Who's been swimming naked?

It's hedge funds.

With apologies to Warren Buffett, who first coined the pithy aphorism, "You never know who's swimming naked until the tide goes out", but we may just be about to discover who has been; again.

Not only has the US Federal Reserve recently told us that the party is about to finish, with a projection that they will probably terminate their bond buying program of Quantitative Easing by this time next year, but last week, the People’s Bank of China, in a tactic no doubt sanctioned by government, administered a sharp "smack on the wrist" for domestic banks, allowing the overnight bond collateral repo rate to hit 13.8 per cent on 20th June, up from 2 or 3 per cent last month. This was designed to teach banks that unlimited liquidity was no longer going to be on tap-especially not to fund property lending. The PBOC has since injected a little more cash, but rates still remain elevated. Reports have filtered out that the PBOC has told banks it will provide them with liquidity if required, but only to fund "real" lending to the economy, rather than for property speculation.

Coupled with the Fed’s actions, this development is doubly significant, and spooked markets globally. The end of an era of unlimited, cheap liquidity seems to be drawing closer, and the implications of China’s move may be felt across many parts of the globe, perhaps nowhere more acutely than in Australia and Africa. It appears China’s administration is finally getting serious about promoting a much-needed re-balancing of its economy; away from property development, and investment generally, and towards personal consumption. To me that sounds like a recipe for less demand for the type of commodities which Australia and Africa produce.

Following the Fed’s announcements, we had already seen emerging markets suffer, as fast money raced out and headed back to the States. Suddenly the easy game of chasing yield around the world, while borrowing US Dollars to fund the practice, didn’t seem quite so rewarding or risk free. China’s policy changes add another layer of uncertainty and fragile emerging markets may be embarrassed swimmers, but many have learnt the lessons of the 1998 Asian crisis and have diligently built large foreign exchange reserves in recent years, so I’d say hedge funds are more likely to be the "‘exposed" this time, as they have been hunting voraciously for yield, whilst banks’ proprietary trading has been seriously curtailed since the onset of the crisis.

Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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The NS Podcast #169: Traingate, gaffes and Ghostbusters

The New Statesman podcast.

This week, Helen and Stephen tackle Traingate and Lunaticgate. George Eaton comes down-the-line from the valleys with the latest on the Owen Smith campaign. Anna Leszkiewicz joins to discuss feminism in the new Ghostbusters film. And you-ask-us: what is the role of the John McDonell in the Corbyn ménage? (Helen Lewis, Stephen Bush, George Eaton, Anna Leszkiewicz) 

Links:

Traingate (01.24)
Stephen on Jennifer's Ear

Lunaticgate (05.20)
David Wearing on Smith's slurs and empty promises.

Owen Smith (11.36)
George's interview for this week's magazine

Ghosbusters (18.44)
Ryan Gilbey reviews the film
Listen to the SRSLY take 
Anna on the dark side of the Romcom

John McDonnell (31.17)
Read him in his own words
And watch him in action

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And if you're craving yet more NS podcastery, you can watch Helen and Stephen host a live recording at this summer's London Podcast Festival. Tickets available here

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