Connect with us


The high threshold for further Fed intervention



At the height of the financial panic that rippled across global markets in March 2020, fixed-income investors called on the Federal Reserve to put the Treasury market on a war footing. 

The plea was to institute a policy last used during the second world war in order to quell volatility in the world’s largest government bond market and return it to normal functioning after a brief but alarming period of illiquidity. 

So-called yield curve control, which was taken up by Australia’s central bank last year and has long been used in Japan, involves the Fed setting targets for Treasury yields and buying as many or as few bonds as necessary to maintain those levels. 

Roughly one year on, investors are again speculating what it would take for the US central bank to go to these great lengths — or any others to keep a lid on long-term Treasury yields — on account of the sharp rise in borrowing costs that has accompanied improving sentiment about the booming economic recovery already taking hold this year. 

But the bar for further intervention is extremely high, and the Fed is far more likely to stay on the sidelines with its current policy intact, or even begin hinting at a gradual retreat, rather than wade deeper into unconventional waters.

“The move in markets reflects fundamentals and the Fed is not going to go against fundamentals,” said Thanos Bardas, global co-head of investment grade fixed income at Neuberger Berman.

As economists have upped their growth and inflation forecasts, the Fed’s approach has been repeatedly tested. Losses for long-dated Treasury bonds have mounted, resulting in the worst quarterly performance in more than four decades. Yields, which rise as prices fall, have in turn surged. The benchmark 10-year note now hovers above 1.7 per cent. That compares with about 0.9 per cent in early January. Trading conditions have at times turned turbulent, and once-mundane Treasury auctions have become flashpoints for further selling. 

The gyrations have not yet rattled top officials at the Fed. Chair Jay Powell underscored last week that the moves to date had been “orderly” and a reflection of an economy on the mend. Gregory Daco, chief US economist at Oxford Economics, said those expecting an intervention from the Fed may be “waiting for Godot”.

According to an Oxford Economics gauge that tracks eight indicators including Treasury yields, the spreads of corporate credit over government bonds, volatility and equity prices, financial conditions remain close to their loosest level in almost 20 years.

Daco calculates that financial conditions at these levels have bolstered real gross domestic product growth by roughly 0.6 percentage points in just the first three months of this year, with a further boost coming in the second quarter through the latter half of the year.

A resurgence of volatility that batters risky assets and begins to constrain economic activity would prompt a rethink from the Fed, investors said. 

“If you had the equity market down 15 per cent and you saw credit spreads widen and credit growth set to slow, that would be the constellation of things that would make the Fed say our growth and inflation outlook is worse than we thought and some incrementally easier policy is necessary,” said James Sweeney, chief economist at Credit Suisse.

Signs that rising US borrowing costs are negatively affecting the housing market, which has roared back this year, could also compel the Fed to act. But according to Sweeney, it would take a much more material increase to reach that tipping point.

Rather, what may end up occupying most of the Fed’s time as the economy recovers is how exactly it will go about extracting itself from a market in which it has become so embedded.

Powell said in March that the economy had not yet seen the “substantial further progress” necessary for the central bank to begin thinking about pulling back its support and tapering its $120bn-per-month bond-buying programme. But investors believe that the swift pace of the recovery expected later this year — which is likely to be hastened if the Biden administration’s $2tn infrastructure plan is passed — could soon challenge this view.

Taper talk could begin as early as this summer, according to Bardas, while Sweeney reckons the Fed will hold off until its September meeting. Pimco, meanwhile, sees the Fed initiating a “gradual taper” late this year or early in 2022.

Barring some unforeseen setback, the odds for less — not more — Fed support look decidedly more favourable.

Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *


ExxonMobil proposes carbon storage plan for Texas port




ExxonMobil is pitching a plan to capture and store carbon dioxide emitted by industrial facilities around Houston that it said could attract $100bn in investment if the Biden administration put a price on the greenhouse gas.

The oil supermajor is touting the scheme ahead of the US climate summit starting on Thursday, where President Joe Biden plans to announce more aggressive national emissions targets and hopes to spur world leaders to increase their own carbon-cutting goals.

