Read our market review and find out all about our theme of the week in MyStratWeekly and its podcast with our experts Stéphane Déo, Axel Botte, Aline Goupil-Raguénès and Zouhoure Bousbih.
Topic of the week: Gilt madness and pension fund stress
- Gilt volatility exploded in late September following the UK mini budget;
- The BoE provided a backstop to stem fire sales of gilts and launched a repo facility to ease the liquidity strain on pension funds;
- LDI strategies used by pension funds involve leverage through large portfolios of derivatives requiring margins to be posted in times of extreme volatility on long-term interest rates;
- This gilt crisis unveiled liquidity risks at pension funds. Regulatory backdrop will have to be improved to stem liquidity riks;
- Pension fund exposure to illiquid assets also played a role in disproportionate selling of gilts.
Market review: The T-note at the highest since 2007
- Truss resigns, successor named within week;
- The T-note near 4.30% at its highest since 2007;
- Swap spreads narrow amid increase in outstanding German debt;
- Credit spreads are tightening, the Euro Stoxx up 1.5%.
Zouhoure Bousbih's podcast
- Who will stop the dollar? (Or heading to a Plaza 2.0?)
Chart of the week
Rising energy prices reduce household disposable income. On our calculations, the impact is around 4% on the purchasing power over one year in the euro zone. However, this decrease is partly offset by various government measures.
If energy prices stabilize, even at current very high levels, the impact on household disposable income over one year would be almost zero by the beginning of next year (only 0.5% loss of purchasing power by March 2023). So there would have to be significant new increases to ensure that the negative impact doesn’t fade quickly.
Figure of the week
That’s the number of statistical series China provided on its economy and beyond (Mongolia). When Xi came to power, there were over 80k.
China is becoming much less transparent about its economy.