Downward Stress on Cash-Market Charges Continues; Delta Variant Hits China Companies Sector

Good day. The Federal Reserve’s primary tool for controlling economic dynamism is ticking down again, increasing the possibility that officials may need to take technical measures to get it going again. Meanwhile, China’s service sector suffered an unexpectedly severe blow in August when a wave of coronavirus infections across the country triggered new lockdowns and sent an official measure of non-manufacturing activity to a contraction area.

Now for today’s news and analysis.

Top news

Covid-19 Delta variant beats up China’s service sector

China’s official non-manufacturing purchasing managers’ index, which tracks activity in construction and services, slumped to 47.5 in August from 53.3 in the previous month, according to data released Tuesday by the National Bureau of Statistics. The value of 47.5 – which fell far short of what economists had forecast for a value comfortably above 50 – marks the measure’s first break into contracting territory since February 2020, at the height of the initial coronavirus explosion that led to the lockdown Hubei Province.

Derby’s Take: Funds rate is softening, adding to the specter of technical rate boosts

By Michael S. Derby

The effective key interest rate has been slipping since around mid-August after it was raised by the Fed at the beginning of summer following a technical rate hike. The key interest rate, which had been around 0.10% for most of the summer, fell to 0.9% on August 18 and again to 0.8% on Monday. If the key rate stays soft or softens and this shift proves to be sustained, the Fed may have to react by revoking the settings of its interest rate control toolkit. Continue reading.

Important developments around the world

Oil industry investigates damage after Hurricane Ida slam in Louisiana

Energy companies assessed the condition of refineries, pipelines, petrochemicals and offshore oil rigs along the central Gulf of Mexico on Monday, the day after Ida hit Louisiana as a powerful Category 4 hurricane.

Unfinished tractors and pickup trucks pile up as components become scarce

Manufacturers stack unfinished goods on factory floors and park incomplete vehicles in airport parking lots while waiting for missing parts, made scarce by supply chain problems that disrupt multiple industries.

New life and work choices enliven exurbs and bring new strains with them

Extra-urban areas have grown nearly twice as fast as domestic over the past decade, and there are signs that growth is accelerating as Americans prepare for a landscape where increased work from home means the need to commute decreased.

EU recommends stopping non-essential travel from the USA

The European Union recommended stopping non-essential travel from the US due to the increase in Covid-19 cases, diplomats said on Monday, ending a summer vacation break for American tourists.

Summary of the Financial Regulation

SEC chair warns against payment for order flow

Robinhood Markets Inc.’s shares plunged Monday after the chief of the Securities and Exchange Commission signaled he was ready to ban payments on the order flow, which makes up most of the online brokerage’s revenue.

Members Exchange urges regulators to fix stock prices for half a penny

Investors could see shares of Apple Inc. and Bank of America Corp. for $ 152.005 or $ 42.115 per share if regulators sign a proposal presented this week. Members Exchange, a startup exchange backed by major Wall Street firms, said in a proposal that the Securities and Exchange Commission should allow some heavily traded stocks to be valued in half-cent increments.

So far, direct listings have paid off for investors

Eyewear maker Warby Parker Inc. is the latest to file with the SEC for direct listing, demonstrating the persistence of the alternative path to public markets for companies that don’t need to raise money.

Foresight

Wednesday (all times ET)

9:30 p.m .: Bank of Japan’s Wakatabe speaks at a meeting with local leaders in Hiroshima

Thursday

8:30 a.m .: US Department of Commerce releases international trade data for July

research

Goldman Sachs says evictions threaten

Around 750,000 American households are now threatened with eviction from rental apartments in the wake of the latest political changes that protect the financially needy, Goldman Sachs said in a message to customers. The investment bank estimates that between 2.5 million and 3.5 million households are behind on rents and owe landlords up to $ 17 billion, while state aid to tenants is slow. “The strength of the housing and rental market suggests that landlords will try to evict tenants who are behind on rent unless they receive government support,” the note said. According to analysts at Goldman Sachs, this should not have a very negative impact on the economy. They say in the note that “Our literature research shows that an eviction episode of this magnitude is a small burden on consumption and employment growth.”

