Market Briefs (Source : Reuters)
• US June ADP National Employment 176k; f/c 105k prev to revised 136k from 133k
• US Weekly Jobless Claims 374k; f/c 385k prev to 388k from 386k
• US Continuing Claim 3.306mm; f/c 3.3mm prev 3.302mm revised up from 3.296mm
• US June ISM Non-Mfg. 52.1; f/c 53 prev 53.7
• US June ICSC Chain Store Sales 2.6% y/y (prev +4.0% y/y)
• BRL June Vehicle Prod. 237.5k, prev 280.7k; Vehicle Sales 353.2k, prev 287.4k
• China C. Bank cuts Deposit Rate 25bps to 3%; Cuts Lending Rate 31bps to 6%; Lowers the floor for Lending Rates to 70% of benchmark rates from 80%
• EBC cuts Refinancing Rate 25bps to 0.75%; Cuts Deposit Rate 25bps to 0.0%
• ECB’s Draghi: Econ growth in EZ remains weak; Now see weakening of growth in whole of Euro area; Q2 indicators point to weakening growth; Downside inflation risks from weaker than expected growth
• Germany’s Merkel- Germany entered no agreements at last EU summit that go beyond existing treaties
• ECB’s Weidman-Aid-providing countries should have preferred creditor status, conflicts of interest could arise if ECB took over banking supervisory role
Asia FX (Source: CME/www.lucafxta.com)
The appetite for risk sank on Thursday after the PBoC and the ECB cut rates, and after the BoE added to its quantitative easing measure. The US economic data was steady after showing weakness in the past weeks; but the economy is far from strong. The European currencies tanked, but the commodity currencies remained firm. The US stock indexes, gold and oil fell.
The short-term outlook for most of the European and commodity currencies is sideways with additional downside risk. 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
China: The People's Bank of China lowered the one-year deposit rate by 0.25% and the one-year lending rate by 0.31%.
Eurozone: The European Central Bank cut its refinancing rate was cut by 0.25% to 0.75%, its deposit rate by 25% to zero, and the marginal lending facility rate to 1.50% from 1.75%.
UK: The Bank of England launched a third round of monetary stimulus, announcing it would buy 50 billion pounds of asset purchases with newly created money to help the economy out of recession. The BoE maintained its bank rate at 0.50% as expected.
US: ADP said the private sector added 176,000 jobs in June following an upwardly revised increase of 136,000 jobs in May (133,000 jobs originally reported).
US: New unemployment claims fell 14,000 to 374,000 new claims for unemployment for the week ending June 30 from the previous week's revised figure of 388,000 (up from the 386,000).
Recap Stock Index Market Report (Source: CME)
The September S&P 500 rallied to its highest level since May 4th during the initial morning hours, helped by central bank support from China, Europe and England. Stocks gained an added lift in response to a couple of US labor market stats that showed improvement. However, some traders indicated that the positive data points could delay potential US Fed easing. It also seemed that the excitement over the European rate cut fizzled as the day wore on, and that weakness weighed on US shares. The September S&P 500 slumped to its low of the session in the wake of US service sector readings that showed slower than expected growth in June. Meanwhile, tech-related shares helped the NASDAQ hold in slightly higher territory throughout the session. Apple shares were up 2.0% on the session, fueled by talk that the company could introduce a smaller version of its iPad in the fall. Financials were one of the laggards on the session, weighed down by a 3.5% loss in the shares of JP Morgan.
Recap Interest Rate Market Report (Source: CME)
Treasury prices started out higher and then fell back slightly in the face of confirmation of foreign central bank easing action. Ultimately Treasury prices regained their footing and returned to almost the middle of the last two month's consolidation zone into what could be seen as an extremely critical monthly US Non Farm payroll result. Perhaps a softer than expected ISM Non Manufacturing result rekindled US slowing fears again and perhaps the slightly better than expected US data released earlier in the session today was simply cause for some traders to discount the prospect of fresh easing dialogue from the Fed Chairman during the Friday US trade action. It is also possible that dialogue from the ECB's Draghi fostered some fresh flight to quality buying of Treasuries as his comments suggested the EU situation remains very precarious.
Asian Stocks Drop 2nd Day on Central Bank Disappointment (Source: Bloomberg)
Asian stocks fell for a second day, paring this week’s gain on the regional benchmark index, as interest-rate cuts in Europe and China failed to assure investors the moves will be enough to boost economic growth. Canon Inc. (7751), a Japanese camera maker that gets 31 percent of its sales in Europe, slid 2 percent. Miner BHP Billiton Ltd. (BHP), whose biggest market is China, declined 0.9 percent as investors sold shares of companies with earnings tied to economic growth. Parco Co. (8251) climbed 3.5 percent in Tokyo after J Front Retailing Co. said it will buy a majority stake in the rival department- store operator. The MSCI Asia-Pacific (MXAP) slid 0.2 percent to 118.82 as of 9:53 a.m. in Tokyo, before markets in China and Hong Kong opened. About the same number of stocks rose as fell. The gauge has fallen 7.8 percent from this year’s highest level in February amid concern economic growth in China and the U.S. is slowing as Europe’s debt crisis deepens. The measure has gained 1.4 percent this week.
