Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

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Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Archive | November, 2016

China global bonds push to support currency

Posted on 31 May 2016 by


Chinese companies’ near-record offshore borrowing in May was partially the result of Beijing’s efforts to support the weakening renminbi, according to bankers.

Mainland groups issued $19.2bn of bonds in the international markets — the third highest month on record, according to Dealogic data — even as they spurned local markets in a dramatic switch from their behaviour since last August when China stunned global markets by devaluing the renminbi.

Leading the charge have been state-backed groups including China Development Bank, China Huarong Asset Management and State Grid, who between them issued bonds worth $7.3bn in dollars and euros in May.

Borrowing overseas and remitting the proceeds back home helps bolster the renminbi — reversing the debt market trend since last August whereby Chinese groups had been borrowing at home to pay down foreign debt in an attempt to reduce the rising debt burden produced by a weakening currency.

    One banker in Hong Kong described the pressure this month from the authorities to borrow overseas rather than domestically as “a lot more than just a nudge.”

    Foreign deals made up almost two-fifths of Chinese companies’ total bond issuance in May, up from less than a tenth on average since last August. Before the devaluation, international deals made up roughly a fifth.

    The shift in emphasis underlines the tensions between China’s desire for investment overseas and its need to control the use of its foreign exchange reserves.

    The overseas branches of China’s biggest banks have also been active borrowers in the offshore markets as part of their efforts to help Chinese companies’ push overseas, as well as remitting funds to the mainland.

    “For the majority of corporates who want to invest offshore, their source of funding must be coming from offshore,” said Zhiming Zhang, head of China research at HSBC. “The perception of any slowdown in ODI [overseas direct investment] looks bad [to China] but they don’t want to do that, at the expense of their reserves.”

    ICBC, Agricultural Bank of China and China Construction Bank raised $4.8bn between them for branches in New York, Singapore and, in CCB’s case, its international leasing business.

    China’s onshore bond markets have also been unsettled by a rise in bond yields after defaults by state-owned groups in April unnerved investors — potentially prompting a move overseas.

    “More volatility onshore is certainly one reason why we are seeing more issuance offshore,” said Ashish Malhotra, global head of bond syndicate at Standard Chartered. “In June all issuance is likely to slow with the Brexit vote and the Fed meeting — a lot of issuers have wanted to get ahead of all that.”

    May is typically a busy month for debt deals wordwide as companies race to beat a US deadline that prevents them from basing offerings on accounts that are more than 135 days old.

    Markets shrug off eurozone deflation

    Posted on 31 May 2016 by


    Eurozone investors have shrugged off news that the region remains trapped in deflation, as bondholders focus on the sudden increase in new government paper after a period of relative quiet.

    Germany, Spain and France are all scheduled to sell debt this week, following a sale of Italian bonds on Monday. Once redemptions are taken into account, markets will be faced with absorbing more than €15bn of debt, up from a negative net supply of bonds last week, according to data from Mizuho.

      “It’s a really busy week,” said Antoine Bouvet, rates strategist at Mizuho. “And that is weighing on prices for eurozone bonds and pushing yields up, regardless of data on deflation.”

      On Tuesday, the EU’s statistical agency revealed that consumer prices had fallen 0.1 per cent on the year in May, the fourth consecutive month of deflation, in spite of policymaker efforts to boost economic growth and inflation.

      Ultra-low inflation is generally a spur for fixed-income securities like government bonds, yet prices across eurozone bond markets fell in the wake of the data release, sending yields up. The yield on benchmark 10-year Germany Bund yields — a proxy for the wider market — rose 2 basis points to 0.18 per cent.

      Bankers say the muted response also reflects the fact that weak inflation is now taken for granted in the eurozone.

      “You have to look at this data in relation to expectations,” said Harvinder Sian, European rates strategist at Citi. “It would require a surprising downturn for investors to expect the ECB to revise its plans. Only that would have led to more of a reaction in markets.”


      Level to which the ECB has raised the amount of bonds that central bankers buy each month

      In the weeks leading up to the European Central Bank’s last policy meeting in March, bond yields fell and equities rose as investors prepared for a fresh round of stimulus.

      This time around, economists are not predicting any new developments.

      “Overall, we expect Draghi to strike a cautiously optimistic tone at the meeting,” said Andy Logan at Oxford Economics. “But at the same time he will also highlight that policy tightening remains a distant prospect and that further policy action will be forthcoming if required.”

