Asia FX By Cornelius Luca - Tue 17 Jul 2012 16:55:35 CT (Source:CME/www.lucafxta.com)
The appetite for risk was relatively firm on Tuesday. Federal Reserve Chairman Ben Bernanke reiterated that the Fed is prepared to take further action to jump start the sluggish US recovery, but offered no hints that is planning another round of quantitative easing, as expected. Most of the European and commodity currencies advanced for a third day. The US stock markets advanced, while the gold/oil ratio declined. The short-term outlook for the European and commodity currencies is sideways. The medium-term outlook for most of the foreign currencies is bearish. The LGR short-term model is short on the European currencies and yen. Good luck!
Overnight
US: CPI came in unchanged in June following -0.3% in May. The core CPI rose 0.2% in June, the same as in May.
US: Industrial production rose by 0.4% in June following a revised 0.2% decrease in May. Capacity utilization edged up to 78.9% from 78.7%.
US: Net long-term TIC flows rose to $55.0 billion in May from April's $25.6 billion. Total net TIC flows rose to $101.7 billion from -$20.5 billion in April.
US: The NAHB Housing Market Index rose to 35 in July from 29 in June.
Canada: The BoC left interest rates at 1%, as expected.
Canada: Manufacturing sales contracted 0.4% during May after falling 1.1% in April.
Today's economic calendar
Japan: The BoJ Monetary Policy Meeting Minutes
Japan: Machine tool orders for June
Stocks, Commodities Rise on Bernanke; Dollar Erases Gain (Source: Bloomberg)
U.S. stocks rose, reversing earlier losses, and commodities climbed as Federal Reserve Chairman Ben S. Bernanke said the central bank is prepared to act to boost growth if labor markets don’t improve. The Dollar Index erased gains while Treasuries retreated. The Standard & Poor’s 500 Index added 0.7 percent to 1,363.67 at 4 p.m. in New York after retreating as much as 0.6 percent. The Dollar Index, a gauge of the currency against six major peers, fell 0.1 percent after rallying as much as 0.6 percent. Ten-year Treasury yields rose three basis points to 1.50 percent, while a gain in oil helped lead the S&P GSCI Index to a fifth straight advance, its longest rally in 11 weeks, even as 16 of its 24 commodities decreased.
Stocks turned lower in the first hour of trading and the dollar rallied as Bernanke’s prepared testimony to Congress provided no specific plans for boosting growth. Equities recovered as the Fed chairman’s answers to senators’ questions signaled he’s concerned about the economic recovery and doesn’t view inflation as a hindrance to providing more stimulus. “His downbeat assessment of the economy left the impression that QE3 may be coming soon,” Jeffrey Kleintop, chief market strategist at LPL Financial Corp. in Boston, which oversees $350 billion, said in an e-mail. “QE3” refers to a third round of stimulus measures known as quantitative easing. Bernanke’s testimony followed data yesterday showing a contraction in June retail sales and a report today that the cost of living in the U.S. was little changed in June, a sign inflation may stay subdued.
Asian Stocks Rise as Bernanke Keeps Stimulus Option Open (Source: Bloomberg)
Asian stocks rose after Federal Reserve Chairman Ben S. Bernanke said U.S. policy makers are prepared to act to boost growth if the labor market doesn’t improve, buoying the earnings outlook for Asian exporters. Nissan Motor Co. (7201), which gets a third of its revenue from North America, rose 2 percent in Tokyo. Uny Co., a Japanese department store operator, slumped 10 percent after saying it plans to raise money in a public share sale. Air China Ltd., a Beijing-based carrier, may be active today in Hong Kong after saying first-half profit may fall more than 50 percent. The MSCI Asia Pacific Index rose 0.4 percent to 116.51 as of 9:30 a.m. in Tokyo, with almost twice as many stocks advancing as declining. Japan’s Nikkei 225 Stock Average gained 0.4 percent, while Australia’s S&P/ASX 200 Index (AS51) was little changed. South Korea’s Kospi Index advanced less than 0.1 percent. Markets in Hong Kong and China are yet to open.