– Michael S. Derby

Basis points

Asking rents for homes rose nearly 13% year-to-date through July, the highest annual increase in five years, according to real estate data company Yardi Matrix.

US pending home sales declined for the second straight month in July, according to the National Association of Realtors, whose index of pending home sales fell 1.8% from June to 110.7. Pending home sales declined 8.5% year over year in July. (DJN)

Manufacturing output in Texas slowed in August, with the Dallas Fed’s Manufacturing Outlook Survey manufacturing index falling to 20.8 from July 31. The general business activity index, which rates general terms and conditions in the industry, fell from 27.3 to 9. (Dow Jones Newswires)

Aluminum forwards on the London Metal Exchange are up a third this year and prices are around 80% above their low in May 2020 when the pandemic restricted sales to the aerospace and transportation industries.

German inflation in August was 3.9% year-on-year, compared to 3.8% in July. (Dow Jones Newswires)

Business and household confidence in the euro zone fell slightly in August after hitting an all-time high in July, the European Commission said, noting that the economic sentiment indicator fell from 119.0 in July to 117.5. Economists polled by the Wall Street Journal expected an index of 118.0. (DJN)

Canada’s quarterly current account surplus rose to $ 3.58 billion or the equivalent of $ 2.84 billion in the second quarter as goods exports soared, Statistics Canada said. The data for the first quarter has been revised, Statistics Canada said, adding that the current account surplus for the first three months of the year was $ 1.82 billion, compared to an earlier estimate of $ 1.18 billion. (DJN)

(END) Dow Jones Newswires

Aug 31, 2021 9:35 AM ET (1:35 PM GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.

Cash-Market Funds Face New Guidelines After Covid Stumble. This is What Might Occur.

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Dream time

While the race in cash At the start of the pandemic, investors pulled cash from money market funds that invest in short-term corporate and municipal debt. That has regulators again concerned about the stability of the sectorand they are considering further rule changes to support them.

In March 2020, investors withdrew $ 125 billion from high-quality funds investing in short-term corporate bonds and $ 9 billion from tax-free money market funds, US officials wrote in a December report. Investors pulled less cash on an absolute basis than they did during the 2008 financial crisis, when a huge prime fund “broke the money” when its share price fell below $ 1. However, with the industry’s asset base lower in 2020, withdrawals made an even larger proportion of the industry’s total size.

Although the market did not repeat itself in 2008, investor exit exacerbated the pressures in the short-term corporate and local finance markets and prompted the Federal Reserve to do so step in and create a facility dedicated to money market funds. This follows two rounds of regulatory efforts to prop up money market funds after the financial crisis.

After renewed burdens last year, officials like Fed Chairman Jerome Powell are now discussing the prospect of new rules to limit the need for future intervention. “We are looking for ways – and people around the world are looking for ways – to make these vehicles resilient so that they don’t have to be backed by the government when market conditions are tough,” he said at the central bank press conference on April 28th . April.

As the regulatory process progresses, strategists join in

Bank of America

hinder the likelihood of different changes.

US Officials suggested a list of 10 Possible reforms in their December report and in a May 6 release are categorized by analysts at the bank into three main categories.

The first group would ease the threshold at which funds would have the ability to penalize redemptions from investors. After the stress on money market funds during the financial crisis, regulators put in place a rule that money market funds can charge fees or goals if their cash equivalents fall below 30% of their portfolio.

Review & preview

Each weekday evening, we highlight the resulting market news of the day and explain what is likely to be important tomorrow.

One of the regulators’ proposals would allow money market funds to collect gates or fees if the board of directors decides that it is in the best interests of the fund, regardless of the size of its cash. This idea was popular with money market fund managers who responded to the government report, Bank of America found. All 14 respondents supported the idea.

