Finance

By Tommy Wilkes

LONDON (Reuters) – As speculation grows about when the Federal Reserve will begin reducing the size of its balance sheet, some analysts say the era of “quantitative tightening” has already started.

Central bank balance sheets ballooned after the pandemic struck in 2020, but with economies rebounding and inflation soaring above target, central bankers are preparing markets for a reversal to their bond-buying stimulus.

Below are a series of graphics laying out the scale of central bank stimulus and what might happen next.

SLOWING, THEN SHRINKING

Markets tumbled this month at the prospect of the Fed hiking interest rates as early as March with quantitative tightening — a shrinking of its $8.8 trillion balance sheet after it doubled in size during the pandemic — following afterwards.

Still, other central banks such as the European Central Bank are likely to keep adding to global liquidity this year, offsetting some of that tightening.

That means that while the rate of expansion in the overall central bank liquidity pool has been slowing since mid-2021, an outright reduction of balance sheets is not expected until late-2022 or even 2023.

(Graphic: Global central bank stimulus – https://fingfx.thomsonreuters.com/gfx/mkt/gdpzykbekvw/cbank%20sheet.JPG)

BofA strategists expect major central bank balance sheets to stabilise rather than shrink in 2022, although as a percentage of GDP they estimate the major central banks will see a decline versus 2021 levels.

Steve Donzé, senior macro strategist at Pictet Asset Management, estimates the Fed, ECB, Bank of Japan, Bank of England, People’s Bank of China and the Swiss National Bank will collectively expand their balance sheets by $600 billion in 2022 — far below the post-financial crisis average of $1.8 trillion and 2021’s $2.6 trillion, but still a net addition.

However, he says that the $600 billion forecast could turn negative if the Fed tightens faster than anticipated today.

And a stronger dollar meant that for global investors, the five biggest central banks actually withdrew more stimulus in the three months to the end of December than they injected versus the preceding three months — the first quarter-on-quarter reduction since before the pandemic, according to his calculations.

(Graphic: Central bank liquidity flows-https://fingfx.thomsonreuters.com/gfx/mkt/klvykqbawvg/pictet%20global%20liquidity.PNG)

Donzé reckons Fed tightening, driven by the end of quantitative easing, rate hikes and then QT, will result in a 4.7 percentage point rise in a U.S. “shadow” real policy rate to -1.8% by the end of 2022.

This shadow rate rose 6 percentage points during the last tightening cycle, but that was over five years, between 2014 and 2019.

FLOWS NOT LEVELS

With central bank balance sheets towering above a huge $25 trillion, many observers say that even after some tightening liquidity will remain plentiful and rates historically low.

(Graphic: Central bank balance sheets, total assets – https://fingfx.thomsonreuters.com/gfx/mkt/akvezexqwpr/cenbank%20balance%20sheets.PNG)

Yet it’s the direction of travel that matters for markets pumped up on cheap cash.

Negative inflation-adjusted bond yields suggest the party will continue but as Citi’s Matt King notes central bank stimulus flows are falling fast and “markets follow flows, not levels”.

JP Morgan strategists point out that excess money supply — the balance of gross money supply versus money demand — has been falling since May by one measure, and the decline in “excess liquidity” is set to accelerate this year.

(Graphic: Excess money supply – https://fingfx.thomsonreuters.com/gfx/mkt/jnpwejbmlpw/jpm%20money%20supply%20chart.PNG)

They also calculate that money supply growth will decline from a $7.5 trillion per annum pace in 2021 to $4.5 trillion in 2022 and $3 trillion in 2023 — a level last seen in 2010.

(Editing by Saikat Chatterjee and Hugh Lawson)

By Tom Wilson

LONDON (Reuters) – A digital pound used by consumers could harm financial stability, raise the cost of credit and erode privacy, though a version for wholesale use in the financial sector demands greater appraisal, British lawmakers said on Thursday.

Britain’s central bank and finance ministry said in November they would hold a consultation this year on whether to move forward on a central bank digital currency (CBDC) that would be introduced after 2025 at the earliest.

Central banks across the world have stepped up work on CBDCs to avoid the private sector dominating digital payments as cash use falls. The prospect of widely-used cryptocurrencies issued by Big Tech has also galvanized such efforts.

