Currencies

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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Banks

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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Currencies

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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Financial

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 inflation highest for over two years

Posted on 30 September 2016 by

Customers push shopping carts as they browse products on offer inside a Carrefour SA supermarket in Portet sur Garonne, near Toulouse, France, on Tuesday, March 5, 2013. Carrefour's stock has risen 47 percent since Georges Plassat's arrival as chief executive officer, partially offsetting a 71 percent decline in the preceding five years. Photographer: Balint Porneczi/Bloomberg©Bloomberg

Eurozone consumer price inflation hit its highest level in more than two years in September, climbing to 0.4 per cent, as the effects of the recent fall in oil prices faded.

The CPI increase was in line with expectations and represented an acceleration from the 0.2 per cent figure seen in August.

    Services provided the bulk of the growth in prices, with inflation up 1.2 per cent. Energy prices, meanwhile, fell 3 per cent, although this was a less sharp drop than the 5.6 per cent in August.

    But core inflation, which strips out the effect of volatile areas such as food and energy prices, remained flat at 0.8 per cent, disappointing economists who had hoped that the European Central Bank’s recent monetary action would have had more of an impact.

    Commenting on the figures on Friday, Jack Allen at Capital Economics said the ECB had “more work to do to return eurozone inflation to target on a sustained basis”.

    In the European Parliament this week, Mario Draghi defended the central bank’s quantitative easing programme, arguing it was “working”.

    Bert Colijn, economist at ING, said that while that was “probably the case, the impact on some key indicators has not been more than limited for now”.

    Figures from earlier in the week revealed that Spanish inflation turned positive for the first time in two years in September, while Germany hit its highest level of inflation in a year.

    Unemployment across the eurozone remained stable, stuck at 10.1 per cent — down from 10.7 per cent the year before but flat from July, according to other figures from Eurostat, as recent improvements in the labour market begin to taper.

    [ECB has] more work to do to return eurozone inflation to target on a sustained basis

    – Jack Allen, Capital Economics

    Across the whole EU, the total unemployment rate remained flat at 8.6 per cent. The Czech Republic has the lowest rate in the bloc, with just 3.9 per cent, followed by Germany where 4.2 per cent are out of work. The highest rates were found in Spain — 19.5 per cent — and Greece, where 23.4 per cent are unemployed.

    “Stubbornly weak core inflation and stuttering labour markets suggest that the ECB may yet have some work to do,” said Howard Archer, an economist at IHS Global Insight.

    Youth unemployment fell a little, but still remained stubbornly high in some countries. Across the eurozone, youth unemployment dropped to 20.8 per cent in August from 20.7 per cent the month before.

    Huge differences between countries in the eurozone remain when it comes to young people without jobs. While just 6.9 per cent of young Germans are out of work, this figure is nearly seven times higher in Greece, where 47.7 per cent of youths are unemployed. In Spain, youth unemployment is 43.2 per cent, while in Italy it has hit 38.8 per cent.

    Chart: Eurozone inflation

    Asia mixed as glow of oil rally fades

    Posted on 30 September 2016 by

    Women walk past an electronic stock indicator of a securities firm in Tokyo, Wednesday, Sept. 28, 2016. Major Asian stock markets were lower Wednesday after investors were reassured by trade-friendly Hillary Clinton's performance in a U.S. presidential debate with rival Donald Trump. (AP Photo/Shizuo Kambayashi)©AP

    Friday 05:45 BST. The fire lit under markets by news of Opec’s tentative agreement to cut oil production sputtered out, with Asian markets broadly down following a lacklustre US trading session.

    Taking the lead from Wall Street’s S&P 500 Index, which closed down 0.9 per cent on Thursday, equities across the Asia-Pacific region struggled to hold onto the previous day’s gains.

    The declines followed the release of data showing that Japanese consumer prices remained in deflationary territory, household spending tumbled in August, and the country’s jobless rate nudged up.

    Marcel Thieliant, senior Japan economist at Capital Economics, said that while consumer spending data “send conflicting messages for third-quarter gross domestic product growth, the solid rise in industrial production in August suggests that Japan’s economy continued to recover in the third quarter”.

    The yen strengthened 0.33 per cent to ¥101.34 against the dollar. Japan’s broad Topix index was down 1.2 per cent, dragged lower by losses in utilities providers such as Kansai Electric Power, which fell 3.9 per cent. The Nikkei 225 also fell 1.3 per cent.

    Australia’s S&P/ASX 200 benchmark index fell 0.6 per cent, with as few as a dozen stocks in positive territory. The blue chip S&P/ASX 20 had just a three stocks rising.

    In Hong Kong, the benchmark Hang Seng Index fell 1.3 per cent as only four of 50 members managed to exit negative territory. Shares listed on the mainland were faring slightly better, with the Shanghai Composite Index up 0.1 per cent and the tech-focused Shenzhen Composite rising 0.3 per cent.

    Futures were tipping the S&P 500 to open down 0.2 per cent, while European stocks are expected to open flat.

