China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Archive | November, 2016

Eurozone markets dip as QE euphoria fades

Posted on 30 April 2015 by

epa04196377 (FILE) A file photo dated 06 November 2013 showing the Euro symbol sculpture illuminated at night in front of the European Central Bank (ECB) headquarters in Frankfurt Main, Germany. The European Central Bank kept interest rates on hold at an historic low of 0.25 per cent 08 May 2014, despite pressure to act to head off the threat a strengthening euro holds for consumer prices. Many analysts believe the ECB will now wait until June, when it releases its new inflation and economic growth forecasts for the 18-member eurozone, before considering any further action. The Frankfurt-based ECB, which held one of its regular out-of-town meetings in Brussels, last cut the cost of money in November, when it trimmed its benchmark refinancing rate by 25 basis points. EPA/DANIEL REINHARDT©EPA

European share prices saw their first monthly decline of 2015 in April, as enthusiasm for Europe’s quantitative easing programme began to fade.

Powerful rallies in eurozone stock and bond markets since the start of 2015 went into reverse this week, with analysts saying asset prices had risen too far, too quickly, and were due for a correction.

    The FTSE Eurofirst 300 index, which surged 16 per cent in the first three months of the year, ended April 0.6 per cent lower than a month earlier. Meanwhile, Germany’s Xetra Dax index ended 4 per cent down on the month, amid concerns that the recent strengthening of the euro had made the country’s exports less competitive.

    “With QE and the euphoria, the market got ahead of fundamentals,” said Sandra Crowl, investment committee member at Paris-based Carmignac Gestion. “There was a real disconnect. The economy is not that strong. It was an accident waiting to happen.”

    Mario Draghi, ECB president, launched eurozone QE on March 9 to prevent the eurozone falling into a damaging deflationary slump.
    Inflation figures on Thursday indicated he had succeeded in averting such a scenario.

    The programme was also designed to keep a lid on interest rates and weaken the single currency. Heavy ECB buying sent government bond prices soaring, pushing yields — which move inversely with prices — to all-time lows and yields on shorter term government debt into negative territory.

    But this week that process went into reverse as yields on German 10-year Bunds rose sharply, reaching a high of 0.38 per cent, up from about zero two weeks ago.

    Another catalyst for the share market turmoil was concern over the strength of the US recovery, which was underscored Wednesday by weak first-quarter figures for US GDP.

    As well as a slowdown in emerging markets, European exporters face the double whammy of an appreciating currency and potentially weaker global demand for their products.

    In the past two weeks, the euro has risen 6.5 per cent to $1.12 against the dollar, after falling as low as $1.05 in mid-April.

    The stronger euro would “automatically be causing some investors to reappraise what is the outlook for some of the European exporters that they were buying”, said Andrew Milligan, head of global strategy at Standard Life Investments.

    Lower bond yields and the weaker euro had “provided rocket fuel for European equity markets”, said James Barty, head of European equity strategy at Bank of America Merrill Lynch. “Markets were a bit overbought.”

    Traders reported swings in yields had been exacerbated by investors having crowded into the same positions — resulting in small shifts in sentiment leading to big price moves.

    Others said investors were keen to take profits after the strong rallies in the first part of the year.

    ECB’s Irish aid ‘totally unprecedented’

    Posted on 30 April 2015 by

    Jean-Claude Trichet©FT

    Jean-Claude Trichet

    The European Central Bank provided more financial assistance to Ireland at the height of its banking crisis in 2010 than any central bank has ever provided to any country, according to the bank’s former president.

    Jean-Claude Trichet told Irish politicians on Thursday that the ECB had extended emergency liquidity assistance to the country’s banking sector equivalent to 100 per cent of its gross domestic product.

      “That was one quarter of the ECB’s total lending at the time and was totally unprecedented,” he said. “We helped Ireland more than any country; more than any central bank did for any country.”

      Mr Trichet was speaking during sometimes testy exchanges with members of a parliamentary committee conducting an official inquiry into the causes of the Irish banking collapse.

      There is a lingering view in Dublin that the ECB effectively bounced Ireland into seeking its €67bn bailout from international creditors by threatening to cut off the emergency liquidity. But Mr Trichet insisted the reality was “to the contrary”.

