China capital curbs reflect buyer’s remorse over market reforms

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

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

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

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Financial system more vulnerable after Trump victory, says BoE

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

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China stock market unfazed by falling renminbi

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

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Hard-hit online lender CAN Capital makes executive changes

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

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Archive | Economy

Eurozone inflation climbs to highest since April 2014

Posted on 30 November 2016 by

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 last year’s energy price falls.

This month’s figures have however been dampened by core inflation – which strips out volatile elements such as energy prices and food – remaining stuck at 0.8 per cent for the fourth consecutive month. The figures are a first flash estimate from Eurostat.

Core inflation is closely watched by policymakers at the ECB who have been battling with persistently low inflation for over two years. Faced with weak price pressures, the central bank is widely expected to extend its landmark €80bn a month bond-purchase at the ECB’s December policy decision next Thursday. (More on that here.)

ECB president Mario Draghi said today he expects inflation to reach its target of below but near 2 per cent by around 2018-2019.

“We’re still years away from a return to normal”, said Peter Vanden Houte, chief eurozone economist at ING, who says low inflation has likely bottomed out this year.

Eurostat said energy prices fell 1.1 per cent this month, compared to November 2015, while food, alcohol and tobacco prices climbed 0.7 per cent and industrial goods prices inched up by 0.3 per cent.

The eurozone-wide figures follow on from a flash estimate of German inflation, which remained unchanged at 0.7 per cent this month, matched by France.

Chart courtesy of Bloomberg

Draghi: Eurozone will decline without vital productivity growth

Posted on 30 November 2016 by

It’s productivity, stupid.

European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation.

Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the eurozone – as measured by workers’ output per hour – have fallen significantly behind the US in the wake of the financial crisis, with growth falling from 2 per cent to 0.5 per cent in recent years.

Raising productivity is vital to boost future economic growth, improve living standards, and help ease the burden on government public finances. Weak output per hour has also plagued the UK and the US since 2009, posing a major headache for economists who have sought to explain its decline.

Mr Draghi attributed weak productivity growth to non-manufacturing firms’ poor ability to absorb technological changes to improve their efficiency – a situation made worse by weak competition in many sectors.

Should governments fail to undertake reforms to lift productivity, encourage business innovation and liberalise labour markets, he warned income growth in the single currency area “is likely to stagnate and may even decline”.

Ahead of a key ECB meeting next week, the Italian central banker said policymakers were taking action to ensure that low interest rates do not become a permanent feature of the eurozone economy, “but we alone cannot eliminate that risk”, he said.

“Monetary policy is providing support and space for governments to carry out necessary structural reforms. It is up to euro area governments to act, individually at national level as well as jointly at European level”, he said.

French inflation climbs to 0.7% in November, matching Germany

Posted on 30 November 2016 by

Annual inflation in the French economy accelerated to 0.7 per cent this month, from 0.5 per cent in the previous month, in an encouraging sign of a pick up in consumer prices in the eurozone’s second largest economy.

Year-on-year prices were pushed up by a 2.1 per cent rise in energy prices and a 1 per cent climb in services. November’s inflation rate means French prices rose at the same pace as in Germany this month.

However, a closely-watched measure of core inflation – which strips out volatile elements – came in at a more moderate 0.5 per cent.

“Core inflation is a very lagging indicator in France, and we think it will rise gently to about 1 per cent in the middle of next year”, said Claus Vistesen at Pantheon.

Eurozone ready to flesh out Greek debt relief options – Dijsselbloem

Posted on 29 November 2016 by

Eurozone finance ministers are ready to further flesh out possible debt relief options for Greece once further progress in made in the latest review of its bailout programme, the president of Eurogroup has said.

Speaking in Brussels on Tuesday, Jeroen Dijsselbloem said he hoped a “staff level agreement” on the review would be completed by finance ministers’ next meeting on December 5.

“This would allow the Eurogroup to have a further discussion on the
short, medium, and long term debt measures needed,” he said.

Should the agreement on the review be reached in time,
December’s meeting will see ministers engage in intense negotiations
between the euro area and International Monetary Fund on whether the
IMF will join the €86bn bailout of Greece – a decision with major
implications when it comes to parliamentary support for the Greek
programme in Germany and some other euro area nations.

A key point to be resolved in those talks will be how long Greece will be expected to maintain the 3.5 per cent primary budget surplus target that the country is scheduled to hit in 2018.

“It will be one of the key debates,” said the Dutch finance minister, adding:

The IMF has argued that you cannot ask Greek to maintain that for a very long time, and others have said that, `well, it’s going to be necessary given the fact that Greece has to comply with the Stability and Growth Pact’.

So, in between those two we will need to find a realistic path forward, and I’m saying realistic because I think the IMF has a point that running a primary surplus of 3.5 for a very long time is a huge thing to ask.

A primary surplus measures the budget excluding debt repayments. The Eurogroup president added that he hoped the IMF would become “fully involved again” in the programme.