    Chris Weston, IG chief market strategist, said that following reports that hedge funds were pulling business from Deutsche Bank, traders’ attention in Europe would “be focused on the open of the German DAX and it seems likely that the media focus will be on their subordinated credit-default swaps (CDS) as well”.

    Major currencies in the region were mixed as the dollar index, which measures the US currency against a basket of international peers, stood virtually flat at 95.558.

    The Australian dollar, often viewed as a proxy for Chinese growth, briefly strengthened following a Caixin manufacturing PMI reading that showed a return to marginal growth in September, but was unable to hold on to those gains and weakened 0.1 per cent against the greenback to $0.7625.

    After pushing upward earlier in the week, Brent crude, the international benchmark, rolled back more of its recent gains to be down 0.6 per cent at $49.93 a barrel. West Texas Intermediate, the US benchmark, was down 0.5 per cent at $47.58 a barrel.

    Fixed income markets were muted, with the yield (which moves inversely to price) on US 10-year Treasuries falling 2 basis points to 1.5445 per cent in Asian trade. The yield on 10-year Japanese government bonds was up 1 basis point at minus 0.072 per cent while that of Australian 10-year government bonds shed 6 basis points to 1.914 per cent.

    For market updates and comment follow us on Twitter @FTMarkets

    Cryan lashes out at ‘forces in the market’

    Posted on 30 September 2016 by

    ©Reuters

    The sharp fall in Deutsche Bank’s shares comes after a year of decline

    Deutsche Bank’s chief executive has hit out at “forces in the market” seeking to undermine Germany’s biggest lender, as its share price dropped to a fresh 33-year low on Friday morning.

    John Cryan wrote to Deutsche Bank staff to insist the bank had “strong foundations”, and called on employees to ensure that any “distorted perception from outside” did not affect the bank’s daily business.

    “In banking, trust is the basis of everything. There are currently some forces at play in the market that want to weaken this trust in us,” he wrote.

    Deutsche Bank’s share price opened the day with a drop of almost 9 per cent, pushing the stock to €9.90, its lowest since 1983. It later pared losses and was off 3.9 per cent to €10.45 at midday in Europe.

    The sharp fall followed news that a number of hedge funds had begun to pull business from Deutsche Bank, a move that could set up a showdown with German authorities over the future of the company.

      Mr Cryan said reports of reduced client activity had caused “unjustified concerns”.

      “I understand if you feel concerned by the extensive coverage on this issue. Our bank has become subject to speculation. Ongoing rumours are causing significant swings in our stock price.”

      Deutsche Bank’s US-listed shares fell 6.7 per cent overnight, while the price of the bank’s €1.75bn of contingent convertible bonds, its riskiest form of debt, sank as much as 7 per cent to a record low of 69.97 cents on the euro early on Friday.

      Deutsche Bank has become the focus of growing anxiety about the health of Europe’s banking system after the US Department of Justice told the bank it was seeking $14bn for mis-selling mortgage-backed securities.

      However, Mr Cryan pointed out that other banks had reached far lower settlements with the DoJ in the past.

      “Even the uncertainty over the outcome of our legal process in the US is not a reason for the pressure on our share price, if we take the settlements of our peers as a benchmark,” he wrote.

      Excluding one-off costs, the bank had made a pre-tax profit of €1.7bn in the first half of the year, he added, drawing attention to the strength of Deutsche Bank’s liquidity reserves, which stand at €215bn.

      While Deutsche Bank has said it does not expect to pay a figure anywhere near the $14bn demanded, the DoJ is pushing to agree a trio of settlements ahead of the US election in November.

      Worries about Deutsche Bank and the broader state of European banking were likely to remain front and centre for markets, said Marc Ostwald, strategist at ADM Investor Services, but any comparisons with the demise of Lehman Brothers were “off target”.

      “Deutsche is a huge deposit taker — close to €600bn — [it] is very clearly too big to fail, and has access to all the ECB funding facilities that have been established since the financial crisis,” he said.

      Concerns about Deutsche Bank have sent ripples through financial markets round the world, and contributed to a 1.6 per cent fall in US stocks on Thursday.

      On Friday morning, the Euro Stoxx banks index slipped 3.6 per cent, with Barclays and Royal Bank of Scotland down by more than 3 per cent. In Paris, BNP Paribas dropped 3.9 per cent, Société Générale lost 4.2 per cent, and Italy’s UniCredit 5 per cent.

      Koon Chow, strategist at UBP, played down the potential fallout from the Deutsche Bank problems, saying: “I think as a potential systemic risk factor, the DB spillover is probably going to be limited as their level of fines could be reduced, particularly given the importance of the bank to the global banking system.”

      This week the German finance ministry denied reports it was working on a rescue package for the bank, which has seen its share prices drop more than half so far this year.

      Official concern about the state of European banks was highlighted on Thursday by the EU’s bank regulation chief who warned that Brussels was prepared to reject international plans to toughen bank capital regulations if they placed an excessive burden on the sector.