      The former ECB president had declined to meet formally with the committee, but he agreed to answer questions from its members after delivering a speech in Dublin on eurozone governance.

      The event was held not in the committee room where the inquiry is taking place, but in the grander surroundings of the 17th century Royal Hospital, once a military facility and now the home of the Irish modern art museum.

      Mr Trichet said Ireland had been facing an unprecedented crisis in 2010 and its banking sector was probably the eurozone’s most vulnerable to collapse.

      He insisted that the issue of not bailing in senior creditors of the banks when they were being recapitalised was the consensus view among central bankers and policy makers at the time. He said the decisions the Irish government took in recapitalising the banks were “the least worst that could have been taken”.

      We helped Ireland more than any country; more than any central bank did for any country

      – Jean-Claude Trichet

      Mr Trichet also told the committee that the Irish government’s decision to guarantee all the liabilities of Irish banks in September 2008, shortly after global financial markets had been sent into turmoil by the collapse of Lehman Brothers, was made without any intervention by and without the knowledge of the ECB or the eurogroup of eurozone finance ministers.

      He said he discovered through the media that the guarantee had been issued, and the ECB did not agree with it.

      “There was no discussion of the guarantee of any kind,” he said, describing it as “like a thunderbolt” for other eurozone member states, which were also not informed that it was to be issued. “We were not in favour of this guarantee. We are on record in writing on this.”

      The guarantee is regarded as the fateful move in forcing Ireland ultimately to seek an international rescue when the banking system finally collapsed in 2010 after the scale of losses became apparent at Anglo Irish Bank, which was heavily exposed to the speculative property market.

      The country emerged from the bailout at the end of 2013.

      Puerto Rico drops tax plan, hitting bonds

      Posted on 30 April 2015 by

      A pedestrian passes a closed shop with a for sale sign outside, along Paseo de Diego in San Juan's Rio Piedras district, September 3, 2013. Flows of Puerto Ricans leaving for mainland United States have run steadily since the 1950s, but are now a torrent stripping the U.S. territory of the young and educated people and destabilizing a weak economy blamed for the exodus. Picture taken September 3, 2013. REUTERS/Alvin Baez (PUERTO RICO - Tags: BUSINESS POLITICS) - RTX13FPI©Reuters

      Puerto Rican bonds slid deeper into distressed territory on Thursday after the debt-laden island’s House of Representatives voted down measures to overhaul the tax system, deepening concerns over the commonwealth’s creditworthiness.

      The House of Representatives voted 28 to 22 to reject a bill that would have reformed the value added tax and helped plug a yawning budget deficit that has led debts to spiral to more than $70bn, in an island with a population of just 3.6m.

        Puerto Rico’s Government Development Bank, which handles the island’s debt sales, said in a letter to the governor and speaker of the house last week that the financial situation was “extremely precarious”. The letter warned of a government shutdown within three months if the bill did not pass and allow the commonwealth to issue another bond to stave off a deeper crisis.

        “A government shutdown would have a devastating impact on the economy, with cuts to payroll and utilities, with a painful and long-term recovery,” an English-language translation of the letter said. “These times of crisis require the co-ordinated and determined contribution in all sectors for the good of our country.”

        The chances of Puerto Rico returning to bond markets now look slimmer. Investors were unimpressed by the legislature’s reluctance to lift taxes, and sent the yield of the $3.5bn bond issued early last year — before debt markets slammed shut — to a new high of 10.6 per cent, up 34 basis points on the day.

        “The government and legislature need to come up with a plan to close the budget deficit that is transparent and credible. Then creditors would be willing to offer some bridge financing,” said Charles Blitzer, a former International Monetary Fund official who advises some Puerto Rican bondholders.

        “Time is running out, but there is still some time to solve this,” he added. “Puerto Rico faces a liquidity problem, not a solvency problem.”

        Puerto Rico’s governor Alejandro Garcia Padilla also criticised the legislature, and said in a statement that the bill’s failure put the future of the country at risk. “The lawmakers who voted against the measure will have to answer to history for their irresponsible actions,” he said, according to Reuters.

