World-Watching: Germany Bundesbank: What Moves Markets?

[Deutsche Bundesbank discussion paper 16/2022 by Mark Kerssenfischer & Maik Schmeling]

Non-technical summary

Research question

A key question in the macro-finance literature concerns the drivers of asset prices. Are asset prices mainly driven by news, or by changes in sentiment and other factors unrelated to economic fundamentals? In most asset pricing models, news play a dominant role. But in empirical investigations, the explanatory power of news is often quite low.

Contribution

We study the explanatory power of news by building a large, time-stamped event database covering a wealth of news related to the macroeconomy, including macroeconomic data releases, central bank announcements, bond auctions, election results, sovereign rating downgrades, and natural catastrophes. We combine this event database with high-frequency stock price and bond yield changes, both for the U.S. and the euro area, going back to 2002.

Results

We find that roughly half of all stock and bond price movements in the U.S. and euro area occur in tight windows around clearly identifiable news and in this sense can be explained by those news. On the positive side, this share is much higher than most previous studies found. However, our results still ascribe a large role to return variation that cannot be linked to news about economic fundamentals.

Read the paper [archived PDF].

Asia-Watching: New Studies on Tariffs; FDIs and Global Value Chains

[from Asia-Pacific Economic Cooperation, May 15, 2022]

Study on Tariffs: Analysis of the
Regional Comprehensive Economic Partnership
Tariff Liberalization Schedules

prepared by Carlos Kuriyama, Sylwyn C. Calizo Jr. & Jason Carlo O. Carranceja

RCEP is the largest regional free trade agreement (FTA) in the world. Its potential is huge, as its 15 members account for about 2.2 billion people (30% of the global population), a regional gross domestic product (GDP) of about USD38,813 billion (30% of global GDP), and 28.8% of global trade. This study examines market access commitments and comparing the extent of tariff liberalization within RCEP as well as the other major regional FTA in the Asia-Pacific, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Read the full article [archived PDF].

The FDI Network, Global Value Chain Participation and Economic Upgrading

by Luna Ge Lai, Nguyen Thu Quynh & Akhmad Bayhaqi

Foreign direct investment (FDI) represents an important internationalization pathway to global value chain (GVC) participation. APEC economies as a group have dominated as FDI recipients, accounting for nearly 52% of the global inward FDI stock. This study analyses the role of FDI in economies’ GVC participation.

Read the full article [archived PDF].

USDA Foreign Agricultural Service: World Agricultural Production

Monthly report on crop acreage, yield and production in major countries worldwide. Sources include reporting from FAS’s worldwide offices, official statistics of foreign governments, and analysis of economic data and satellite imagery. The report reflects official USDA estimates released in the monthly World Agricultural Supply and Demand Estimates (WASDE).

Sign up for USDA FAS mailings.

World-Watching Energy: Gas Future Demand

Future of EU Gas Demand

[from E3G, by Euan Graham, Kamila Godzinska]

The EU is implementing an ambitious package of measures to reduce its reliance on Russian gas, targeting both supply and demand. REPowerEU will accelerate the EU’s move away from reliance on gas imports over the next decade.

When it comes to U.S. gas exports, while this will lead to an increased reliance on liquefied natural gas (LNG) in the short term, the outlined strategy doesn’t imply any long-term LNG market growth. The U.S. can supply Europe with sufficient LNG without building new infrastructure. New findings show that, with clean technologies and energy efficiency, EU gas demand will decline before newly proposed projects are actually completed — 15-20 years — and long payback periods mean LNG export projects may never recover the capital investment.

[LNG projects timeline]
Indicative construction and payback timelines for new LNG terminals, contrasted to additional LNG demand set out in REPowerEU. LNG demand between 2025 and 2030 reflects the potential of increased action on demand-side as set out by E3G.

Read the full briefing [archived PDF] on the future of EU gas demand.

Science-Watching: High-Energy Physics (CERN Courier – May/June 2022)

[from CERN Courier – May/June 2022, by Matthew Chalmers, editor]

As the LHC beams prepare to set new records in brightness and energy, the Courier takes an in-depth look at the Run 3 physics prospects in searches, precision measurements, flavor and heavy-ion physics. Together with a diverse fixed-target program, the LHC experiments are forging new research directions, while recent developments advance the feasibility study for a possible Future Circular Collider.