But an e-pound used by households and business for everyday payments could see people move cash from commercial bank accounts to digital wallets, said the report by a committee in the House of Lords, parliament’s unelected upper chamber.

That could spark financial instability in times of economic stress and increase borrowing costs as a key source of lenders’ funding would dry up, it said.

A digital pound could also harm privacy, the report added, by allowing the central bank to monitor spending.

“We were really concerned by a number of the risks that are posed by the introduction of a CBDC,” Economic Affairs Committee Chair Michael Forsyth told Reuters.

Many benefits for the consumers could be “achieved by alternative means with fewer risks,” Forsyth said, pointing to regulation as a better tool to ward off the threat of crypto issued by Big Tech firms.

However, a wholesale CBDC used to transfer large sums could make securities trading and settlement more efficient, the report said. Britain’s central bank and finance ministry should consult on its advantages over the expansion of the existing settlements system, it said.

Britain’s parliament should have the final say on any decision to launch a e-pound, the report said, calling for lawmakers to also vote on its governance.

A CBDC would have “far-reaching consequences for households, business and the monetary system,” Forsyth said. “That needs to be approved by parliament.”

(Reporting by Tom Wilson; Editing by Tomasz Janowski)

WARSAW (Reuters) – Poland will cut value added tax on gas, food and petrol as part of a second package of measures to soften the blow from surging inflation, the prime minister said on Tuesday.

Rapid price growth has eaten into household budgets, posing a headache for a government that has built its popularity to a large extent on raising living standards for ordinary Poles through generous social benefits.

“(The programme) is intended to leave as much money in Poles’ wallets as possible,” Mateusz Morawiecki told a news conference.

The measures, several of which had been previously announced, include a cut in VAT on basic food items and gas to zero, sharp reductions in VAT on fuel, heating and electricity.

Poland has been hit by Europe’s energy crisis, which started last year when the lifting of COVID-19 restrictions put huge demands on depleted stocks of natural gas. Rising fuel prices during winter have contributed to a cost-of-living squeeze across the region.

Morawiecki said the anti-inflation measures would cost the budget 15-20 billion zlotys ($3.74- 4.99 billion).

Morawiecki’s ruling nationalists Law and Justice (PiS) have faced a difficult start to the year, with businesses complaining about the soaring energy costs and mistakes in a flagship economic programme that was meant to lower taxes for most people but resulted in some workers, such as teachers, receiving lower paychecks in January.

Particularly damaging were reports that institutions such as schools and hospitals were facing gas bills many times higher than a year ago.

The latest package of anti-inflation measures contains a proposal to add those institutions to a tariff mechanism that protects households from surging gas prices.

“This (mechanism) meant that the increase in gas bills for households was still very big, but a 54% average increase for these customers compared to several hundred percent… for other entities, we must say that it was quite reasonable,” Deputy Prime Minister Jacek Sasin told public radio on Tuesday morning.

Economists have said that the government’s measures will cut the peak of inflation in the first half of 2022, but could serve to boost price growth later on.

On Monday, analysts from Credit Agricole said that a temporary cut on VAT on food to zero would actually lead to prices being higher than they would have been otherwise when taxes return to normal, citing the risk that companies partially absorb the tax break as profit.

($1 = 4.0090 zlotys)

(Reporting by Alan Charlish, Anna Koper, Anna Wlodarczak-Semczuk; Editing by Jan Harvey and Frank Jack Daniel)

By Tommy Wilkes, Saqib Iqbal Ahmed and Elizabeth Howcroft

LONDON/NEW YORK (Reuters) – In May, San Diego-based Emily was feeling flush from a year of double-digit gains earned from trading stocks. Equity options, which some fellow stay-at-home investors were dabbling in, would juice up her returns, she decided.

Emily was among the army of small-time investors who shook up stock markets in 2021. Some earned fortunes by squeezing out hedge funds from short positions on so-called “meme” stocks such as retailer GameStop and cinema group AMC Entertainment.

But AMC proved to be Emily’s downfall. As its shares hovered around $15, she began selling “naked call options” that allowed holders to buy underlying stock from her at pre-agreed price. Instead of falling as expected, however, AMC stock rocketed.

Naked options meant Emily did not actually own the shares. When AMC shares hit $72.62 on June 2, margin calls kicked in – essentially a demand for cash to top up her brokerage account.