      Instead, the ECB is expected to wait and see what effect its last stimulus boost has, including raising the amount of bonds that central bankers buy each month from €60bn to €80bn, cutting rates to a new low and expanding the assets purchased to include corporate bonds.

      However, in spite of these efforts, investor expectations of price growth in the eurozone remain subdued. The market measure of inflation expectations over five years, in five years’ time remains far below the ECB’s target at just 1.47 per cent.

      Monitise drops plans to sell voucher unit

      Posted on 31 May 2016 by

      Shares in Monitise fell nearly 8 per cent on Tuesday after the lossmaking UK mobile payments company said it had abandoned plans to sell its voucher business.

      Monitise said in March that it was in “early stage discussions” to sell its Markco Media division, which includes the website It paid £55m to buy Markco Media in July 2014 from its founder, Mark Pearson, a former chef under Gordon Ramsay at Claridge’s.

        The announcement sent shares in the Aim-listed Monitise up nearly 60 per cent in a day.

        But on Tuesday, Monitise revealed that it would not be selling the voucher business, saying “greater shareholder value can be delivered by retaining the content business within the group”.

        “The company will continue to regularly evaluate all assets within the Monitise group to ensure that long-term shareholder value is maximised,” the company added in a statement.

        Shares in Monitise are down 80 per cent over the past year and 96 per cent over the past two years amid widening losses and multiple management changes.

        Monitise said in February that pre-tax losses had quadrupled in the six months to December 31, with losses increasing to £211m for the period, while sales fell from £42m to £33m.

        At the time, the company also took a hit of nearly £167m to the value of its non-cloud businesses. After the announcement, however, chief executive Lee Cameron insisted there would be no further writedowns.

        “It is absolutely not my expectation that there will be any more writedowns,” he said, adding that the company’s “tumultuous period” was at an end.

        Monitise, which is set to report its annual results in September, has said it will make a profit in the second half of the year.

        Founded in 2003, the company grew by building bespoke services for individual banks and financial institutions. At the start of 2014 its valuation exceeded £1bn.

        But multiple warnings over its revenues, as well as the departure of several senior staff as the company worked to overhaul its business model, have left Monitise with a market capitalisation of around just £66m.


        losses for the 6 months to December 31

        Monitise is now trying to convince clients to adopt a single “cloud” system to gain more consistent revenues from subscriptions than charging licence fees for its products.

        The company went through two chief executives and a finance director in 2015 alone before Mr Cameron took up his post last September.

        In March, the company said it was hiring Gavin James, former chief executive of call-centre operator Vertex Group, as chief financial officer and chief operating officer.

        Monitise shares were down 7.6 per cent at 2.91p in afternoon trading.

        Mood sours as MSCI’s China verdict nears

        Posted on 31 May 2016 by

        Chinese stock investors monitor their share prices at a stock brokerage firm in Huaibei, east China's Anhui province on June 4, 2012. Chinese investors took notice after the key Shanghai stock index ended down 64.89 points -- exactly matching the numerals in June 4, 1989 -- the date of the Tiananmen Square crackdown. CHINA OUT AFP PHOTO (Photo credit should read STR/AFP/GettyImages)©AFP

        It was a year ago that index provider MSCI considered whether to include Chinese domestic-listed A shares in its emerging market indices. The Chinese market was setting new highs on an almost daily basis, with the Shanghai Composite Index peaking on June 12, two days after MSCI opted not to include the shares.

        Officials in Beijing sat on the sidelines encouraging the rise, while the local media took the euphoria as further confirmation of the ascent of China itself.

          Since then, the market has dropped steadily. At the worst of the turmoil last year, over half of all A shares were suspended, often at the request of management and shareholders.

          Even today, 10 per cent remain in this state — more than twice as many as is the norm for Hong Kong. The big listed brokerages spent money supporting the market at the request of regulators — a decision taken without any board or shareholder vote.

          Moreover, only later was it apparent that much of the buying was with borrowed money (with some arguing it could be triple the official guesstimate of Rmb1.5tn).

          Buying with borrowed money is of course like building a house on sand: it is inherently unstable. Meanwhile, official buying to cushion the plunge in the market means that a larger part of the shareholder register is made up of the ever heavier hand of the state, through the China Securities Finance Crop which lent money for the price support operation.

          The “A share market is walking in the long shadow of the rescue campaign toward normalisation”, Credit Suisse noted in a recent report.

