Central bank equity buying: some evidence

Over the past few months there seems to have been a growing debate, here and elsewhere, as to the impact of central banks upon equity markets.   While few would dispute the notion that many monetary authorities would like to see equities rise, and indeed put in place macro policies that are intended to effect that outcome, the degree and influence of CBs' direct participation has been a source of disagreement.

In an effort to put to rest the tiresome trope that "central banks are in buying" seemingly every time that equities rally, Macro Man decided to do a little digging.  Fortunately, the ETF and J-REIT purchases by the BOJ are a matter of official policy, and thus there is an official dataset of the historical date and size of BOJ participation in equity markets.  Macro Man decided to parse the data to see what he could find.

If the conspiracists are correct, what should we expect to see?  In other words, what verifiable predictions can this "CBs directly drive equities higher" model of the world make?  Two obvious ones come to mind:

* We should see better index performance on buying days than non buying days

* We should see a larger volume on buying days than non buying days.

So what does the data tell us?

A couple of pretty strong patterns emerge.   The first is that yes, volume does tend to be higher on BOJ purchase days, by roughly 10%.   Macro Man did not run "value traded" numbers, but this strikes him as a volume boost that is likely to be greater than that accounted for by direct BOJ purchases.

The second is that the Nikkei fares much, much, much worse, on a consistent basis, on BOJ buying days than it does on non-buying days.  In fact, the average daily return on buying days is negative, both overall and every single year since the program was inaugurated in 2011.

Now, there could be a simple explanation for this: namely, that the BOJ has their monthly purchase bogey, and on a high frequency basis choose to time their buys on days when the market sells off out of the gate.  This seems pretty reasonable to Macro Man; after all, Japan was the birthplace of the PKO (price-keeping operation.)

However, whatever buying that the BOJ is doing, it is not sufficient to propel the market back to gains on the day they do it.  Now, adherents to the "CBs control all equity price action" theory might respond that "yeah, of course, they buy when the market's down, and the impact carries over to the next day."

OK fine, but that's contrary to the original claims, and also suggests that the original theory is wrong, to wit:  those days that the stock market rises are precisely those days when the CBs are not in buying.

You can't have it both ways, fellas, by claiming that equities are up because central banks are buying, and then say that they only buy on days when the market goes down.  Having it both ways isn't a theory, and it certainly isn't science; it's some sort of cultish financial religion. 
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Anonymous
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January 26, 2016 at 3:28 PM ×

It is true that we are not being specific when we claim "Central Banks" are buying, for the following reasons:
- We often don't specify the exact asset class(es).
- Often the operations are performed by associated entities, in the case of BOJ, they work hand-in-hand with GPIF and others for example.
- Finally once a Central Bank entity provides a suitable bid, other market participants quickly climb on board.
As such your post doesn't evidence the counter-claim, sorry.

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Macro Man
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January 26, 2016 at 3:34 PM ×

I am shocked, SHOCKED that you dispute the evidence. What verifiable predictions can your model of the world make? I hear a lot of ex-post rationalizations, and zero predictions, other than "the market's just gone up a lot, it will probably go up more".

GPIF, yen debasement, JGB buying are all part of the Abenomics policy platform. The strongest evidence we have, however, suggests that the very days you claim that the 'BOJ is in' are statistically the least likely for them to be so.

No predictions and no concrete evidence = no credibility.

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washedup
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January 26, 2016 at 3:44 PM ×

anon 3:28 - I doubt we will settle the debate today, but I would like to point out that this theory has been doing the rounds since the 1987 market crash - are you seriously suggesting that over two decades of a 15 minutes of fame muckraking explosion, there has not been one serious whistleblower who mentioned it in passing at a party to a CNBC gawker, not one disgruntled ex fed analyst who mentioned it on a blog, and not a single software programmer who helped write the PPT algorithm for any of the three major CBs who chose to casually mention it in a hedge fund interview?

If these operations are being conducted by the Knights of Templar and anyone who choses to mention is immediately silenced, I guess thats the end of the story - as for MM's valiant effort in presenting scientific evidence, I have a far dumber exhibit - namely, why TF did this secret society of perma-bulls allow equities to fall more than 50% in 2002 and 2008-09?

