BondTalk

Direct from the desk of Kames Capital's award-winning fixed income team

BondTalk is Kames Capital’s dedicated fixed income blog. It provides regular insight into the ideas, debate and opinion behind our portfolios and strategy, straight from the fixed income desk.

Comments are illustrative not portfolio specific; the blog’s purpose is to be relevant, thought-provoking and interesting. Sign up for our weekly BondTalk email using the registration form.

Dull or extraordinary?

Over the years some of us fixed income fund managers have had to endure much leg pulling from our colleagues that manage assets in other more ‘exciting asset classes’. Boring, dull are adjectives I‘ve heard whispered in corridors or by the coffee machine, perhaps they...

read more

Eat, Drink and be Merry

The food retailers will be trying hard to tempt you over the coming festive season with their irresistible products, as UK food remains highly competitive. However the British Retail Consortium (BRC) has warned that Christmas dinner could be an expensive affair this...

read more

Making Stuff is Hard

The most valuable lessons in high yield investing are usually delivered using a mix of shock, pain and humiliation. A rare exception to this occurred to me a few years ago; however I suspect more recently, similar lessons are visiting Tesla investors, albeit more...

read more

Forward guidance – 2017 style

UK rates move up by 0.25%. This was widely anticipated - but more interestingly - what next? Carney and the MPC would like to be have some flexibility but as the short press statement reminds us – they are as much in the dark about the economy up to, and after, Brexit...

read more

More rare than a Chinese Congress

China has been in the news a great deal this week, with the announcement, at the Communist Party’s quinquennial Congress, of the next cadre of leadership alongside President Xi Jinping. However, China did something else significant this week too, and even more...

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Winter is coming

UK clothing and sales volume growth has been robust year-to-date. Latest data from Kantar Worldpanel (to 24 Sept 2017) shows the market has improved marginally year-on-year (yoy) for the fourth year in a row. 12-week yoy growth at +1.5% is the strongest seen for...

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Familiar faces, unfamiliar risks

A couple of weeks ago, finance ministers, central bank governors, and other interested parties, including lots of emerging markets-focused investors, gathered in Washington, D.C. for the IMF and World Bank Group’s Annual Meetings. Listening to speakers, and talking to...

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All over bar the counting

November’s Bank of England MPC meeting is set to send base rates 25 bps higher. Ever since MPC member Andy Haldane’s comments in June, markets have started to price in rate rises. Comments from another member, Vlieghe, further surprised the market and his rate rise...

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Love me tender…

Despite recent gilt market weakness related to a shift in rhetoric around the prospect of a rate rise from the Bank of England in the near term, sterling credit markets remain well underpinned. Key to this is the strong macro backdrop and generally robust corporate...

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Fortune favoured the brave

At a well-attended investment bank research conference on emerging markets last week, a noteworthy chart on show displayed returns across various asset classes over the year to date. In this chart, six of the top ten asset classes were from EM. Well out in front of...

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Paying the price for excitement

A common investment mantra is that high risk equals high returns. Yet, if we look back at history, we see so often this is not the case, for the simple reason that excitement is fundamentally overvalued. We can of course in hindsight look back on bubbles throughout...

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No Hope for hay fever

Last week Yuriko Koike, the leader of Japan’s ‘Party of Hope’ and the main opposition to Japanese Prime Minister Shinzo Abe, unveiled her “12 zeroes” manifesto. The promise of ‘zero’ hay fever caught my attention: a welcome claim for the 25 million sufferers in Japan,...

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A stock picker’s take on striking gold

Markets are in good shape, and as expected, the new-issue market cranked back into gear last month – an opportunity to find good quality cash flows for our portfolios. What can be astonishing (and pleasing) in this market is the difference in relative valuations...

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If The Cap Fits

The Conservative party has long been in favour of a free and open market economy. So it was no surprise to see, at the party conference, Theresa May extolling the virtues of this at some length. Then, after a brief pause to collect ‘her’ P45 from a prankster in the...