          Now, with the Chinese market down 45 per cent from its peak last June, the annual rite over whether the MSCI will include the A shares starts again, with a decision expected on June 14.

          The subdued nature of the debate this year reflects how much has changed. The centre of gravity has swung in favour of pessimists, partly because of the way authorities in Beijing responded to the plunge in the stock market and pressure on the renminbi. Sentiment continues to deteriorate, despite some recent tinkering with market rules.

          Last year, MSCI’s decision took place against a backdrop of lobbying pressures. On the one hand, major international investment houses such as BlackRock that had laughably small quotas ($1.5bn in BlackRock’s case) were pushing against inclusion. On the other, those who were exposed to China (in part precisely because they anticipated that inclusion would lead to a wave of buying) were strong advocates.

          Credit Suisse put the chance of rejection at 60 per cent; Morgan Stanley is telling clients the likelihood is 50 per cent, while Goldman is the most bullish with a 70 per cent likelihood of inclusion. Credit Suisse’s view did not stop it coming up with five stock picks that could be beneficiaries in the case of inclusion. Most of them offer exposures to sectors not available in Hong Kong, such as Kweichow Moutai, the maker of that strong alcoholic brew.

          Even if the MSCI does open up its indices, the move will not necessarily lead to a wave of forced buying by those who benchmark against these indices. Indeed, international brokerages estimate the buying will add up to no more than $16.5bn, or a mere 0.2 per cent of total market capitalisation of the A shares. Many hedge fund managers in Hong Kong say they are indifferent to the decision.

          Another development next month could be the extension of the stock connect scheme — a mechanism introduced last year that gives international retail investors access to A-shares. It is currently limited to Shanghai and Hong Kong but may be extended to Shenzhen, according to research from Natixis Asia. That too, though, is likely to prove incremental.

          Today, few strategists would make the argument that share prices in China are a great buying opportunity. There are big question marks over huge swaths of the economy, led by banks whose problem loan figures are questionable and unlikely to improve even if the central bank lowers interest rates. The structural reform that could cut capacity dramatically and bring real profitability to state-owned enterprises seems to have been postponed. A weak currency also limits the attraction of the market to foreigners.

          In the past, the economy and the market seemed disconnected. Now they are moving together — with both emitting signals of gloom, if not outright distress. Whatever MSCI decides won’t change that.

          How investors will trade the rest of 2016

          Posted on 31 May 2016 by


          A Chinese tourist at Boracay, the Philippines

          Can investors navigate the rest of 2016 safely?

          Well into the second quarter, markets have recovered after a torrid opening to the year, however sentiment remains challenged by the lack of a
          strong investment case to rally firmly behind.

          With the arrival of June, a critical month for markets featuring the Brexit referendum and a Federal Reserve meeting, the FT asked market commentators how the rest of the year will pan out.

          What events or data will shape markets for the remainder of 2016?

          Brexit and Federal Reserve meetings figure prominently, while China lurks in the background.

          “The question is whether the Fed overshoots,” says James Bateman, head of portfolio management at Fidelity. “There is a danger that the Fed may be caught between what’s right for the economy and what’s right for markets, bowing to pressure to please the latter.”

          John Bilton at JPMorgan Asset Management is optimistic about global growth and thinks that will aid dollar consolidation, spurring risk appetite, but says UK investors will “find it difficult to focus on much beside Brexit risk”.

          Commentators also worry about China across a multitude of areas — from a growing non-performing debt problem and restructuring of State Owned Enterprises, to growth data and its capital account.

          market trades of 2016

          Which asset classes feel most and least attractive?

            Attractive assets? There aren’t any, says Larry Hatheway at GAM: “The choice facing investors is choosing the least unattractive offerings.”

            Alain Bokobza, head of global asset allocation at Société Générale, favours inflation-protected bonds, while Mislav Matejka of JPMorgan prefers “hard assets” — such as gold and real estate — because policy will shift from monetary to fiscal stimulus.

            Equities may no longer be cheap, says Mr Bilton, but they are still an attractive alternative to bonds. Mr Bateman is convinced Brexit won’t happen, so plumps for UK equities on a relief rally.

            But for Mr Matejka “least attractive from here are equities, given the potential end of the cycle”.

            Which three assets would you back?

            Buy every G10 currency against the dollar, advises Ulrich Leuchtmann of Commerzbank. “I find it hard to believe that the trend we saw in the first months of 2016 is over,” he says. Gold gets a good following, oil is also reasonably favoured, and there is a smattering of support for EM assets.