Bernanke “continued to indicate that the Fed would ease policy further if they thought that was necessary,” said Stephen Halmarick, Sydney-based head of investment market research at Colonial First State Global Asset Management, which oversees about $150 billion. There were “certainly no hints on when that action might be or what it might entail.”
Topix Poised to Snap Eight-Day Loss on Bernanke Remarks (Source: Bloomberg)
Japanese stocks rose, with the Topix Index poised to snap an eight-day loss, after Federal Reserve Chairman Ben S. Bernanke said U.S. policy makers are prepared to act to boost growth if the labor market doesn’t improve, lifting the earnings outlook for exporters. Nissan Motor Co. (7201), Japan’s third-largest carmaker by market value, rose 2 percent. Econach Holdings Co. led real estate stocks higher. Sumco Corp. (3436), a maker of silicon wafers for semiconductors, lost 3.1 percent after industry bellwether Intel Corp.’s sales forecast missed estimates. Department-store operator Uny Co. plunged 11 percent on a share sale plan. The Topix advanced 0.5 percent to 747.29 as of 9:21 a.m. in Tokyo after capping an eight-day loss yesterday, the longest such streak since July 2010. The Nikkei 225 Stock Average (NKY) gained 0.5 percent to 8,796.75 with about four stocks rising for each that fell.
Stocks also rose after members of the Bank of Japan said they’ve been pursuing “powerful easing,” according to minutes of its June policy meeting released today.
U.S. Stocks Gain as Bernanke Says Fed Prepared to Act (Source: Bloomberg)
U.S. stocks rose, erasing earlier losses, as Federal Reserve Chairman Ben S. Bernanke told senators the central bank is prepared to act to boost growth if the labor market doesn’t improve. All 10 groups in the Standard & Poor’s 500 Index rose. Walt Disney Co. (DIS) rallied 3.1 percent to a record after Bank of America Corp. analysts raised the world’s largest entertainment company to a buy. Coca-Cola Co. (KO) advanced 1.6 percent after earnings beat projections. Mattel Inc. jumped 9.7 percent after second-quarter profit exceeded the average analyst estimate. The S&P 500 added 0.7 percent to 1,363.67 at 4 p.m. in New York after losing as much as 0.6 percent. The Dow Jones Industrial Average increased 78.33 points, 0.6 percent, to 12,805.54. Trading of S&P 500 stocks was 4.6 percent below the average level at this time of day over the past three months.
“The stock market has faith in the Fed,” said Jack Ablin, chief investment officer at BMO Harris Private Bank in Chicago, which oversees about $60 billion of assets. “With all of the headlines, and all of the slowing, investors still believe the Fed will do anything in its power to keep the ship afloat.”
Canadian Stocks Advance as Rising Oil Prices Boost Energy Shares (Source: Bloomberg)
Canadian stocks gained for a third day as rising oil prices drove energy shares higher and expectations grew that the U.S. Federal Reserve will take further action to boost growth. Imperial Oil Ltd. (IMO) and Canadian Natural Resources Ltd. (CNQ), two of the nation’s largest energy providers, added at least 1.4 percent. Heroux-Devtek Inc. (HRX) surged 33 percent after the maker of landing gear agreed to sell four factories to Precision Castparts Corp. for C$300 million. Energy stocks contributed the most among 10 industries to the advance in the Standard & Poor’s/TSX Composite Index. The S&P/TSX advanced 50.01 points, or 0.4 percent, to 11,571.19. It lost as much as 0.4 percent in earlier trading. The gauge is down 3.2 percent in 2012.