      The pressure facing German banks in particular was further underlined as Commerzbank, the second-biggest lender, unveiled plans to cut 9,600 jobs and scrap its dividend “for the time being” to boost its flagging profitability. Commerzbank shares dropped more than 7 per cent on Friday morning.

      Richard Hunter at investment house Wilson King said: “The problems at these banks come at a time when the German economy is actually in rude health and their situation is therefore somewhat counter-intuitive.”

      Reporting by Michael Hunter, Martin Arnold, Laura Noonan, Barney Jopson, Josh Noble and James Shotter.

      RBS to rename investment bank

      Posted on 30 September 2016 by

      ©EPA

      Royal Bank of Scotland is to rename its investment bank as part of plans to comply with so-called “ringfencing” regulation designed to protect taxpayers from ever having to bail out a bank again.

      Lenders with more than £25bn of deposits must hive off their consumer-facing business from riskier investment banking activities under the rules, which come into force in 2019.

      RBS said on Friday it will place the bulk of its UK and western European banking business within the ringfence by the end of 2018.

      In order to achieve this, a holding company will be created — called NatWest Holdings — for the ringfenced banks, at the start of next year.

      This will comprise RBS’ personal, private, business and commercial customers, and the NatWest, Coutts and two Ulster bank divisions.

        Three divisions will sit outside of the ringfence, including the investment bank, which will be renamed NatWest Markets, as well as its Jersey and Isle of Man bank.

        The new ringfenced group and the non-ringfenced division will sit underneath Royal Bank of Scotland, which will remain the group holding company.

        The plan will involve shifting personal, private, business and commercial customers across its legal entities, in mid-2018. The investment bank will be renamed at the same time.

        NatWest will become the main brand in England, Wales and western Europe, while Royal Bank of Scotland will remain the core brand in Scotland.

        Ross McEwan, chief executive of the bank, said: “Our proposed future structure under the ringfencing legislation and our brand strategy are key elements of the bank we are becoming.

        “The future ringfenced structure of the bank is not only designed to be in compliance with the new regulatory requirements and objectives but will better reflect who we are as a bank and what we stand for: a bank that is focused on its customers.”

        China’s RMB joins elite global reserve club

        Posted on 30 September 2016 by

        CHINESE WOMAN LOOKS AT CURRENCY...A Chinese woman looks at an exhibition of Chinese currency in Beijing, China, Thursday, Aug. 7, 2003. A South Korean finance official, in Manila for the ASEAN + 3 finance ministers' meeting, lashed out at China and Japan on Thursday for keeping their currencies lower than the free market might dictate. As China becomes an increasingly important exporter, it has faced calls to let its yuan, also known as the renminbi, strengthen against other currencies to avoid too much of a trade imbalance. (AP Photo/Str)©AP

        China’s renminbi formally becomes a reserve currency on Saturday, the 67th anniversary of Communist party rule in China, reaching a milestone on its long march to international acceptance.

        Government officials led by Zhou Xiaochuan, head of the People’s Bank of China, lobbied long and hard for the renminbi to be included in the International Monetary Fund’s special drawing rights — a reserve asset whose value was previously determined by a basket of just the dollar, euro, yen and pound.

          Mr Zhou’s determination that the renminbi join this elite group reflects a dual agenda — reducing the global dominance of the US dollar while also overcoming domestic opposition to currency reforms at home.

          While US economic output has declined from 22 per cent of the global total in 1990 to an expected 15 per cent by 2020, the greenback has retained its dominant position and “haven” status even in the wake of the global financial crisis. About 90 per cent of all currency trades involve the dollar, compared with 40 per cent for the euro and just 2 per cent for the renminbi.

          According to Chinese policymakers and their advisers, Mr Zhou used the prize of SDR inclusion to overcome resistance to controversial reforms aimed at making the renminbi’s own value more market-determined.

          “China is likely to push for a more prominent role for the SDR in global finance as a means to elevate its own currency’s prominence,” says Eswar Prasad, a professor at Cornell University and author of a forthcoming book on the renminbi.

          Beijing was one of the leading proponents of the World Bank’s debut issue of SDR-denominated bonds on the eve of September’s G20 summit in Hangzhou, while Chinese policy banks are reportedly considering SDR bond issues of their own.

          Both developments were foreshadowed by a policy paper issued by Mr Zhou during the depths of the global financial crisis. Published in March 2009, the paper argued that “the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system”.

          “Giving the SDR a more central role in global finance would allow the IMF to act as a global lender of last resort, reducing the reliance of the international monetary system on any single national currency or central bank,” adds Prof Prasad, a former head of the IMF’s China division.

          Mr Zhou almost stumbled at the final hurdle of his long campaign. In August 2015 he failed to communicate clearly a technical change aimed at giving the market a greater say in determining the renminbi’s “daily fix” against the dollar, spooking international investors.

          That was followed by an even worse outbreak of turbulence on China’s equity and currency markets in January, as the PBoC sought to emphasise the renminbi’s performance against a basket of international currencies rather than just the dollar.