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Is everything still on track?

The announcement of the agreement to merge Siemens and Alstom’s train assets will create a large European champion, which should be better placed to compete with increased competition from China’s CRRC. It marks the end of speculation on a number of outcomes, and on...

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A green opportunity, but at what cost?

Green bonds have grown in prominence over the last couple of years, with a company’s ESG (Environmental, Social and Governance) credentials assuming ever-greater importance for investors. The terminology used to describe green, or ethical, bonds – and the definition...

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Cure us of this lunacy!

In a remote north-west corner of Scotland there is an island in the middle of a loch called St Maree. On it are the remains of a chapel and a holy tree, believed to be around 1,300 years old. Legend had it that if you rowed around the island twice, submerged yourself...

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Rates market joins the dots

On the face of it, the US Federal Reserve shouldn’t have surprised the markets last night, but by announcing their decision to keep interest rates unchanged and to start their programme to reduce their balance sheet, markets were taken aback – the USD dollar...

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Spare a thought for index-linked!

Government bond markets tend not to register as volatile; media headlines typically focus on shares falling by whatever huge amounts. But spare a thought for holders of index-linked! Last week saw the largest weekly fall this year in the long index-linked gilt. The...

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Not so (Pet)Smart

Revenues mean nothing if the company in question loses money with every sale made. While this may seem obvious, the high yield market has been reminded of this in a painful way over the last few months. The company in question is PetSmart – a large American pet store...

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Prepare to be Prepared

The Bank of England (BoE) today made a not-so-subtle attempt at getting the market ready for an imminent interest rate rise. In the minutes of today’s 7-2 vote it was noted that “a majority of MPC members judge that…. some withdrawal of monetary stimulus is likely to...

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Nothing to fear except price itself?

Is the real challenge for fixed income markets solely their valuations? Most measures from the global real economy point to stronger PMI, lower unemployment or increased GDP – all suggesting that rates should be higher. So why are Treasuries at their lowest yields...

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Positive on the periphery

The European Central Bank’s (ECB) Governing Council decided yesterday to keep monetary policy unchanged in the euro area but signalled strongly that, all being well, policy would be ‘recalibrated’ at the October meeting. So we will all have to wait until later in the...

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Back in the summer of… 2011

As fund managers interacting with our clients, the team often gets asked, “What’s the holding period for a trade”? And, given our strong belief in active management, we typically respond by explaining how we rotate our portfolios’ credit and rates exposure across...

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Inflation, remember that?

Both German and Spanish CPI was released today for August. They can be added to the expanding list of countries in the European area where inflation is coming in higher than expected. Germany reported 1.8% year-on-year, with Spain at 2.0%. To put these figures into...

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Where there’s smoke…

The US Food and Drug Administration (FDA) recently announced that it would seek public input to potentially lower nicotine levels in combustible cigarettes to non-addictive levels. The FDA took over tobacco regulation in 2009 and has the authority by law to reduce...

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Prime time to checkout Amazon?

Amazon is a company that polarises opinion in the investment world. It has been variously described as the biggest not-for-profit organisation in the world to one that epitomises the new technology world we live in, a company that is at the vanguard of the...

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Boring is good

In our experience, some of the best high yield bonds reflect those of us who invest in them; low-key, reliable, and often profoundly boring. The ‘monotony’ of a business that reliably posts juicy but safe cash flows? Sign me up! Some of our fondest positions are in...

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Masterly manipulation

“Masterly manipulation” it was called by J.M.Keynes in secret papers in the 1920’s. Today we call it QE.  A fascinating and only recently discovered entry in old Bank of England ledgers revealed that in 1914 the Bank was forced to purchase Gilts for itself as there...

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Testing times

The recent egg scandal has once more brought the issue of food safety into the public spotlight. Along with the horse meat scandal and baby milk in China, there are strong reasons to suggest that food testing will continue to be required to ensure the quality of the...