            Real estate, credit and gold are Mr Matejka’s preferences, while Mr Monson opts for high-yielding global equities, global bank stocks and a selection of EM equities. “International investors will need to remain patient, but valuations versus developed markets are offering near decade low discounts,” he says.

            Which trade do you wish you had recommended this year?

            The swings in market sentiment this year mean there are many profitable surprises to choose from: Long yen, long EM, short US dollar, long oil.

            “This year has all been about the momentum reversal and the rally in anything related to emerging markets or the dollar,” says Richard Turnill, global chief investment strategist at BlackRock.

            Anthony Karydakis, chief economic strategist at Miller Tabak, says: “The highly counter-intuitive surge of the yen in response to the BoJ’s foray into negative rates in late January arguably takes the cake as the biggest missed trading opportunity for many people so far this year.”

            market trades of 2016

            Which trade recommendation do you wish you hadn’t made (and could it still come good)?

            European equities were favoured at the start of the year on hopes for divergent monetary policy, but early investors in the Euro Stoxx 600 are down more than 4 per cent in 2016.

            The European banks sector sits nearly 16 per cent lower this year and over a third off their 2015 high.

            Jeremy Hale, global macro strategist at Citi, recommended buying European banks after March’s announcement but now says “it was a mistake. They look cheap but may stay cheap.”

            However, Mr Monson stands behind his global banks subsector — capital-rich dividend-paying banks with limited EM, southern Europe and investment banking exposure — to generate growing dividends and price appreciation from today’s “very low valuations” and as a “hedge” against rising interest rates.

            Australian bonds have been helped by the Reserve Bank of Australia cutting interest rates, says Matthias Scheiber, multi-asset fund manager at Schroders, “but it remains a volatile trade driven by uncertainty about the Chinese recovery”.

            Mr Bilton also likes the Aussie bonds as “valuations on credit assets offer a more attractive entry point than equities”, and they are one of the few sovereign bonds with relatively high returns.

            It’s May 2017 and the Fed still hasn’t raised rates again — what are the chances, and what would be your investment strategy now?

            While most forecast a raise this year, Mr Hale says the do-nothing option is “a real possibility”.

            To believe this scenario, you are “counting on economic disaster”, says Mr Bateman and so recommends haven assets of gold, oil and inflation-linked bonds. Likewise, Mr Matejka would focus investment on free cash flow, buybacks and yield, adding that “real estate and utilities should be the winners in this scenario”.

            However, if there was no recession in the scenario, the dollar would weaken and “this would be extremely positive for commodities and most emerging markets”, says Mr Bokobza. Mr Turnill agrees an environment with the Fed on the sidelines and where global growth “is holding up but remains low” would be extremely bullish for emerging markets and commodities.

            market trades of 2016

            Refugees stuck in German banking limbo

            Posted on 31 May 2016 by

            When Anas Albasha arrived in Germany after fleeing Syria in late 2014, one of the first things he tried to do was open a bank account. “In Germany you need a bank account for everything,” he says.

            However, this proved to be a Kafkaesque undertaking — one bank turned Mr Albasha away because it did not accept his papers, while another rejected him because he did not speak German. It was only in October 2015, more than a year after his arrival, that the 24-year-old Syrian refugee finally got his account.

            More than 1m migrants, many of whom are from war-torn Syria, arrived in Germany last year, and the country’s officials are well aware that having a bank account is a crucial step in their path to integration
            . But it has been a struggle to persuade banks, which have to verify their customers’ identities, to open accounts for refugees.

            The heart of the problem is documentation. “Many refugees arrive in Germany without a passport or ID card; that’s just the way it is after the journeys they have been through,” says Katharina Stamm, an expert on migration law at the charity Diakonie. “You can’t always expect that victims of war or state persecution will have picked up another document on the way.”

            Once new arrivals have begun the process of applying for asylum, they are given papers that allow them to stay in Germany for the duration of their application — and that should also meet the identification requirements for opening a bank account.

            The snag is that some people have had to wait for up to a year to start their asylum application process due to the volume of new arrivals. The papers they are provided in the meantime may not qualify with bankers worried about anti-money laundering rules.

            The result, according to Ms Stamm, is that more than 300,000 refugees are stuck in a legal limbo in which they cannot open an account. This, in turn, holds them back from setting up their new lives.