The second set of proposals is to encourage either fund management companies or investors to pay to offset the risk of future runs. For example, officials are considering new rules detailing exactly when and how a fund’s parent company would be required to support their funds, for example by providing liquidity to cover investor withdrawals.

Third, regulators are considering a group of ideas to reduce the likelihood that investors will withdraw their money in the first place.

One of the options in this category would be a new rule that would reduce the incentive for an investor to try to get their money out of a fund first. In essence, the rule would introduce a delay before an investor could cash out a certain portion of their stock. This means that an investor who withdrew prematurely would still be involved in the losses if a fund ran.

While most money market fund managers didn’t endorse the idea, Bank of America said “it has some potential” although it “could make it less attractive to invest in top quality or tax-exempt money market funds.”

Another proposal could fundamentally change the expectations of individual investors in certain types of money market funds: regulators suggested allowing the price of retail investor stocks to fluctuate or, under certain conditions, move their prices up and down with market conditions instead of staying at 1 USD per share. This would reflect a rule change from the post-financial crisis, when officials introduced rules that allowed stock prices to float for institutional investors’ stakes in high-quality, tax-free money market funds.

Of course, these rules would only apply to money market funds that invest in short-term corporate or municipal debt. So it seems possible that this set of rule changes, like the last round of reforms, will continue to push investors into money market funds that invest in US government bonds.

In short, “there are changes coming in high-quality, tax-exempt money market funds,” wrote Bank of America, “which we believe will undermine investor interest in these funds.”

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com

Deal with Cash-Market Funds Like Banks

A year After the collapse of the COVID-19 market, the first major financial regulation debate under the Biden government revolves around mutual funds with high-quality money markets.

While banks held up well during the pandemic (demonstrating the success of the Dodd-Frank capital rules), high-quality money market mutual funds (which invest in short-term government bonds and commercial paper) saw massive redemptions in March 2020. The disbursements reflected those during the 2008 financial crisis, despite the US monetary fund reforms that came into effect in 2016. As with the Great Depression bank runs, money market funds are prone to significant redemptions when their net asset values ​​(NAV) “break the buck” (below $ 1) and investors try to pull their money out to avoid a hit.

Indeed, there is a growing consensus that the previous money market fund reforms implemented in 2016 not only did not prevent runs, they did not prevent them either The money market may have deteriorated by asking fund companies to impose goals and fees on investors if a monetary fund’s assets fall by 30 percent. The reforms also attempted to familiarize investors with small losses by creating a “floating net asset value” (expanding net asset prices to four decimal places instead of two so investors can see small fluctuations in returns), but this does not appear to have had any effect on the Runs prevent.

Now prime money funds (which behave very much like bank deposit accounts for institutional cash) are facing the problem Possibility of prohibition a total of.

This is not a problem that only affects wealthy individuals. Given that retail investors constitute a significant amount of money market wealth and that institutional cash holdings are often owned by many pension plan holders, a fragile money market system can also pose risks to the savings of middle- and low-income Americans.

When interbank lending was frozen in the face of money market funds during the global financial crisis, it had a massive impact on lending to poorer households and contributed to the creation of double-digit unemployment.

The story goes on

Like in 2008 when the Fed used its “lender of last resort” powers to create a facility (the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or “AMLF”) to rescue money funds adopted by them Will they hold Lehman Commercial Paper? On mass redemptions and fire sales, the Fed stepped back in 2020 and set up a similar facility (the Money Market Fund Liquidity Facility, or “MMLF”).

In fact, through these programs, the Fed provides an ad hoc insurance mechanism for monetary funds in the event of runs.

To create a more permanent deposit insurance scheme for prime money funds, Congress should establish an FDIC-like agency for prime money funds that will institutionalize the 2008 and 2020 AMLF and MMLF facilities on a more permanent basis.

There could be many preventative benefits of money fund insurance when it comes to preventing runs.

