article: Article: Buying Up the Planet: Out-of-control Central Banks on a Corporate Buying Spree.” OpEdNews. N.p., 21 June 2014. Web. 23 June 2014. <http://www.opednews.com/articles/Buying-Up-the-Planet–Out-by-Ellen-Brown-Banksters_Central-Banks_Public-Banks_Public-Banks-140621-615.html>.

“Currency Composition of Official Foreign Exchange Reserves (COFER).” Currency Composition of Official Foreign Exchange Reserves (COFER). N.p., n.d. Web. 23 June 2014. <http://www.imf.org/external/np/sta/cofer/eng/>.

Jones, Claire. “Central banks set to cut debt holdings – FT.com.” Financial Times. N.p., 23 June 2014. Web. 23 June 2014. <http://www.ft.com/intl/cms/s/0/b615abf2-f899-11e3-befc-00144feabdc0.html#axzz35PjRCWw4>.

Marsh, David. “Central banks becoming major investors in stock markets Marsh on Monday.” MarketWatch. N.p., 16 June 2014. Web. 23 June 2014. <http://www.marketwatch.com/story/central-banks-becoming-major-investors-in-stock-markets-2014-06-16>.

“OMFIF – Official Monetary and Financial Institutions Forum.” OMFIF – Official Monetary and Financial Institutions Forum. N.p., n.d. Web. 23 June 2014. <http://www.omfif.org/>.

“Report to Congress on International Economic and Exchange Rate Policies.” U.S. Treasury. N.p., n.d. Web. 22 June 2014. <http://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/2014-4-15_FX%20REPORT%20FINAL.pdf>.

 


Thanks for sharing !


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