Mr Dijsselbloem also took a veiled swipe at a recommendation from the
European Commission that the euro area should aim for a fiscal stimulus equivalent to 0.5 per cent of GDP next year, pointing out that it runs counter to budget plans that governments have already agreed on with the EU.

The Commission made the recommendation earlier this month, as a way of putting pressure on countries in a strong budgetary position, such as Germany and the Netherlands, to do more to boost demand and stimulate growth.

“Some would argue that given the position where we are in the economic
cycle, where the output gap is closing, that in some countries it
would not be wise to stimulate further with fiscal policy,” he said.

Commission officials “need to realise” that governments are put in a
complicated situation if the institution’s guidance on the broader
fiscal stance clashes with EU budget rules intended to make sure
nations do not overspend, he said.

Spanish inflation holds steady at 0.5%

Posted on 29 November 2016 by

Spanish inflation is holding up. Just.

The country’s stats office said today that the pace of EU-harmonised annual inflation maintained its pace at 0.5 per cent, a nose ahead of forecasts. The drop in fuel prices is “noteworthy”, it added.

(Chart: Bloomberg.)

French GDP growth confirmed at 0.2% in third quarter

Posted on 29 November 2016 by

Back to growth.

France’s economic growth accelerated by 0.2 per cent in the three months to the end of September as attention turns to the country’s presidential elections next year, a second reading of the data confirmed today.

The French economy has been struggling to generate any sustained momentum in 2016, having slipped into a surprise 0.1 per cent contraction in the middle of the year.

The figures for the third quarter from stats office Insee on Tuesday, means French GDP growth matched that of Germany over the same period and came in line with expectations.

On Sunday, former prime minister François Fillon was elected to stand for the opposition right-wing Republican party in presidential elections held in April and May next year.

Mr Fillon is promising a dose of shock economic medicine for the French economy, including 500,000 public sector job cuts, a raising of the retirement age and a hike to the 35-hour working week (read more on his plans here).

According to Insee, imports rebounded to grow by 2.5 per cent in the quarter, from a contraction of 1.7 per cent, while consumer spending growth stagnated and investment edged up by 0.2 per cent.

The French economy is set to be driven by higher consumer demand at the end of the year, with Insee reporting a strong 0.9 per cent rise in October consumer spending numbers – bouncing back from a 0.4 per cent contraction in the previous month.

Eurozone business confidence slips, UK back up to pre-referendum level

Posted on 29 November 2016 by

Business sentiment in the eurozone fell unexpectedly in November while the UK saw its economic confidence gauge climb above its pre-Brexit vote levels.

The European Commission’s monthly business climate indicator in the single currency area fell 0.14 points to 0.42 this month – a three-month low and defying expectations of a slight climb.

A related measure of eurozone economic sentiment was broadly unchanged, inching up by 0.1 points after several months of strong gains to an 11-month high.

Outside the eurozone, a healthy bounce in the UK’s economic sentiment dragged the EU-wide indicator up by 0.4 points, with Britain registering a 1.5 point increase to push its confidence gauge back above to its pre-referendum level.

It was the best monthly rise since December 2015 and corresponds with resilient consumer spending in the UK following the June 23 vote.

In Germany, economic sentiment slipped o.7 points, while France rose 1.5 points. Italian confidence fell 0.6 points as the country prepares to go to the polls in a key referendum next week.

Overall, the eurozone figures provide a welcome boost for policymakers at the European Central Bank, who are expected to announce an extension of their landmark stimulus measures next week, said Jack Allen at Capital Economics.

“With inflation pressures still very weak, and the EC survey measure of inflation expectations still consistent with low core inflation, we still expect the Bank next week to announce an extension to its asset purchases by six months at the current pace”, said Mr Allen.

Chart courtesy of Bloomberg

Italian 10-year bond yields slip below 2%

Posted on 29 November 2016 by

Italian government debt is rallying strongly today with 10-year yields falling below 2 per cent for the first time in a week, helped along by reports the European Central Bank could ramp up its purchases of the country’s bonds ahead of a crucial referendum on Sunday.

Yields on Italy’s benchmark 10-year bonds are down 0.07 percentage points (7 basis points) on Tuesday to 1.98 per cent – outperforming peers across the eurozone today (yields fall when a bond’s price rises).

Within the last hour, Reuters has reported that ECB policymakers are ready to temporarily accelerate their purchases of Italian government debt as part of its existing quantitative easing measures, in a bid to calm market nerves should a ‘No’ vote lead to heightened volatility after the referendum.

Italian yields have climbed above 2 per cent for the first time since 2015 this month as investors have sold the country’s debt on the back of rising concern over support for populist groups who are critical of Rome’s eurozone membership.

Addressing MEPs on Monday, ECB president Mario Draghi rejected any suggestions the central bank would intervene in a bailout of the country’s struggling banking system. He added, however, that the Italian economy remained “vulnerable to shocks”.

The ECB has been snapping up €80bn of government bonds a month as part of its landmark asset purchase programme, launched in March last year. The purchases are carried out by the eurozone’s national central banks and are done according to the share of GDP represented by each member state.