The very presence of deposit insurance prevents runs (created by information asymmetries about asset and liquidity uncertainty) in a way described by economists Doug Diamond and Phil Dybvig in their famous 1983 Journal of Political Economy Paper.Bank runs, deposit insurance and liquidity. ”

Bank runs are triggered by a self-fulfilling prophecy in which depositors pull their money out of fear that others will do the same. Due to the dynamism of the runs, an otherwise solvent bank can lose its financing in times of financial stress. Taking away the fear that others might inflict significant losses on you credibly can make runs go away.

This is effectively what deposit insurance creation has done around the world: elimination of traditional bank runs on a large scale. In the United States, FDIC insurance currently only applies to bank deposits (insuring deposits of up to $ 250,000 per bank).

There are more similarities between bank deposits and money market funds than people realize. Like banks, prime money funds fulfill a special function in the financial markets by supporting lending, maturity transformation and the facilitation of payments.

Money fund insurance would be bought by the fund sponsor (in the same way that banks pay deposit insurance premiums to the FDIC) and passed on to consumers in the form of slightly higher fees.

There are some regulatory hurdles to creating FDIC-style deposit insurance for high-quality money funds. The FDIC Federal Deposit Fund does not have enough funds to stop the runs for good. Therefore, it is important that money fund insurance is backed by the US Treasury Department (the full trust and credit of the US government) to make it a credible tool.

As an alternative to money fund insurance, Congress could give money funds access to the Fed’s discount window. One challenge with this approach, however, is that the Fed would have to classify monetary funds as banks and impose 6 percent Dodd-Frank capital requirements, potentially resulting in high costs.

Federal Reserve Vice Chairman for Financial Oversight Randal Quarles and the rest of the Federal Reserve’s Board of Governors do not appear to be ready for a capital exemption (or at least a lower capital requirement to reflect the much lower risk) for prime money right now .

There are several other proposals to reform the prime money fund that include introducing swing prices for money funds or subordinated share classes (both difficult for money funds to operate), banning prime money funds, or switching to cash ETFs and away from problematic daily NAV prices. Almost everyone seems to agree on removing the gates and fees of money fund reforms in 2016, which appears to have made matters worse.

Of the reforms under consideration, money fund insurance is the easiest route, as the operational and regulatory reliefs allow Prime Money Funds to function largely as they do today, but only require them to deposit small insurance premiums into an insurance fund. Some may argue that the insurance premiums would make Prime Money Funds less profitable. It would be important to find the happy medium that is small enough not to interfere while also meeting the financial need for liquidity insurance during times of financial stress.

Others might also argue that FDIC-style insurance could pose a moral hazard, i.e., how do you motivate money market funds to invest in riskier securities by insuring against losses? I would argue that moral hazard risks already exist in the sense that the 2008 and 2020 Fed money market funds liquidity programs already offer de facto insurance.

Despite Washington’s boom over the past hundred years, the FDIC has been one of the most effective regulators at preventing banking operations that were all too common prior to the 1933 Banking Act. Likewise, a monetary fund insurance program could promote greater financial stability by preventing monetary fund runs (which appear to have become a decadal event) while maintaining an effective tool for providing short-term credit to support economic growth.

More from National Review

Treasury Yields Face Curbs From Fistful of Cash-Market {Dollars}

(Bloomberg) – The flood of dollars helping to bring some US money market rates below zero could fuel the international appetite for longer-term government bonds and help contain rising bond yields at the longer end of the curve.

The abundance of greenbacks in the financial markets, fueled by a combination of Federal Reserve monetary policy and the prospect of government spending equal to the $ 1.9 trillion stimulus package, did not help reduce the cost of any US dollar-based investors by reducing currency hedging on their holdings of government bonds. This, combined with now higher nominal returns in America, means that it seems more attractive for these investors to get in and buy.

“The secured return has not been so attractive in euros and yen for years,” said Chris Iggo, chief investment officer at AXA Investment Managers.