“I was on the phone with (brokerage) TD Ameritrade’s margin team, telling them to give me more time … but it was either I sell it or they sell it,” she said. Eventually, she said she liquidated her portfolio, losing $670,000.

For a related graphic on AMC Surge, click: https://fingfx.thomsonreuters.com/gfx/mkt/akvezodylpr/amc.PNG

Emily is not the trader’s real name but she provided documents confirming her identity. Reuters could not independently verify the size of her losses but reviewed brokerage statements showing she sold sizeable call options on AMC and other stocks in May.

“It was very devastating. I couldn’t sleep,” Emily said. Having quit her human resources job at the end of 2019 to trade full time, she now works as a delivery driver.

Her account is a cautionary tale of what can happen when booming markets tempt inexperienced investors to risk it all.

But for every Emily, there is a small-time trader who surfed this year’s stock market boom, energised by economic recovery, central bank money-printing and government cash handouts.

TD Ameritrade, the broker Emily used, says along with broker Schwab, it added six million new accounts this year.

Conditions were ripe for retail trading even pre-pandemic, as new mobile platforms enabled individuals to buy stocks, or fractions of stocks, at tiny or even non-existent commissions.

“Everyone can get their bit of the pie,” said Ben Phillips, a 30-year old London-based pilot who started trading in 2019. He calls himself a long-term investor, but also day trades “as a bit of fun, a bit of gambling”.

The retail wave was the “main reason” global equity demand reached $1.1 trillion this year, JPMorgan strategist Nikolaos Panigirtzoglou said.

“By acting as momentum traders, retail investors will most likely continue to propagate the equity markets, at least for the coming year. They will have no alternatives because interest rates will stay near 0%,” he added.

BIG BUYERS

Retail trading, unlike meme crazes, seems unlikely to fade.

U.S. retail traders have bought a net $281 billion worth of U.S. stocks so far this year, against $240 billion in 2020 and $38 billion in 2019, according to Vanda.

Many forayed into equity options, lifting U.S. volumes more than 40% from 2020, analytics firm Trade Alert estimates.

They also account for up to half the trading in single-stock options – wagers on individual shares – according to JPMorgan. That in turn took such options’ share of total option volumes to a record high this year, Reuters analysis of Trade Alert data shows.

For a related graphic on Equity options, click: https://fingfx.thomsonreuters.com/gfx/mkt/znpnexymnvl/equity%20options.PNG

The retail frenzy is most pronounced in U.S. markets and even platforms popular in Europe say traffic is generally highest in U.S. companies such as Tesla, Nio, Apple, Amazon and GameStop.

But the trend is broadening.

Russia’s Moscow Exchange says 26 million retail accounts are registered with it, up four-fold from early 2020, and both the bourse and brokerage Tinkoff plan to expand trading hours, including into the weekend.

In India, 19% of trading in November was by mobile phone – one barometer of retail activity – according to Bombay Stock Exchange data, versus 7% in November 2019.

SLOWDOWN

Trading activity growth has slowed, possibly as central banks signal higher interest rates are coming.

Brokerage eToro’s online platform, which has two-thirds of its customers in Europe, saw 106 million trades in the third quarter of 2021, half of the first quarter total, though well above early-2019 levels of 63 million.

Meagre returns elsewhere persuaded Phillips, the pilot, to start trading in late 2019.

While his Tesla holdings were hit hard by the March 2020 sell-off, he bought more after watching YouTube videos where traders advised watchers to “buy the dip.”

The subsequent bounce quadrupled Phillips’ initial 15,000 pound ($20,100) outlay, he said, but he has no plans to sell, citing his “10-year conviction” on Tesla.

Others such as Dan, a 24-year-old student from northern England, caught the trading bug through “boredom” and reading online chatrooms such as ‘WallStreetBets’ that pumped meme stocks.

Requesting his full name not be used, Dan says he made four times his 1,000 pound investment in GameStop, though friends who got in late lost money.

He has since quit day trading, calling it “luck,” but invests in stocks via a British savings account. The experience had “helped me be more financially literate,” he added.

Emily, the Californian trader, also still trades but in smaller volumes.

She hopes one day to rebuild her portfolio.

($1 = 0.7454 pounds)

(Additional reporting by Andrey Ostroukh in Moscow Editing by Sujata Rao and Mark Potter)

MILAN (Reuters) – Stellantis said on Friday it had entered exclusive talks with BNP Paribas, Credit Agricole and Santander as it seeks to overhaul its financing operations in Europe through new partnerships.

