Currencies

Renminbi strengthens further despite gains by dollar

The renminbi on track for a fourth day of firming against the dollar on Wednesday after China’s central bank once again pushed the currency’s trading band (marginally) stronger. The onshore exchange rate (CNY) for the reniminbi was 0.28 per cent stronger at Rmb6.8855 in afternoon trade, bringing it 0.53 per cent firmer since it last […]

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Financial

Sales in Rocket Internet’s portfolio companies rise 30%

Revenues at Rocket Internet rose strongly at its portfolio companies in the first nine months of the year as the German tech group said it was making strides on the “path towards profitability”. Sales at its main companies increased 30.6 per cent to €1.58bn while losses narrowed. Rocket said the adjusted margin for earnings before […]

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Property

Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Currencies

Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Banks

RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Archive | Economy

Eurozone money supply growth hits slowest pace since pre-QE

Posted on 28 November 2016 by

Money supply in the eurozone grew at its softest pace since the European Central Bank began its bond-buying programme last month, with the central bank likely poised to extend its stimulus measures next week.

A measure of broad money, known as M3, expanded by 4.4 per cent in October, coming in lower than the 5 per cent forecast by economists and the slowest pace of growth since February 2015.

Usually seen as a forward indicator for economic activity, the money supply figures were coupled with a moderate rise in lending to households, which grew by 1.8 per cent – in line with expectations and unchanged from September.

Credit growth for businesses inched up by 2.1 per cent on a month on month basis, from 2 per cent in the previous month, according to figures from the ECB.

Eurozone policymakers are widely expected to announce a six-month extension to their quantitative easing measures first launched back in March 2015, and which could last until September 2017.

The meeting will be held on December 8 and comes after the ECB has already snapped €1.1tn of government bonds under the scheme.

President Mario Draghi is due to be quizzed on QE and the fallout from the UK’s Brexit vote when he addresses MEPs in the European Parliament later today (1400 GMT).

Jitters strike Italian bank stocks ahead of referendum

Posted on 28 November 2016 by

Stop me if you think you’ve heard this one before.

Italian bank stocks are being hit hard this morning, leading declines across European financials ahead of a key referendum on December 4 that could have major consequences for plans to revive Italy’s troubled financial system.

UniCredit – Italy’s most systemically important bank – is the biggest loser, falling 4 per cent, while Banco Popolare, Banca Popolare di Milano and Banco Emilia are down more than 3 per cent in early morning trading.

Italy’s main banking index has now slumped to a two-month low with all the stocks in the Euro Stoxx banks index in the red on Monday.

Investors are settling stocks as Italians prepare to go to the polls in six days’ time to decide on a reform to the country’s constitution in a vote that has become referendum on the leadership of Rome’s centre-left prime minister Matteo Renzi.

Should the reform be rejected – as tight polling indicates – Mr Renzi has vowed to step down in a move that could throw plans to clean up Italy’s oldest bank Monte Dei Paschi into turmoil, and spark contagion fears in the eurozone’s third largest economy (read more from the FT’s Rachel Sanderson here).

Italy has eight banks known to be in various stages of distress. As well as Monte dei Paschi, they include mid-sized lenders Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

Senior bankers have told the FT they fear Mr Renzi’s resignation would deter private investors from pumping fresh funds to recapitalise lenders, leading to fears they will need to be put under a new EU “resolution” mechanism that would force losses on creditors.

A ‘No’ vote “would likely usher in a period of increased political uncertainty in Italy and would represent a major set-back for economic reform efforts”, notes Elsa Lignos at RBC Capital Markets

“Italy continues to be a long-term risk for the euro area, but that is a two-year rather than a two-month trade”, said Ms Lignos.

Chart courtesy of Bloomberg

Donald Trump’s infrastructure plans win backing from OECD

Posted on 28 November 2016 by

Donald Trump’s economic plans received strong backing from the Organisation for Economic Co-operation and Development on Monday, with the international organisation predicting the president-elect’s infrastructure plans would increase US growth, combat inequality and energise discouraged workers.

In contrast to its support for US policy, the Paris-based OECD’s twice-yearly economic outlook is cool on the UK outlook, marking down Britain’s economic prospects on the view that the UK is heading for a hard Brexit in 2019.