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Greece-ing the wheels of recovery

Greece returned to the international bond markets last week with its first issuance since 2014, which at the time was its only issuance since the European Sovereign Crisis when the vast bulk of its debt was ‘restructured’. This return to the market is another small...

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A Liborious task ahead

Yesterday the CEO of the FCA, Andrew Bailey, gave a speech in which he supported ending the publication of LIBOR (London Inter-Bank Offer Rate), the key risk-free reference rate used by the financial system in the UK. In general the comments were nothing new – this...

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Who Benefits from QE?

A report out overnight from the Bundesbank examines the impact of quantitative easing on the rate of interest German authorities pay to borrow money. In 2007 the average rate for the government or a local authority to borrow was 4%, last year it was less than 2%. Over...

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Not just all talk, maybe some trousers?

Well now, a month ago I wrote a piece comparing the current mania for buying government debt to “The Emperor’s New Clothes”. Let’s all lend to the government for returns massively below the level of inflation and growth and pretend it’s all good. Individually we all...

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UK employment is not the full story

The dilemma for the Bank of England (BoE) intensifies in light of this morning’s May employment figures. UK unemployment has fallen further to 4.5%, versus the BoE forecast at 4.7%. To find a similarly low level you have to go back to the mid-70s, as shown in Chart 1....

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Kames Keeps up with the Kardashians

Reality television production might not immediately appear to be the strongest credit proposition – but appearances can be deceptive. A new bond issue from Banijay Group (responsible for many well-known hits including ‘Keeping up with the Kardashians’ and ‘Location,...

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Holmes moans about loans

As a high yield fund manager it has been interesting to watch leveraged loans become something of an investor darling this year – almost $13bn has flowed into US loans over the year to date. Investors have sought out loans as a place to hide from a Fed that is raising...

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Awake at the wheel

“Asleep at the wheel” has been the accusation levelled at central bankers such as the Bank of England (BoE) over the financial crisis of 2008. But eager to prove its new found vigilance, the BoE yesterday tightened its controls on bank credit by announcing changes to...

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Valuations Sour the Green Apple

This week saw the issuance of Apple’s second green bond, a $1billion 10-year transaction to help fund its goal of running 100% of the company’s operations on renewable energy. The issue builds on $1.5billion of green bonds sold by Apple a year ago, the biggest ever...

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More HC Andersen: The Emperor’s New Clothes

2017 is the 180th anniversary of the publication of Hans Christian Andersen’s short story “The Emperor’s New Clothes”. For those not familiar with the tale, it is the story of how two conmen convinced an Emperor to part with money for nothing – by creating a scheme...

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UK election positives

It is early days yet but it looks like Theresa May is going to be returned as prime minister as the Conservatives form a government with support from the Democratic Unionist Party (DUP). On first glance it seems a bit of a mess but taking a closer look at the results...

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Careful what you wish for!

Careful what you wish for! Steve Jones our CIO uses this phrase; Theresa May should have heeded these words. Not a natural gambler, May’s snap election has backfired leaving political uncertainty. There is little doubt her political authority is reduced and there will...

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Politics getting in the way – again

One of the biggest surprises so far this year has been the strength in the Italian economy. In Q1 2017 Italy posted a 0.4% increase in real GDP, the strongest quarter since the European Sovereign Crisis. Meanwhile composite PMIs are reaching new highs, unemployment is...

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Somewhat dovish

The “solids, modestly and little changed” have it. Yesterday’s FOMC minutes as ever run to a dozen pages and steer the market into its thinking. The small bounce of around 25c in 10-year US Treasury prices show the text was received in a “somewhat” dovish tone....

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Low unemployment… and low gilt yields

The most recent unemployment rate in the UK came in at 4.6% – along with the highest ever employment rate achieved, at 74.6%. Economic theory – namely the Phillips curve model – tells us that as the level of unemployment falls, the economy can expect a corresponding...

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Taxi Driver – the sequel

Sequels are rarely good as the first. In Robert De Niro’s original 1976 film, Taxi Driver, Vietnam veteran Travis descends into New York’s low life as sexual infatuation and delusion overtake him. As the original is based on sex it’s no surprise that the sequel is...

