INSIDE DEBT
INSIDE DEBT PRODUCED BY REUTERS IN PARTNERSHIP WITH ICAP Tuesday, October 21, 2014 CHART OF THE DAY U.S. MARKETS TODAY U.S. existing home sales TODAY’S TOP STORY: Home resales raced to a one-year high in September, the latest indication the housing market recovery is gradually getting back on track. For more please click here Click on the chart for full-size image TREASURIES: Treasuries fell as less worrisome data on China and a report on the European Central Bank possibly moving to buy regional corporate bonds allayed some concerns about the global economy and reduced safe-haven bids for low-risk government debt. The benchmark 10-year notes were down 12/32 to yield 2.22 pct. 30-year bonds fell 26/32, yielding 3 pct. The 2-10 spreads widened by 3 bps and the 5-30 spreads widened by 2 bps. Existing home sales increased 2.4 percent to an annual rate of 5.17 million units TODAY’S TOP NEWS U.S. existing home sales hit one-year high, prices up ECB looking at corporate bond buys, could act as soon as Dec China's growth slowest since global crisis, annual target at risk Japan downgrades economy for second month as output sags EU can't let austerity override investment -Austria's Faymann Rising UK borrowing leaves no room for pre-election sweeteners Greek 2013 budget gap revised down to 1.8 pct/GDP ECON WATCH FOR WEDNESDAY OCTOBER 22 ET 04:30 04:30 08:30 08:30 08:30 08:30 08:30 10:00 Indicators GB GB US US US US CA CA BOE MPC Vote Hike BOE MPC Vote Unchange CPI YY, NSA Core CPI YY, NSA CPI Index, NSA Real Weekly Earnings MM Retail Sales MM BoC Rate Decision Unit Reuters Prior 2 2 7 7 pct 1.6 1.7 pct 1.7 1.7 ind 237.97 237.9 pct 0.3 0.4 pct 0 -0.1 pct 1 FOREX: The euro fell sharply against the dollar after Reuters reported the European Central Bank was looking at buying corporate bonds as soon as December in its efforts to revive the stagnating euro zone economy. "Headlines on the market today about the ECB potentially buying corporate bonds has reinvigorated attention on the downside for the euro," said Richard Cochinos, head of Americas G10 FX strategy at Citi in New York. The euro fell 0.65 pct to $1.2715. It traded to 135.95 yen, a loss of 0.67 pct. The dollar recovered some lost ground against the Japanese currency but was still down 0.04 pct at 106.90 yen. CORPORATES: Corporate bond spreads tightened following U.S. economic data showing strong home resales and reports that the European Central Bank is looking to buy corporate bonds. New issuers include The Kroger Co, Korea Hydro & Power and Turkiye. Citigroup Treasurer Eric Aboaf announced in a conference call that the company plans to issue $6 billion more unsecured bonds before this year end. The CDX-IG.22 index tightened by 3 bps to 66 bps. STOCKS: Stocks jumped following upbeat earnings and a report that the European Central Bank was looking at buying corporate bonds. Apple rose 2.7 pct a day after revenue topped expectations, helped by strong iPhone sales. Waters jumped 9.7 pct and Illumina was up 9.2 pct. The Dow rose 215.33 points, or 1.31 pct, to 16,615, the S&P 500 gained 37.26 points, or 1.96 pct, to 1,941.27 and the Nasdaq added 103.40 points, or 2.4 pct, to 4,419.48. C & E: Gold rose to a six-week high at above $1,250 an ounce, lifted by broad-based commodities gains and concerns over an economic slowdown in China. Gold hit its highest since Sept. 10 at $1,255.20 an ounce in earlier trade, also helped by a softer dollar. It was last up 0.16 pct at $1,248.10 an ounce. Oil rose 0.12 pct to $82.81 a barrel. Reuters-Jefferies index gained 0.69 pct to 273.66. For EYE ON ASIA click here For MARKET SNAPSHOT click here For MARKET SNAPSHOT on Asia click here For NEXT UP click here For EYE ON LATAM click here For DEEP DIVE click here INSIDE DEBT October 21, 2014 MARKET SNAPSHOT as of 3:20 pm EST REPURCHASE AGREEMENTS G/C MORTGAGE REPOS O/N 0.130 O/N 0.150 2-Week 0.120 2-Week 0.140 1-Month 0.120 1-Month 0.140 3-Month 0.120 3-Month 0.170 AGENCY REPOS i-REPOSM INDEX O/N 0.140 10:00 AM 0.126 2-Week 0.140 3:00 PM 0.125 1-Month 0.140 3-Month TREASURIES <5> <500> BID