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Polemic
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January 26, 2016 at 5:00 PM ×

great post MM and I admire your Darwinian take down of the CB equity creationists.

I'd go one stage further though and say ' So what if they are'?
It is immaterial to traders' profits unless their actions can be read, as you point out they can't, or stopped - which Mr tinfoil beany wearer won't be able to change, unless tinfoil beeny wearers get elected. Much like any other religion, things that arent wanted or are unexpainable are blamed on a superbeing. Only in this case a lot of it is explainable as you pointed out.

Oh damn , I was going for a bike ride this evening but it's stormy outside, bloody Central Banks making it stormy and ruining my life.. And I 'll tell you what - I bet it will be stormy again at some point when I want to go out and that will REALLY prove my point.

Pol

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Thud and Blunder
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January 26, 2016 at 5:03 PM ×

Some see God in every blade of grass. What possible refutation could one wield?

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Anonymous
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January 26, 2016 at 5:27 PM ×

Several equity indexes now up 2% on the day. Most interesting is the price action itself - discounting Shanghai being down -6%, and Oil falling, equities have risen in a near straight line all day. The price action fully confirmed by the patterns indicating central bank buying, called here ahead of time.

Again, feel free to make puerile comments, we will continue to book profits. Good day.

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Anonymous
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January 26, 2016 at 6:05 PM ×

Yawn. All these da vinci coders need do is lay out all their specific evidence of this buying (not the alleged symptom re price) for peer review and we may all convert; absent that it's garbage.

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Anonymous
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January 26, 2016 at 6:26 PM ×

Ray Dalio on QE and Fed's tightening
http://www.ft.com/intl/cms/s/2/b41813dc-c028-11e5-846f-79b0e3d20eaf.html#axzz3yIOmyPlG

Here is my highlight:

"That is where things now stand across the world’s reserve currencies, where the expected returns of bonds (and most asset classes) are relatively low in relation to the expected returns of cash.

As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth.

When this configuration exists — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.

At such times the risks are asymmetric on the downside and it behoves central banks to err on the side of waiting until they see the whites of the eyes of inflation before tightening.

That, in my opinion, is now the case.
"

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Anonymous
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January 26, 2016 at 6:35 PM ×

I think the late Mark Pittman proved that Central Bank operations are not always transparent or forthcoming.

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Macro Man
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January 26, 2016 at 6:37 PM ×

I would also note that since 1994, the annualized average change in the SPX the day before a Fed announcement is 27% (47% during tightening cycles.) Congrats, Anon, on forecasting a phenomenon that the NY Fed identified just three and a half years ago.

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Anonymous
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January 26, 2016 at 6:37 PM ×

The "we're making money, therefore all our theories are correct" argument reminds me of a guy who told me of his system for playing roulette.

He would wait until there were 4 spins of black, and then bet on red. Because the odds of 5 blacks in a row were really low. I tried to argue with him, and he said "I make money doing this".....

- Whammer

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Anonymous
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January 26, 2016 at 7:52 PM ×

Judging by the negativity above I think it's safe to say that the majority here either lost or made no money today. lol.

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Anonymous
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January 26, 2016 at 8:07 PM ×

Rumors today that the SNB are in the market (mainly in FX, but the SNB also buy large amounts of equities). Source (RanSquawk, BBG, un-named European Bank).


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Anonymous
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January 26, 2016 at 8:10 PM ×

Fed are obviously in FOMC meetings today. Considering the number of leaks that have emerged from them, I wonder if that's also had some impact on market movements today?

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Macro Man
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January 26, 2016 at 8:40 PM ×

"Judging by the negativity above I think it's safe to say that the majority here either lost or made no money today" Well, either that, or irritation that someone keeps spouting a load of bollocks with their unproven conspiracy theories.

Frankly, I don't get worked up on a day to day basis whether I make, lose, or break even on the day, because if you're playing proper macro, your P/L is random on the sort of time frame that anonymous spivs seem to care so dearly about.

