China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Archive | November, 2016

City jobs vacancies show sharp fall

Posted on 31 October 2012 by

Job vacancies in the City in October were down by 36 per cent on a year ago as the gloom surrounding London’s financial sector refused to shift, a big recruitment agency has reported.

The findings from Morgan McKinley follow confirmation of an international cull of 10,000 investment banking jobs at UBS, which is expected to have serious implications for the bank’s 6,500 London staff. About 100 fixed-income traders were shut out of the Finsbury Avenue office on Tuesday.

    Morgan McKinley said the number of City vacancies was up by 11 per cent to 2,457 compared with September, but that was in line with the seasonal pattern seen in recent years.

    “Typically at this time of year, hiring activity increases as managers are ensuring they utilise budget and get sign-off in time to add headcount before the year end,” said Hakan Enver, operations director at Morgan McKinley Financial Services.

    He said confidence among employers and job seekers was “marginally better” than in July-September but November was unlikely to bring much improvement in job availability.

    The pattern was confirmed in separate estimates by Astbury Marsden, another recruiter, which said new jobs were 10 per cent up on September but 14 per cent down on a year ago.

    Mark Cameron, chief operating officer, said: “This is still a very difficult jobs market, with a huge surplus of talented finance staff who are looking for jobs and continued cost cutting at some of Europe’s biggest investment banks.”

    He added: “In a normal market you’ll have at least one of the larger investment banks taking advantage of weakness in the jobs market by going on an aggressive hiring spree and building capacity. That just isn’t happening at the moment.”

    Wall Street contingency plans take heat

    Posted on 31 October 2012 by

    Flawed back-up systems marred Wall Street’s return to work on Wednesday, while exchanges and regulators blamed a lack of disaster preparation by some market participants for the extended break in trading.

    Michael Bloomberg, mayor of New York City, received sustained applause from traders when he rang the opening bell on the New York Stock Exchange on Wednesday morning, putting an end to the exchange’s longest weather-related stoppage in more than a century. The S&P 500 rose 0.02 per cent to 1,412.16 in the first day of trading since Hurricane Sandy.

      Larry Leibowitz, chief operating officer at NYSE Euronext, which received some criticism for the two-day suspension, said: “Even if we opened on Monday or Tuesday, the securities community was not fully prepared to implement our back-up plan.”

      The NYSE’s contingency plan for a disaster that made running the trading floor impossible was to move all trading to the all-electronic Arca system. But the opening was delayed until Wednesday, people familiar with the discussions say, because numerous trading firms were not prepared and some even needed to rewrite computer code, potentially putting people at risk during the storm.

      The Securities and Exchange Commission is expected to raise concerns with trading firms as part of its deeper review of market structure, a person familiar with the matter said.

      There is no statutory requirement for contingency plans, but since the 2001 terrorist attacks securities regulators have emphasised the importance of being able to operate remotely. One official said it was another blow to market confidence after recent technology failures including the $460m trading glitch at Knight Capital and the botched Facebook public offering at Nasdaq.

      “The reality is that when there is a disaster of this magnitude it is difficult for all market participants to invoke contingency plans at the same time and expect a good outcome,” said Mr Leibowitz.

      “It becomes problematic when people adapt on the fly,” floor trader Gordon Charlop, managing director of Rosenblatt Securities, said. “Given the recent incidents with electronic trading, everybody wanted to err on the side of caution rather than flip a switch and try a whole new way of trading. That would have been asking people to take a lot of risk.”

      The poor preparation was highlighted by another shortcoming at Knight Capital, one of the biggest trading companies in the US by volume. The company, based in Jersey City, just across the water from lower Manhattan, was forced to shut down most of its trading business Wednesday after a back-up generator failed.

      Sullivan & Cromwell, the prominent law firm whose clients include Goldman Sachs, was flooded and advised clients to contact lawyers using text messages after other forms of communication failed. One lawyer noted the firm’s disaster recovery system had shown itself to be inadequate. “It’s a disaster,” he said.

      Companies in midtown Manhattan, headquarters to Morgan Stanley and JPMorgan Chase, fared better – unless they were close to the precarious dangling construction crane at 57th Street. Banks reported pleas for spare desks from some hedge fund clients affected by road closures around that site.