        Puerto Rico’s predicament is complicated by its legal status. It is an unincorporated US territory, as opposed to a full state or sovereign country. This means that investors have benefited from the tax exemption given to US municipal debt, but the island cannot go to the International Monetary Fund for a bailout.

        Jack Lew, US Treasury Secretary, earlier this week urged Puerto Rican officials to come up with a “credible” budget for next year and a longer-term solution to address its crisis, but the US has so far refused to offer any direct help for the territory.

        Even bankers and investors that have been cautiously optimistic on Puerto Rico eventually navigating its way through its debt crisis are becoming more guarded on the island’s future.

        “Puerto Rico faces near-term liquidity problems,” said a municipal finance banker. “They need to demonstrate the willingness to increase taxes and cut spending . . . To get out of the distressed space they have to show some real austerity.”

        Balls seeks to reassure sceptical City

        Posted on 30 April 2015 by

        Labour's Shadow Chancellor, Ed Balls, campaigning in Cheshire ahead of the general election. To go with George Parker interview.On the train to Crewe.©Charlie Bibby/FT

        Shadow chancellor Ed Balls campaigning in Cheshire

        Ed Balls, shadow chancellor, has sought to reassure a sceptical City that an incoming Labour government would not drive banks and wealth creators out of Britain, pledging not to pursue “heavy-handed and dirigiste” regulation.

        Attempting to answer Square Mile criticism of Labour’s plans to increase taxes and regulation, Mr Balls insisted in an interview with the Financial Times that his party understood the vital role played by financial services. “You don’t cut off your nose to spite your face,” he said.

          Business figures will question how Mr Balls’s rhetoric squares with his plan to increase the bank levy, to impose a one-off bank bonus tax and to raise the top rate of income tax to 50 per cent.

          More than 100 business leaders this month signed a letter backing the Conservatives amid concern at the economic policies of Labour leader Ed Miliband — who once labelled some companies “predators” — and his plan to intervene in certain markets.

          Mr Balls said he and the Labour leader had spent 20 years working in the Treasury and in senior political jobs and understood the need for a balanced relationship between politicians and business.

          “Ed Miliband and I have never run a business but we have more experience than anybody in British politics in working with business,” he told the FT.

          “Financial services, properly regulated with the right leadership and values, have a big role to play in the British economy,” he said, adding: “Ed Miliband knows how important banks are to our economy.”

          Mr Balls said those with the “broadest shoulders” — including those who had enjoyed big rises in income in the past five years — had to pay more to convince the country that the free-market economy was working fairly.

          But he said that while the 50p income tax rate would be in place throughout the next parliament, Labour would seek to reduce it when fiscal conditions allowed: “It’s not a principle for me,” he said.

          Mr Balls said Labour would not insist that banks be forced to dispose of branches once they exceeded a certain market share, rather that it would trigger a competition review to see whether any problems arose.

          He would ensure that banks were properly regulated but he hoped that HSBC and Standard Chartered would retain their headquarters in Britain. “There are some who would say ‘good riddance’: I’m categorically not one of those.”

          Mr Balls pointed out that HSBC was concerned about Britain’s future in the European Union and he criticised the “potentially very dangerous” promise by David Cameron of an EU referendum, saying it was causing great concern in Washington.

          Ed Miliband and I have never run a business but we have more experience than anybody in British politics in working with business

          The shadow chancellor said that if Labour won the election he would resist any sale of the government’s stake in Royal Bank of Scotland at below the “in price”: “I would be instinctively unhappy about selling the first tranche of shares at a discount.”

          Mr Balls also promised to work closely with Mr Miliband in government — avoiding any repeat of the damaging splits between Tony Blair and Gordon Brown.

          The shadow chancellor has asked Sir Nick Macpherson, the Treasury’s top civil servant, to ensure that relations with Number 10 would be open and collaborative under a Miliband administration, in contrast to the poisonous atmosphere which prevailed during the New Labour years.

          Mr Balls was a central figure in that drama. As Gordon Brown’s top adviser in the Treasury he regularly clashed with Mr Blair. The former prime minister reportedly complained that he felt like “an abused wife” after one confrontation.