ASK 1-Mo Bill 0.030 0.025 3-Mo Bill 0.025 0.020 6-Mo Bill 0.055 0.050 1-Year 0.100 0.090 2-Year 100.266 100.305 3-Year 100.313 100.352 5-Year 101.594 101.641 7-Year 101.680 101.727 10-Year 101.445 101.508 30-Year 102.719 102.781 YIELD CHANGE 0.03 0.000 0.025 0.007 0.056 -0.001 0.101 0.001 0.362 0.000 0.769 0.031 1.415 -0.020 1.866 -0.063 2.210 -0.133 2.986 -0.375 IR SWAPS <19901> SPREAD 2-Year 23.50 27.50 3-Year 20.50 24.50 5-Year 15.75 19.75 7-Year 9.50 13.50 10-Year 12.00 16.00 30-Year -3.75 0.25 RATE 0.59 0.62 0.97 0.99 1.57 1.59 1.96 1.97 2.33 2.33 2.95 2.94 EQUITIES U.S. Interest rate swap—yield curve O/N 1-Month 3-Month 6-Month 12-Month BID - ASK 0.100 0.150 0.200 0.310 0.170 0.240 0.360 0.430 0.082 0.082 0.134 0.092 0.092 - 0.144 10-Year 30-Year MATURITY 9/27/2017 9/12/2019 - 194.17 97.69 35.12 COMMODITIES NYMEX BRENT SPOT GOLD PALLADIUM SILVER PRICE CHANGE 82.8 86.2 1248.8 771.9 17.5 0.1 0.8 2.7 11.9 0.1 EURODOLLAR FUTURES Nov-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 CLOSE CHANGE 99.765 99.735 99.475 99.735 98.615 99.070 0.000 -0.005 0.000 -0.005 0.015 0.015 PRICE 120.57 125.23 131.81 CHANGE 0.09 0.16 0.50 CURRENCIES BID EBS PRECIOUS METALS Bid Ask SPOT GOLD 1248.76 1249.53 PALLADIUM 1275.24 1282.75 SILVER 17.49 17.54 ACTIVE FANNIE MAE AGENCIES TERM COUPON 3-Year 1 5-Year 1.75 7-Year - CHANGE CBOT 5 yr CBOT 10 yr CBOT 30 yr EURODOLLAR DEPOSITS & OIS STRIPS (ASKED) ASK 0.100 INDEX 16593.84 4413.77 1939.13 FUTURES 0.130 BID 0.080 DJIA NASDAQ S&P 500 FED FUNDS Open 0.0700 High 0.1000 Low 0.0700 Euro 1.2724 Sterling 1.6120 JP Yen 106.8300 Swiss Franc 0.95 Can Dollar 1.1222 Mexico 13.5454 ASK 1.2726 1.6124 106.8600 0.95 1.1226 13.5476 ACTIVE FREDDIE MAC AGENCIES YIELD-SPREAD 12 9 17.75 14.75 - YIELD 0.882 1.588 - - - - - 6.625 11/15/2030 7 4 3.055 TERM COUPON 3-Year 0.875 5-Year 0.875 7-Year 1.375 10-Year 2.375 30-Year 6.25 MATURITY 2/22/2017 3/7/2018 05/1/2020 1/13/2022 7/15/2032 YIELD-SPREAD -10 -13 -23.25 -26.25 -16 -19 1.25 -1.75 13 10 Wrightson ICAPSM Chart of the Day Active MBS 15YR CPN FNMA 2.5 FHLMC 2.5 BID 102.0060 101.2900 ASK 102.0120 101.2900 YIELD 2.069 2.099 Active MBS 30YR CPN FNMA 2.5 FHLMC 2.5 GNMA 2.5 BID 97.0200 96.2460 98.1660 ASK 97.0200 96.2520 98.1720 YIELD 2.856 3.531 2.943 2 YIELD 0.9 1.223 2.089 3.033 3.115 INSIDE DEBT October 21, 2014 TODAY’S TOP NEWS U.S. existing home sales hit one-year high, prices up ECB looking at corporate bond buys, could act as soon as Dec Home resales raced to a one-year high in September, the latest indication the housing market recovery is gradually getting back on track. The National Association of Realtors said existing home sales increased 2.4 percent to an annual rate of 5.17 million units, the strongest reading since September of last year. Still, sales were 1.7 percent below those for September of last year. The 30-year mortgage rate fell to an average of 3.97 percent last week from 4.12 percent in the week ended Oct. 9, according to data from mortgage finance firm Freddie Mac. First-time buyers accounted for 29 percent of sales for a third straight month, below the 40 percent to 45 percent that is considered ideal by economists and real estate agents. The inventory of unsold homes on the market increased 6 percent from a year ago to 2.30 million. At September's sales pace, it would take 5.3 months to clear houses from the market, down from 5.5. months in August. In a separate report, the Philadelphia Federal Reserve Bank said its gauge of non-manufacturing activity in the mid-Atlantic region rose to 44.1 in October from 35.7 in September. Measures of new orders and sales both increased, but a reading on service sector jobs slipped, suggesting a slower pace of improvement in the labor market. The European Central Bank is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December with a view to begin purchases early next year, several sources familiar with the situation told Reuters. The ECB has already carried out work on corporate bond buying, which would widen out the private-sector asset-buying programme it began on Monday. It is