            “It’s much harder to get paid at work if you don’t have a bank account, or to transfer money, for example to pay a doctor or join a gym,” says Mr Albasha, who is from Aleppo. “And if you are sleeping in a sports hall full of other people, or in a refugee centre with a group of strangers, you can’t just leave all your money in your pocket — otherwise you will wake up and find you have none.”

            Azad Younes, a 33-year-old from the Syrian city of Hasakah who arrived in Germany in January 2015, recounts similar experiences. “You can’t sign a phone contract without a bank account,” he says. “And you can’t rent a flat. No landlord is going to let you pay your rent in cash every month.”

            German officials are keen for refugees to open bank accounts, not only to ease integration but also because transactions made through the banking system are far easier to monitor for illicit activity such as money laundering. Payments made via other channels, such as money transfer services, are harder to track.

            Germany’s financial watchdog wrote to the country’s banks last year to spur them into action, saying that they could adjust their rules and open accounts for arrivals who had ID documents issued by German refugee authorities.

            The country’s network of just over 400 savings banks, known as the Sparkasse, has been relatively responsive. They have opened more than 250,000 basic accounts for refugees, including 150,000 this year.

            The Berliner Sparkasse has been among the most active, setting up two specialist centres in Lichtenberg and in Wilmersdorf to cope with the surge in demand. It opens about 120 accounts a day for refugees and has managed 19,000 so far.

            “Last summer, branches near to reception centres and accommodation for refugees were overwhelmed by the numbers of people wanting to open accounts,” says Alexander Fest, head of private customers at the Berliner Sparkasse.

            “On top of this there was uncertainty about what papers were needed, and there was also the language barrier. By setting up the two refugees centres last September we . . . were able to deal with several problems at once.”

            Yet while the Berliner Sparkasse’s two centres are working as fast as possible, both refugees and case workers say Germany’s international banks, such as Deutsche Bank and Commerzbank — which have to comply with both domestic and foreign anti-money laundering laws — remain far more reluctant to open accounts.

            “I had hoped that the topic had been dealt with, but in recent weeks we have had more and more reports of problems opening accounts,” says Sebastian Röder at the Refugee Council in Baden-Württemberg, a state in south-west Germany.

            Deutsche and Commerzbank both say they open accounts for refugees on an individual basis, but stress that they need to comply with international financial crime rules.

            In depth

            Europe’s migration crisis

            A migrant family walk toward the border after arriving at the railway station of Botovo, near the Croatian-Hungarian border, on September 21, 2015. Hungary has emerged this year as a "frontline" state in Europe's migrant crisis, with 225,000 travelling up from Greece through the western Balkans and entering the country from Serbia and most recently Croatia. Last week Hungary sealed its southern border with Serbia, forcing tens of thousands of migrants to enter Croatia, from where many then again crossed into Hungary and headed for Austria and beyond. AFP PHOTO / STRINGER

            The EU is struggling to respond to a surge of desperate migrants that has resulted in thousands of deaths

            In theory, the situation for refugees should improve in June, as a German law comes into force that requires banks to provide a basic account to all people with a right to remain in the EU.

            But in practice, Ms Stamm says, further work is needed to clarify rules for under-documented refugees, since Germany’s anti money laundering law still contains a clause that effectively requires a passport or ID card to open an account. “The legal situation will be contradictory,” she says.

            Germany’s finance ministry has drawn up a proposal to rectify the problem, although the interior ministry is yet to give its sign-off.

            If approved, the proposal should make it easier for new arrivals to follow Mr Albasha into the workforce. Having opened his account and learnt German, he now works at the Berliner Sparkasse, helping other refugees open accounts of their own.

            China rebuts renminbi criticism

            Posted on 31 May 2016 by

            A Chinese national flag flies at the headquarters of the People's Bank of China, the country's central bank, in Beijing, China, in this January 19, 2016 file picture.©Reuters

            China’s currency suffered its second-biggest monthly depreciation ever in May as the central bank pushed back against claims it has abandoned market-oriented exchange-rate reform.

            The renminbi fell 1.6 per cent against the dollar in May, its largest decline apart from the surprise 2.6 per cent weakening in August after the People’s Bank of China reformed the way it sets its daily guidance rate for the currency, known as the midpoint price.

              The central bank cast that reform as a move to loosen government control of the exchange rate and let market forces play a greater role. However, many foreign investors were sceptical of the move because it came when market forces could be reliably expected to push the renminbi weaker. 