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Anonymous
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January 26, 2016 at 8:59 PM ×

Who is going to win nominations for both parties and eventually become President of the U.S? How that will affect the stock mkt?

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Anonymous
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January 26, 2016 at 9:06 PM ×

Gross: Buffett, not oil, likely cause of today's rally. $32 billion purchase of PCP closes Friday. Fresh $$.

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Anonymous
admin
January 26, 2016 at 9:15 PM ×

@anon 7:52

Though I bought the dip last week and enjoyed a nice profit right now, as many others here, your comment really annoyed me becasue of its emptiness. Even FM sounded much more intelligent and interesting than you in this regard.


---------------------------

On the market, mREITs seemed to come back as fast as oil/gas equities, which makes me wonder if this is just a correlation between oil and mREIT, or someone liquidited lots of their positions in mREITs last week, or there is a link between oil and mREIT through credit. Can someone please share some insight here?


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Anonymous
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January 26, 2016 at 9:41 PM ×

I am pretty sure that our Fed is precluded by law from buying equities. Hussman has repeatedly opined that the prohibition applies to ABS as well.

Rossmorguy

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Anonymous
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January 26, 2016 at 9:57 PM ×

Did ZH turn 10 or something?!

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Hotairmail
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January 27, 2016 at 12:08 AM ×

On the other hand, are we saying that if an entity buys stock, it has no effect on the general price level? That sounds counter-intuitive.

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Macro Man
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January 27, 2016 at 1:02 AM ×

Well, if the amount purchased is statistically insignificant relative to the total market turnover, it seems reasonable to conclude that so would its impact be on the the total price level. Over a 5 year span, the BOJ has acquired ETFs totalling just over 1% of the market cap of the Nikkei, over 846 separate trading days. On a per-session basis, that averages out to 0.001% of Nikkei market cap per session. The equivalent ticket size in Treasuries is $214 mio. Would you really expect a CB ticket of that size over few days to permanently shift the level of Treasury market?

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Anonymous
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January 27, 2016 at 1:41 AM ×

Again, we all know that CB operations are in the main driven via other entities. MM himself has made the point that CBs are not independent of govt. Here are just a couple of examples of state entities that work alongside their CBs and who have bought sizable amounts of equities: BOJ, GPIF etc. PBoC, CSF, SAFE etc. Add in to the mix various other pension & insurance companies, primary dealers etc (all working in conjunction with the aforementioned) and you have an extremely large asset base.

The WSJ, FT, BBG, Reuters etc have all commented on these activities. We're not talking ZH here. I think the comments above stating that any possible CB activity is "tin hat conspiracy theory" are childish to say the least.

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Anonymous
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January 27, 2016 at 1:56 AM ×

And what is the indicator of CBs buying ? How do you see it ? Discussion of cause is irrelevant unless you clearly define the "thing" you attribute to be CBs buying (and no anon comments on a blog does not cut it).

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Macro Man
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January 27, 2016 at 2:14 AM ×

Moreover, I think it would come as a real surprise to the gentlemen who run GPIF, SAFE, etc that they are in fact monetary agents who are employed by Kuroda, Zhou, etc.

Yes, GPIF and SAFE are subject to political pressure, but guess what: that pressure comes from sources that exceeds Kuroda and Zhous's payscale (though probably not Mark Carney's!)

Are SWFs equity investors? Absolutely...though of course, their AUM has leveled off sharply or, in the case of the petro guys, fallen. Judging from their behaviour in tangential asset classes/currencies where their presence is more easily detectable (viz GBP FX), they are not in risk additive mode at the moment.


But when you say 'CBs are buying equities', you are making a very specific allegation that monetary policy authorities are printing money to buy equities, perhaps even foreign equities. In virtually all but a few cases, that is just nonsense.

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Variance
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January 29, 2016 at 7:35 AM ×

I have to disagree. Your logic seems flawed.
Obviously they buy only on losing days and thereby still have a positive impact as they reduce the downside.
It is like coinflipping where you only lose a fraction of what you gain if you win. E.g. Instead of 1/2 vs 1/2 you lose 1/4 but still win 1/2

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