Policymakers have flexibility within the QE framework to quicken or slow the pace of its purchases of different government debt. In the past, it has used this flexibility to buy fewer bonds in periods during the summer, when debt markets are less active.

Last week, ECB vice president Vitor Constancio hinted policymakers would react to any adverse financial shock from the vote on constitutional reform that prime minister Matteo Renzi has staked his job on.

“It’s the sort of political uncertainty that will trigger or not an economic shock in financial markets”, said Mr Constancio.

“And depending on the degree of that shock, then we have to see if we have anything to do or not”.

An ECB spokesperson declined to comment.

New Basel banking rules’ impact on European economy

Posted on 28 November 2016 by

The coming days will be crucial for the future of the European economy. The Basel Committee on Banking Supervision will officially present its final set of proposals on capital requirements for the banking sector, known as the Basel IV framework.

The Basel Committee is targeting the degree of variability in how banks define the risks that ultimately determine their capital requirements. The highly technical nature of this topic should not divert attention from the fundamental question that lies behind the review: how, in the future, will European banks be able finance the economy and hence foster growth and raise employment?

Three points that the Basel Committee does not seem to have taken into account in its assessment need to be stressed.

First, it is important to emphasise that the opposition of European banks to this set of proposals is not down to their supposed readiness to ignore or disguise structural weaknesses. No doubt certain shortcomings still remain, but the vast majority of European banks have significantly reinforced their balance sheet and capital levels since the beginning of the crisis. Moreover, since the adoption of the Basel III rules, all large internationally active banks have met minimum and core equity capital requirements. At the same time, we have seen the establishment of a truly Europe-wide system for bank regulation and supervision, managed collectively by the European Banking Authority, and for the eurozone by the European Central Bank.

Second, there are important differences between the US and European banking sectors. The European economy, unlike that of the US, is largely bank-financed. In fact, more than three quarters of Europe’s businesses and households are today financed by banks.

There are also differences in portfolios and in markets. US banks have tended to keep the riskiest part of their commitments — often also the most profitable — on their balance sheets. Securitisation and deeper financial markets help them to take the remainder off their balance sheets. And they can rely on two government agencies, Freddie Mac and Fannie Mae, to reduce their exposure to residential mortgages. On the other hand, favourable weights for well-rated and well-secured credits have encouraged EU banks to keep these loans on their balance sheets.

Third, it is time to put to rest the idea that the risk-weighted models used by European banks are excessively sophisticated and therefore less reliable. The relatively low risk profile of European banks in comparison to US banks is explained by the high risk discrimination of their portfolios. Moreover, every model in use by European banks has been approved and authorised by both national and European regulators. The desire of the regulators to harmonise existing risk-weighted systems and reduce disparities between different banking systems is understandable. But this should not come at the expense of the European system or disrupt the financing of the real economy.

Beyond a greater impact on the EU banking system and the financing of the European economy due to increases in the cost of lending, the revision of risk evaluation by the Basel Committee could potentially discourage good risk management and well-diversified portfolios. The committee should therefore commit itself to making sure that the final set of proposals will not have a significant impact on the capital requirements for banks in any region.

The European project relies on the capacity of its institutions to bring prosperity and security to the peoples of Europe. While the Basel IV rules and the future of the European economy might seem like two different and separate issues, the reality is that the revision of the present framework for banks’ capital requirements could have very important consequences for Europe as a whole.

The writer is president of the European Banking Federation

ECB’s Cœuré stresses barriers to Greek QE inclusion

Posted on 28 November 2016 by

Policymakers at the European Central Bank will have to make a series of judgements about the sustainability of Greece’s debt and the trajectory for its economic growth before deciding on whether to include the country in its bond-buying measures, one of its senior officials has said.

Stressing the hurdles that still exist before Greece can be eligible for the ECB’s quantitative easing measures, Benoît Cœuré, executive board member, said that any decision would be taken “in full independence”.

The ECB has said that any move to buy Greek government debt as part of its stimulus measures would be partially dependent on political decisions made by EU creditors on Athens’ bailout progress.

With the International Monetary Fund due to deliver its verdict on the thorny issue of Greek debt, Mr Cœuré said the ECB would likely carry out its own analysis of the country’s 180-per-cent-of-GDP debt pile before giving any green light for QE.

“The debt sustainability assessment of the institutions are an important input, but they are not the only ones”, said Mr Cœuré, speaking in Athens on Monday.

“The Governing Council will base its assessments also on internal analysis and will take into account other risk management considerations before making its final decision”.

Eurozone finance ministers will be meeting with IMF creditors next month to try and bridge their differences over the level of austerity demanded by Greece’s three-year bailout programme and to pin down measures to restructure the country’s debt after 2018. The IMF has been a fierce advocate of bold debt relief and less stringent budgetary surplus targets for the debtor economy.

In its latest economic outlook, the Organisation for Economic Co-operation and Development joined the calls for debt relief for Greece, arguing its liabilities “undercut confidence in the Greek economy”.

Earlier today, European Commission vice president Valdis Dombrovskis said talks with Greece’s left-wing Syriza government remained “on track”.