For managers of euro and yen portfolios who buy assets denominated in US dollars and hedge the currency risk on a three-month basis, the shift in the so-called cross-currency basis swaps since last year, together with the direct increase in nominal returns, means the The yield on 10-year US benchmark debt is now at its highest level since 2017 and well above what it can achieve in its home markets. This could lead to foreigners jumping in to buy after last week’s sell-off on bonds that are generating 10-year returns above 1.6%. However, whether this can stop the drive for ever higher government bond yields remains to be seen.

“The recent surge in US yields and the development of the currency base have made US Treasuries more attractive to international investors,” said Mohit Kumar, strategist at Jefferies International.

Euro-based investors who buy 10-year government bonds can collect 113 basis points versus 10-year German government bonds. Meanwhile, yen-based investors, who typically measure the 10-year government bond versus 30-year Japanese government bonds, will receive a 47 basis point increase in yield on that trade, according to Kumar, a former trader.

The story goes on

The three-month cross-currency base swaps for the yen and euro have fallen from their highs this year, but are still well below their December lows. The Fed’s efforts to increase the dollar’s liquidity and the US Treasury Department’s cuts have resulted in an abundance of dollars in the money market system. The dollar glut keeps overnight rates close to zero, and from time to time slightly negative interest rates appear on loans backed by Treasury bills.

The three-month cross-currency yen base swap stood at minus 11.25 basis points on Tuesday. A Japanese investor looking to hedge their Treasury exposure would borrow in yen, pay the three-month Japanese Libor (currently minus 0.087%), and convert the yen to US dollars to buy US Treasuries. The Treasuries can be sold via reverse repo and the proceeds can be converted back into yen via the cross-currency base swap.

It is speculated that Japanese investors will become more involved in trading after the fiscal year begins in April.

Curve softening

US yields rose sharply last week, with the 10- and 30-year tenors hitting their highest levels in more than a year, pricing in an economic recovery as the US virus infection rate eased with the introduction of the vaccine. The 10-year return rose to 1.609% while the 30-year return hit 2.394%. The market has since stabilized and the 10-year situation eased back to around 1.42% on Tuesday.

“I would be surprised if 10-year yields were to rise above 1.5%, let alone over 2%,” said Nikolaos Panigirtzoglou, strategist at JPMorgan Chase & Co. Yen and euro-based investors flow into government bonds “, Provided that interest rate volatility subsides.

“It is not possible here to sustainably decouple the steepness of the curve in the USA from other regions,” said Panigirtzoglou. “If the US curve continues to steepen, investors outside of the US will ultimately take advantage of the return advantage.”

Core returns in the eurozone and Japan have failed to break out of the lows seen in recent years. Japan’s 10-year return is still below 0.20% while the German 0.35% is negative.

“As the Bank of Japan remains committed to controlling the yield curves and the European economic outlook does not warrant higher returns, foreign investors are very likely to take advantage of this opportunity,” said AXA’s Iggo.

(Updated levels in the eighth paragraph)

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Cash-Market Funds Create a New Time period for Dropping Cash

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While most experts don’t think negative interest rates are likely, the fund industry has recently begun explaining to regulators what to do just in case.

Reverse Distributions – a paradoxical term that sounds almost like Orwellian, like “war is peace” – is exactly what the Investment Company Institute, a fund trading group, describes a December report over Money market capital. The report was designed to address concerns that US money funds, after deducting their fees, cannot deliver even zero returns in a negative interest rate environment – as was the case in Europe since 2014.

How can distributions that you are supposed to receive work the other way around? The ICI paper describes a process in which, instead of an income payment, a reverse distribution mechanism or RDM “a [constant net asset value or] Negative return of the CNAV money market fund due to cancellation of shares in shareholder accounts. It offsets the negative return accrued daily (ie a decrease in the fund’s net assets) by reducing the number of fund shares outstanding. This process enables the Fund to maintain a constant Net Asset Value per Share, typically $ 1.00. “

In Europe, reverse distributions are referred to as much less appealing but simpler “stock destruction” or “stock cancellation”. These terms describe exactly what will happen.