          Relations between David Cameron and George Osborne since 2010 have been remarkably cordial and Conservatives say that in the event of a Labour election victory, Mr Balls and Mr Miliband would repeat that dysfunctional New Labour relationship.

          Mr Balls and Mr Miliband have not always operated smoothly together; they both worked as officials at the Treasury under Mr Brown (Mr Balls was the senior partner) and contested the Labour leadership in 2010. But Mr Balls insists their partnership has grown stronger since his appointment as shadow chancellor in 2011.

          He says normal pre-election conversations between the opposition and the civil service had taken place. “I’ve asked Nick Macpherson to make sure we have really clear arrangements for close working between No 10 and No 11.”

          I’ve asked Nick Macpherson to make sure we have really clear arrangements for close working between No 10 and No 11

          The Labour leader has not guaranteed that he would make Mr Balls his chancellor, although he has praised him in recent speeches and anticipated working with him on the party’s first post-election Budget.

          George Osborne routinely portrays the “the two Eds” as the men who “crashed the economy”, citing their role in the Treasury during the Brown era, in which the former Labour chancellor claimed to have abolished boom and bust economic cycles.

          So Mr Osborne will be surprised to hear Mr Balls dwelling on the experience he says he and Mr Miliband have in working with business.

          Mr Balls, speaking on a train between a business meeting at Birmingham airport and a campaign stop in Chester, says FT readers have “known about me for 25 years” ever since he wrote an economic notebook for the paper in the early 1990s.

          He prefers to dwell on the advice he dispensed to Mr Brown at the Treasury on keeping Britain out of the eurozone and granting independence to the Bank of England, rather than the events leading up to the financial crash of 2008.

          While Mr Miliband has divided business into “predators and producers” and routinely attacks City excess, Mr Balls is seen by some top bosses as a more fruitful interlocutor.

          But Mr Balls says that unless those with the “broadest shoulders” make a bigger contribution and ordinary people feel the economy is operating fairly, it is harder to make the case for the free market economy.

          He has acknowledged that bank regulation was too loose before the crash but has never accepted the Tory charge that Labour overspending in the Brown years contributed to Britain’s fiscal mess.

          In depth

          UK general election

          The UK faces its closest and most unpredictable general election in memory on May 7
          Further reading

          The shadow chancellor presents himself as a fiscal disciplinarian who wants to get the current budget “into surplus” by the end of the parliament, but has given few details of the tax rises or cuts needed to achieve that goal.

          Mr Balls places great emphasis — Tories say too much — on raising Britain’s productivity through investment in skills, infrastructure and by reforming the planning system, hoping that higher growth can eat away at the deficit.

          So will Mr Balls be as abrasive as a Labour chancellor as he was in his dealings with Tony Blair when he was a mere adviser? Mr Balls, an enthusiastic baker, admits that his bulky physique means it is hard to shake off the old image: “You are always going to be described as a bruiser rather than a cupcake maker”.

          Bunge rules out transformational deals

          Posted on 30 April 2015 by

          Combine harvesters crop soybeans during a demonstration for the press, in Campo Novo do Parecis, about 400km northwest from the capital city of Cuiaba, in Mato Grosso, Brazil, on March 27, 2012. AFP PHOTO/Yasuyoshi CHIBA©AFP

          Bunge, the international agricultural trader, said it was looking for smaller acquisitions rather than a transformational deal as it reported strong first-quarter results driven by soyabean processing and improved grain trading.

          Soren Schroder, Bunge chief executive, said it was looking at businesses up to the range of about $600m, all but ruling out an independent move for Tate & Lyle, the UK sweeteners company that the commodity trader was recently linked with. Mr Schroder declined to comment directly on Tate & Lyle, which has a market capitalisation of $4.2bn.

            Discussing the possible type of acquisition target, he pointed to Bunge’s deal this month for 50.1 per cent in CWB, formerly the Canadian Wheat Board, for C$250m ($202m) alongside the Saudi Agricultural and Livestock Investment Company.

            His comments came as the New-York based company reported adjusted net profits of $1.58 a share for the first three months of 2015 compared with a loss a year ago. Analysts’ consensus forecasts were around $1.14 a share.

            “Overall, it was a strong quarter and solid start to the year,” said Mr Schroder.