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And another thing Mr Carney…

A quiet weekend for me – my usual taxi-driving services not required. My 17-year-old son took himself off round a series of Universities, ostensibly checking them out ahead of deciding where to study next year. I note the perfect correlation between institutions on...

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EM Corporates – Stay selective

It’s a difficult time to like EM corporate bonds. In the first instance, valuations are expensive. In fact, emerging market corporate bonds now trade at a tighter spread than emerging market government bonds. Source: JP Morgan. CEMBI is the EM corporate index, EMBIG...

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Sell gilts: UK high street inflation shocker!

I have just wandered to my nearest Starbucks for the bargain that was its “tall, black, filter coffee”. As others have paid £4 for their daily dose of vanilla-spiced, grande, half-fat frozen frappuccino, that august American tax-paying institution has been charging me...

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UK election; early thoughts

It seems a done deal that the Conservative Party will win the 2017 General Election and will increase its majority in the House of Commons. The Conservatives are around 17 points ahead in the opinion polls and the Labour Party’s election campaign to date can best be...

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History Repeating – divergent economic data

History has a habit of repeating itself.  We often hear “it’s different this time” only to find that events at least rhyme if not repeat the past.  A good example is US GDP data: Q1 GDP data has been weaker than expected in the US in each of the last few years and it...

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Challenging consumption in the US

We should not totally dismiss the weakness in Q1 GDP in the US. Private consumption disappointed – no question about it – while inventories detracted 1% over the quarter. But there were also reasons to celebrate. We saw a healthy increase in investments – and since an...

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Netflix launches Billions

OK, so “Billions” is actually produced by Netflix competitor Showtime, owned by CBS and broadcast in the UK by Sky Atlantic. However, yesterday, Netflix issued its debut bond into the Euro market with €1bn of 3.625% 10 year bonds using its B1 rating.  What is unusual...

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Step out of the shadow

We believe there is a long shadow of the 2008 Global Financial Crisis (GFC) that still prejudices investor sentiment to risk and return within corporate bond markets. Recently we were asked about default rates in investment grade credit, and what impact this had on...

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The Sleepy High Yield New Issue Market

The chart shows the proportion of new debt raised in the high yield market that is used to refinance existing borrowings, rather than for more speculative purposes such as capital projects, mergers & acquisitions, and returns to shareholders. Refinancing is the...

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Starting the Final Lap

The final lap of the race for the French presidency has started. Emmanuel Macron with 23.75% of the votes and Marine Le Pen reaching 21.53% will compete for the second round of the French presidency on May 7. Voter turnout was 78.69% versus 80.42% in 2012. French...

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UK election – Bypassing the bond market, again

Election announcements make good theatre. A rushed press conference, lectern in the middle of Downing Street, searing Prime Ministerial looks and boom – a snap election for June 8. In years gone by, such uncertainty was a source of material volatility to all markets,...

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US inflation – letting off a little steam

The inflation surge as evidenced by the TIPS market (US Government Treasury Inflation Protected Securities) that started around September ’16 has taken a bit of pause and has actually has started to reverse. Undoubtedly there were some Trump effects to the inflation...

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The coupon’s round trip

A few days ago we wrote about the possibility of the US Federal Reserve not reinvesting maturing bonds in its QE programme. Over time this would see the Fed’s portfolio of bonds reduce to zero (a very long time). This debate is about the reinvestment of maturities,...

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To reinvest or not to reinvest

Last night the US Federal Reserve debated its $4.5 trillion balance sheet. This discussion has started to gain momentum with the change of politics on Capitol Hill at the end of 2016, and with one of the Fed governors William Dudley already indicating that 2018 may...

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South Africa: stay cautious for now

On Friday morning President Zuma of South Africa dismissed his Finance Minister and Deputy Finance Minister. Such a move had seemed likely after the highly unusual decision to call back the two ministers from a roadshow in London earlier that week. Finance Minister...