The world’s fourth largest carmaker said it aimed to create a 50-50 operational leasing company with Credit Agricole Consumer Finance, while reorganising its financing activities through joint ventures in each country with BNP Paribas Personal Finance and Santander Consumer Finance.

The relevant agreements could be signed in the first quarter of next year, while the transaction are expected be completed in the first half 2023, Stellantis added in a statement.

(Reporting by Giulio Piovaccari; editing by Agnieszka Flak)

By Patturaja Murugaboopathy

(Reuters) – Global hedge funds are poised to achieve positive inflows in 2021, for the first time in three years, data from Preqin shows, thanks to strong returns and an investor shift to alternative assets during a period of volatility and rising inflation.

Alternative assets data and analytics firm Preqin’s data shows hedge funds have attracted flows totalling $40.9 billion in the first three quarters of the year, after outflows of $97.2 billion and $44.5 billion in 2019 and 2020 respectively.

(Graphic: Quarterly flows into hedge funds, https://fingfx.thomsonreuters.com/gfx/mkt/jnvweabzavw/Quarterly%20flows%20into%20hedge%20funds.jpg)

“Investors are looking to hedge funds to achieve a measure of diversification, particularly considering that the specter of inflation has recently entered the fray,” Benjamin Crawford, vice president and head of research at alternate investment data firm BarclayHedge, said.

“Several sectors of the hedge fund industry have a well-earned reputation for shielding assets from inflation.”

(Graphic: Hedge funds’ total asset under management, https://fingfx.thomsonreuters.com/gfx/mkt/akvezoxrnpr/Hedge%20funds%20total%20asset%20under%20management.jpg)

Analysts said the inflows are likely to rise further next year due to increased market volatility and uncertainty over the Omicron variant of COVID-19.

Data from Preqin showed global hedge funds gained 13.9% on average between January and November this year, marking their third successive year of returns above 10%. That compares with the MSCI global stock index’s gain of 12.4% in the same period.

(Graphic: Yearly performance of hedge funds, https://fingfx.thomsonreuters.com/gfx/mkt/byvrjqedeve/Yearly%20performance%20of%20hedge%20funds.jpg)

Event-driven strategies, which bet on corporate changes such as mergers and restructurings, led with a 15.1% gain, while equity strategies delivered a 12.3% gain.

On the other hand, macro strategy funds provided just 7% return in the first eleven months of 2021, compared with more than 14% in 2020.

(Graphic: Hedge funds performance by strategy, https://fingfx.thomsonreuters.com/gfx/mkt/egpbkoqwwvq/Hedge%20funds%20performance%20by%20strategy.jpg)

“Global macro hedge funds have been challenged, as some common themes at the start of the year have not played out as planned, such as the steepening yield curve theme and weakness in the US dollar,” Robert Christian, co-chief investment officer at K2 Advisors, said.

According to eVestment data, multi-strategy funds and managed futures funds were the biggest recipients of cash into hedge funds between January and October this year, taking in $24.7 billion and $13.1 billion respectively.

Long/short equity funds, on the other hand, witnessed the highest outflow of $12.6 billion this year.

(Graphic: Fund inflows by hedge fund strategies, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjonqxqpr/Fund%20inflows%20by%20hedge%20fund%20strategies.jpg)

Broken down by region, U.S. hedge funds attracted $44.3 billion this year, while Europe and Asian funds obtained $2.95 billion and $2.34 billion respectively.

On the other hand, emerging market funds saw outflows totalling $4.86 billion, the data showed.

“Seemingly, everyone is finding a reason to put their assets into hedge funds, regardless of whether they think the current moment portends doom, the coming of a halcyon age, or have absolutely no idea what’s ahead but don’t want to be caught off guard either way,” BarclayHedge’s Crawford said.

(Additional reporting by Gaurav Dogra in Bengaluru; Editing by Vidya Ranganathan and Alexander Smith)

(Reuters) – Bitcoin rose on Sunday to reclaim levels above $50,000.

The world’s biggest and best-known cryptocurrency gained 2.11% to $50,445.34 at 1803 GMT on Sunday, adding $1,044.80 to its previous close.