          After rising almost 30 per cent in the ten years to January 2014, when $1 bought just six renminbi, the redback has since retreated more than 10 per cent to Rmb6.67 to the dollar. Donald Trump alluded to this recent decline in Monday’s presidential debate against Hillary Clinton, in which he highlighted China’s alleged “manipulation” of the renminbi.

          The return of Mao: a new threat to China’s politics

          Visitors take a picture in front of the statue of Chairman Mao Zedong at the central square of his hometown Shaoshan. In their hands smaller sized statues they bought at a shop in Shaoshan.

          The dictator is enjoying a surge of popularity amid an age of growing inequality. But the rise of a neo-Maoist movement threatens the stability of China’s political system

          But Chen Long, China economist at Gavekal Dragonomics, notes that for most investo—s – and even the US government — the PBoC’s “gradual and managed depreciation of the renminbi is a non-story right now”.

          The Chinese economy’s better than expected performance over recent quarters and the UK’s decision to leave the EU have deflected international intention from the PBoC’s earlier policy errors, allowing for a smooth run-up to this weekend’s official inclusion in the SDR.

          The only better present Mr Zhou could hope for is an electoral triumph next month for Mr Trump. The Republican nominee has said that international investors might be willing to accept a haircut on their US government debt, a move that could hasten the reordering of the global currency order that Beijing has long sought.

          US seeks pre-election mortgage mis-selling deal

          Posted on 30 September 2016 by

          The exterior of the U.S. Department of Justice headquarters building in Washington...The exterior of the U.S. Department of Justice headquarters building in Washington, July 14, 2009. REUTERS/Jonathan Ernst (UNITED STATES) - RTR25O5F©Reuters

          The US Department of Justice hopes to agree an omnibus settlement with Barclays, Credit Suisse and Deutsche Bank, extracting multibillion dollar fines from three of Europe’s biggest lenders for mis-selling mortgage securities. 

            By grouping the three banks together into a single deal the DoJ hopes to achieve maximum public impact by collecting an eye-catching sum in penalties from the trio just weeks before the US presidential election. 

            Until now, investors have been primarily focused on Deutsche’s talks with the DoJ, after an initial demand for the German bank to pay $14bn to settle the issue was leaked, triggering widespread jitters about the financial solidity of the bank. 

            Yet two people familiar with the discussions said the DoJ had indicated that it would prefer to combine the settlements of the three banks into a single announcement. That could shift some attention away from Deutsche and onto its UK and Swiss rivals 

            With only four months left in the administration of Barack Obama, such a move may also provide a career boost for Loretta Lynch, who is likely to be replaced as attorney general when the next president takes charge in January. 

            One of the people briefed on the discussions said it was not certain that the DoJ would succeed in completing the three settlements all at once.

            Barclays, Credit Suisse, Deutsche and the DoJ declined to comment. 

            The DoJ’s unexpectedly high initial claim on Deutsche has knocked investor confidence in Germany’s biggest bank. Hedge funds have started to pull some business from Deutsche, setting up a potential showdown with German authorities over the lender’s future. 

            Shares in Deutsche fell almost 7 per cent in New York trading on Thursday, having hit a 33-year low earlier this week, even after the bank recirculated a statement emphasising its strong financial position. 

            Perversely, a liquidity panic could even strengthen [Deutsche’s] bargaining hand with the DoJ

            – Stuart Graham, banks analyst at Autonomous

            Some analysts believe the fears are exaggerated. Stuart Graham, banks analyst at Autonomous, said in a note published on Thursday that with €233bn of liquid reserves, including cash and sovereign bonds, Deutsche “does not have a near-term funding problem”. 

            “Perversely, a liquidity panic could even strengthen its bargaining hand with the DoJ,” he added. “Does the DoJ want to run the risk of being branded by European leaders as responsible for inadvertently bringing down the fourth most systemic bank in the world? Logically not, in our view.”

            Deutsche said after the $14bn claim from the DoJ first emerged two weeks ago that it had “no intent to settle these potential civil claims anywhere near the number cited,” adding: “The negotiations are only just beginning”.

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            The German bank has built up a reserve of €5.4bn to deal with its legal woes and holds a further €1.7bn as unreserved contingent litigation liabilities, although it has not stated how much is earmarked for the US mortgage securities probe. It is widely expected to need to raise capital once it completes the settlement talks.

            Deutsche Bank: death would be too simple

            The headquarters of Germany's Deutsche Bank is photographed early evening in Frankfurt, Germany, January 26, 2016. REUTERS/Kai Pfaffenbach/File Photo

            Talk of failure is over the top, but so are hopes for a recovery

            Barclays set aside £2.5bn for investigations and litigation in the two years to June, while Credit Suisse had taken SFr1.76bn ($1.82bn) of equivalent provisions at the same point.

            The DoJ is also still investigating Royal Bank of Scotland, HSBC, UBS and Wells Fargo over the same issue, but they are likely to be further away from any settlement. 