      Platinum Partners, a hedge fund with more than $1bn under management, said that its office in the Carnegie Hall Tower was closed due to the hanging crane. “It’s definitely an inconvenience but thankfully we have good contingency procedures in place. We have a back-up office up and running in Hawthorne, New York,” said Mark Nordlicht, Platinum’s founder.

      Bloomberg, the data provider, said it had provided terminals for more than 100 customers whose offices were out of action and 24,000 people used laptops to remotely access the service from out of the office compared with 7,000 on a normal day.

      Additional reporting by Dan McCrum, Michael Mackenzie and Andrew Edgecliffe-Johnson in New York

      Power outage stops Knight Capital trading

      Posted on 31 October 2012 by

      For the second time in three months, Knight Capital was forced to shut down trading and advise traders to route orders elsewhere after suffering a power outage on Wednesday.

      The electronic trading and market-making company said back-up generators powering its headquarters in Jersey City, New Jersey failed just before midday in New York, bringing its business to a halt. The company was relying on back-up power after Hurricane Sandy left large parts of the US east coast without electricity earlier in the week.

        Knight Capital, which accounts for 10 per cent of daily US equity trading volumes, told traders “to seek an alternate destination” for orders. “All computer interfaces with Knight will be shutdown with no new orders, both by phone or electronic, being accepted at this time,” it said in an alert sent out at 11.49am.

        Shares in Knight fell as much as 8.4 per cent soon after.

        The setback comes after the company lost $461m from a trading glitch on August 1. Those losses, which occurred as its systems inadvertently purchased billions of dollars worth of stocks, forced the company to sell more than 70 per cent of its business to a group of investors to avoid bankruptcy.

        “The affected businesses are reported to be market making and sales and trading which account for over 80 per cent of total revenue,” said Christopher Harris, analyst at Wells Fargo. “We estimate that for each day these systems are offline, Knight Capital’s revenue is impacted by slightly less than $4m.”

        Knight Capital said it had resumed trading normally earlier Wednesday morning along with the rest of the US markets, which had been closed for the prior two days due to the storm.

        “We opened trading this morning with generators at our Jersey City headquarters and we had a generator failure late this morning,” Knight Capital said.

        The company said its institutional equity trading, market-making, HotSpot FX and Knight Match systems had all been affected by the shutdown. Citadel, a rival trading firm, said its systems were operating normally.

        “Other offices are not impacted,” Knight Capital added.

        The company has yet to disclose the results of a third-party study by IBM of its internal product development process following the August glitch. Tom Joyce, chief executive, has defended his leadership of Knight Capital despite the recent setbacks. Mr Joyce’s contract is up for renewal at the end of this year.

        Knight’s shares rose 0.4 per cent to $2.63 in New York.

        Barclays feels force of energy regulator

        Posted on 31 October 2012 by

        In the early 2000s, the US electricity sector was seen as the wild west of the commodities markets. It lurched from crisis to crisis and was notorious for spiking prices. Not any longer.

        The revelation that Barclays is about to be fined in the US for allegedly inappropriate trading in power markets highlights the tougher approach being taken by US regulators a decade after the collapse of energy trader Enron.

          Wholesale electricity has faced tougher scrutiny by Washington since the Californian energy crisis of 2000-01, when Enron and other traders were accused of rigging supplies and causing huge blackouts.

          Regulatory attention has risen even further over the past 18 months as the US Federal Energy Regulatory Commission, the watchdog, has flexed its muscles by launching a series of crackdowns.

          The tougher stance comes as support is growing for stricter oversight of commodities markets from US lawmakers, prompted by large price swings over the past five years and following the 2008-09 global financial crisis.

          The London-based bank is not alone. JPMorgan, Constellation Energy and Deutsche Bank are among the companies that have been caught in the tighter regulatory net of the US electricity market over the past year and a half.

          Nor is FERC alone in adopting a more aggressive attitude. The US Commodity Futures Trading Commission, which polices the commodities derivatives market, has stepped up its oversight and launched a nationwide investigation into the oil markets in 2007.

          Moreover, energy and commodities lawyers say that FERC and the CFTC have increased information sharing, allowing them to pursue related cases from different angles. The Federal Trade Commission, the agency that promotes competition in the US economy, has also stepped up its efforts in antitrust cases in the energy market.