Fed Chairman Ben S. Bernanke told senators that the central bank is prepared to act to boost growth if the labor market doesn’t improve. Oil rallied 0.9 percent to a seven-week high after his comments and as a Bloomberg survey of analysts showed inventories of the commodity falling. “Ben Bernanke understands that to make a deleveraging feel not as bad, you can add a lot more money to the system than you normally could,” Arthur Salzer, who manages C$200 million at Northland Wealth Management, said in a phone interview. “He’s doing everything in his power to keep the patient alive.”
European Stocks Drop as Alcatel Profit Falls (Source: Bloomberg)
European stocks fell for the first time in three days as companies including Alcatel-Lucent SA (ALU) reported lower earnings and Wolseley Plc said it would sell its French business. Alcatel plunged the most in almost 14 years after France’s largest telecommunications equipment supplier posted a second- quarter loss. Wolseley slid 1.9 percent after saying it may sell its French business and write down the value of the unit. CSR Plc (CSR) surged 34 percent after Samsung Electronics Co. agreed to buy its wireless technology unit. U.S. Federal Reserve Chairman Ben S. Bernanke told congress that more easing tools are available and the central bank is examining what to do if more needs to be done to boost jobs.
The Stoxx Europe 600 Index (SXXP) slipped 0.3 percent to 256.09 at the close of trading, erasing an earlier advance. The benchmark measure has still climbed 9.5 percent from this year’s low on June 4 as the European Central Bank and People’s Bank of China cut their benchmark interest rates and euro-area leaders eased repayment rules for Spanish banks and conditions for possible Italian aid. “The market was trading most of the day on hopes that Fed Chairman Bernanke would signal some more QE moves,” said Stephane Ekolo, chief European strategist at Market Securities in London. “But what Bernanke said is that easing tools shouldn’t be used lightly, which means we are somehow far from another round of QE. I think that after that kind of statement there will be more bears than bulls.”
Dollar Trades Near Week-Low Before Fed’s Beige Book Data (Source: Bloomberg)
The dollar was 0.3 percent from its lowest level in a week against the euro before the Federal Reserve releases its Beige Book assessment of economic conditions today. Demand for the U.S. currency was tempered after Fed Chairman Ben S. Bernanke said yesterday in testimony to the Senate Banking Committee that policy makers are studying options for further easing. Bernanke is set to appear before a House committee today. The euro failed to extend an advance from yesterday versus the yen before Germany’s lower-house lawmakers vote tomorrow on aid to recapitalize Spanish banks. “Markets are tilted toward the view that additional monetary easing will be needed, leading to dollar selling,” said Kengo Suzuki, a foreign-exchange strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “The possibility of more easing is gradually increasing as a series of economic indicators is worsening.”
The dollar fetched $1.2286 per euro as of 8:01 a.m. in Tokyo from yesterday, when it touched $1.2317, the weakest level since July 10. The greenback was at 79.11 yen after climbing 0.2 percent to 79.06 yesterday. The 17-nation euro was little changed at 97.20 yen after rising 0.4 percent to 97.21 in New York.
FOREX-Dollar struggles before Bernanke testimony
LONDON, July 17 (Reuters) - The dollar fell against the euro and other major currencies before testimony from Federal Reserve Chairman Ben Bernanake who could hint at more monetary stimulus after recent disappointing U.S. data.
"The market is positioned aggressively for more QE, but I think Bernanke would want to wait for a bit more data, which leaves it at risk of a disappointment and a dollar bounce," said John Hardy, FX strategist at Saxo Bank.
Treasuries Stay Lower on Speculation Housing Starts Rose (Source: Bloomberg)
Treasuries stayed lower following the biggest decline in two weeks on speculation a U.S. housing report today will underpin industry figures yesterday showing an improvement in the real-estate market. Government securities tumbled yesterday after Federal Reserve Chairman Ben S. Bernanke said policy makers are studying options for further easing that could be deployed in case economic growth remains too feeble to produce a lasting decline in unemployment. “Yields will rise,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third- largest publicly traded bank by assets. “The economy will pick up. The housing market has bottomed out.” Benchmark 10-year notes yielded 1.50 percent as of 9:23 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 1.75 percent security maturing in May 2022 changed hands at 102 1/4. Yields climbed four basis points, or 0.04 percentage point yesterday, the most since July 3. The all-time low was 1.44 percent set June 1.
