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SHIFTING FROM REFLATION TO THE HIGHER YIELD TRADE

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SHIFTING FROM REFLATION TO THE HIGHER YIELD TRADE

By Graham Bishop, Investment Director at Heartwood Investment Management

Central bank liquidity has been a key support for economic activity in recent years. However, policymakers in the US, Europe, UK and Canada have recently signalled their intent to start to (or continue to) withdraw emergency stimulus and normalise monetary conditions. After several years of being part of the solution in helping to avert a global depression following the 2008 Financial Crisis, central bank policymakers are beginning to acknowledge that they now run the risk of being part of the problem, possibly contributing to excesses that have the potential to destabilise future growth. Worries about persistently low interest rates and their impact on the misallocation of capital, which many believe have contributed to growing income inequalities and the dissatisfaction of electorates with political elites, seem to be prompting this shift in narrative.

Whether these rhetorical efforts represent the early stages of a coordinated global tightening programme remains open to debate. In any event, the pace of any tightening being considered is likely to be very gradual and should still leave financial conditions very accommodative. What is evolving, though, at least in the US and Europe, is that policymakers appear willing to overlook recent inflation disappointments, which they see as transitory, and instead are focused on the solidity of global growth. In their view, deflation risks have been defeated and the discussion now shifts to the adjustment of the current policy framework, which has been established for an emergency situation. Meanwhile, policymakers from the Bank of England have emphasised that the tolerance level for above-target inflation (the target being 2%) is at the limit, although we expect this hawkishness might prove short-lived given downside risks to UK growth prospects.

While central banks are likely to proceed carefully to avoid any disorderly market disruption, we have to acknowledge that policy risk is rising. Balance sheet reduction in the US, tapering in Europe and further targeted tightening measures in China could all impact market liquidity and sentiment, despite overall financial conditions still remaining accommodative. These potential outcomes also come at a time when the growth momentum appears to be softening in the US and UK, albeit at the margin. By implication, in the future, the onus would fall to governments to support growth as central banks step back from financial markets.

It remains early days and for now, at least, economic fundamentals continue to support risk asset markets. Nonetheless, more policy uncertainty is likely to add to market volatility and higher bond yields to reflect a less dovish posture taken by many central banks. The marked rise in the 10-year German bund yield at the start of July is a clear symptom of this shifting narrative. We may now be entering a period which is not so much characterised around the ‘reflation’ trade, but rather the ‘higher yield’ trade.

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Current cryptocurrencies unlikely to last, Bank of England governor says

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Current cryptocurrencies unlikely to last, Bank of England governor says 1

By David Milliken

LONDON (Reuters) – No existing cryptocurrency has a structure that is likely to allow it to work as a means of payment over the long term, Bank of England Governor Andrew Bailey told an online forum hosted by the Davos-based World Economic Forum on Monday.

“Have we landed on what I would call the design, governance and arrangements for what I might call a lasting digital currency? No, I don’t think we’re there yet, honestly. I don’t think cryptocurrencies as originally formulated are it,” he said.

Bitcoin, the best-known cryptocurrency, hit a record high of $42,000 on Jan. 8 and sank as low as $28,800 last week, far greater volatility than is found with normal currencies.

“The whole question of people having assurance that their payments will be made in something with stable value … ultimately links bank to what we call fiat currency, which has a link to the state,” Bailey said.

The BoE, like the European Central Bank, is looking at the feasibility of issuing its own digital currency. This would allow people to make sterling electronic payments without involving banks, as is currently possible with banknotes, and would in theory help avoid the volatility that renders bitcoin impractical for commerce.

Bailey said the appropriate level of privacy for digital currencies was likely to be hotly debated and was potentially underrated as a challenge in setting one up.

“This is a big one that is coming on to the landscape, the whole question of a privacy standard for transactions made in any form of digital currency, and where the public interest lies,” he said.