          In the clearest example of the new approach, FERC agreed this year to a record $245m settlement with Constellation Energy for alleged manipulation of the country’s power markets. The settlement contrasts with fines totalling just $127m in aggregate in the previous five years, despite new rules introduced in 2005 that gave the Washington-based regulatory body the power to impose penalties of up to $1m a day on companies found to have manipulated US energy markets.

          “Understand that the [Federal Energy Regulatory] Commission will be vigorous in using its anti-manipulation authority to protect consumers,” Jon Wellinghoff, FERC chairman, said after the regulator announced the fine on Constellation.

          In addition to tougher financial penalties, FERC has increased its market surveillance. Earlier this year it opened a new division dedicated to monitoring the multibillion-dollar markets for electricity and natural gas in the US.

          Carlos Blanco, an expert on US energy regulation at the Oxford Princeton Programme, said in a recent article that the creation of the new market surveillance division and the record fine to Constellation Energy suggested participants in the US electricity and natural gas markets were facing a “new world”.

          “FERC is strengthening its monitoring efforts and pursuing more aggressively any perceived wrongdoing by gas and power market participants,” he wrote.

          The more aggressive approach has resulted in 11 probes into potential manipulation of the country’s power market since January 2011, including around the activities of JPMorgan, Barclays and Deutsche Bank.

          In December, FERC said Deutsche Bank’s energy trading business might have engaged in manipulation of the California power market between January 2010 and March 2010. FERC has also subpoenaed JPMorgan twice this year as it investigates whether the bank manipulated power markets in California.

          The investigation into Barclays and four former traders forms part of the crackdown. The regulator has in the past alleged the bank and the traders bought and sold electricity in enough volume to move exchange prices up or down to benefit parallel positions in the derivatives market.

          The bank on Wednesday said FERC was investigating its “power trading in the western US with respect to the period from late 2006 through 2008”, warning that it could be fined. People familiar with the situation said the proposed fine was likely to be “high”. The bank, in a statement, said it intended to “vigorously defend” its trading activities in the US market, opening the door to a protracted lawsuit. A FERC spokesman declined to comment, saying the commission has not issued an order in the case.

          Other regulators have also brought significant cases outside electricity. In a notorious case, the CFTC last year charged Parnon Energy, a US oil trader, together with its Swiss and UK affiliates Arcadia, with manipulating oil prices in 2008. Arcadia has denied any wrongdoing.

          Additional reporting by Gregory Meyer in New York

          Funds boost for St James’s Place

          Posted on 31 October 2012 by

          Shares in St James’s Place hit a five-year high after the life-assurer-cum-wealth-manager said well-heeled investors had entrusted more funds to it.

          The group, in which Lloyds Banking Group holds a 57 per cent stake, said it now manages £32.8bn worth of client monies – an increase of 6 per cent in the past three months and 15 per cent since the start of the year.

            St James’s Place has more than 200,000 clients with at least £50,000 invested, and has found that they are increasingly seeking face-to-face advice to deal with “a growing tax burden, low interest rates and increasing life expectancy”.

            The FTSE 250 company said lower volatility in equity markets in recent months had boosted the confidence of retail investors, which helped it to attract £750m worth of net inflows in the third quarter. This took the total net inflow for the year to £2.26bn.

            David Bellamy, chief executive, also argued that St James’s Place was well placed to win business from rivals – particularly from retail banks.

            He said high-street banks were increasing the minimum level of funds required by individuals seeking financial advice. “High-street players . . . are looking to distance themselves from the middle market,” he said.

            By closing or cutting back on their advisory services, the banks were also making more financial advisers available for St James’s Place to recruit, he added.

            But analysts said the future of Lloyds’ stake in the business, which was originally bought by HBOS in 2000, remained a key consideration for investors. According to Barrie Cornes, analyst at Panmure Gordon, a part-disposal of the stake “cannot be too far off”.

            St James’s Place also disclosed on Wednesday that Bank of America Merrill Lynch had replaced Deutsche Bank as its joint corporate broker, working alongside JPMorgan Cazenove.

            Shares in St James’s Place rose 16.3p or 4.35 per cent to 396.2p – their highest level since the onset of the financial crisis in August 2007.