Housing starts rose 5.2 percent last month to a 745,000 annual pace, the strongest since October 2008, according to the median estimate among economists surveyed by Bloomberg News. Building permits, a proxy for future construction, dropped 2.4 percent to a 765,000 rate, the survey showed.
Bernanke Sees Range of Options for Additional Fed Easing (Source: Bloomberg)
Federal Reserve Chairman Ben S. Bernanke said policy makers are studying options for further easing that could be deployed in case economic growth remains too feeble to produce a lasting decline in unemployment. Bernanke, responding to questions during testimony today to the Senate Banking Committee in Washington, said easing tools include further purchases of assets, such as mortgage-backed securities, reducing the interest rate that the Fed pays on reserves banks keep with the Fed, and altering its communications on the outlook for interest rates. “We haven’t really come to a specific choice at this point, but we are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market,” Bernanke said.
Bernanke and his colleagues on the Federal Open Market Committee meet in two weeks to continue debating whether further action is needed to reduce a jobless rate stuck above 8 percent since February 2009. Last month, they decided to extend to the end of the year their program, known as Operation Twist, to lengthen maturities of assets on the Fed’s balance sheet. “They probably want to see more evidence that the labor market has stalled,” said Roberto Perli, a managing director at International Strategy and Investment Group Inc. in Washington and a former senior staff economist in the Fed’s division of monetary affairs. “If they do become convinced of that, then further easing is in the cards, but we’ll probably have to wait beyond the next meeting for that.”
Factories in U.S. Show Resilience as Production Rises: Economy (Source: Bloomberg)
Industrial production increased in June, paced by gains among auto and machinery makers that may ease concern some of the drivers of the U.S. economic expansion were floundering. Output at factories, mines and utilities rose 0.4 percent last month after a revised 0.2 percent drop in May that was larger than previously reported, according to Federal Reserve data issued today in Washington. Other figures showed consumer prices were unchanged and homebuilder confidence jumped. Fed Chairman Ben S. Bernanke today acknowledged the recovery had lost momentum in the first half of the year as a result of the European crisis and the prospect of fiscal tightening. Factories still face challenges of a slower global economy and an American consumer hobbled by 8.2 percent unemployment and stagnant income growth.
“Production is showing some signs of life,” said Robert Brusca, president of Fact & Opinion Economics in New York, who correctly projected the gain in output. “If you look at all of the data, what you see is an economy that is mixed. The industrial production report is one of the stronger pieces of data we have.” Stocks fluctuated between gains and losses as Bernanke, in testimony before the Senate, refrained from detailing specific steps the central bank could take to boost the world’s largest economy. The S&P 500 Index was at 1,353.53 at 11:42 a.m. in New York, down less than 0.1 percent from yesterday’s close.
Bernanke Predicts Slow Progress on Unemployment (Source: Bloomberg)
Federal Reserve Chairman Ben S. Bernanke told lawmakers that progress in reducing unemployment is likely to be “frustratingly slow” and repeated that the central bank is ready to take further action to boost the recovery, while refraining from pledging any new policies. Bernanke, responding to questions during testimony today to the Senate Banking Committee in Washington, said easing tools include further purchases of assets, such as mortgage-backed securities, reducing the interest rate that the Fed pays on reserves banks keep with the Fed, and altering its communications on the outlook for interest rates. Bernanke and his colleagues on the Federal Open Market Committee are considering whether the economy will need additional stimulus to reduce a jobless rate stuck above 8 percent since February 2009. Last month, they decided to extend to the end of the year their program, known as Operation Twist, to lengthen maturities of assets on the Fed’s balance sheet.