              That debate has been reignited in recent days following a Wall Street Journal report that the PBoC had secretly decided to scrap market-based reform in favour of exchange rate stability. On Friday, the normally tight-lipped central bank published a statement on its official Weibo account denying the report and declaring its “unceasing commitment to the direction of market reform and increasing the exchange rate’s bidirectional flexibility”. 

              On Tuesday, Sun Wei, deputy general manager for financial markets at China Citic Bank, who also serves on an advisory committee for China’s interbank foreign exchange market, shared more detail on how the daily midpoint is set. He emphasised that the PBoC’s daily midpoint is based on the previous day’s spot close, plus overnight movements in other currencies — rather than reflecting the shifting whims of the central bank. 

              Sceptics of the PBoC’s commitment to market reform point not only to the daily midpoint, but also to the central bank’s direct interventions in the market. As concern grows over China’s slowing economy and capital outflow, the PBoC has spent hundreds of billions of dollars to curb renminbi weakness. 

              Analysts said the PBoC’s post-August intervention showed that Chinese authorities remain uncomfortable allowing the market unfettered influence over the exchange rate. Yet they also distinguish between intervention designed to limit sharp, short-term swings in the exchange rate and more heavy-handed interference aimed at fundamentally reversing the direction of market forces. 

              The currency’s decline in May suggests the PBoC is following the former approach. As expectations of a summer Federal Reserve rate increase revived, the dollar gained against a broad range of currencies. For its part, the renminbi has followed the same basic trajectory as other non-dollar currencies.

              While the Chinese currency would probably have fallen even more sharply absent ongoing intervention, the renminbi’s monthly decline in May was its second-biggest on record, undercutting claims that the PBoC is narrowly focused on stability. 

              Indeed, the central bank’s statement on Friday clearly reflected its pragmatic approach to exchange rate reform. After emphasising its commitment to liberalisation, the PBoC added that it was likewise committed to “maintaining basic stability of the renminbi exchange rate at a reasonable, balanced level”. 

              Analysts say this careful wording reflects the PBoC’s effort to balance competing priorities: “reasonable, balanced level” signals its commitment to let market forces set the exchange rate, while “basic stability” signals that it reserves the right to intervene during periods of intense volatility. 

              “Under the new framework, the renminbi has displayed greater bidirectional volatility against the dollar,” wrote Yu Xiangrong, economist at China International Capital Corp. “But these adjustments are established on the basis of overall stability.”

              Twitter: @gabewildau

              Eurozone inflation stuck in negative territory

              Posted on 31 May 2016 by

              The euro sign sculpture is reflected in office windows as it stands outside the former European Central Bank (ECB) headquarters, at night in Frankfurt, Germany©Bloomberg

              Prices in the eurozone have continued to fall, with the inflation rate for the single currency area remaining in negative territory in the year to May mostly as a result of the slump in energy prices over the past 12 months.

              Inflation for the single currency area rose — but only slightly, edging up from minus 0.2 per cent to 0.1 per cent, according to Eurostat, the European Commission’s statistics bureau. Most of the movement was down to a smaller decline in energy prices, which fell by 8.1 per cent in the year to May compared with 8.7 per cent the previous month.

                The core measure, which strips out price changes for more volatile items such as food and energy products, rose to 0.8 per cent in the year to May — up from 0.7 per cent the previous month.

                While the May inflation figure is likely to matter little to the outcome of the European Central Bank’s governing council meeting on Thursday, the persistence of low price pressures across the eurozone highlights the scale of the challenge facing the region’s monetary policymakers in hitting their inflation target.

                Inflation has been below the ECB’s target of below but close to 2 per cent for more than three years. Though some of that weakness reflects subdued global inflation, the below par figure for core inflation suggests demand in the region remains weak. However, the slightly stronger figure for the core and headline readings — coupled with better economic growth — suggests the chances of a serious bout of deflation have fallen.

                Economists at the central bank expect inflation to remain below target at least until 2017.

                The ECB will present the latest of its staff economic forecasts this week. The most recent forecasts, from March, showed inflation hitting 0.1 per cent this year, 1.3 per cent for 2017 and 1.6 per cent in 2018.

                Officials on the ECB council are expected to keep monetary policy on hold at Thursday’s policy meeting. The governing council is waiting to see the impact of a fresh round of measures unveiled in March before deciding whether to act again. The ECB will begin buying corporate bonds this month as part of changes to its quantitative easing package, made in March.