            FT Comment

            New business growth at St James’s Place has accelerated in recent weeks, and its business model looks relatively well placed to deal with regulatory changes in the sector in 2013. But much of this appears to be priced in. After outperforming the mid-cap index by almost 15 per cent in the past six months, the shares trade on more than 21 times full-year 2012 earnings of 18p – a large premium to the FTSE 350 life insurance sector on 11 times earnings, and to wealth management peers Brewin Dolphin on 13, and Rathbones on 17. That leaves little room for any slip ups.

            ● Andy Haste, former boss of RSA, has been named as Lloyd’s of London’s deputy chairman. He replaces Andreas Prindl, who is retiring.

            KPMG opens office in Myanmar

            Posted on 31 October 2012 by

            KPMG has become the first of the big four professional services firms to open a Myanmar office, in what some observers see as a crucial step in the entry of big western investors to the country.

            The move highlights Myanmar’s rapid opening after western governments eased economic sanctions earlier this year. It also underlines the impact of the US policy shift on corporate America.

              KPMG withdrew from Myanmar in the early 2000s after the US imposed sanctions but is now seeing strong investment interest, particularly from its large base of Thai, Japanese and international clients in neighbouring Thailand and Singapore.

              Even so, the company’s rapid re-entry to Myanmar – before the country has finalised its much-postponed new foreign investment law and ahead of a new regulatory framework for business – surprised some Yangon-based analysts.

              “Every day we’re hearing of some new move by one company or another to enter Myanmar – but before the new legal framework is certain, it’s doubtful there’ll be many big investments,” said one Yangon-based diplomat.

              However KPMG, which is running the new Myanmar operation from its Bangkok headquarters, is confident of strong demand from its client network, particularly in Asia, said Kaisri Nuengsigkapian, the company’s chief executive in Thailand.

              “So far we have seen demand from local, regional and multinational clients. Some of our larger Thai clients already have operations in Myanmar which they control from the Thai headquarters. We have seen interest across all sectors,” she said.

              “We hope our presence in Myanmar can contribute to the development of regulatory infrastructure and promote good business practice,” Ms Kaisri added.

              Approved foreign investment in Myanmar amounted to $31bn as of September 30, about $10bn less than in the same period last year. Although foreign business missions have flocked to Myanmar, analysts say it is a “look-see” period ahead of new laws and regulations.

              “It’s all still evolving – and the entry of firms like KPMG is an important step – particularly for big western companies that need help in starting up in Myanmar and navigating aspects such as new US disclosure and licensing regulations,” said Praab Pianskool, who oversees Thailand, Myanmar and neighbouring countries at the US-Asean Business Council in Bangkok.

              Among several other top auditing and consultancy groups considering a move into Myanmar, Deloitte joined the council’s first Myanmar business mission in July.

              KPMG Thailand employs about 1,200 staff and counts Japanese and Thai companies – which are leading a new wave of investment interest in Myanmar – among its biggest clients.

              From its new office near central Yangon, the company will initially focus on tax and advisory services, with plans for auditing and other services to follow, noted Ms Kaisri. The Yangon office opened with a small team but more are being added, with flexibility to draw on KPMG operations in Japan, Singapore and Bangkok.

              “If a big company wants 60 people on the ground for a project next month, we can put them there. We’re seeing that businesses are interested and we’ll draw on appropriate resources as necessary to help our clients invest in Myanmar,” said another KPMG official.

              “We’ve had a longstanding relationship with Myanmar . . . It’s a market many of our global and Thai clients are interested in, so we’re happy that we can re-enter to support them,” said Ms Kaisri.

              Concern at Intesa debt exchange offer

              Posted on 31 October 2012 by

              Investors and analysts are up in arms over the terms of a bond exchange offer made by Italy’s Intesa Sanpaolo, which some argue is “aggressive” and potentially “gamechanging” for bondholders.

              The Italian bank last week announced that it would offer to exchange some of its existing tier two subordinated bonds for a new five-year senior bond.

                Greek government debtClick to enlarge

                Bond exchanges and debt buybacks have become commonplace among banks looking to replace expensive debt or find more collateral. But what is unusual about the Intesa debt exchange offer is that the Italian bank has amended the early redemption, or call, option on the notes and done so without consulting investors.