Also in the issue: a massive surprise from CDF, intriguing results at Moriond, luminosity versus energy, the CERN Neutrino Platform, International Linear Collider, and much more.

Read the May/June 2022 issue [archived PDF].

Japan-Watching: Governor Haruhiko Kuroda’s Special Lecture

[from Columbia Business School’s Center on Japanese Economy and Business]

Japan’s Inflation Dynamics and the Role of Monetary Policy (April 22, 2022)

by Haruhiko Kuroda (黒田 東彦), Governor, Bank of Japan (日本銀行)

Climatology-Watching: Tyndall Centre for Climate Change Research

[from Tyndall Centre for Climate Change Research]

UK’s climate change readiness has made ‘significant progress’

by Renee Karunungan on May 4, 2022

There is significant progress in the UK for reporting and implementing climate change adaptation, according to a new study led by Tyndall UEA’s Katie Jenkins. Katie has created an Adaptation Inventory of adaptation actions happening based on official records of adaptation projects being implemented by both public and private sector, accompanied by  a systematic review of the peer-reviewed literature of adaptation case studies.

Adapting to climate change means taking action to prepare for and adjust to current and predicted effects of climate change. Adaptation plays an important role in managing past, present and future climate risk and impacts. However, there is an “adaptation gap” where the distance between existing adaptation efforts versus adaptation needs is widening, according to the United Nations Environment Programme’s Adaptation Gap Report. Tracking national adaptation plans is deemed critical to support future decision-making and drive future actions.

Studies of adaptation consider the UK at the forefront of adaptation planning, setting an early example with the Climate Change Act 2008 which contains a five-year cycle of adaptation planning, published as the UK Climate Change Risk Assessment. Evidence from the UK Climate Change Committee shows that adaptation action has failed to keep pace with increasing climate risks. 

According to the Committee’s assessment, adaptation planning for 2C and 4C global warming is not happening, and that the gap between future risks and planned adaptation has widened, delivering the minimum level of resilience.

Katie’s new Adaptation Inventory provides insight on what is currently being implemented, which helps policymakers and practitioners learn from existing knowledge and practical case studies.

“The Adaptation Inventory provides a consistent and easily searchable database which will continue to evolve. It can provide evidence on the specific types of adaptation implemented on the ground as well as provide more detailed insight into the specific examples of action being implemented. This has the potential to help and inform UK-based decision-making,” Katie said.

The Adaptation Inventory identifies and documents current and planned adaptation in the UK, and how it is being implemented through adaptation actions, the sectors where adaptation is occurring, and where the gaps remain. There were 360 adaptation actions identified in the Inventory, comprising 134 adaptation types. Out of these 360 adaptation actions, 80% have already been implemented.

The private sector accounts for 74% of the actions with water companies dominating. Regulatory frameworks, standards, and reporting requirements are key drivers required by water companies by the Regulator. For example, water companies are already required to plan their resilience to drought.

The most common types of adaptation actions are flood protection (12%), leakage reduction (4%), water metering (3%), property level flood protection (3%), operational improvements (3%), and back-up generators (3%). Most actions were categorized as structural and physical interventions. Other interventions were categorized as technological and ecosystem based. 

An example of a structural adaptation action is raising boat landings to address higher tides because of rising sea levels. For an example of technology, London Transport has installed air cooling units and mechanical chillers at two key busy tube stations to address heat stress. An ecosystem-based example  introduces barley straw to reservoirs to control blue green algae, more common with warmer summers.

The Adaptation Inventory also looks at the types of climate hazards being addressed. It found that 76% of the actions were in response to drought, 26% for extreme rainfall, 13% for flooding, and 11% for higher temperatures. One example of adaptation for drought is rainwater recovery using storage facilities available on the site, reducing the demand for fresh water during drought. For alleviating flooding, a water company is using afforestation. The London Underground has doubled the capacity of ventilation shafts on the Victoria line, which provide more air flow on hot days.