(Reporting by David Milliken, editing by Tom Wilson and Alistair Smout)

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EU sustainable investment rules need better corporate data – banking report

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EU sustainable investment rules need better corporate data - banking report 2

By Simon Jessop and Kate Abnett

LONDON (Reuters) – European Union rules aimed at defining sustainable investments should help reduce “greenwashing” by businesses, but better quality corporate data is needed to ensure they work effectively, a banking report said on Tuesday.

The sustainable finance rules will classify investments that can be marketed as sustainable, a move aimed at steering much-needed cash into low-carbon projects to deliver the bloc’s climate goals.

From January to August 2020, 26 of the region’s biggest lenders tested the EU framework across a range of core banking processes, including retail banking, trade finance and lending to smaller companies.

As the main providers of finance to companies across the EU, the ability of the banking system to track and report on whether corporate activities are sustainable or not could prove crucial in assessing the rules’ success or otherwise.

The lenders broadly welcomed the regulations as they seek to align their businesses with the transition to a low-carbon economy, the report by the United Nations Environment Programme Finance Initiative and the European Banking Federation found.

However, they also raised a number of issues, many of which were data-related and could require a phasing in of reporting requirements.

While many large companies are already required to disclose certain environmental and social information by law, the bulk of smaller and mid-sized banking clients are not, hampering banks’ assessment of their alignment with the rules.

Concerns over the quality, detail and standardisation of data is also an issue when looking at banks’ lending overseas, something that would be made more complex as other regions launch their own regulations.

The banks who tested the EU rules called on regulators to seek global alignment of regulations, and for better tools to manage data from clients, such as a centralised EU database.

While under no compulsion to lend to activities that can be classed as sustainable, banks see sustainable finance as a growth area that is likely to take on more importance in coming years should policymakers tighten environmental legislation.

With more investors globally looking to become shareholders of companies with a good record on managing environmental risk, banks are also likely to look to reduce their exposure to environmentally or socially harmful activities over time.

The European Commission is expected to finish the section of the rules covering climate change in the coming months, before they take effect in 2022.

(Reporting by Simon Jessop and Kate Abnett; Editing by Pravin Char)

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Bitcoin, crypto inflows hit record last week – CoinShares

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Bitcoin, crypto inflows hit record last week - CoinShares 3

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Investment flows into cryptocurrency funds and products hit a record $1.31 billion last week after a few weeks of small outflows, as investors took advantage of the decline in bitcoin and other digital asset prices, according to the latest data on Monday from asset manager CoinShares.

Total assets under management (AUM) in the industry slipped to $29.7 billion as of Jan. 22, from an all-time peak of $34.4 billion on Jan. 8. At the end of 2019, the total AUM was just $2 billion.

Grayscale, the world’s largest digital currency manager, posted assets under management of $24 billion last week, down from $28.2 billion on Jan. 8. CoinShares, the second largest crypto fund, managed assets of $2.9 billion in the latest week, also down from $3.4 billion on Jan. 8.

“We believe investors have been very price conscious this year due to the speed at which prices in bitcoin achieved new highs,” said James Butterfill, investment strategist, at CoinShares.

“The recent price weakness, prompted by recent comments from Secretary of the U.S. Treasury Janet Yellen and the unfounded concerns of a double spend, now look to have been a buying opportunity with inflows breaking all-time weekly inflows,” he added.

Bitcoin dropped to a low of $28,800 on Friday, after scaling an all-time peak of $42,000 on Jan.8. It was last down 0.5% at $32,124.

About 97% of inflows went to bitcoin, the data showed, with Ethereum, the second largest cryptocurrency, posting inflows of $34 million last week.

So far this year, volumes in bitcoin have been considerably higher, trading an average of $12.3 billion per day, compared to $2.2 billion in 2020.

Glassnode, which provides insight on blockchain data, said in a report on Monday that bitcoin’s net unrealized profit/loss (NUPL) was getting close to exceeding the “belief” range and moving into the “euphoria” range.

Previously, when NUPL entered this range, it signaled a global top in bitcoin’s price.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Richard Chang)

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