                The move is unsettling for bondholders as they see such call options as sacrosanct. Call options offer the ability for an issuer to repay debt early. While there are examples of other organisations not calling their bonds, investors expect borrowers to repay callable notes at the first opportunity and the notes are often valued on that basis.

                Intesa said that it did not “deem it appropriate to maintain its call-exercise policy in the existing market conditions” but would be offering investors a chance to exchange those notes affected with a new senior bond. It said those investors that did not take part in the exchange would see the call option removed so that the paper would be acceptable under new Basel III rules on tier two capital.

                Given the current economic environment, the worry is that other banks will decide not to call their bonds or adjust the language of their existing call options because it is either more expensive to refinance the debt or because of regulatory factors.

                There are concerns that so-called “economic calls” are becoming the trend.

                BBVA, for example, said in October that any decision to exercise the option to call some of its subordinated notes would take “into consideration the economic impact of such early redemption, the regulatory requirements and market conditions”.

                “We know that banks always have an option not to call a bond,” says Neil Williamson, head of European credit research at Aberdeen Asset Management. “And we were nervous on calls but we didn’t anticipate this step change . . . this kind of tactic leaves a sour taste in the mouth.”

                He says the risk to a bank is potentially reputational – if it fails to call its bond it may no longer be able to rely on those investors to support its next bond issue.

                Investors were angry when Deutsche Bank in 2008 broke with convention and decided not to exercise a call option on some subordinated bonds. But investors supported subsequent new issues of debt.

                Georg Grodzki, head of credit research at Legal & General, says the Intesa move is “unusual and un­helpful”, adding that it is rational that an issuer wants to change the terms in his favour, but he considers bondholders should be consulted and trustees should not act without their consent.

                Intesa said in its offer statement that the trustee, The Law Debenture Trust Corporation, was of the opinion that removing the call option was “not materially prejudicial to the interests of bondholders”.

                Mr Grodzki says the worry is that Intesa’s action “will open the floodgates” for other issuers trying to remove call options without involving bondholders. “This incidence will force investors to review their position,” he says.

                Analysts have questioned the rationale behind Intesa’s move since the new regulations on what kind of tier two capital banks must hold are being finalised. Intesa declined to comment.

                Ivan Zubo, European banks credit analyst at BNP Paribas says: “It’s yet to be seen what the [tier two capital] regulations will look like. But it is clear that Intesa could have done things differently . . . in general investors didn’t think that the premium was significant enough to offset such a change in policy. It’s a gamechanger. There’s no question about it.

                “I would be surprised if the management of other banks were not carefully looking at the issue and the market practice is progressively moving towards economic calls. But some will be wary about being associated with an action taken by banks in the [eurozone] periphery because it could be seen as a sign of weakness,” says Mr Zubo.

                Some investors and bankers argue that bondholders need to be more realistic.

                “The fact is there are banks where the cost of funding is higher than they’d like, especially in the periphery, and they don’t see why they should pay up to replace relatively cheap capital with more expensive debt,” says Stefan Isaacs, a fund manager at M&G Investments.

                “The bigger context is that banks are being pressed by regulators to increase their capital base and at the same time increase lending. You could argue that those two things are contradictory. But to then expect them to be as friendly to bondholders as they have been is a hope more than a reality.”

                EU short selling rules spark confusion

                Posted on 31 October 2012 by

                Late and complex guidance from regulators has left the markets unprepared and confused ahead of today’s imposition of the first pan-EU rules on short-
                selling, according to brokers, traders and investors.

                The far-reaching regulation, which was finalised in March, imposes tough disclosure requirements for investors who place large bets that the prices of EU-listed shares or bonds will fall.

                  The legislation also tightens rules against “naked” shorting – selling shares without arranging to borrow them first – and bans investors from buying credit default swaps on debt issued by sovereigns in the 27-nation bloc unless they can show they are hedging a long position.

                  But investors and their lawyers have complained that the European Securities and Markets Authority, the pan-EU regulator, has failed to give them enough guidance on how to calculate the size of their short positions.

                  “It’s a shambles,” said Darren Fox, a partner at Simmons & Simmons who advises hedge funds. “People are crying out for clarity. I can’t remember another piece of European legislation being implemented this badly.”