Bitcoin is up 81.9% from the year’s low of $27,734 on Jan. 4.

Ether, the coin linked to the ethereum blockchain network, rose 0.26% to $4,100 on Sunday, adding $10.78 to its previous close.

(Reporting by Anirudh Saligrama in Bengaluru; Editing by Lisa Shumaker)

By Noor Zainab Hussain

(Reuters) – Visa Inc, the world’s largest payment processor, on Wednesday launched a global crypto advisory service for clients such as banks and also merchants, as the adoption of digital currencies gains steam.

The move by Visa comes against the backdrop of unprecedented investor demand for crypto services and the company’s latest offering is geared towards financial institutions eager to attract or retain customers with a crypto offering, retailers looking to delve into non-fungible tokens (NFTs), or central banks exploring digital currencies.

Visa’s services include educating institutions about cryptocurrencies, allowing clients to use the payment processor’s network for digital offerings, and helping manage backend operations.

“We came to Visa to learn more about crypto and stablecoins and the use cases that are most relevant for our retail and commercial business lines,” said Uma Wilson, executive vice president at UMB Bank, a regional U.S. lender.

A new global study by Visa showed nearly 40% of crypto owners surveyed would be likely or very likely to switch their primary bank to one that offers crypto-related products in the next 12 months.

Visa currently uses its network to allow buying, selling, and custody of digital currency. It also offers a credit card that lets users earn bitcoin on purchases and also allows the use of USD Coin, a stablecoin cryptocurrency whose value is pegged directly to the U.S. dollar, to settle transactions on its payment network.

However, for cryptocurrencies such as bitcoin to be used as a medium of exchange, price stability is needed, Visa’s Chief Financial Officer Vasant Prabhu told Reuters.

“If the price is going to fluctuate from $60,000 to $50,000 in a few hours, it’s a very difficult thing for a merchant to accept (bitcoin) as a currency,” Prabhu said.

“I don’t know if cryptocurrencies like bitcoin will ever be a medium of exchange. Stablecoins will,” he said, adding that Visa would facilitate such transactions when the time was right.

(Reporting by Noor Zainab Hussain in Bengaluru; Editing by Shailesh Kuber)

By Matt Scuffham

NEW YORK (Reuters) -U.S. bank executives on Tuesday raised concerns about the impact of a sustained period of higher inflation, adding to pressure on the Federal Reserve to accelerate plans to slow down the pace of its asset purchases.

Wells Fargo Chief Executive Charlie Scharf said at a conference that the Fed may need to move more quickly to address inflation concerns. Goldman Sachs Chief Executive David Solomon said he anticipated a period of higher inflation.

The International Monetary Fund last week warned of intensifying inflationary pressures, especially in the United States, and said U.S. central bankers should focus more on inflation risks.

“There’s a case to be made that they (the Federal Reserve) should be moving faster than they’ve been moving,” said Scharf, speaking at the Goldman Sachs Financial Services Conference.

“Inflation is very, very real,” he said. “Prices are significantly higher for inputs across most industries. Labor shortage and wage increases are extremely real. Whether that continues for several years is not all that relevant but it certainly will have an impact over the next year or so.”

The Fed needs to be ready to respond to the possibility that inflation may not recede in the second half of next year as most forecasters currently expect, Federal Reserve Chair Jerome Powell said last week.

“My guess is now that there will be a quicker path to appropriate actions,” said Scharf.

Goldman Sachs’ Solomon anticipates inflation will be higher for a period but doesn’t expect a repeat of the cost rises seen in the 1970s, he said in an interview with CNBC.

“There’s a reasonable chance that we’re going to have inflation above trend for a period of time but that doesn’t mean it has to be like the 1970s,” he said. “You’ve got to be cautious and manage your risk appropriately.”

Solomon acknowledged “uncertainty” in global financial markets due to factors including the Omicron COVID-19 variant and question marks over the pace at which the Fed and other central banks will reduce asset purchases.

“We’re still not completely out of the pandemic. There’s uncertainty that comes from that and that uncertainty is going to affect economic activity,” he said.

“On top of that, we have shifts going on in fiscal and monetary policy to try to balance that. There’s no question that this has been an unprecedented period so it’s very hard to predict how we’re going to come out of this.”

(Reporting by Matt Scuffham, Editing by Louise Heavens and Emelia Sithole-Matarise)