“We are still reasonably cautious,” said Tim Riordan, who helps manage $200 million at Parker Asset Management Ltd., a hedge fund in Sydney. “All of these moves by central banks had been expected, so they were baked into the price. ECB rate cuts are getting to the point where each cut is met with diminishing returns.”
Japan Stocks Swing From Loss, Gain as ECB Disappoints (Source: Bloomberg)
Japanese stocks swung between gains and losses as rate cuts and asset purchases by central banks in the euro zone, England and China failed to boost investor confidence before a U.S. jobs report today. Konica Minolta Holdings Inc. (4902), a film maker that depends on Europe for more than a quarter of its sales, sank 3.1 percent. GS Yuasa Corp. sank 4.1 percent after Barclays Capital cut the battery maker’s rating to underweight. Parco Co. climbed 3.3 percent after J Front Retailing Co. said it will buy a majority stake in the rival department store. The Nikkei 225 Stock Average (NKY) rose less than 0.1 percent to 9,080.85 as of 9:39 a.m. in Tokyo. The broader Topix Index advanced 0.1 percent to 777.46 after falling as much as 0.3 percent. The European Central Bank and People’s Bank of China cut their benchmark borrowing costs, while the Bank of England increased its bond-buying program.
“All of these moves by central banks had been expected, so they were baked into the price,” said Tim Riordan, who helps manage $200 million at Parker Asset Management Ltd., a hedge fund in Sydney. “ECB rate cuts are getting to the point where each cut is met with diminishing returns.”
S&P 500 Snaps 3-Day Rally on ECB Ahead of Jobs Report (Source: Bloomberg)
U.S. stocks declined, halting a three-day advance for the Standard & Poor’s 500 Index, amid disappointment over Europe’s efforts to tame the region’s debt crisis as investors awaited tomorrow’s American jobs report. Financial (S5FINL) shares had the biggest loss among 10 groups in the S&P 500 as Spanish and Italian bonds plunged. JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) retreated at least 3 percent. Retailers in the benchmark measure rose 1 percent amid June sales data. Apple Inc. (AAPL), the world’s most valuable company, advanced 1.8 percent to pace gains in technology companies. The S&P 500 decreased 0.5 percent to 1,367.58 at 4 p.m. New York time. The Dow Jones Industrial Average fell 47.15 points, or 0.4 percent, to 12,896.67. Volume for exchange-listed stocks in the U.S. was 5.3 billion shares, 21 percent below the three- month average. The market was closed yesterday for a holiday.
“There’s a bit of disappointment with the ECB,” said Mike Ryan, the New York-based chief investment strategist at UBS Wealth Management Americas. “Meantime, people are not willing to take big bets going into the jobs report tomorrow.”
China’s Stocks Decline Most in Week on Property, Bank Concerns (Source: Bloomberg)
China’s stocks fell, dragging the benchmark index down by the most in a week, on concern proposed rules for banks may curb credit growth and speculation intensified the government won’t loosen property restrictions. China Citic Bank Corp. led declines for lenders after a China Banking Regulatory Commission official said the nation plans to retain a cap on loans at 75 percent of deposits and may add further requirements that constrain credit growth under draft rules. Sany Heavy Industry Co. extended the biggest machinery maker’s losses to a fourth day amid concern demand may falter. China’s recent increase in home prices was the result of a “misinterpretation” of the nation’s economic policies, a government think tank researcher said. The Shanghai Composite Index (SHCOMP) fell 26 points, or 1.2 percent, to 2,201.35 at the close, the biggest drop since June 25. The CSI 300 Index (SHSZ300) slid 1.4 percent to 2,430.37. U.S. financial markets were closed yesterday for a national holiday.
“Investors are concerned about company earnings in the second quarter and there are expectations of further cuts in profit forecasts,” said Chen Liqiu, a strategist at Jianghai Securities Co. in Shanghai. “They are expecting property curbs to ease and it turns out it may be quite the opposite so this is dragging on sentiment.”
European Stocks Drop as Draghi Sees Risks; Banks Retreat (Source: Bloomberg)
European stocks retreated as European Central Bank President Mario Draghi said downside risks to the economy remain, offsetting monetary policy easing by countries from China to the U.K. Spanish and Italian banks fell as bond yields climbed after the ECB refrained from announcing new measures to support growth. Volkswagen AG (VOW) jumped 5.1 percent after reaching an agreement with Germany’s tax authorities to buy the 50.1 stake in Porsche SE that it doesn’t already own. GKN Plc jumped 13 percent after buying Volvo AB (VOLVB)’s aircraft-engine unit. The Stoxx Europe 600 Index (SXXP) lost 0.2 percent to 256.93 at the close in London after earlier falling as much as 0.8 percent and rising as much as 0.8 percent. The equity benchmark is still headed for a fifth-straight week of gains, which would be its longest winning streak since January. The Stoxx 600 has climbed 9.9 percent from this year’s low on June 4 amid speculation that central banks would ease monetary policy.
“A lot of today’s announcements were largely anticipated,” said Edmund Shing, an equity strategist at Barclays Capital in London. “You could argue that over the last few days, markets have been pricing in increasing expectation of central-bank action.”