hoping these measures will foster lending to businesses and thereby support the euro zone economy. "The pressure in this direction is high," said one person familiar with the work inside the ECB, speaking on condition of anonymity. An ECB spokesman, however, said of such purchases: "The Governing Council has taken no such decision." The ECB's policymaking Governing Council could discuss the possibility of making corporate bond purchases at its December meeting, two of the four sources Reuters spoke to said. All four said such plans were being discussed. The policymakers could decide at the December meeting to go ahead with the purchases, but such a step is not certain. Should the Council decide in December to proceed, the purchases on the secondary market could begin in the first quarter of 2015, one of the sources said. Japan downgrades economy for second month as output sags China's growth slowest since global crisis, annual target at risk Japan's government cut its overall economic assessment for the second straight month as weak consumption after a sales tax hike in April is causing companies to reduce production. The government also cut its view on industrial output for the first time in five months as companies produced fewer goods and as inventories piled up due to weak demand. "The Japanese economy is on a moderate recovery, but recently weakness can be seen," the Cabinet Office said in its monthly economic report for October. That was a downgrade from last month's assessment, which said that weakness was limited to a just a few sectors. The government downgraded industrial production after it fell 1.9 percent in August as companies made fewer cars and less construction material due to flagging demand after the sales tax rose to 8 percent from 5 percent on April 1. The Cabinet Office stood by its view that the economy can recover in the future because companies expect output to increase in September, they have robust capital expenditure plans and because the labour market remains tight. China grew at its slowest pace since the global financial crisis in the September quarter and risks missing its official target for the first time in 15 years, adding to concerns the world's secondlargest economy is becoming a drag on global growth. A pick-up in factory output and government confidence that the labour market remains stable were offset by further slowing in the property sector, and economists remained divided on whether authorities would step in with major stimulus measures such as interest rate cuts. China's GDP grew 7.3 percent in the third quarter from a year earlier, official data showed, the weakest rate since the first quarter of 2009. That was slightly above the 7.2 percent forecast by analysts but slower than 7.5 percent in the second quarter, and even then some economists were surprised. A weakening property market continued to weigh on broader activity in the third quarter. Other data showed factory output rose 8.0 percent in September from a year earlier. Fixed asset investment was weaker than expected, as were retail sales. Rising UK borrowing leaves no room for pre-election sweeteners EU can't let austerity override investment -Austria's Faymann British government borrowing rose more than 10 percent in the first half of the financial year, giving finance minister George Osborne little scope to offer sweeteners to voters before a parliamentary election in May. A finance ministry spokesman said the figures showed "the impact of the great recession is still being felt in our economy and the public finances ... we have to recognise that the UK is not immune to the problems being experienced in Europe and other parts of the world economy." Borrowing for September was 15.3 percent higher than a year earlier at 11.8 billion pounds, the Office for National Statistics said. For the first six months of the financial year, public sector net borrowing, excluding statecontrolled banks, was 58.0 billion pounds, 10.3 percent higher than in 2013. Public sector net debt excluding state-controlled banks totalled 1.451 