07/14/2017 - The Roundtable Insight: Yra Harris On How The ECB Is Increasing Its Balance Sheet To Create A Eurozone Bond – Will The ECB Buy German Equities?

FRA is joined by Yra Harris in a discussion on the effects and implications of Lael Brainard’s speech on both the US and Europe.

Yra Harris is a world-recognized Floor Trader and Floor Broker with over 40 years of experience in areas of commodities and futures trading, with broad expertise in currency markets. He has served as a member of the Board of the Chicago Mercantile Exchange (CME). He is a regular guest on Bloomberg and CNBC.

The FOMC’s Lael Brainard gave a speech that has potentially significant implications for the financial markets and monetary policy. Brainard and Yellen seem to be confidants, where the two of them share a lot of thoughts and provide strategic thinking for the Federal Reserve. The piece was dynamic because it laid out why the Fed may consider the necessity  of starting to shrink the balance sheet while halting further interest rate increases.

The implication is that they don’t want the Dollar going up, that they’re concerned about the recent flattening of the yield curves, and that they’re not in a hurry to raise interest rates because they’re worried that they’re not seeing the inflation impact that they would’ve liked to have seen. This really lays out, in a way we usually don’t get, what the inner sanctum of the Fed is thinking about.

Prior to this we were seeing the stock markets falling because of the view that Trump vulnerable, and then it stopped. This has a far greater impact because the market will love the fact that the Fed will stop raising the Fed Funds interest rate, and will actually move to shrinking the balance sheet. Even Brainard makes a statement that it’s more the short term interest rates that have a greater impact on currency movements. Cutting short term interest will hurt your currency, and raising short term rates will impact your currency favorably. For example, the Canadian Dollar is trading at 18-month highs and all that took was a 25 basis points increase to 75 basis points.


German equities may be bullish even though you’re getting various sell signals across various equities. In terms of relative value, Germany as a stock market has a better relative value. They’re not ridiculously overvalued on a historical basis, and it’s really the only place for German investors to park their money. Everyone on the planet wants to see Germany with massive tax cuts to generate more consumption and therefore reduce the current account and trade balances of Germany.

When you’ve got the ECB still buying, and the BoJ still captured by their own lunacy under Kuroda, still buying significant amounts of sovereign bonds on a monthly basis, it’s a good time to start shrinking your balance sheet – that’s where the Fed is now. If the Fed embarks on this, the market’s not going to be as gentle letting them out as they believe, and that’s with the other central banks buying. There’s going to be all sorts of repercussions on the long end of the market, but the Fed isn’t that concerned about it right now. They would love to see a steepening of the yield curve that would help the banks whether or not they raise rates on the short end.

What seems to be taking place is that Draghi is in a rush to build a balance sheet because they’re eventually going to create a Eurozone bond. If you’re going to buy $1B of assets, you have to do it according to everyone’s capital contribution to the ECB. You can’t violate that, but he’s been violating that because there’s politics involved. Italy’s in total violation of the Maastricht Agreement, with 134% debt to GDP ratio. Italy will never be able to outgrow what its financing needs are for its deficit. With all the issues of non-performing loans in the Italian banking system, of course Draghi is going to violate this. Under that rubric of ‘whatever it takes’, he’ll do whatever he needs to do. This could translate into the ECB buying German equities.


It really didn’t have much. They wanted to isolate Trump, and it’s not hard to do that, and they did it. When you’re portraying President Xi of China as a free trader, you’ve got a lot of problems. Europe is a free trader when it wants to be a free trader; France is notorious for tariffs and blocking trade. There’s absolutely nothing there.

The Japan-EU agreement won’t see the light of day in its present form. The biggest blocker will be the German auto-makers. There’s a lot of agricultural stuff that makes it into Japan, but the auto end of it is very interesting. So it’ll be a long, drawn-out process.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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