Carbon capture and storage, or CCS, “should be a key part of the US strategy for meeting its Paris goals and included as part of the administration’s upcoming Nationally Determined Contributions”, said Joe Blommaert, head of Exxon’s low-carbon focused business, referring to the targets that countries are required to submit under the 2015 Paris climate agreement.

Oil and gas producers have sought to highlight their commitments to tackle emissions ahead of this week’s climate talks, which promise to heap pressure on the fossil fuel industry. BP pledged to stop flaring natural gas in Texas’ Permian oilfields by 2025, while EQT, the country’s largest natural gas producer, said it backed federal methane regulations.

The International Energy Agency has called carbon capture and storage, which uses chemicals to strip carbon dioxide from industrial emissions, “critical for putting energy systems around the world on a sustainable path”.

But the technology has struggled to gain traction as costs have remained persistently high. The most recent setback in the US came last year with the mothballing of the Petra Nova project, the country’s largest, which captured carbon from a Texas coal-fired power plant.

Many environmental groups have been critical of the oil and gas industry’s focus on carbon capture, arguing it is used to justify continued investment in oil and gas production and is not economical, especially as the costs of zero-carbon wind and solar power have plummeted.

Exxon said that establishing a market price on carbon — which has been attempted by a handful of US states, Texas not among them — would be important. The US government should “implement policies to enable CCS to receive direct investment and incentives similar to those available to other efforts to reduce emissions”, Blommaert said.

Exxon declined to comment on the carbon price it thought was needed to justify the investment, but said its plan would generate $100bn of investment from companies and government in the Houston region.

The company’s plans call for a hub that would capture emissions from the 50 largest emitting industrial facilities along the Houston Ship Channel, such as oil refineries and petrochemical plants, and ship the carbon by pipeline to reservoirs for storage deep under the sea floor of the Gulf of Mexico.

The project could capture and store about 100m tonnes of CO2 a year by 2040 if developed, Exxon said. That is 2 per cent of the roughly 4.6bn tonnes of US energy-related carbon emissions in 2020, according to the Energy Information Administration.

Exxon has been under intense pressure from investors, including a proxy fight with the activist hedge fund Engine No 1, to bolster its strategy for the transition to cleaner fuels. In February, it created a low-carbon business line that it said would spend about $3bn over the next five years.

Biden’s $2tn clean-energy focused infrastructure plan would expand carbon capture and storage tax credits. The administration said it would back 10 projects focused on capturing carbon from heavy industry, but it did not endorse a price on carbon.

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here 

Source link

Continue Reading


European stocks hit record after strong US earnings and economic data




European equities hovered around record levels, the dollar dropped and government bonds nudged higher on Monday as markets continued to cheer strong economic data while also banking on continued support from the US Federal Reserve.

The regional Stoxx Europe 600 index gained 0.3 per cent during the morning to set a new record, before falling back to trade flat.

This follows a week of upbeat earnings from US banks as investors await results from big businesses including Coca-Cola and IBM later on Monday. Data released last week showed US homebuilding surged to a near 15-year high in March while retail sales increased by the most in 10 months.

The dollar, as measured against a basket of currencies, fell 0.4 per cent as bets on higher interest rates receded. The euro rose 0.4 per cent against the dollar to buy at $1.203. Sterling also gained 0.4 per cent to €1.389.

Federal Reserve chair Jay Powell told the Economic Club of Washington DC last week that the central bank would not taper its $120bn of monthly asset purchases until it saw “substantial further progress” towards full employment.

Haven assets such as government debt remained in demand. As prices ticked up, the yield on the benchmark 10-year US Treasury note fell 0.02 percentage points to 1.557 per cent, while the yield on the equivalent German Bund slid 0.01 percentage points to minus 0.271 per cent.

Investing convention assumes that US Treasuries and global equities move in opposite directions to cushion against falls in either asset class, but both have now rallied in tandem for an unusually sustained period.