            Earnings before interest and tax jumped at the agribusiness division, which moves soyabeans, corn and other crops between continents and processes them into food products.

            The unit’s first quarter ebit more than quadrupled to $330m from $79m in the same period last year. Volumes for the agribusiness were largely unchanged at 31.2m tonnes.

            Mr Schroder said that the situation in China “felt a lot better than last year” and added that the market distortion in the soyabean market from financial players had declined.

            Bunge was positive on the outlook for the rest of the year, noting that big supplies of grains and oilseeds thanks to strong North and South American crops were expected to be met with solid underlying demand.

            The company said lower prices had increased underlying consumption and trade flows, but warned that price falls could lead to slower farmer selling that may defer income to later quarters.

            Meanwhile losses at the sugar and bioenergy business fell from $64m to $23m. The company said that sugar cane in Brazil was developing well and the business was expected to be profitable and cash flow positive for the full year.

            On the CWB deal, Bunge said the investment provided access to high quality Canadian grain, improving the balance of its global grain trading network.

            Mr Schroder said that the transaction filled “a missing piece of Bunge’s global agribusiness footprint”.

            Additional reporting by Gregory Meyer in New York

            Greece struggles to make pension payments

            Posted on 30 April 2015 by

            Pensioners wait outside the National Bank of Greece to get their monthly pensions on April 29, 2015. Greece has been trying to negotiate a deal that would unlock 7.2 billion euros (7.8 billion USD) in remaining EU-International Monetary Fund bailout money that the debt-ridden Mediterranean country needs to avoid default and a possible exit from the euro. So far, Athens has resisted new pension caps, the elimination of some VAT exemptions and no longer wants to use privatisation proceeds to repay state debt. AFP PHOTO / LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)©Getty

            Pensioners wait outside the National Bank of Greece

            The Greek government was struggling on Thursday to complete payments to more than 2m pensioners after claiming that a “technical hitch” had delayed an earlier disbursement.

            Elderly Athenians waited at branches of the National Bank of Greece, the state-controlled lender handling the bulk of pension payments, which are staggered over several days.

              “Normally I only withdraw half the money at the end of the month, but today I’m taking it all,” said Sotiria Zlatini, 75, a former civil servant. “There are so many rumours going round because of the government’s problems and what happened two days ago.”

              On Tuesday, the main state social security fund, IKA, delayed pension payments by almost eight hours. The heavily lossmaking fund relies on a monthly subsidy from the budget to be able to cover its obligations.

              “I went to the ATM in the morning before going to the supermarket but the money wasn’t there. . . I went back at eight in the evening feeling quite anxious, but it had arrived,” said Socrates Kambitoglou, a retired civil engineer.

              Dimitris Stratoulis, deputy minister for social security, said a technical problem with the interbank payment system had caused the delay. Payments were made normally on Wednesday, said a senior Greek banker.

              But an official with knowledge of the government’s cash position denied there had been a technical hitch. He said the payments were held up because the state pension funds “were still missing several hundred million euros on Tuesday morning”.

              Another official said inflows of €500m on Wednesday had eased the situation and €300m was due to be paid on Thursday. “We’re probably going to make it this month,” he said.

              The leftwing Syriza-led government scrambled to pay pensions and public sector salaries in February and March after failing to reach agreement with international lenders on unlocking €7.2bn of bailout aid.

              Meanwhile, talks with the EU and International Monetary Fund have resumed in Brussels with a fresh team of Greek negotiators, led by Euclid Tsakalotos, deputy foreign minister for economic affairs, after Yanis Varoufakis, the outspoken finance minister, was sidelined earlier this week.

              In depth

              Greece debt crisis

              Greece debt crisis

              The Syriza government is facing resistance to its plans to tackle the country’s massive debt burden
              Read more

              Greece has relied on its own funding resources since last August due to a prolonged stand-off with creditors over structural reforms, including further cuts in pensions, increases in value added tax and fully liberalising labour markets.

              The liquidity squeeze has become especially acute this month because of shrinking cash reserves and a sharp decline in tax revenues, according to a finance ministry official.