trillion in September. The European Union cannot afford to let fiscal belt-tightening halt investment needed to spur slowing economies, Austria's leader said, setting up a clash with Brussels over Austria's 2015 budget deficit target. Chancellor Werner Faymann told reporters after a cabinet meeting that the European Commission's call for Austria to run a structurally balanced budget next year was "an interesting opinion that we don't share". He was speaking as the Austrian central bank revealed its leading indicator suggested the exportdependent economy would stay weak for the rest of the year. If the choice was between austerity alone or investment, "I call for standing more on the investment side because growth is so slight and unemployment is so high across Europe", Faymann said. 3 INSIDE DEBT October 21, 2014 TODAY’S TOP NEWS (continued) Greek 2013 budget gap revised down to 1.8 pct/GDP Judge drops hints as Detroit bankruptcy case nears finish line Greece had a smaller than previously reported budget deficit last year, the European Union's statistics office said, as it recalculated data under a new accounting system. Eurostat said that Greece had an overall budget deficit of 12.2 percent of GDP in 2013 rather than the 12.7 percent under the old accounting system. Of that number, 10.4 percent of GDP is accounted for by money set aside to recapitalise the Greek banking sector, Eurostat said, so the actual government deficit was revised down to 1.8 percent from 2.3 percent under the old accounting system. Meanwhile according to balance of payments figures released by the central bank, Greece's current account surplus widened in August compared to the same month last year, boosted by higher tourism receipts. The surplus stood at 1.83 billion euros versus a surplus of 1.21 billion euros in August last year. The U.S. judge overseeing Detroit's historic bankruptcy dropped hints on what he wants to hear in the city's closing statements and what he may be scrutinizing in creditor settlements. The city's emergency manager also testified in federal court that a recent settlement with the last major holdout creditor was important to keeping elements of Detroit's debt adjustment plan together. "We are getting finality and stability going forward," state-appointed Emergency Manager Kevyn Orr told U.S. Bankruptcy Court Judge Steven Rhodes, referring to last Thursday's deal with bond insurer Financial Guaranty Insurance Co. Rhodes said he wants the city to explain its settlements with creditors, its exit financing, the "reasonableness" of consultants' fees and the business justification for discrimination among classes of unsecured creditors in closing arguments scheduled for Oct. 27. Rhodes quizzed Orr about the value of part of the settlement. Orr said the property has no current market value because the arena is set to be demolished, but various credits, tax increment financing and demolition money for the project add up to $22 million. Detroit filed only a draft of the final version of its bankruptcy plan, saying it needed time to integrate FGIC's settlement with a deal reached with another bond insurer, Syncora Guarantee Inc. NEXT UP Political risk slowing foreign investment in Greece -think tank IOBE expects the economy to pull out of a six-year recession and expand by 0.7 percent this year, sticking to a previous forecast in July, and still sees unemployment averaging 26.7 percent. The think tank's projections are broadly in line with estimates by the country's European Union and International Monetary Fund lenders, who expect the 183-billion euro ($233 billion) economy to grow by 0.6 percent this year. IOBE also expects deflation to slow slightly to 0.8 percent from 0.9 percent last year. Tourism, a major currency earner for Greece, will continue to be a main recovery driver, the think tank said, a forecast supported by balance of payments data released by the central bank. The Bank of Greece said the country's current account surplus widened in August compared to the same month last year, boosted by higher tourism