The US $ 1 net asset value has been inviolable to retail investors in US money market funds since its inception in 1971, so investors can think of money market funds as bank accounts even though they are not insured nationwide. The few cases where money market funds have “broken the money” have been during times of extreme market stress. The last case was the decline in the Reserve Primary Fund to 97 cents in 2008 due to the Lehman brother’s bankruptcy.

RDMs create the illusion that investors are not losing money by maintaining the net asset value of $ 1 while the number of stocks goes down. However, the purpose is not to mislead investors, but rather to prevent the Net Asset Value from falling due to fees and falling returns in an environment with negative interest rates below $ 1. “In the current [zero interest rate] Surroundings, [money funds] waive more than half of their fees, ”said Peter Crane, president of money fund tracker Crane Data. “So instead of charging [0.28%], they are charging [0.13%] for now.”

Some money managers say that maintaining a net asset value of $ 1 even when the number of stocks goes down is easier for brokers selling funds to keep track of when they are depositing and withdrawing cash each day. “When you sweep [cash] At the end of each day, developing a stable net asset value product is pretty easy because it only costs one dollar to one dollar, ”said Deborah Cunningham, CIO of Global Liquidity Markets at Federated Hermes, who manages and carried $ 433 billion in marketable assets contributes to the ICI report along with other money market managers. “With this sweep mechanism, there are no computations of stocks versus price, whereas pretty much any other mechanism would require computations of stocks versus price.”

However, there is also a psychological dimension to getting the NAV of $ 1 instead of floating or “floating” it like a normal stock or bond fund. “Our investors want a constant NAV solution,” said Jeff Weaver, senior portfolio manager who oversees money market funds valued at approximately $ 200 billion

Wells Fargo

Asset Management, which also contributed to the ICI report. “You don’t want a floating net asset value.”

However, institutional municipal debt and premium money market funds already have a floating net asset value that can drop below $ 1 as a result a 2016 regulatory change. According to Weaver, Wells Fargo’s institutional clients want this not to be the case: “Clients in money market funds are trying to get the capital. If a net asset value fluctuates, there is a possibility that you will lose capital. “

Weaver compares the ICI’s report on RDMs to a “contingency plan” because the likelihood of negative interest rates in the US is “very small”. While the Treasury bills briefly fell into the negative yield territory during the pandemic crash last marchThe US has been in recovery mode since then.

However, the coronavirus remains an economic wildcard. The Federal Reserve Bank “said they didn’t want to go negative, but they never say never,” says Crane. “They’re getting another big shock to the economy, pushing us back down, and suddenly negative rates and deflation could be possible again.”

There could also be regulatory hurdles for RDMs. When European interest rates turned negative in 2014, some funds like the BlackRock ICS Euro Government were Liquidity Fund busy RDMswhich the ICI’s RDM design is similar to. Ultimately, EU regulators banned RDMs in 2018and said they weren’t “compatible“Had to use existing regulations and resources Changeover to floating NAVs.

If the RDM scenario is unlikely in 2021, why did the ICI publish a detailed report in late 2020? One reason was to make the RDM case public. The ICIs are issuing this not only for the people in the industry and their customers, but also for the regulators themselves to improve understanding [RDMs] could work, ”says Weaver. The other was customer concern. “The negative interest issue has been so persistent from the start of last year [of the pandemic crisis] In March you couldn’t have a conversation with a customer or colleague without discussing it [it]. ”

If RDMs were to take place, training investors would certainly be a challenge. “This is something that would be new to most investors, especially retail investors,” affirmed Jeff Naylor, director of operations and distribution for the ICI. “We highlight in the paper the need for a communication strategy for both the funds and the intermediaries.”

One thing that could help clear things up is not to refer to them as RDMs, but instead share the destruction. That would be less Orwellian.

Write to editors@barrons.com