                  Dealers are even angrier. The regulation contains important exemptions to the rules for market makers but Esma is not expected to issue final guidance on what counts as market making until later in November.

                  “The regulators aren’t ready for this,” said Paul Cluley, a partner at Allen & Overy who has been advising market participants. “Esma isn’t ready. It is coming into force because there is a political will to be seen to be doing something, even if no one knows quite how, or indeed if, it will work.”

                  The regulation also marks one of the first times that the EU has sought to regulate transactions outside its borders – any shorting of a security with a primary listing in the EU is covered.

                  “This is really the first time that non-US regulation has impacted directly [on] US market traders,” said Stephen Wink, partner at Latham & Watkins, the law firm. “I think this was a real surprise for many folks in the US market.”

                  The UK’s Financial Services Authority recently set up an application procedure for institutions that think they fit under the market-making exemption but the City watchdog has told banks and brokers to look to Esma to define what is covered.

                  Esma officials acknowledged that the guidance on market makers would not be ready in time. But they noted that the EU regulator has already published two sets of frequently asked questions and downplayed the importance of the market-maker guidelines.

                  “The requirement regarding the market-maker and primary-dealer exemption is already set out in the regulation,” Esma said in a statement. “The proposed guidelines, which are currently under discussion, are aimed at clarifying and explaining the application of the regulation, but do not change its scope.”

                  But dealers said they needed the final guidelines to see whether Esma had responded to complaints that the draft version was significantly more restrictive than the regulation itself.

                  “There isn’t total clarity on how that market-making exemption will work,” said Richard Metcalfe of the International Swaps and Derivatives Association. “There is still debate about what actually constitutes market making and whether that has to be a frequent activity. That shouldn’t be the case.”

                  The new law also calls for the EU watchdog to opine whether national regulators are being reasonable when they impose emergency bans on selling equities and bonds short. Esma is expected to issue its view of the current Greek and Spanish bans this week.

                  Swiss boost holdings of UK debt

                  Posted on 31 October 2012 by

                  Switzerland has emerged as one of the biggest overseas buyers of UK government debt as it seeks to offload a huge stockpile of euro accumulated during its push to weaken the Swiss franc.

                  The Swiss National Bank more than doubled its holdings of sterling in the third quarter of the year in an effort to reduce its exposure to the eurozone, cutting its euro reserves from 60 to 48 per cent and increasing sterling reserves from £8bn to £18.9bn.

                    Analysts at UBS and Nomura estimated that the SNB had been responsible for two-thirds of total gilt purchases by non-UK residents in the third quarter of the year, buying £10bn-11bn out of an estimated £17bn in total. Overseas investors own nearly a third of the UK government bond market.

                    “This is a huge number. It will definitely have pushed gilt yields lower than they otherwise would have been,” said Geoffrey Kendrick, foreign currency analyst at Nomura. Ten-year gilt yields ended the third quarter flat at 1.73 per cent and have since climbed to 1.84 per cent.

                    Switzerland has built up record levels of foreign currency reserves this year as a direct consequence of its policy of keeping the franc at SFr1.20 against the euro, which has been in place since September last year. Switzerland is now the fifth largest reserve manager in the world, behind China, Japan, Saudi Arabia and Russia.

                    The central bank started buying tens of billions of euros a month in May, when the eurozone crisis worsened and foreign investors rushed to buy the Swiss franc as a haven asset. But the improved sentiment towards the eurozone in recent months has eased the pressure on the franc, giving the Swiss central bank time to diversify its holdings.

                    Other currencies including the Canadian dollar and the Australian dollar have also seen heavy inflows from the Swiss National Bank as it has recycled its euros.

                    Central bankers have taken note of Switzerland’s activity in the foreign exchange market this year. The governor of the Reserve Bank of Australia in August expressed surprise that a “conservative institution” like the SNB would be interested in the Australian dollar. Holdings of so-called “other” currencies by the SNB, which include the Australian dollar, rose to record proportions in the third quarter of the year at 4.1 per cent.

                    Switzerland’s ballooning reserves have sparked concerns among analysts. A report by Standard & Poor’s in September warned that Swiss buying of core eurozone government bonds had caused price distortions, sparking an unusual rebuttal from the SNB.