Fed Shifts Focus to Jobs as Unemployment Stalls Above 8% (Source: Bloomberg)
Joblessness is the blemish on Ben S. Bernanke’s report card. Since the recession ended in June 2009, the Federal Reserve chairman has achieved inflation near his target of 2 percent, bolstered capital across the banking system and helped underpin confidence in the U.S. economy that’s contributed to record-low borrowing costs for the nation. Meanwhile, the unemployment rate has stalled above 8 percent for 41 consecutive months. The failure to bring joblessness closer to Fed officials’ longer-run goal of 5.2 percent to 6 percent has prompted Bernanke and his lieutenants to emphasize the need for economic growth over price stability, said John Silvia, chief economist at Wells Fargo Securities LLC. Bernanke added to his record monetary stimulus last month and said more action will be needed without “sustained improvement” in the jobs outlook.
“The employment number just isn’t improving; it’s the thing that’s out of whack,” Silvia said in a telephone interview from his Charlotte, North Carolina, office. “Yes, you’ve got a dual mandate, but like everything else in life sometimes you’ve got to focus on one more than the other.”
Consumer Price Index in U.S. Was Unchanged, Core Up 0.2% (Source: Bloomberg)
The cost of living in the U.S. was little changed in June, a sign inflation may stay subdued as Federal Reserve officials have predicted. No change in the consumer-price index followed a 0.3 percent drop in May, a Labor Department report showed today in Washington. The measure matched the median forecast of economists in a Bloomberg News survey. The so-called core measure that excludes volatile food and fuel costs rose 0.2 percent for a fourth month. Companies from Supervalu Inc. (SVU) to Chrysler Group LLC are offering incentives to boost sales as weak job gains squeeze households, underscoring limited pricing power among businesses. With inflation less of a concern, Fed policy makers have room to take additional steps to ensure the world’s largest economy keeps expanding.
“Inflation is not a concern at this time,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who was among economists projecting no change in June consumer prices. “The central bank is more worried about growth. Policy makers have signaled they may lean toward more easing.”
Homebuilder Confidence in U.S. Rises Most Since September 2002 (Source: Bloomberg)
Confidence among U.S. homebuilders increased in July by the most in almost a decade, indicating further improvement in residential real estate. The National Association of Home Builders/Wells Fargo confidence index climbed 6 points, the biggest gain since September 2002, to 35 this month, a report from the Washington- based group showed today. The gauge exceeded the most-optimistic projection in a Bloomberg News survey of 46 economists. Readings below 50 mean more respondents said conditions were poor. Builders said they were more upbeat about sales prospects as both current purchases and buyer traffic improved, showing the industry is being fueled by record-low mortgage rates and cheaper properties. At the same time, limited job growth, stricter credit standards and foreclosures are hurdles for the industry that precipitated the last recession.
“The housing market has turned the corner as more buyers perceive the benefits of purchasing a newly built home while interest rates and prices are so favorable,” Barry Rutenberg, chairman of the National Association of Home Builders and a builder from Gainesville, Florida, said in a statement.
Gross Says U.S. Nearing Recession as BlackRock Sees Fed Step (Source: Bloomberg)
Bill Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co., said the U.S. is approaching a recession as BlackRock Inc. (BLK) expects the Federal Reserve to take more steps to support growth. Five-year Treasury yields slid to a record 0.577 percent yesterday after an unexpected drop in U.S. retail sales rekindled speculation Fed Chairman Ben S. Bernanke will use testimony today to hint at further monetary easing. That followed data earlier this month showing American employers added fewer-than-estimated workers to payrolls. Goldman Sachs Group Inc. (GS) and Deutsche Bank AG cut forecasts for U.S. growth. The U.S. is “approaching recession when measured by employment, retail sales, investment, and corporate profits,” Gross, who manages the $263 billion Pimco’s Total Return Fund (PTTRX), wrote on Twitter yesterday.