              Trying to address the cash crunch, the government last week ordered 1,500 state entities, including local authorities, hospitals and universities, to hand over their cash reserves to the central bank to be deposited in short-term “repos” — repurchase agreements.

              But foot-dragging by some entities reluctant to lose control of their funds, among them local authorities run by mayors from opposition political parties, has meant that transfers have been delayed.

              Funds have so far been transferred by only one of the country’s 13 regional governors, amid concerns over whether the central government would be in a position to return them.

              Costas Bakoyannis, governor of central Greece, said more time was needed to clarify the measures and arrange the transfers without endangering payments to contractors and suppliers.

              “It’s agreed the money will be handed over, based on the government’s commitment that it’s a temporary measure,” said Mr Bakoyannis.

              Meanwhile, the state-controlled electricity utility PPC, which is listed on the Athens stock exchange, denied reports that it had been asked to help make up the shortfall.

              One person familiar with the issue said the government wanted to tap €200m of funds earmarked as a downpayment on a new €1.5bn power plant to be constructed in northern Greece.

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              EU to launch probe into US tech giants

              Posted on 30 April 2015 by

              This picture taken on May 13, 2013 in the French western city of Rennes shows a woman choosing Google Search (or Google Web Search) web search engine front page on her tablet. A report by a French expert panel published on May 13, 2013 recommended imposing taxes on smartphones and tablets but rejected a call for search engine Google to be charged for linking to media content. The nine-member panel, headed by respected journalist and businessman Pierre Lescure, said in the keenly awaited report that the revenue gained from the proposed new taxes could help fund artistic and creative ventures. AFP PHOTO / DAMIEN MEYER (Photo credit should read DAMIEN MEYER/AFP/Getty Images)©AFP

              Brussels is set to widen its front against US tech companies just two weeks after the launch of its landmark competition case against Google by initiating a separate probe into a wider range of online platforms.

              The move marks a first step towards tighter EU regulation of the internet and comes with the European Commission under pressure from France and Germany to take a tougher line on tech groups such as Amazon and Google.

                In a draft plan for a “digital single market” encompassing everything from online shopping to telecoms regulation, the commission said it would probe how online platforms list search results and how they use customer data. The latest draft of the plan, seen by the FT, will be approved by the commission next week.

                The plan could also bring in stricter rules for video-on-demand services such as Netflix and messaging apps like WhatsApp and Skype that have become big rivals to traditional European media and telecoms companies.

                Companies such as Airbnb and Uber are also likely to be roped into any investigation into platforms, which will aim to determine whether they are abusing their market power in the so-called “sharing economy”.

                The EU’s intensifying assault on big American tech groups has triggered accusations in the US, including from President Barack Obama, that the bloc is engaging in protectionism.

                The plan for a “comprehensive assessment” of online platforms comes after French and German ministers urged the EU to launch an investigation into the role played by the US internet giants.

                Earlier this week, the French economic minister Emmanuel Macron and German economic minister Sigmar Gabriel called for a “general regulatory framework for ‘essential digital platforms’” in a letter to the commissioner overseeing the reforms that was seen by the FT.

                They wrote: “We believe that the growing power of some digital platforms is a wider challenge that warrants a policy consultation with the aim of establishing an appropriate general regulatory framework for ‘essential digital platforms’.”

                The commission will start the probe “before the end of 2015”, according to the draft. It will look at the role of paid-for links and advertisements in search results, along with the ability of individuals and businesses to move from platform to platform.

                “Some online platforms have evolved to become players competing in many sectors of the economy and the way they use their market power raises a number of issues that warrant further analysis beyond the application of competition law in specific cases,” the 17-page document reads, in a clear reference to the Google antitrust case.

                Elsewhere in the draft, the commission said that it will “review” whether on-demand services such as Netflix should be subject to the same rules as traditional TV broadcasters. According to the document, on-demand services are sometimes “subject to lower obligations” than their television peers.

                We believe that the growing power of some digital platforms is a wider challenge that warrants a policy consultation’

                – French and German economic ministers

                Other measures to be proposed include plans to make it easier for small merchants in the EU to sell goods to customers in other countries. As part of the measures, ecommerce groups would be subject to their own national laws rather than the buyer’s as well as a set of EU-wide contractual rights. The commission will also crackdown on the opaque pricing structures used by parcel companies for deliveries between EU countries.