            US authorities including the DoJ have already collected more than $40bn from six US groups — Bank of America, JPMorgan Chase, Citigroup, Morgan Stanley, Goldman Sachs and credit rating agency S&P Global Ratings — for alleged mis-selling of residential mortgage-backed securities in the run-up to the 2008 financial crisis.

            Investors buckle up for final quarter

            Posted on 30 September 2016 by

            Supporters of Donald Trump, president and chief executive of Trump Organization Inc. and 2016 Republican presidential candidate, affix dollar bills to campaign signs in hopes to get Trump's signature on them before a town hall event at the Tampa Convention Center in Tampa, Florida, U.S., on Monday, March 14, 2016. As protesters shadow campaign appearances by Trump, the billionaire has shifted a planned Monday-night rally in south Florida to Ohio, where polls show Governor John Kasich may be pulling ahead days before the states primary election. Photographer: Andrew Harrer/Bloomberg©Bloomberg

            Donald Trump supporters in Tampa affix dollar bills to campaign signs in the hope of getting his signature on them

            With the third quarter ending, investors face a choice of sticking with winners or buying this year’s laggards in a final three months that will help shape their performance in a challenging year.

            Among the major risks framing the fourth quarter are the US presidential election, a possible rate rise from the Federal Reserve, Opec’s gathering in late November along with corporate earnings and guidance from US and European companies that will arrive this month.

              Here is how investors and strategists view the prospects for major asset classes in the quarter.

              Equities

              Equity markets’ performance swung during the third quarter and, most recently, saw them rebound from a bout of volatility in the middle of September. Leading the way among developed markets since the start of July has been Germany’s Dax, up 7.5 per cent, while Japan’s Topix has risen 7.8 per cent.

              Powering the S&P 500’s current quarterly gain of 2.5 per cent has been technology shares, with a 12 per cent rally as the revenue and profits picture brightens for the sector. Opec’s production deal this week, has propelled energy shares into positive territory for the quarter.

              Mislav Matejka at JPMorgan Cazenove says: ‘’At the sector level, cyclicals appear to have stalled since the start of the month, and we believe that they should be faded.”

              Bank shares in the US, Europe and Japan had a winning quarter, but will remain at the front of investors’ anxieties as the fourth quarter starts. A global backdrop of negative and ultra-low interest rates remains a headwind for the sector, notably in Europe, with Deutsche Bank
              shares at a multi-decade low. This week, Credit Suisse’s chief executive Tidjane Thiam warned European banks are in a “very fragile situation” and are “not really investable as a sector”.

              Profits and guidance from corporate America are likely to prove critical to whether US equities can hang on to their gains.

              Investors are keen to see stronger profits from US groups, with valuations having become “stretched”, says Peter Kenny, a senior market strategist at Global Markets Advisory Group. The S&P 500 was priced at 16.8-times forward 12-month earnings as the third quarter came to a close, according to FactSet data, compared with the average of 14.3-times over the past decade.

              Chart: Markets Q4 analysis 1; Developed Market Equities

              Bonds

              This year’s historic rally in bonds has made government debt a sweet spot for investors. Buying long-dated bonds has delivered double-digit gains, but notable investors, such as Jeffrey Gundlach of Doubline and Bill Gross, have voiced concern over frothy valuations.

              Asset manager BlackRock warns that there is now a meagre safety cushion for holders of long-dated US government bonds. A 0.2 percentage point increase in Treasury yields “could wipe out a whole year’s worth of yield income”.

              Moreover, Treasuries are becoming less attractive to non-US investors, as the increased cost of currency hedging wipes out the extra yield on offer. Foreign central banks have pared their holdings in recent months, and demand at auctions in coming weeks will be closely watched by traders.

              The announcement by the Bank of Japan that it’s targeting a steeper yield curve, alongside the prospect of fiscal easing from governments, also cloud the outlook for fixed-income. ‘’We see a steeper yield curve ahead amid a gradual pivot toward fiscal expansion globally, although central banks still have the ability to limit any unwanted yield rises,” says BlackRock.

              Chart: Barclays Global Aggregate Bond index

              Others are more sanguine. Robert Michele, global head of fixed income at JPMorgan Asset Management, argues “it’s still a good time to be a bond investor”.

              “Secular stagnation is inevitable and growth in much of the world is stabilising at below historical levels — not a bad backdrop for fixed income.”

              Corporate bonds

              Bonds issued by companies — especially highly-rated ones — have been the biggest winners from the evaporating yields in sovereign markets.

              As a result, many measures of corporate indebtedness are worsening after a long borrowing binge since the financial crisis, and investors have recently ramped up bets against US corporate bonds. The rally in junk bonds looks particularly vulnerable, given the weak backdrop, but the eroding creditworthiness of big companies rated “investment-grade” is also causing some concern.

              “There’s been an understandable increase in leverage in investment grades, as companies have taken advantage of their rock-bottom borrowing costs,” says Jesse Fogarty, senior portfolio manager at Insight Investment. “Money has been pouring in, so technically the market is in good shape, but we have the slow-moving tectonic plate of weakening fundamentals.”