Ten-year Treasury yields added one basis point to 1.48 percent as of 4:11 p.m. in Singapore, compared with the all-time low of 1.44 percent reached June 1. The MSCI World Index (MXWO) of shares rose 0.2 percent. Bernanke will present his semi-annual monetary policy report to lawmakers in the Senate and House of Representatives today and tomorrow. He said on June 20 that the central bank will be prepared to take more steps, including additional asset purchases, if the labor market doesn’t improve continuously.
International Demand for U.S. Assets Rises on Europe Crisis (Source: Bloomberg)
International demand for U.S. financial assets rose in May as investors sought shelter from the debt crisis in Europe. Net buying of long-term equities, notes and bonds totaled $55 billion during the month, compared with net purchases of $27.2 billion in April, the Treasury Department said today in Washington. Economists surveyed by Bloomberg News projected net buying of $41.3 billion of long-term assets, according to the median estimate. Including short-term securities such as stock swaps, foreigners bought a net $101.7 billion in May, compared with net selling of $8.2 billion the previous month.
“The euro zone troubles had not yet reached their zenith in May and the dollar’s surge against the euro is a sign that global investors shifted assets into the safe haven of U.S. Treasuries and other securities,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said by e-mail before today’s report. “The U.S. despite its slower economic growth remains an oasis of safety for investors seeking to keep their portfolio’s free from danger.”
Asean Shares Best With Top Risk-Adjusted Returns: Southeast Asia (Source: Bloomberg)
Southeast Asia (MXSO), the heart of the 1997 currency crisis, produced the best risk-adjusted returns for Asian stocks since global markets started to rebound three years ago, as investors sought a haven from Europe’s debt turmoil. Benchmark indexes in the Philippines, Malaysia, Thailand, Indonesia and Singapore returned the most among Asia-Pacific markets worth more than $100 billion in the three years ended July 17, according to the BLOOMBERG RISKLESS RETURN RANKING. All five beat an index of developed markets by risk-adjusted returns, and four came out on top over five years.
“Investors have been focused on and rewarded in the smaller Asean markets because they have been more defensive and domestic-oriented,” said Timothy Moe, a Hong Kong-based strategist at Goldman Sachs Group Inc., referring to the Association of Southeast Asian Nations. “That’s been a better source of growth than what we see in the other more cyclical markets in North Asia. It probably will continue,” he said in a Bloomberg television interview in Hong Kong on June 26. Southeast Asian governments have bolstered spending on infrastructure and stepped up efforts to spur domestic consumption in a bid to reduce their economies’ reliance on exports. That’s helping to shield the nations from Europe’s debt crisis and a global economic slowdown, which has fueled volatility in the northern Asian markets.
China Raises Treasury Holdings First Time in Three Months (Source: Bloomberg)
China, the largest foreign U.S. creditor, boosted its holdings of government securities in May to the most in six months as the American economy stalled and Europe’s sovereign-debt crisis deepened. Chinese holdings rose 0.4 percent to $1.1696 trillion, Treasury Department data released yesterday show. Those of Japan, the U.S.’s second-largest lender, rose 1.4 percent to an all-time high of $1.1052 trillion. Net foreign purchases of Treasuries increased $54.2 billion, or 1 percent, to a record $5.264 trillion in May, the data show. “Slowing U.S. growth and increasing uncertainty about Greece is what caused more private and official demand,” said Shyam Rajan, an interest-rate strategist in New York at Bank of America Merrill Lynch, one of the 21 primary dealers that trade with the Federal Reserve. “U.S. data has actually gotten weaker since.”
Investors continued to seek a haven in U.S. Treasuries in May as concern mounted regarding the potential need for Spain to seek a bailout and amid uncertainty whether a party seeking to cancel the terms of earlier bailouts would win elections in Greece. The balloting was seen as a referendum on whether the country would stand by its international-bailout commitments.
