Summary for the 29th of January 2019


In the aftermath of the financial crisis, the Federal Reserve (Fed.) has been cutting interest rate and buying treasury securities, agency debt and agency mortgage backed securities to lower the longterm interest rate and thus stimulates the economy. This leads to a built up of the Fed’s balance sheet, up until 2017, the Fed has been reinvesting the proceeds of the maturing securities. Since 2017, the Fed is gradually reducing the holding of these securities, and to lower its balance sheet by decreasing reinvestment of the proceeds.

There are two factors that are important in the financial market: The solvency regulations of the financial institutions and the systems for liquidity management. In the aftermath of the financial crisis, banks are required to hold more liquid assets, often through required reserve in the central bank to obliged the liquidity coverage ratio.

As a result, the required liquidity in the Fed has been higher than necessary these last years, thus creating an uncertainty about what level of the reserve is going to trigger a stress in the money market, as was clear during the end of the 2018 where there were signs of stress in the money market.

The President of the European Central Bank, Mario Draghi held a statement at the the ECON committee of the European Parliament yesterday, this was his last hearing before he will be stepping down as the President in October. The message still has the same tone as the meeting on the 25thof January, but with a clearer message about The US and China resolving their trade conflict, the economic growth would start picking up the pace again. He also is relying on the Chinese government economic measures to also lead to increase growth in the EU-area.

Greece government announced yesterday that it would be returning to the bonds market and would be selling bonds for the first time after it has exited from the international bailout program 5 months ago. It would like to test the investor interest in the country after the Prime Minister Alexis Tsipras securing the ratification of the Macedonian name deal.

Indices on 28th of January: US stock market has declined this day due the US government unveils criminal charges against Huawei of stealing American technology and breaking sanctions against Iran. The Asian stock market also declined due to lower expectation of the economic growth from China.

Dow: -0.8% (28th)
S&P 500: -0.8% (28th )
Nasdaq: -1.1% (28th)
Nikkei: -0.1% (29th)
Chinese indices: -0.9% (29th)
STOXX Europe 600 Index: +0.80% (29th)

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