The S&P 500, the blue-chip US stock index, has risen for four consecutive weeks to set new records. The yield on the 10-year Treasury has fallen from about 1.74 per cent at the end of March to just under 1.56 per cent on Monday as investors bought the debt. Treasuries and US stocks not have risen together for so long since 2008, according to Deutsche Bank.

Futures markets indicated the S&P would drift 0.2 per cent lower as Wall Street trading opens.

“I am not saying it’s a rational time in the markets,” said Yuko Takano, equity fund manager at Newton Investment Management. A reason for caution, she added, was signs of “bubbles” in alternative assets such as cryptocurrencies and non-fungible tokens. “There is really an abundance of liquidity. There will be a correction at some point but it is hard to time when it will come.”

“Markets may have become temporarily overbought,” strategists at Credit Suisse commented. “For now, we prefer to keep equity allocations at neutral” rather than buying more stocks, they said.

In Asia, Hong Kong’s Hang Seng index closed up 0.5 per cent and Japan’s Topix slid 0.2 per cent.

Global oil benchmark Brent crude fell 0.3 per cent to $66.57 a barrel.

Source link

Continue Reading


EU split over delay to decision on classing gas as green investment




The European Commission is split over whether to postpone a decision on classifying gas generated from fossil fuels as green energy under its landmark classification system for investors.

Brussels had planned to publish an updated draft of a taxonomy for sustainable finance later this week. The document is designed to guide those who want to direct their money into environmentally friendly investments, and help stamp out the misreporting of companies’ environmental impact, known as greenwashing. 

The commission was forced to revamp its initial proposals earlier this year after the text was criticised by member states which want gas to be explicitly recognised as a low-emission technology that can help the EU meet its goal of becoming a net-zero polluter by 2050. 

Now the publication of the draft rules could be postponed again as the commission seeks to resolve the impasse. According to a draft of the text seen by the Financial Times, the commission proposed to delay the decision in order to carry out a separate assessment of how gas and nuclear “contribute to decarbonisation” to allow for a more “transparent” debate about the technologies.

But officials told the FT that some commissioners were pushing for gas to be awarded the green label now, rather than delaying the decision until later this year. 

“There are a sizeable number of voices in the commission who want gas to be included in the taxonomy,” said one official. A final decision on whether to approve the current text or delay it again for further redrafting is likely to be made on Monday.

The EU’s taxonomy is being closely watched by investors as the first big attempt by a leading regulatory body to create a labelling scheme that will help guide billions of euros of investment into green financial products.

But the process has proved divisive, as several EU governments have demanded recognition for lower-emissions energy sources such as gas. 

Coal-reliant countries such as Poland, Hungary, Romania and others that are banking on gas to help reduce their emissions do not want the labelling system to discriminate against them. France and the Czech Republic, meanwhile, are also pushing for the recognition of nuclear as a “transitional” technology in the taxonomy.

A leaked legal text seen by the FT earlier this month paved the way for gas to be considered green in some limited circumstances. That has since been removed along with other sensitive topics such as how best to classify the agricultural sector, according to the latest draft the FT has seen.

EU governments and the European Parliament have the power to block the draft if they can muster a qualified majority of countries and MEPs against it. 

Environmental groups have hailed the exercise, and urged Brussels to stick to science-based criteria in defining the thresholds for sustainable economic activity.

Luca Bonaccorsi from the Transport & Environment NGO said delaying decisions on gas and nuclear risked allowing pro-nuclear countries like France and the Czech Republic to join up with pro-gas member states “to forge an alliance that will obtain the greening and inclusion of both energy sources”.

“Should they ally, it will be impossible to resist the greenwashing of these two unsustainable energy sources,” said Bonaccorsi. 

The delays in agreeing the taxonomy have forced Brussels to abandon an attempt to use it as the basis for EU green bonds that will be issued as part of the bloc’s €800bn recovery and resilience fund. About €250bn of debt will be issued in the form of sustainable bonds over the next few years, which will make the commission one of the world’s biggest issuers of sustainable debt.

Source link

Continue Reading