                The commission said it would launch long-awaited copyright reform before the end of this year, which will probably spark a tussle between large media groups, artists and producers as well as consumer groups.

                Brussels will aim to introduce the “full portability of legally acquired content” and allow “cross border access to legally purchased online services”. A crackdown on online piracy will focus on “commercial scale infringements”, rather than individual abuses.

                Finally, the commission will launch another attempt to reform telecoms regulation in the EU, to apply the same rules for traditional telecoms groups and internet rivals such as WhatsApp and Skype.

                Three fronts in the EU-US trade war

                Competition Tax Regulation
                Margrethe Vestager accuses Google of illegally using its dominance in online search to steer European consumers to its own in-house shopping services. The US search giant is also accused of forcing wireless companies into uncompetitive contracts to use its Android software. Apple, Starbucks and Amazon are all being investigated for artificially lowering their tax bills in EU member states. Apple potentially faces a bill for billions of euros for its tax arrangements with Ireland, while Luxembourg and the Netherlands are also part of the formal tax investigation. EU is preparing to investigate companies such as Google and Amazon over how they list their search results and use personal customer data. The investigation is part of a broader plan to create a “digital single market” in the EU and came after pressure from Germany and France for a probe.

                Vale earnings slump 60% on China cutbacks

                Posted on 30 April 2015 by

                Trucks transport mined iron ore at Vale SA's Brucutu mine in Barao de Cocais, Brazil©Bloomberg

                Vale’s iron ore mine in Barão de Cocais, Brazil

                Vale, the world’s largest producer of iron ore, reported its worst earnings for six years as Chinese steelmakers cut back orders, hitting the Brazilian company hard.

                First-quarter adjusted earnings before interest, taxes, depreciation and amortisation slumped 61 per cent to $1.6bn from a year earlier, disappointing analysts and marking Vale’s lowest ebitda result since the second quarter of 2009.

                  The plunge in Brazil’s real against the dollar added to Vale’s woes by increasing the value of its largely dollar-denominated $24.8bn net debt, forcing the company to report a total net loss of $3.12bn in the first quarter compared with a net profit of $2.52bn a year ago.

                  It was the company’s third consecutive quarterly net loss.

                  “Weak market fundamentals continued to undermine prices, with soft demand from Chinese steel mills and strong seaborne supply,” Vale said in a statement on Thursday.

                  “Even some state-owned enterprises cut down on production levels in China and capacity may not increase back despite the Chinese government’s recently announced tax reduction on mining activities.”

                  Net operating revenue fell 34 per cent to $6.24bn in the first three months compared to $9.5bn in the previous year, far lower than the $7.42bn average estimate compiled by Bloomberg. Vale’s shares fell 1.5 per cent in midday trading in São Paulo.

                  Iron ore prices have slumped to a decade-low as Vale and the world’s other largest miners — Rio Tinto and BHP Billiton — have increased output to crowd out smaller rivals.

                  Even some state-owned enterprises cut down on production levels in China and capacity may not increase back despite the Chinese government’s . . . tax reduction on mining activities

                  – Vale

                  Meanwhile, demand in China — Vale’s biggest market, accounting for 28 per cent of revenues in the first quarter — has slowed, exerting pressure on the entire industry.

                  Vale has fared particularly badly because the price slump comes as the Rio de Janeiro-based company is midway through the most ambitious and costly project in its history — the development of the vast Carajás iron ore mine in the Amazon rainforest.

                  The company’s first-quarter capital expenditure totalled $2.21bn, of which $1.52bn was spent on project execution, Vale said.

                  However, as a result, Vale’s total iron production in the first three months of this year rose to 74.5m tonnes, a company record. Almost 37 per cent came from Carajás.

                  In spite of its negative assessment of the current global steel market, Vale said there were reasons for optimism in the medium-term.

                  “Looking forward, we expect some improvements in Chinese steel demand as the property sector responds to the ongoing and possibly upcoming government’s easing measures,” it said, adding that emerging markets elsewhere could also help increase demand.

                  Quiz: When did Warren Buffett say it?