China’s Wen Warns of Severe Job Outlook as Growth Yet to Rebound (Source: Bloomberg)
Premier Wen Jiabao said China’s labor situation will become more “severe,” underscoring concern that the weakest economic growth since 2009 will lead to increasing job losses. The government will continue to implement a more “proactive” labor policy, Wen said yesterday at a government meeting on employment, according to a statement posted on the central government’s website. The job situation will become more “complex,” Wen said. The comments build on the premier’s warning published three days ago that the nation’s economic rebound lacks momentum and difficulties may persist for a while. Authorities are intensifying efforts to halt a slowdown in expansion as the ruling Communist Party prepares for a once-a-decade leadership handover later this year.
“Party commissions and governments at all levels should further enhance the awareness that employment work is extremely important and earnestly put promoting employment at a priority place among all work tasks,” Wen said, according to the statement. The country should maintain steady and relatively rapid economic growth and enhance the economy’s role of driving job growth, he said. More than 2,000 Hong Kong-owned factories in China’s Pearl River Delta may close this year as export orders fall and wages rise, the Federation of Hong Kong Industries said this week. China’s gross domestic product rose 7.6 percent in the second quarter from a year earlier, the statistics bureau said July 13, the sixth straight quarterly slowdown.
China Slowdown Stymies Plan to Curb Shadow-Banking Risks (Source: Bloomberg)
China’s economic slowdown threatens to derail efforts to curb underground lending -- measures championed by Premier Wen Jiabao as crucial to future growth. The country grew in the second quarter at the slowest pace since the depths of the global financial crisis in 2009, 7.6 percent, putting pressure on China’s leaders to boost stimulus spending. Wen’s proposals to rein in the shadow-banking system, estimated to be about one-third the size of official lending, may be sidelined as a result, according to half a dozen economists interviewed by Bloomberg News.
“With an economy slowing more aggressively than the authorities perhaps want, the imperative to crack down on shadow financing becomes increasingly conflicted,” said Alistair Thornton, a Beijing-based economist with research firm IHS Global Insight Ltd. (IHS) “With the government increasingly in firefighting mode, the desire to push through tough reform in the financial sector inevitably takes a back seat to staving off a hard landing and managing global economic volatility.” Wen, whose term ends next year, has led calls to control what IHS estimates is $1.3 trillion of private financing, an amount equal to last year’s U.S. budget deficit. He has proposed channeling that money through government-regulated institutions to break what he called a “monopoly” on lending by state-owned banks and open a cascade of capital to China’s 42 million small and medium-sized businesses.
Bank of Canada Keeps Higher Rate Bias in Slower Rebound (Source: Bloomberg)
The Bank of Canada kept its main interest rate at 1 percent and said an increase remains possible, while adding the domestic recovery will be slowed by weaker global demand for exports. The world’s 10th largest economy won’t reach full output until the second half of next year, compared with an April prediction for the first half of 2013, the Ottawa-based central bank said. The decision was forecast by all 24 economists surveyed by Bloomberg News. “While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth,” policy makers led by Governor Mark Carney, 47, said in a statement. “Some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.” The statement comes as central banks around the world are easing policy. The U.S. Federal Reserve and the Bank of England expanded programs to buy assets in the last month, while the People’s Bank of China and the European Central Bank cut their main interest rates.
Canadian policy makers are “quite worried about the situation in Europe and the possible collateral damage,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto, who predicts no increase for a year. “There is very little urgency to raise interest rates.”
ZEW Investor Confidence Declines to Lowest Since January (Source: Bloomberg)
German investor confidence declined for a third month in July as the euro area’s debt crisis and cooling global demand dimmed the economic outlook. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, fell to minus 19.6 in July from minus 16.9 in the previous month. In the U.K., inflation dropped to the lowest in 2 1/2 years. Germany’s economy, which grew 0.5 percent in the first quarter, is running out of steam as austerity measures across Europe and weakening global growth curb demand for its goods and damp confidence. The International Monetary Fund yesterday cut its global growth forecast for 2013 to 3.9 percent from a 4.1 percent estimate in April.