receipts. Tourism revenue grew 10 percent to 3.18 billion euros. After meeting Prime Minister Antonis Samaras in Athens, the chief executive of British tour operator TUI Travel said that visitors to Greece rose 10 percent this year and the company aimed at a same-level increase in 2015. Political uncertainty is slowing foreign investment in Greece, the country's most influential think tank warned, endangering a fragile economic recovery. Fears of a snap election and the government's plan to exit early from a bailout triggered a sell-off in Greek bonds last week, pushing the yield on 10-year government paper above 9 percent and pricing it out of international capital markets. A presidential vote in February or March is seen as a likely trigger for early elections next year as Greece's coalition government does not have the backing of 180 lawmakers needed to push through its nominee for head of state. Under Greek law, parliament must be dissolved if it fails to elect a president. Greece's main opposition, the anti-bailout Syriza party, which leads in opinion polls, has said it will not back any candidate put forward by the ruling coalition. "Part of the electoral cycle uncertainty (after the European parliament elections in May) remains, continuing to dampen investment ventures from a portion of foreign investors," the think tank, IOBE, said in a report. 4 INSIDE DEBT October 21, 2014 EYE ON ASIA POLL & PREVIEW EVENTS Singapore Sept industrial output seen little changed on year AUSTRALIA CPI (yy) for Q3: Expected 2.3 pct Prior 3.0 pct Singapore's industrial production was probably marginally higher in September than a year earlier, a Reuters poll showed, after disappointing export data stirred concern about sluggish global demand. The median estimate in the Reuters survey of 13 economists was for manufacturing output to have risen 0.1 percent in September. On a seasonally adjusted month-on-month basis, manufacturing output was seen likely to slip 0.8 percent in September. NEW ZEALAND CPI (yy) for Q3: Expected 1.3 pct Prior 1.6 pct For Oct 22 POLL & PREVIEW (continued) Eased inflation seen letting Philippine c.bank hold rates The Philippine central bank is expected to hold its benchmark rate steady on Thursday and possibly signal a pause in its tightening cycle until the end of the year, as inflation pressures have eased recently. But an anticipated power shortage, which could raise consumer prices, plus eventually higher interest rates in the U.S. could mean the Philippines needs to hike rates again as early as the first quarter of 2015, according to some analysts. Nine of 11 economists polled by Reuters expect the central bank on Thursday to keep the overnight borrowing rate steady at 4.0 percent. Eight of the 11 forecast no change that day in the short-term special deposit account (SDA) rate, now at 2.5 percent. Slowing New Zealand CPI seen keeping RBNZ rates on hold An expected easing in New Zealand price pressures is forecast to lower the annual inflation rate in the third quarter, increasing the likelihood of the central bank waiting until next year to resume raising official interest rates. A Reuters poll shows economists expect official data due on Thursday will show that CPI rose 0.5 percent on the quarter in July-September, while annual inflation slowed to 1.3 percent from 1.6 percent in the previous quarter. While the poll's annual CPI outlook is in line with the Reserve Bank of New Zealand's forecast, some economists predicted a lower number, which would take inflation further below the central bank's 2 percent target. This would fuel the argument that the RBNZ may wait until later next year to start raising rates again, having paused its tightening cycle after lifting rates by 100 basis points this year to take official rates to 3.5 percent. MARKET SNAPSHOT as of 3:20 pm EST GOVERNMENT BOND BENCHMARKS 5-Year Bid Yield Australia 99.621 2.832 Japan 99.819 0.137 China 101.699 3.620 Hong Kong 101.590 1.163 Singapore 101.100 1.394 10-Year Bid Yield 95.631 3.290 100.170 0.482 102.650 3.806 101.900 1.753 106.750 2.233 