              Nonetheless, most fund managers are confident corporate bonds will continue to be a star performer. For many investors, highly-rated corporate debt is the only alternative, and every minor squall has quickly become a buying opportunity. “The demand is just overwhelming,” Mr Fogarty points out. “In every pullback we’ve seen interest come back in.”

              G10 Foreign Exchange

              There is plenty that points towards a stronger quarter for the dollar. Analysts at Barclays say they expect a stronger US currency over the quarter, “albeit at a slower pace, in the year to come. Slow but steady monetary policy normalisation along with its safe-haven status should support it.”

              The caveat is, of course, the US election. The narrowing in opinion polls is forcing investors to pay more attention to the prospect of a victory for Republican nominee Donald Trump, an outcome that could potentially raise doubts over the future of leadership at the Federal Reserve.

              For sterling, it’s all about the data and the picture it will paint of the UK economy post the Brexit vote. The picture that emerges will probably determine whether the pound will break this year’s low of $1.28 or stabilise above $1.30. November’s Autumn Statement from the UK chancellor also looms as a key driver of sentiment for UK assets and the pound.

              Meanwhile, the euro has been in a period of stagnation for most of 2016, but the rest of the year is fraught with risk. Europe’s banking problems are threatening to develop into a crisis, the outcome of Italy’s constitutional referendum in early December may force the resignation of prime minister Matteo Renzi, Portugal’s investment-grade status is in peril and Spain’s attempts to form a government remain deadlocked. Even so, analysts expect the euro to hobble on to the end of the year broadly unchanged.

              Emerging Market Assets and Currencies

              With a few exceptions, emerging markets have regained their allure. EM currencies are among the best performers across FX this year, notably South Africa’s rand, Brazil’s real and Russia’s rouble. So how long can the run last?

              Chart: Markets Q4 analysis 2; Emerging Market Assets

              Political risk may stalk these currencies, yet the low-rate environment in developed markets persuades investors to take the plunge anyway. This is unlikely to change anytime soon. “The Fed is most likely going into a one-month vacation,” says Luis Costa of Citigroup’s FX strategy team, expressing surprise at how little interest investors have shown towards the pronouncements of Fed members this week.

              A European banking crisis could blow a large hole in the risk-on sentiment that has been driving the EM rally. The chances are, though, that EM assets will remain in vogue until investors sense a more fundamental realignment of rates in developed markets. That remains a distant prospect.

              Commodities

              The scale of any production cut that ultimately emerges from Opec will dominate the outlook for the oil market. Brent crude closed out the second quarter just shy of $50 a barrel and is on course to end September little changed. Many are sceptical. The proposed cut in production to 32.5m-33m barrels is modest, while the details will not arrive until Opec’s meeting at the end of November.

              Gold is at the forefront of investors’ minds. After a blistering first-half rally that saw gold peak at $1,375.5 a troy ounce in early July, gold has been stuck in a narrow trading range and fell to a low $1,302 in September. Stronger US consumer confidence and a recovery in the US dollar have sapped momentum.

              For other metals, such as zinc, aluminium and nickel, the question for investors will be whether supply shortages that have boosted prices this year will last.

              Chart: Commodities

              Aluminium prices, for example, have rallied 11 per cent this year, and zinc has surged 45 per cent. However China, which produces half of the world’s aluminium, is set to increase production as smelters restart operations. Consultants at CRU expect around 1.7m tonnes of capacity to come back online.

              In zinc, Glencore, the giant commodity trader and miner, is weighing up when to bring back production it cut in the face of slumping prices last year. Traders say prices could be hit as soon as this happens. Zinc mines in China could also restart production.

              “The pressure to cut supply further has evaporated with the commodity recovery,” say analysts at Macquarie. “For a healthier fundamental situation, further permanent capacity cuts are required across many markets.”

              Reporting by Michael Mackenzie, Roger Blitz, Henry Sanderson, Michael Hunter and Robin Wigglesworth and Adam Samson.

              European equity funds outflows near $100bn

              Posted on 30 September 2016 by

              FRANKFURT AM MAIN, GERMANY - JUNE 24: (Editors Note: This picture is taken with the in-camera multiexposure mode.) Trader sit at his desk under the day's performance board that shows a dive in the value of the DAX index of companies at the Frankfurt Stock exchange the day after a majority of the British public voted for leaving the European Union on June 24, 2016 in Frankfurt am Main, Germany. Many prominent corporate CEOs and leading economists have warned that a Brexit would have strongly negative consequences for the British economy and repercussions across Europe as well. (Photo by Thomas Lohnes/Getty Images)©Getty

              Redemptions from European equity funds have approached $100bn as investors race out of an asset class that has been rattled by the uncertain health of the continent’s financial sector.

              Funds invested in European stocks suffered $1.9bn of withdrawals in the week to September 28, the 34th consecutive week of outflows, according to fund flows tracked by EPFR. The exodus since mid-February has reached $95bn, the data show.