Equity markets have already rallied on the expectation of a boost to US growth from looser fiscal policy and the OECD’s support marks the first leading international organisation to validate financial market bets.

The OECD’s support highlights how views of US prospects have altered over the past two months. Before the US election, international financial institutions, such as the International Monetary Fund and World Bank, feared a Trump presidency and officials discussed him as a sort of Voldemort for the global economic order — like the villain in Harry Potter, his name spoken only in hushed tones and behind closed doors.

Having long been a staunch supporter of budgetary prudence, the OECD has performed a U-turn over the past year, as it has become concerned that if governments do not use low interest rates to boost capital investment, advanced economies will become stuck in a low growth trap.

Catherine Mann, chief economist of the OECD said: “We are concerned about the extent to which asset prices are underpinned by low interest rates — so monetary policy has been over-burdened and there is now a premium on getting fiscal levers pulled in the right way”.

The latest OECD forecasts in its economic outlook show improvements to growth forecasts for 2017, which are directly caused by the organisation’s positive view of US tax and public spending policy after the election.

The US is expected to be the best performing large advanced economy in 2017, growing 2.3 per cent with the eurozone growing 1.6 per cent, 1.2 per cent in the UK and only 1 per cent in Japan.

“[The Trump fiscal effect] is an important part of our projection,” Ms Mann told the FT. “We don’t think anything will happen over the next six months, but we expect [a stimulus worth] 0.25 to 0.5 per cent of national income in the second half of 2017, mostly spent on public infrastructure and 1 per cent or so in 2018 coming from tax cuts.”

The outlook says US policies might even help get the world out of a rut. More active fiscal policy, it says, “should revive expectations for faster and more inclusive growth, thus allowing monetary policy to move toward a more neutral stance in the United States at least, and possibly other countries as well”.

“The boost to [US] spending on infrastructure and other investments (such as improving skills and facilitating job-finding success through more active labour market policies and the provision of child care) will combat inequality and counter the steady decline in labour force participation rates, both by prime-age men and women,” the report says.

Amid the praise for Mr Trump’s policies, the OECD warns that if he carries out his threats to raise trade barriers, the gains would disappear. “Trade protectionism shelters some jobs, but worsens prospects and lowers wellbeing for many others,” says.

It is similar concerns that have led the organisation to double-down on its dim view of Brexit, producing forecasts based on Britain moving to trade with the rest of the EU on World Trade Organisation rules from 2019, a so-called “hard Brexit”.

“The unpredictability of the exit process from the European Union is a major downside risk for the economy. Uncertainty could hamper domestic and foreign investment more than projected and the pass-through of currency depreciation to prices could be larger, deepening the extent of stagflation,” the OECD warned.

The OECD said there was room for fiscal expansion also in Britain, Germany, France, Belgium and Russia, but recommended that China, Hungary and Israel should move to a much tighter budgetary stance.

Donald Trump’s economic policy gets thumbs up from OECD

Posted on 28 November 2016 by

Donald Trump’s economic plans received strong backing from the Organisation for Economic Co-operation and Development on Monday, with the international organisation predicting the president elect’s infrastructure plans would increase US growth, combat inequality and energise discouraged workers.

In contrast to its support for US policy, the Paris-based OECD’s twice-yearly economic outlook is cool on the UK outlook, marking down Britain’s economic prospects on the view that the UK is heading for a hard-Brexit in 2019.

Equity markets have already rallied on the expectation of a boost to US growth from looser fiscal policy and the OECD’s support marks the first leading international organisation to validate financial market bets.

The OECD’s support highlights how views of US prospects have altered over the past two months. Before the US election, international financial institutions, such as the International Monetary Fund and World Bank, feared a Trump presidency and officials discussed him as a sort of Voldemort for the global economic order — like the villain in Harry Potter, his name spoken only in hushed tones and behind closed doors.

Having long been a staunch supporter of budgetary prudence, the OECD has performed a U-turn over the past year, as it has become concerned that if governments do not use low interest rates to boost capital investment, advanced economies will become stuck in a low growth trap.

Catherine Mann, chief economist of the OECD said: “We are concerned about the extent to which asset prices are underpinned by low interest rates — so monetary policy has been over-burdened and there is now a premium on getting fiscal levers pulled in the right way”.