INTEREST RATE SWAPS <SWAPS> 5-Year 10-Year Bid Ask Bid Ask 3.0875 3.1475 3.565 3.625 AUD JPY 0.2075 0.2675 0.5825 0.6425 CNY 3.84 4.04 HKD 1.49 1.57 2.1 2.18 TWD 1.56 1.615 INR KRW SGD 2.3 1.51 2.34 1.54 7.02 2.56 2.255 FORWARDS 3 months <FORWARDS> ASIA FUTURES 7.32 2.6 2.28 Close Change Bid Ask SGX Nikkei 225 14430.00 40.00 JPY -11.14 -10.94 SGX MSCI Taiwan 318.00 7145.00 354.30 4.90 20.00 2.00 AUD NZD HKD -57.94 -72 -3 -57.44 -71.5 0 7809.50 461.73 69.00 0.22 SGD THB 0.15 13.7 0.25 13.9 SGX FTSE China SGX MSCI Singapore SGX CNX Nifty SGX AC ASIA P xJP DEPOSITS 3 months <DEPOS> Bid 0 4.35 2.8 3.75 0.25 0.3125 JPY CNY AUD NZD HKD SGD 5 NDF’s 3 months Bid <NDFS> Ask CNY 0.0168 0.0188 TWD KRW INR -0.102 1057.9 62.165 -0.082 1059.1 62.265 MYR 3.279 3.282 PHP IDR 44.84 12360 44.88 12410 INSIDE DEBT October 21, 2014 EYE ON LATAM LATAM TOP STORIES LATAM MARKETS TODAY Brazil's mid-October inflation remains above target ahead of election TREASURIES Mexican 30-Year Brazil's annual inflation rate remained above the official target in mid-October, providing ammunition to opposition candidate Aecio Neves just days before a tightly contested presidential election. Consumer prices rose 6.62 percent in the 12 months through mid-October, according to the IPCA-15 price index released by statistics agency IBGE. The inflation rate was slightly below market consensus of 6.65 percent in a Reuters poll, but remained above the 6.5 percent ceiling of the government's target range. Prices rose 0.48 percent from mid-September, up from 0.39 percent in the previous month. Inflation is a politically sensitive issue in a country traumatized by runaway prices in the past. Although price rises are now much better contained than they were 20 years ago, higher inflation contributed toward tarnishing the popularity of reelection candidate Dilma Rousseff. The government has blamed the recent inflation spike partly on higher beef prices, which rose 2.4 percent in mid-October. Beef prices rose sharply due an increase in exports to Russia. In the full month of September, Brazil's annual inflation rate hit the highest in nearly three years at 6.75 percent. 5.89 -11 /32 Brazilian10-Year 11.97 -486 /32 Brazilian 5-Year 12.21 -117 /32 Chilean 30-Year 1.10 15 /32 Chilean 10-Year 0.46 -3 /32 Colombian 10-Year 6.61 13 /32 Colombian 5-Year 5.84 12 /32 Venezuela PDVSA 20 year 15.94 -27 /35 Venezuela PDVSA 10 year 21.35 -64 /34 EQUITY MSCI Latin American Index Close 3040.08 Brazil's Bovespa Index 52432.43 -3.44 Mexico's IPC Index 43630.58 0.96 Chile's IPSA Index 3794.50 1 Fallabella 4245.00 2.01 Cencousud 1636.00 1.84 323.70 1.54 13595.00 1.08 SQM CURRENCIES Colombia reopened the sale of 2024 and 2044 global bonds, the Finance Ministry's head of public credit, Michel Janna, told Reuters, to pre-finance 2015 spending. The dollar-denominated 2024 and 2044 bonds have coupons of 4.000 percent and 5.625 percent respectively, according to Thomson Reuters unit IFR. The sale comes three weeks after the government carried out a swap of $2.84 billion worth of peso-denominated bonds due in October 2015 and in 2018 for longer-running debt, easing imminent financial burdens. That has reduced the amount the government will need to borrow domestically via peso-denominated Treasury bonds, known as TES, to 2.6 trillion pesos. The government will also carry out a similar swap by the end of the year with the national treasury to defer repayment of 1.5 trillion pesos of debt. The Finance Ministry has planned to sell $3 billion of foreign debt and raise a further $2.1 billion in loans from multilateral financial institutions, to put towards the 2015 budget. The government's foreign debt repayment obligations for 2015 now stand at around $5 billion. Price -8 /32 Mexican10-Year MSCI Taiwan Colombia reopens 10, 30 year bonds to pre-finance 2015 budget Yield 6.81 Last Pct Change -1.82 Pct Change Brazilian Real 2.4815 Mexican Peso 13.5512 0.16 Chile Peso 583 -0.45 Columbian Peso 2044 -0.89 2.9 -0.03 Peru Sol LATAM TOP STORIES 0.69 (continued) Venezuela sees 2015 GDP growth 3 pct, annual inflation 2530 pct Venezuela's proposed 2015 budget is based on economic growth of 3 percent and inflation of 25 to 30 percent, according to the country's budget bill presented to lawmakers. Annual inflation is running over 60 percent, while the economy is believed to be in recession though the central bank has not published GDP figures for 2014. 