                Anxiety over the health of the European banking system, which recently culminated with a rise in short interest in Deutsche Bank, has persisted from the year’s start and weighed on the region’s nascent recovery.

                The European Central Bank has unleashed a wave of stimulus in a bid to rekindle growth and inflation, but has been unable to shake investor concerns. Flight from European stocks has been fanned by a troubled Italian financial sector as well as the UK’s Brexit vote, which is seen as a weight on economic activity throughout the bloc.

                Deutsche Bank was thrust to the fore after a report said German officials were drawing up contingency plans in the event it is unable to tap financial markets to meet regulatory requirements resulting from a US fine. The bank has emphasised its strong financial position, but that has not stopped some hedge funds from pulling part of their business from the German group.

                “Deutsche Bank’s travails kept mutual fund investors on their toes during the final week of September,” said Cameron Brandt, director of research for EPFR. “Sentiment towards Europe took hits from the setting of a date for Italy’s constitutional referendum and the possibility of higher oil prices sapping regional consumer confidence.”

                Gabriela Santos, a strategist with JPMorgan Asset Management, added that there was investor “frustration” over the poor performance in European stocks “driven by fears around financials”. Shares of European bank stocks have slid 28 per cent this year, compared with a 5 per cent fall by their US counterparts.

                Investors instead turned to US equities in the latest week, with mutual funds and exchange traded funds invested in the asset class counting $4.2bn of inflows — the greatest weekly addition in more than a month.

                The fragility of the European financial sector has been seen as an impediment to the Federal Reserve tightening policy, which has buoyed equity and bond markets, Mr Brandt noted. Overall, bond funds added $9.2bn in the latest week while stock funds took in $5.6bn, a five-week high.

                Emerging market stock funds counted $1bn in new capital, lifting their haul since the start of July to nearly $19bn, while flows into EM bond funds hit a nine-week high. Developing market debt has attracted a flood of investor appetite as investors search for higher-yielding assets.

                “There is this unrelenting drop in yields,” Ms Santos added. “But it is more than that. It is about the feeling that the worst is over for emerging markets.”

                eric.platt@ft.com

                Twitter: @ericgplatt

                Global investors eye China debt

                Posted on 30 September 2016 by

                A man sits in front of an electronic board displaying share prices at a securities brokerage in Beijing, China, on Monday, March 7, 2016. Chinese small-cap stocks rallied after Premier Li Keqiang failed to mention a planned shift to a more market-based system for initial public offerings, a reform seen luring funds from existing equities. Photographer: Qilai Shen/Bloomberg©Bloomberg

                Foreign fund managers plan to double their investments in renminbi-denominated bonds in the next year, according to a survey that suggests appetite for China’s vast debt market is rising in spite of fears about the country’s financial stability.

                Investors polled by Deutsche Bank said they planned to double their allocation in the next year to about 13 per cent of their local currency portfolios, following moves by China this year to open its bond markets — the world’s third-largest behind the US and Japan.

                  Outstanding onshore bonds are currently worth about $7.5tn, roughly the same as the rest of the entire emerging-market debt universe, analysts have calculated. The US bond markets are worth $35tn and Japan’s $11tn.

                  China’s opening of its debt market in May allows international investors to buy onshore bonds under the auspices of a so-called agent bank appointed by the government rather than having to seek approval for an investment quota under a set of rules known as QFII.

                  The changes represented a streamlining of the investment process for foreigners, and a willingness by Beijing to ease tight controls by delegating approval. About 20 banks are agents including HSBC, Standard Chartered and Deutsche Bank.

                  “Now that access has opened up substantially for offshore investors, we expect foreign participation in China’s domestic bond market to accelerate and for onshore renminbi bonds to be an increasingly important component of major global fixed-income investors’ portfolios,” said Michael Ormaechea, head of Deutsche Bank’s global markets unit in the region.

                  More than a quarter of survey respondents had already filed for registration or were selecting an agent, while a further 40 per cent were currently looking at the opportunities.

                  Bankers have been reporting rising interest from fund managers in the relatively high yields on offer in China. Ten-year Chinese government bonds, for example, currently yield about 2.7 per cent, compared with 1.6 per cent for equivalent US sovereign debt. Japanese and German government bonds offer negative yields.

                  Now that access has opened up substantially for offshore investors, we expect foreign participation in China’s domestic bond market to accelerate

                  – Michael Ormaechea, Deutsche Bank

                  China’s appeal is also sharpened by the limited links its debt market has with global market moves. Onshore bond indices have shown a correlation of only 0.2 — where 1 would mean they move in tandem — with other emerging market local currency bonds and a link of just 0.13 with US Treasuries, according to a study by Invesco, the fund manager.

                  One catalyst for faster investment by foreign investors would be the inclusion of China in international bond indices, which would force index tracking funds to buy onshore debt. Four-fifths of those surveyed by Deutsche expect that to happen in the next two years.