                In depth

                Eurozone economy

                An employee shows fifty-euro notes in a bank in Sarajevo in this March 19, 2012 file photo. The European Central Bank took the ultimate policy leap on on January 22, 2015 launching a government bond-buying programme which will pump hundreds of billions of new money into a sagging euro zone economy. The Europen Central Bank (ECB) said it would buy government bonds from this March until the end of September 2016 despite opposition from Germany's Bundesbank and concerns in Berlin that it could allow spendthrift countries to slacken economic reforms. Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing programme will pump 60 billion euros a month into the economy, ECB President Mario Draghi said. Picture taken March 19, 2012. REUTERS/Dado Ruvic (BOSNIA AND HERZEGOVINA - Tags: BUSINESS)

                News and analysis of the single currency bloc’s fragile recovery as it attempts to regain competitiveness in the wake of the sovereign debt crisis and its struggles with austerity

                “The economy is expanding at a satisfactory clip, the hypothetical deflation threat has receded and none of the risks that had roiled markets early this year has materialised. At its meeting in Vienna this Thursday, the ECB Council will not need to take any major decision,” said Holger Schmieding, economist at Berenberg Bank. “While the ECB will not rule out further easing, the council will likely emphasise that its previous stimuli seem to be working. As much of the effect of the big March easing package is still in the pipeline, a wait and see stance makes sense.”

                Meanwhile, figures from Eurostat for the jobs market showed unemployment in the euro area remained stable at 10.2 per cent in April 2016 — unchanged from the March figure.

                While inflation is weak throughout the euro area, there are vast differences in unemployment rates between stronger and weaker members of the currency union. Unemployment rates range from 4.2 per cent in Germany to 24.2 per cent in Greece.

                Global investors buy collateralised loans

                Posted on 31 May 2016 by

                European Central Bank (ECB) President Mario Draghi addresses a news conference at the ECB headquarters in Frankfurt, Germany, March 10, 2016. The European Central Bank cut interest rates and expanded its quantitative easing asset-buying programme on Thursday to boost the euro zone economy. REUTERS/Kai Pfaffenbach©Reuters

                ECB president Mario Draghi

                Negative yields are prompting European and Japanese investors to look at bonds backed by leveraged loans as they seek income producing investments.

                Collateralised loan obligations — structured products which sell bonds and equity backed by bundles of risky loans — provide investors with an opportunity to derive a higher yield than from owning standard bonds that carry a similar rating.

                  Japanese banks and European pension funds are looking at senior, and therefore safer, tranches of CLO deals.

                  As the European Central Bank and the Bank of Japan hold down interest rates through their respective quantitative easing programmes, $10tn of global bonds now yield less than zero. While that has spurred a global search for positive yielding securities, for investors the value of currencies also plays a crucial role.

                  Higher yields on US deals are attractive for foreign investors but appetite has been stymied by currency volatility that has dimmed some of the appeal of dollar-denominated assets. During May the dollar has gained on the yen and the euro after losing ground earlier this year.

                  The cost of swapping CLO interest payments from dollars into euros can remove much of the price differential for funds that need to satisfy euro obligations. “At first glance it looks more interesting in dollars but you’re 40-50bp better off in euro tranches,” said Pierre Verle, head of credit at Carmignac.

                  That has some investors focusing their attention on Europe.

                  “We initially favoured the US because the US market was offering better value; that is no longer as acute so there is buying of dollar and euro,” said Christopher Redmond, global head of credit at Towers Watson, the pensions consultancy that advises the European pension fund industry.

                  Investors say Japanese banks, typically large investors in US deals, have been looking at triple-A rated tranches of European CLOs as highly rated alternatives to Japanese government bonds that pay negative returns to investors out to 30 years.

                  MUFG, one of the largest Japanese buyers of triple-A rated CLO debt, has been absent from the US so far this year but has bought the senior debt of four European bonds, say people familiar with the deals.

                  Adnan Zuberi, managing director of bank solutions and credit structuring at BNP Paribas, said he counts three Japanese banks that between them buy “significant” sizes of triple-A paper and have been absent from the market this year.

                  “The yen dollar basis has made it more expensive for them to take yen deposits and then buy dollar CLO paper,” he told a conference in New York this month. “They prefer to rotate that into European CLO paper.”