Knot Theory and the Strangeness of Reality

The subfield of “knot theory” in math as a kind of geometry of “twistiness” gives us a deep “meta-intelligent” signal or lesson.

Meta-intelligent means “perspective-challenging” with or without full details of any subfield itself.

Consider this overview or comment on “knot theory” now:

“In mathematical knot theory, you throw everything out that’s related to mechanics,” Dunkel (MIT math professor) says. “You don’t care about whether you have a stiff versus soft fiber—it’s the same knot from a mathematician’s point of view. But we wanted to see if we could add something to the mathematical modeling of knots that accounts for their mechanical properties, to be able to say why one knot is stronger than another.”

But you immediately think: in the real world knots are not only twisted up in mathematically definable ways but are in fact actual shoelaces, neckties, ropes, etc, that have chemical and molecular properties before you describe their twist-and-tighten or slide-and-grip “shapes.”

Which is the real: the math or the “ropiness” of the ropes or the “laciness” of the laces?

The relationship between things and numbers is elusive.

Mathematicians have long been intrigued by knots, so much so that physical knots have inspired an entire subfield of topology known as knot theory—the study of theoretical knots whose ends, unlike actual knots, are joined to form a continuous pattern.

In knot theory, mathematicians seek to describe a knot in mathematical terms, along with all the ways that it can be twisted or deformed while still retaining its topology, or general geometry.

MIT mathematicians and engineers have developed a mathematical model that predicts how stable a knot is, based on several key properties, including the number of crossings involved and the direction in which the rope segments twist as the knot is pulled tight.

“These subtle differences between knots critically determine whether a knot is strong or not,” says Jörn Dunkel, associate professor of mathematics at MIT. “With this model, you should be able to look at two knots that are almost identical, and be able to say which is the better one.”

“Empirical knowledge refined over centuries has crystallized out what the best knots are,” adds Mathias Kolle, the Rockwell International Career Development Associate Professor at MIT. “And now the model shows why.”

As per usual in science, one is dazzled by the ingenuity of the quest and the formulations but puzzled by the larger implications since we can never decide whether math “made” us or we “made” (i.e., invented) math.

World-Watching: War and Military

Russians Make Minimal Progress in the Donbas, DOD Official Says

[from U.S. Department of Defense, by David Vergun, sent May 2 @ 3:58 PM]

Russian forces in the Donbas region of eastern Ukraine—where the bulk of the fighting is taking place—are suffering from poor command and control, low morale, and less than ideal logistics, a senior Defense Department official, said today. 

“We continue to see minimal, at best, progress by the Russians in the Donbas,” the official said. “They are not making the progress that they had scheduled to make and that progress is uneven and incremental.”

The Russians have had some minor gains east of the Ukrainian cities of Izyum and Popasna, the official said, adding that that progress has been anemic. 

“What we saw there in Popasna is not unlike what we’ve seen in other hamlets in the Donbas. Russian forces will move in, declare victory and then withdraw their troops only to let the Ukrainians take it back. So, there was a lot of back and forth over the last couple of days,” the official said. 

Also, the Pentagon has observed that Russian forces seem to have a risk and casualty aversion in both the air war and the ground war, the official said. 

Ukrainian forces continue to hold Kharkiv against nearby Russian forces. The city continues to endure Russian air strikes, the official said. 

“But the Ukrainians have been doing an able job over the last 24 to 48 hours of pushing the Russians further away. And they have managed to push the Russians out about 40 kilometers to the east of Kharkiv,” the official said.  

That’s a good example of the stiff and formidable resistance Ukrainian forces are displaying, the official said. 

Mariupol continues to get hit with standoff Russian air attacks. “We continue to see them using dumb bombs in Mariupol,” the official said, referring to ordnance that’s not precision-guided. 

Regarding security assistance to Ukraine, more than 70 of 90 M-777 howitzers the U.S. planned to send are now in Ukrainian hands, along with over 140,000 155 mm rounds that these cannons use, which is about half of the projectiles planned for delivery, the official said. 

Training on those weapons continues outside of Ukraine, the official added. 

From the start of the invasion 68 days ago, the Russians have launched 2,125 missiles into Ukraine, the official mentioned.