                    Hong Kong harbours ‘hot money’ misgivings

                    Posted on 31 October 2012 by

                    When you squeeze a balloon, you can never be sure where the bubble will pop out.

                    This is something like the uncertainty faced by investors, analysts and economists watching Hong Kong as the monetary authorities react against an apparent influx of “hot money”.

                      hong kongClick to enlarge

                      Banks, the stock market and property could all feel the effects of these inflows through inflated balance sheets or prices.

                      This is not yet happening, however, and the local government is also acting to prevent it happening in residential property. The question is not only about from where the hot money has come but also to where it has gone.

                      There is a related mystery, too, over the strength of capital outflows from China – a key source of hot money entering Hong Kong. Outflows appear to have been strong for much of the year but the signals used to judge this have gone into reverse.

                      “It’s always difficult to tell where hot money is coming from,” says Paul Tang, chief economist at BEA in Hong Kong. “But now it is much more likely to be from other markets, mainly the US and much less so from mainland China.”

                      First, the simple facts. The Hong Kong Monetary Authority has intervened five times in the space of two weeks to weaken the local currency, injecting HK$17bn and taking about US$2bn out of circulation. It said it expected net inflows to increase for some time.

                      Since the US Federal Reserve launched its third round of quantitative easing, the Hong Kong currency has strengthened. It is pegged to the US dollar at HK$7.8 and the HKMA must act if it hits either side of the trading band of HK$7.75 to HK$7.85.

                      Hong Kong is not alone in seeing strengthening pressure on its currency in the wake of QE3 – as the Fed action is known.

                      South Korea, Taiwan and other Asian countries have seen their currencies appreciate against the US dollar, while one way to view the October interest rate cut in Australia is that it was done to prevent another round of strengthening for the Aussie.

                      Hong Kong had similar issues during the first round of QE in the US in 2008-09. During that spell, the HKMA injected HK$650bn to hold down the exchange rate, many more times the amount spent so far in this round.

                      Back then, the cash injection was positive for the economy. There was a strong property market with a rising proportion of mainland buyers and strong Chinese corporate initial public offering activity in Hong Kong, which attracted international investment, say analysts at Citi.

                      There were also improving export markets as 2009 wore on and so good demand for corporate credit growth and trade finance. All of these things gave the hot money places to be usefully employed. Now things are much different.

                      In the stock market, an initial explosion of blocktrades and shares placings after QE3 led to almost $7bn worth of follow-on capital raisings or stakes changing hands in a range of listed companies. The Hang Seng rose almost 14 per cent by mid-October.

                      Investor fatigue set in before even the first decent-sized IPO could get
                      under way, however, and this week Fosun Pharmaceutical had a shocking debut. Also, market volumes have remained flat since QE3 against much of the rest of the year, suggesting no great leap in fund inflows.

                      In residential property, prices are up about 14 per cent this year. The government has instigated a 15 per cent stamp duty aimed at foreigners and speculators, partly designed to curb hot money flows.

                      But transaction volumes have been weak, according to Barclays analysts,
                      while the proportion of mainland buyers has been shrinking.

                      It is down from a peak of 42 per cent of new sales in the third quarter of last year to 23 per cent in the third quarter of this year, according to Credit Suisse analysts.

                      This may be slipping further. They note that in the recent sales of new blocks called Century Gateway and Kadoorie Hill, developers reported that mainlanders bought just 5 per cent and 10 per cent, respectively.

                      This trend runs counter to the view that there has been a wave of capital flight from China this year with estimates of $200bn-plus. It supports instead the view that companies on the mainland have been holding on to US dollars they have received in payments.

                      Either way, the pressure of funds flowing into Hong Kong from China does not look huge. The sharp rally in the renminbi against the US dollar suggests at the very least that less money may be seeping out of China.

                      So, the main area that could be seeing the money inflows then is Hong Kong’s banks, where deposits grew by 1.3 per cent, or about HK$99bn in September.

                      This though presents a problem, as analysts at Barclays note. Corporate credit demand is weakening, especially compared with 2008-09, while cross-border trade credit has weakened as mainland China interest rates have been cut and liquidity improved.

                      Furthermore, demand for mortgages is declining, with analysts at Citigroup pointing out that some Hong Kong banks have been increasing commissions to brokers to win more business.