                  Additional reporting by Mary Childs

                  Asia looks to end month on positive note

                  Posted on 31 May 2016 by

                  An investor speaks on her mobile phone as she walks past electronic board showing stock information at a brokerage house in Hangzhou...An investor speaks on her mobile phone as she walks in front of an electronic board showing stock information at a brokerage house in Hangzhou, Zhejiang province, China, October 8, 2015. China stocks posted their biggest rise in two trading weeks on Thursday, catching up to a rebound in global markets after a week-long holiday, but trading remained thin, reflecting investor worries about the cooling economy. REUTERS/Stringer CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA TPX IMAGES OF THE DAY©Reuters

                  Tuesday 05:10 BST. Asian markets were heading higher, buoyed by a raft of economic data following an overnight session in which Wall Street and UK markets were shut for public holidays.

                  Japanese shares recovered from an initial drop, with the broad Topix up 0.8 per cent and Nikkei 225 up 0.9 per cent, while the yen erased early gains to be 0.2 per cent weaker at ¥111.32 per US dollar, following data showing Japan’s economic recovery continued in the second quarter.

                    Industrial production rose 0.3 per cent month-on-month in April following the earthquake that struck the southern island of Kyushu that month, for a 3.5 per cent yearly pace of decline — both down versus March but comfortably ahead of economists’ forecasts.

                    Household spending contracted 0.4 per cent year-on-year in April, an improvement from March’s 5.3 per cent drop and also better than expected, and the national unemployment rate held steady at 3.2 per cent, as forecast.

                    The industrial output and household spending data suggest Japan’s economy continued to expand at a “solid pace” in the June quarter, according to Marcel Thieliant at Capital Economics.

                    “Firms are forecasting another 2.6 per cent month-on-month rise in production in May followed by a 0.3 per cent uptick in June. Even allowing for the usual upside bias in these projections, we estimate that industrial output may rebound by 1.5 per cent quarter-on-quarter this quarter, consistent with another robust rise in GDP,” he said.

                    Australia’s S&P/ASX 200 was down 0.2 per cent while in Hong Kong the Hang Seng gained 1.2 per cent. On the mainland, China’s Shanghai Composite was up 2.4 per cent — on track for its biggest one-day gain in two months — and the technology-focused Shenzhen Composite climbed 2.8 per cent.

                    Wall Street was closed overnight for the Memorial Day public holiday, while markets in the UK were shut for a bank holiday. European stocks closed 0.4 per cent higher.

                    The dollar index, a measure of the greenback against a basket of global currencies, was flat at 95.55 on Tuesday. It has been in the spotlight this month, climbing 2.7 per cent and on track for its best monthly performance since November as investors upgrade the probability of a near-term interest rate rise from the Federal Reserve.

                    Kit Juckes at Société Générale said the focus this week will be US economic data, starting with personal income and spending data on Tuesday, followed by manufacturing numbers and culminating in the non-farm payrolls report on Friday.

                    “The Fed’s been talking up the economy, but a data-sensitive central bank’s ability to ignore even temporary weakness is doubtful. If the data are solid, fine, but will a shower of soggy data ruin the summer Fed hiking party?” he said.

                    The dollar, and the market’s revised US interest rate expectations, have had a sizeable impact on other assets.

                    Gold was up 0.5 per cent at $1,211.98 an ounce on Tuesday, potentially ending a nine-session losing streak that matches its longest on record. It has fallen 6.3 per cent this month, its worst performance since November.

                    The yen has retreated 4.5 per cent so far in May, putting it on track for its worst month since November 2014, right after the Bank of Japan ramped up its quantitative easing programme.

                    In the wake of the Reserve Bank of Australia’s decision to cut interest rates to a record low, the Australian dollar is down 4.8 per cent in May and facing its worst monthly performance since September 2014. On Tuesday the currency was 0.9 per cent higher at US$0.7243 in response to solid trade data expected to underpin better first quarter gross domestic product data tomorrow. Building approvals and private sector credit figures were similarly upbeat.

                    Oil prices have also been a big mover in May, with both Brent crude, the international benchmark, and West Texas Intermediate, on track for a fourth straight month of gains — the longest monthly winning streak since an eight-month run to April 2011. On Tuesday Brent was off 0.2 per cent at $49.65 a barrel while WTI rose 0.4 per cent to $49.54.

                    Opec members are due to meet on Thursday, and could provide more details about a potential global production freeze. Last week Brent traded above $50 a barrel for the first time since November.

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