6 INSIDE DEBT October 21, 2014 DEEP DIVE Commentary and Analysis Fragility bigger worry than volatility Even so, it's potentially unsettling to investors if some members of the leading monetary policy institution start questioning their faith. The debate is a reminder that monetary policy doesn't follow a prescribed and consistent line. Rather, as the Fed likes to say, it's data-dependent. Put another way, it can be knocked off course. The same thinking can be extended to geopolitics. Many people assume, for instance, that economic considerations will keep Russian President Vladimir Putin from tipping the Ukrainian crisis into war with the West or China's Xi Jinping from turning territorial disputes in the South China Sea into overt hostilities with Japan. But other factors, including in both these examples eruptions of domestic dissent, could change the two leaders' calculus quickly. That would surely result in more market volatility. However, with the odd exception that would be a symptom of bigger trouble, not a cause. By Rob Cox It has been impossible to escape the V-word for the past week. Turn on the television, and it is easy to conclude that central bankers, corporate chiefs, investors and politicians think volatility is the biggest problem vexing global markets. The rollercoaster ride recently experienced by financial assets is nettlesome. But it's merely a symptom of a bigger malady: the fragility of widely accepted assumptions about where the world is headed. The see-sawing of markets is succinctly illustrated by the Chicago Board Options Exchange Volatility Index, or VIX. It uses the prices of S&P 500 Index options to give an indication of investors' expectations of near-term swings in the stock market. Conventional wisdom suggests that the higher the index goes, the greater the fear is among investors that markets will forge an unstable path in the weeks ahead. Market volatility makes it hard for people in the real economy to plan ahead. So, a fund manager fearing zigzagging prices may be better off keeping funds invested in cash. Company executives may hold back on hiring new staff or buying new equipment until things calm down. And central bankers pondering what to do about interest rates may have a change of heart. On Thursday, James Bullard, president of the Federal Reserve Bank of St. Louis, suggested that the U.S. central bank may need to rethink its plan to finish phasing out its bond-buying effort later this month. While he was responding specifically to diminished expectations of inflation his comments came after the VIX surged to almost 31, its highest level in nearly two years. Yet obsessing about volatility, rather than examining its underlying causes, would be a mistake. Seen as emblematic of larger problems, volatility is a helpful motivator. The doubling in the VIX from Oct. 8 to last week's high presents an opportunity to address causes for concern in the global economy, including monetary policy, geopolitics, growth and, at least for the moment thanks to media excitement, health. All have seen events that exposed the fragility of their generally accepted trajectories. Though it arguably doesn't belong on the standard dashboard for financial investors, the unfolding Ebola crisis nicely illustrates this. Just weeks ago, the virus was considered a matter of West African regional concern. Even when a carrier of the hemorrhagic malady was discovered in Texas, U.S. health officials delivered soothing reassurances that the disease would easily be contained. In a matter of days, it became clear this confidence was at least somewhat misplaced. Of course the United States has ample resources to nip an Ebola outbreak in the bud. Nigeria, Senegal and Spain have each