                  Posted on 30 April 2015 by

                  Healthy liquidity needed to survive shocks

                  Posted on 30 April 2015 by

                  A Wall Street sign adjacent to the New York Stock Exchange, Thursday, Oct. 2, 2014. European stock markets opened with slight gains Thursday Dec. 11, 2014 after a nosedive in Asia as falling oil prices reinforced jitters about a sluggish global economy. (AP Photo/Richard Drew)©AP

                  What are the big risks to the stability of western financial markets today? This week I posed that question to powerful finance industry professionals at the Milken Institute global conference in Los Angeles.

                  Grexit was mentioned. So was a slowdown in China, Middle East instability and the looming US interest rate rise (although, when asked when the Federal Reserve would start raising rates, more than half of the audience thought it would not happen until 2016).

                    But there was another, more esoteric concern on almost everybody’s lips: liquidity mismatches deep in the bond markets. Seven long years after the 2008 crisis, reforms to the financial system have produced some success, in the sense that regulated banks have reduced their risks. But they have not just moved out of some of the crazier arenas, such as ultra-complex derivatives, in which they operated before 2008; they have left more mainstream areas, too. The inventories of US corporate bonds held by broker-dealer banks have plunged
                    from $300bn in 2008 to $50bn, according to research from CQS.

                    This is a classic unintended consequence. It has reduced the ability of banks to act as market makers, standing ready to buy or sell when investors want to trade, leaving it harder for others to do so. So while the stock of outstanding US high-grade corporate bond has risen since 2008, from $2,800bn to $5,000bn, the level of market turnover has tumbled to “at or close to the lowest levels on record”, Barclays says.

                    What makes this pattern particularly pernicious — and worrying to those Milken guests — is that while banks have cut their inventories of bonds, asset managers have recently been gobbling them up on a formidable scale in a search for yields. It is estimated that in the past year more than 70 per cent of corporate credit was purchased by investors such as mutual funds, a dramatically higher figure than before.

                    In theory, this could deliver benefits for the wider financial system; after all, if non-bank actors buy corporate credit, that diversifies risks. But the catch is that many asset managers rely on potentially flighty forms of funding. Mutual funds, for example, typically have to return investor funds on demand (in the jargon they operate with “daily liquidity”). And that creates liquidity mismatch: if US rates suddenly rise, retail investors might flood out of bond funds — since they fear the move will trigger sharp bond price falls — forcing those funds to sell. If that happens, those funds might discover the bonds are completely illiquid, or untradeable except at rock bottom prices, like those subprime assets back in 2008).

                    Is there any way to mitigate this risk? Regulators show little willingness to roll back regulatory reforms. Nor are they keen to use public money to keep markets moving (although some central bank governors privately admit that, if a really big crisis were to hit, central banks could eventually be forced to make markets themselves).

                    The key is to watch what the rest of the private sector might, or might not, do as banks retreat. There are plenty of actors still flush with liquidity: as Josh Harris, co-founder of Apollo Global Management, points out, private equity funds have big untapped resources and might buy bonds if the prices fell.

                    There are also signs that entrepreneurs are moving in to fill the void. “Creative destruction as banks are forced to evolve opens up enormous opportunity [for others],” argues Bill Blain of Mint Partners, a small London broker. Most notably, new trading platforms are springing up to provide alternatives to the banks, including one run by Mint.

                    Meanwhile, some banks are turning entrepreneurial. Last month State Street unveiled a service to enable its asset manager clients to assess their vulnerabilities and liquidity needs and help them withstand any future shock. The custodian bank knows asset managers face growing pressure from regulators to strengthen their buffers — and wants to jump into a new business niche.

                    Although these entrepreneurial responses are encouraging, it is unclear whether they will be enough to avoid future jolts, given the sheer scale of the structural mismatches.

                    Thankfully, nobody expects the test to come quite yet. And if a Fed rate rise is delayed until 2016 asset managers will have more time to prepare — and more entrepreneurs will jump in. Or so the hope goes. But, if nothing else, the pattern is a potent reminder that the problem of liquidity and maturity mismatches did not disappear with the 2008 crisis. Nor did the potential for some investors to keep ignoring them until it is too late