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China in the age of Trump

China has seen elevated credit growth since the global financial crisis, such that investors consistently raise this issue as a core concern for emerging markets. The more recent rise of President Trump has also added to the pressure on the world’s second largest...

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Heed the lessons of the past

"Markets are highly correlated with historically low volatility. Central bank activity has created a “goldilocks scenario” where investors treat bad news as good and good news as excellent. As a result of low cost of debt, markets have been propelled to record highs....

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Kondratieff

On Tuesday we hosted a conference where we heard from our own team and a couple of economists. Chris Watling at Longview Economics takes a, well, long view. He is quite a proponent of Kondratieff. Who he? Starting at the end, he faced Stalin’s firing squad in 1938 at...

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A dovish rate rise

As anticipated by every single economic forecaster, the Federal Reserve raised rates last night.  Their range for interest rates was increased by 25 basis points to 0.75% to 1%.  The 2017 and 2018 median dots were unchanged with two more rate rises anticipated by the...

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Going dotty tonight

At 6pm GMT it is widely anticipated that the Federal Reserve will raise interest rates by 25 basis points.  It would be a huge market surprise if they did not increase rates and an absolute shock if they moved by 50bps.  What matters more is the language around the...

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Are fund managers too scared to take a view on Venezuela?

It has been long expected, but its happening still caused meaningful price dislocation. Two weeks ago, President Maduro of Venezuela announced that the country would restructure its debts. As a result, so far this month Venezuelan dollar bonds have delivered an -18.5%...
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Dull or extraordinary?

Over the years some of us fixed income fund managers have had to endure much leg pulling from our colleagues that manage assets in other more ‘exciting asset classes’. Boring, dull are adjectives I‘ve heard whispered in corridors or by the coffee machine, perhaps they...
Read More

Eat, Drink and be Merry

The food retailers will be trying hard to tempt you over the coming festive season with their irresistible products, as UK food remains highly competitive. However the British Retail Consortium (BRC) has warned that Christmas dinner could be an expensive affair this...
Read More

Making Stuff is Hard

The most valuable lessons in high yield investing are usually delivered using a mix of shock, pain and humiliation. A rare exception to this occurred to me a few years ago; however I suspect more recently, similar lessons are visiting Tesla investors, albeit more...
Read More

The King (well, Queen) is dead, long live the King!

Janet Yellen is set to be replaced by Jerome Powell as Chair of the US Federal Reserve. Whilst markets have speculated what the new kid on the block will deliver, the outcome is evolution, not revolution. Powell was not the preferred candidate of those who thought...
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Forward guidance – 2017 style

UK rates move up by 0.25%. This was widely anticipated - but more interestingly - what next? Carney and the MPC would like to be have some flexibility but as the short press statement reminds us – they are as much in the dark about the economy up to, and after, Brexit...
Read More

The rating of your debt can go up as well as down…

Being reasonably experienced in European bonds I can just about recall the time when, just over 25 years ago, Standard & Poor’s awarded Italy its first Foreign Currency Long-Term Debt rating. Back then, Italian debt was denominated in Lira and withholding tax was...
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Emerging market sovereigns and corporates – why they’re different, and why they both matter

One paradox of investing in emerging market debt is as follows: very often, those outside the asset class, when criticising it, fail to differentiate between sovereign and corporate borrowers. At the same time, those within the asset class probably don’t think...
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Leonardo da Vinci, Paul Newman, QE and relative value

On Thursday (26th October), Mario Draghi outlined the ongoing monetary easing that the European Central Bank (ECB) will provide to the European economy.  He announced that the ECB will buy assets at a rate of €30bn per month in the first nine months of 2018 (at least)...
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More rare than a Chinese Congress

China has been in the news a great deal this week, with the announcement, at the Communist Party’s quinquennial Congress, of the next cadre of leadership alongside President Xi Jinping. However, China did something else significant this week too, and even more...
Read More

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