The latest OECD forecasts in its economic outlook show improvements to growth forecasts for 2017, which are directly caused by the organisation’s positive view of US tax and public spending policy after the election.

The US is expected to be the best performing large advanced economy in 2017, growing 2.3 per cent with the eurozone growing 1.6 per cent, 1.2 per cent in the UK and only 1 per cent in Japan.

“[The Trump fiscal effect] is an important part of our projection,” Ms Mann told the FT. “We don’t think anything will happen over the next six months, but we expect [a stimulus worth] 0.25 to 0.5 per cent of national income in the second half of 2017, mostly spent on public infrastructure and 1 per cent or so in 2018 coming from tax cuts.”

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”.

The liberal elite’s Marie Antoinette moment

Posted on 27 November 2016 by

Some revolutions could have been avoided if the old guard had only refrained from provocation. There is no proof of a “let them eat cake” incident. But this is the kind of thing Marie Antoinette could have said. It rings true. The Bourbons were hard to beat as the quintessential out-of-touch establishment.

They have competition now.

Our global liberal democratic establishment is behaving in much the same way. At a time when Britain has voted to leave the EU, when Donald Trump has been elected US president, and Marine Le Pen is marching towards the Elysée Palace, we — the gatekeepers of the
global liberal order — keep on doubling down.

The campaign by Tony Blair, former UK prime minister, to undo Brexit is probably the quaintest example of all. A more serious incident was the forecast by the Office for Budget Responsibility in the UK, which said last week that Brexit would have severe economic consequences. Coming only a few months after the economics profession discredited itself with a doomy forecast about the consequences of Brexit, this is an astonishing reminder of the inadequacy of economic forecasting models.

The truth about the impact of Brexit is that it is uncertain, beyond the ability of any human being to forecast and almost entirely dependent on how the process will be managed. “Don’t know” is the technically correct answer. Before the referendum, Project Fear was merely a monumental tactical miscalculation. Today it is stupidity. One of the debates was whether people should be listening to experts. We have moved beyond that. Because of a tendency to exaggerate, macroeconomists are no longer considered experts on the macroeconomy.

Out-of-touch former leaders and the economic establishment are not unique. In Italy, the political establishment is considering amending recently modified electoral law solely to keep Beppe Grillo’s rebellious Five Star Movement from power. This is intertwined in a complex way with next Sunday’s referendum on constitutional reform.

The electoral law that came into force in July gives the strongest party quasi-dictatorial powers. It was a stitch-up agreed in 2014 between Prime Minister Matteo Renzi’s Democratic party and former prime minister Silvio Berlusconi’s Forza Italia. Neither man then believed the Five Star Movement would ever be in a position to shake the cosy duopoly. No matter how the referendum on constitutional reforms ends, expect to see one of the most glaring efforts of gerrymandering in modern politics. But Mr Renzi’s problem is not the Five Star Movement. It is the voters.

The EU itself, too, is doubling down whenever it can. The trade agreement with Canada, and the yet to be concluded Transatlantic Trade and Investment Partnership, are about as popular today as the stationing of medium-range nuclear missiles in the 1980s. A popular insurrection is under way against them because people fear a reduction in consumer protection and a power grab by multinationals.

Why is this happening? Macroeconomists thought no one would dare challenge their authority. Italian politicians have been playing power games forever. And the job of EU civil servants is to find ingenious ways of spiriting politically tricky legislation and treaties past national legislatures. Even as the likes of Ms Le Pen, Mr Grillo and Geert Wilders of the far-right Dutch Freedom party head towards power, the establishment keeps acting this way. A Bourbon regent, in an uncharacteristic moment of reflection, would have backed off. Our liberal capitalist order, with its competing institutions, is constitutionally incapable of doing that. Doubling down is what it is programmed to do.

The correct course of action would be to stop insulting voters and, more importantly, to solve the problems of an out-of-control financial sector, uncontrolled flows of people and capital, and unequal income distribution. In the eurozone, political leaders found it expedient to muddle through the banking crisis and then a sovereign debt crisis — only to find Greek debt is unsustainable and the Italian banking system is in serious trouble. Eight years on, there are still investors out there betting on a collapse of the eurozone as we know it.