                  However, earlier this year onshore equities were turned down for inclusion in MSCI’s benchmark global equities indices partly because foreign buyers were concerned about their ability to repatriate investments on demand. It’s a worry also raised by bond investors.

                  The survey also highlighted longstanding concern over the risks of investing in China. Just over 40 per cent of those polled said they were uncomfortable with the stability of the financial system. However, less than a third were worried about the risk of a sharp depreciation in the renminbi — fear of which sent global markets into a tailspin in January.

                  Deutsche Bank concerns weigh on US market

                  Posted on 29 September 2016 by

                  FRANKFURT AM MAIN, GERMANY - SEPTEMBER 26: The headquarters of Deutsche Bank stand on September 26, 2016 in Frankfurt, Germany. Shares of Deutsche Bank dropped by over 6% today and fell to their lowest level since the 1980s following reports that the German government will not step in to shore up the bank. U.S. regulatory authorities are seeking a USD 14 billion fine from Deutsche Bank due to its role in contributing to the U.S. sub-prime mortgage crisis of 2007-2008. (Photo by Hannelore Foerster/Getty Images)©Getty

                    The US stock market took a tumble on Thursday as mounting concerns over the financial health of Deutsche Bank unnerved investors and ramped up demand for US Treasuries.

                    Deutsche Bank has been under pressure for most of the year, most recently over concerns of a $14bn potential settlement with the US Department of Justice. Its shares had steadied recently after the bank agreed to sell its Abbey Life insurance arm for $1.2bn, and chief executive John Cryan had ruled out a share sale.

                    But on Thursday the pressure ramped up again, after Bloomberg reported that some hedge funds have pared parts of their business with the German lender, reigniting market jitters.

                    A person briefed on the situation at Deutsche Bank told the Financial Times that some hedge fund clients had imposed risk limits on the business they do with the German bank in response to the negative headlines and the recent rise in its credit default swap prices, a widely-watched indicator of credit risk.

                    The bank’s US-listed shares fell as much as 9.1 per cent on Thursday, and ended the day down 6.7 per cent, giving Deutsche Bank a market capitalisation of just $15.8bn, compared to its total assets of €1.8tn.

                    Given Deutsche Bank’s heft and global links, its woes helped send US financial stocks down as much as 1.9 per cent, and the S&P 500 index closed down 0.9 per cent, its biggest one-day fall in more than two weeks.

                    Hedge funds pull business from Deutsche Bank

                    Dark clouds hovering over Deutsche Bank towers...epa05001594 (FILE) A file photo dated 20 May 2015 showing dark clouds hovering over the headquarters of German banking and financial services corporation Deutsche Bank in Frankfurt, Germany. Deutsche Bank, Germany's largest bank, said 29 October 2015 that it will cut about 9,000 jobs, four days after it announced a restructuring. The reorganization of the bank's leadership was announced Sunday by chief executive John Cryan, who said the aim was 'to create a bank that's better-controlled, more cost-efficient and more strongly focused.' The bank has been dogged by a host of problems in recent months, ranging from shake-ups in management to major anticipated losses. It also was fined 2.5 billion dollars in April for its role in manipulating the benchmark Libor interest rate, which banks charge one another for loans. Deutsche Bank is also preparing to sell its Postbank subsidiary, which will mean a loss of a further 15,000 positions. EPA/ARNE DEDERT

                    Pressure on German bank weighs on its shares and the wider US market

                    Demand for safer assets pushed the 10-year Treasury yield down from 1.6 per cent to a low of 1.54 per cent, before rebounding to 1.55 per cent once the initial jitters subsided.

                    Bloomberg reported that 10 hedge funds, including Millennium Partners, Capula Investment Management and Rokos Capital Management, had moved part of their derivatives-clearing business elsewhere, citing an internal Deutsche Bank document.

                    In response the bank recirculated a statement that said: “Our trading clients are amongst the world’s most sophisticated investors. We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the US and the progress we are making with our strategy.”

                    Short-sellers increase the pressure on Deutsche Bank’s shares

                    A statue is seen next to the logo of Germany's Deutsche Bank in Frankfurt...A statue is seen next to the logo of Germany's Deutsche Bank in Frankfurt, Germany, January 26, 2016. REUTERS/Kai Pfaffenbach/File Photo

                    Credit default swaps also reacting sharply to trials of German bank

                    The person close to Deutsche Bank said the reining in of risk by hedge funds had affected the sales and trading operations of its global markets division. But it had not seen similar moves by clients in its transaction banking division, which provides cash management and global custody services to large investors and corporate clients, or at its corporate finance division, which provides advice and financing to companies for M&A deals.

                    But some hedge funds have been ratcheting up their bets against Deutsche Bank’s shares, which have lost more than half their value this year, and others said they were monitoring Deutsche Bank’s situation closely.

                    “They are pulling exposures,” said a hedge fund trader, who does not clear with the German lender. Some funds were “pulling excess collateral, pulling cash and reassigning trades so they don’t face Deutsche but they face other counterparties”.