“Germany’s export prospects to Europe are in the doldrums and the U.S. and China cooling doesn’t bode well either,” said Carsten Brzeski, an economist at ING Group in Brussels. “A stronger domestic economy can’t offset that, so we are looking at a long period of stagnation, albeit at a high level.” Economists forecast a drop to minus 20, according to the median of 38 estimates in a Bloomberg News survey. ZEW’s gauge of sentiment in the 17-nation euro region fell to minus 22.3 from minus 20.1. A measure of current conditions in Germany slumped to 21.1 from 33.2.
Draghi Meets Noonan as ECB Shift Strengthens Irish Hand (Source: Bloomberg)
European Central Bank President Mario Draghi said the question of senior bondholders sharing the burden of ailing banks is “evolving” in Europe and he expects developments to be reflected in Ireland’s bailout program. Draghi acknowledged the “successful implementation” of Ireland’s program in a meeting with Irish Finance Minister Michael Noonan in Frankfurt today, the ECB said in a statement. As there aren’t bondholders now in Irish banks where burden- sharing “would be of any great solution,” Ireland will benefit from policy changes “in some other way,” Noonan said. Ireland is “making progress” in easing the terms of its international bailout, Noonan told reporters after his talks with Draghi. “In the context where policies change elsewhere in the euro zone, these changes will be reflected in the Irish program to improve its sustainability.”
The discussions took place against the backdrop of a move by the ECB to advocate losses on senior bondholders at crippled euro-area banks, as cited yesterday by two officials with knowledge of the ECB’s thinking.
Hungary Starts IMF Talks as Economists Predict Delay (Source: Bloomberg)
Hungary will probably miss its goal of obtaining an International Monetary Fund loan by the end of October as Prime Minister Viktor Orban gears up for a re- election bid in 2014, according to a survey of economists. Talks which started today in Budapest will yield an agreement after October, according to eight of 12 economists surveyed by Bloomberg News yesterday. Four expect a deal in October, six by the end of the year and two in 2013. IMF and EU officials will focus on untangling policies that contributed to an economic contraction in the first quarter and the downgrade of Hungary’s credit to junk last year. While the forint has gained this year on optimism the country would reach a bailout agreement, that may weaken Orban’s resolve to reach a loan agreement as he seeks to regain investor confidence, boost growth and reduce financing costs without shedding more support halfway through his four-year term.
“Orban is more concerned about domestic politics than investors,” Juri Kren, a London-based economist with IdeaGlobal, said in a phone interview. “Given that the popularity of his Fidesz party has decreased and bearing in mind elections are approaching, unless market conditions deteriorate significantly and force him to sign a deal quickly, I don’t think it will happen before December.”
Merkel Export Machine’s Gains Exceed Bailout Costs (Source: Bloomberg)
German Chancellor Angela Merkel’s export machine is generating far more in revenue than her anti- bailout voters are committing to euro-crisis fighting as the weakening currency adds to the country’s competitive edge. German exporters are enjoying a 100 billion-euro ($122 billion) annual advantage amid the turmoil, said Nathan Sheets, chief international economist at Citigroup Inc. (C) in New York. That’s more than 10 times the 8.7 billion euros the country is contributing this year to the rescue fund being set up. The figures underscore the benefits to Europe’s biggest economy of Merkel’s austerity-first strategy, which channels her voters’ doubts about propping up debt-laden countries. Her approach has drawn criticism from policy makers around the world and pleas for easing from southern Europe, where bond spreads have climbed to euro-era records amid concern about whether the 17-nation currency region can hold together.
“Do they care? I don’t think so,” David Buik, a market strategist at Cantor Index in London, said in a July 13 telephone interview, referring to German policy makers. “It’s dog eat dog out there. It is a question of shore up the dams and do what we can for ourselves.”
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