Mr Renzi could have used his ample political capital to reform the Italian economy instead of trying to cement his power. And imagine what would have been possible if Chancellor Angela Merkel had spent her even larger political capital on finding a solution to the eurozone’s multiple crises, or on reducing Germany’s excessive current account surpluses. If you want to fight extremism, solve the problem.

But it is not happening for the same reason it did not happen in revolutionary France. The gatekeepers of western capitalism, like the Bourbons before them, have learnt nothing and forgotten nothing.

munchau@eurointelligence.com

Datawatch: low interest rates mean savings for governments

Posted on 25 November 2016 by

Declining interest rates have led to unexpected savings on interest costs for governments. Reduction over the period 2015-2017 are expected to be sizable in Italy but smaller in France and the UK , as old debt at higher yields matures.

French consumer confidence sticks at nine-year high

Posted on 25 November 2016 by

The French consumer is showing few signs of jitters ahead of the presidential election next year.

Consumer confidence in the eurozone’s second largest economy remained at a nine-year high this month at 98 – the same level hit in October – on the back of a healthy outlook for living standards among French households.

The survey, carried out by stats agency Insee, found households fears of unemployment fell from 40 to 29, while inflation expectations over the next 12 months also slipped, compared to October.

Consumer confidence remains below its long-term average of 100 but climbed above its post-financial crisis high earlier this year.

It comes after Europe’s largest economy Germany saw one of its closely-watched consumer confidence gauges climb stronger than expected this month.

Consumers have been driving the eurozone’s moderate economic recovery over the past 12 months and are set to enjoy the benefits of still low inflation well into next year, according to calculations from the European Central Bank.

France heads for a key presidential election in April next year. The country’s opposition centre-right Republican party will be nominating its presidential candidate at a second round vote between two former prime ministers on Sunday.

Irish PM says Brexit ‘impossible’ within two years

Posted on 25 November 2016 by

The Irish prime minister has said it will be “impossible” to agree Brexit within two years, in the strongest rejection so far of the UK’s negotiating timetable by an EU leader.

Enda Kenny, who is seen as one of Britain’s allies in the process, said “there’s a growing feeling in Europe that there should be a transition period, and that the transition period will be longer than those two years — I think it will be.”

Earlier, Joseph Muscat, Malta’s prime minister, suggested that Britain’s departure from the EU could be delayed “at the very end of the process”, citing a possible veto by the European Parliament as a possibility. “It will get complicated. Divorces are never easy, I think,” Mr Muscat said.

The warnings are a potential headache for Theresa May, who has insisted that Britain will trigger Article 50, the EU’s official exit clause, by the end of March. That would begin a two-year negotiating period that could only be extended by the unanimous agreement of other member states.

The prime minister’s approach has been criticised by some hardline Brexiters, who argue that Britain should be prepared to abandon the Article 50 process and trade with the rest of the EU on World Trade Organisation rules. Some pro-EU politicians, meanwhile, argue that Britain should delay triggering Article 50 until after the French and German elections next year in order to make best use of the two-year period.

A British general election is due by May 2020, providing a potential complication should Brexit talks extend beyond two years. The governor of the Bank of England, Mark Carney, has also said he will leave his post in mid-2019, a decision that appeared to assume that Brexit would have been completed by that date.

Since the referendum in June, diplomats have expressed scepticism that Britain could negotiate the terms of its exit from the EU and a new trade relationship with the bloc within two years.

In contrast, Guy Verhofstadt, the European parliament’s head negotiator, said that Brexit must happen before the next parliamentary elections in May or June 2019. “I can’t imagine we start the next legislative cycle without agreement over UK withdrawal,” he said in September. François Hollande, the French president, has also said that “everything must be completed by 2019”.

Mrs May has not ruled out a transitional post-Brexit agreement, or continued contributions to the EU budget. In an interview with the Financial Times, Wolfgang Schäuble, the German chancellor, said that Britain might have to keep paying in until 2030.

Questions have been raised about the readiness of Britain’s civil service for Brexit negotiations.

In this week’s Budget, Philip Hammond, chancellor, announced up to £412m in additional funding between now and 2020 for the three main departments — the Department of Exiting the EU, the Department of International Trade and the Foreign Office. Other departments, including the Department for Environment, Food and Rural Affairs, are also expected to need increased resources.