achieved as much. But the American public must now grapple with the notion that the Centers for Disease Control and Prevention is fallible. That's a shock for the many Americans who thought the agency led the world in fending off anything smacking remotely of apocalypse, even the cinematic zombie variety. If the CDC can screw up – failing to advise a potential Ebola carrier against boarding a commercial flight with some 130 passengers, for example – then so can other institutions respected for their preparedness like the Fed, the ECB, the Chinese Communist Party, or the Kremlin, not to mention less-esteemed bodies, such as OPEC. At the Fed, Bullard may be in a minority and he won't be a voting member of the central bank's rate-setting committee for another two years. His Texas counterpart Richard Fisher, who is a voting member this year, told CNBC on Monday that he sees no reason to delay the end of the central bank's bond purchases. (The author is a Reuters Breakingviews columnist. The opinions expressed are his own.) ECB corporate bond buying? A paperweight on the euro By Neal Kimberley If the U.S. and Japanese experience is anything to go by, the prospect of the European Central Bank buying corporate bonds, in an attempt to stimulate lending within the euro zone, will hit the euro. The ECB is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December, several sources told Reuters. If the proposal gets the green light, the ECB could begin buying the bonds, a market the central bank itself estimates amounts to more than 1.4 trillion euros, early next year. Traders' initial reaction to that prospect was to push the euro down half a percent against the dollar, and that could be just a foretaste of things to come. In the absence of domestic demand, when a central bank opens the spigots and pumps more and more money into the local economy, that money tends to seek alternative destinations that offer better returns. Though the U.S. Federal Reserve would probably dispute it, traders and indeed many emerging market finance ministers, would see a linkage between the early rounds of Fed-led quantitative easing and a weakening dollar. The Fed's asset purchase programmes released trillions of dollars into the U.S. economy. But, unable to find decent returns at home, those dollars went globetrotting in search of higher yields, weighing down on the greenback's external value as they were converted into foreign currencies for investment. The Bank of Japan's monetary policy has also been characterised in recent years by significant asset purchase programmes, intended to stimulate domestic economic activity and ignite inflation, but resulting in a weaker yen as a "side effect". With a surfeit of yen but weak loan demand at home, Japan's main banks have opted for aggressive overseas expansion, and that has led to a ballooning of their foreign currencydenominated loans. That has been part of the narrative behind the yen's weakness on the foreign exchange market. PAPERWEIGHT There is no reason why, if the European Central Bank decides to buy corporate paper, the result will be any different. The euros injected into the system by ECB purchases of corporate bonds would probably leak out of the currency bloc and 7 INSIDE DEBT October 21, 2014 DEEP DIVE Commentary and Analysis (continued) head elsewhere. Why would investors expect returns in a euro zone with deeprooted economic problems and where ultra-easy ECB monetary policy has made yields on euro deposits negligible at best? It is far more likely that the euros end up, at least partly, being converted into foreign currencies and invested in economies that offer better returns, just as arguably was the Japanese and U.S. experience. So ECB corporate paper buying could well end up with the foreign exchange market selling the euro. (Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own) INSIDE DEBT is produced by Reuters in partnership with ICAP. Edited and compiled by Bodhisattya Chakraborty and Subramani Palanichamy in Bangalore. 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