Most Swiss Stocks Fall as ECB Outlook Offsets U.S. Data (Source: Bloomberg)
Most Swiss stocks dropped as European Central Bank President Mario Draghi said he sees risks to the euro-area economic outlook, overshadowing better-than-forecast U.S. jobs reports. Adecco SA (ADEN), the world’s biggest supplier of temporary workers, declined 2.2 percent. Logitech International SA (LOGN), the largest maker of computer mice, slipped 1.3 percent. Barry Callebaut AG (BARN) fell 2 percent after the biggest maker of bulk chocolate posted sales that missed analysts’ estimates. The Swiss Market Index (SMI) rose less than 0.1 percent to 6,202.32 at the close of trading in Zurich. Thirteen stocks declined and seven rose even after the ECB and the People’s Bank of China cut their benchmark borrowing costs and the Bank of England boosted the size of its asset-purchase program. The gauge has rallied 2.2 percent this week, extending the 2012 advance to 4.5 percent. The Swiss Performance Index was also little changed percent today.
“The ECB, China, and BOE news today may have already been baked into the cake over the past few trading sessions,” said Serge Berger, a trader at Blue Oak Advisors LLC in Zurich. “The central banks gave the market what it wanted, which is likely why the investors are selling the news.”
Temasek Spends More on Investments, Adds Energy Holdings (Source: Bloomberg)
Temasek Holdings Pte, Singapore’s state-owned investment company, said it spent the most on new holdings in four years as it added more energy and resources producers to its portfolio. The company said it made S$22 billion ($17 billion) of investments in the year to March 31, boosting assets to a record S$198 billion. It invested S$2 billion in FTS International, a U.S. shale energy production service provider which it has a 40 percent stake in, and S$1.3 billion in The Mosaic Co., a U.S. fertilizer producer. The deals helped Temasek weather Europe’s debt crisis and a lackluster U.S. economic recovery that roiled markets. Total shareholder return, which includes changes in asset values and dividends, gained 1.5 percent in a year when market volatility reached the highest level since the 2008-2009 crisis, while the MSCI World Index (MXWO) lost 1.7 percent.
“My sense is that Temasek’s modus operandi in difficult years is actually to be even more aggressive in terms of its acquisitions,” said Eugene Tan, an assistant law professor at Singapore Management University and a nominated member of Parliament who’s not affiliated with a political party. “They have the bandwidth to go into many investments, which many others may be somewhat hesitant. It reflects their confidence of what they feel will work out for them in the medium to long term.”
Aussie Heads for 5th Weekly Gain as Global Easing Boosts Demand (Source: Bloomberg)
Australia’s dollar headed for a fifth weekly gain, the longest winning streak since February, on prospects a new round of global monetary stimulus will keep economic recovery from faltering. China yesterday cut its key interest rate for the second time in a month, the European Central Bank lowered borrowing costs to a record and the Bank of England expanded asset purchases. New Zealand’s dollar traded near a two-month high after the government said the budget deficit was narrower than forecast. Demand for the South Pacific nations’ currencies was limited after a jump in Spanish and Italian bond yields added to concern Europe’s debt crisis is far from a resolution. “Global monetary easing is sending money into commodity- related currencies,” said Junichi Ishikawa, an analyst in Tokyo at IG Markets Securities Ltd. “The Australian dollar is well supported.”
Australia’s dollar was at $1.0281 as of 9:34 a.m. in Sydney from $1.0287 in New York yesterday, set for a 0.4 percent advance this week. The currency fetched 82.17 yen from 82.22. New Zealand’s dollar traded little changed at 80.38 U.S. cents after touching 80.76 yesterday, the highest since May 3. It bought 64.27 yen from 64.22.
Euro Set for Weekly Loss Before Spanish, German Output (Source: Bloomberg)
The euro headed for its biggest weekly decline in more than six months amid signs the region’s debt crisis is weighing on economic growth. The 17-nation currency held a two-day decline against the yen before data today forecast to show industrial production in Germany and Spain declined. The European Central Bank and the People’s Bank of China cut their benchmark borrowing costs yesterday, while the Bank of England expanded the size of its asset-purchase program. “The economic fundamentals surrounding the euro area look dire,” said Takuya Kawabata, researcher at Gaitame.com Research Institute Ltd. in Tokyo, a unit of Japan’s largest currency- margin company. “We can’t expect any economic indicators that can bolster the euro.”
The euro was little changed at $1.2394 as of 8:38 a.m. in Tokyo from $1.2392 yesterday, when it touched $1.2364, the lowest since June 1. The shared currency is poised for a 2.2 percent drop this week, the sharpest decline since the five-days ended Dec. 16. Europe’s currency was at 99.05 yen from 99.03, set for a 2 percent weekly drop. The greenback bought 79.92 yen from 79.92 yen. Japan’s currency fetched 82.20 per Australian dollar from 82.22 yesterday when it reached 82.36, the weakest since May 4.
FOREX-Euro steady, seen vulnerable to expected ECB cut
LONDON, July 5 (Reuters) - The euro steadied versus the dollar but looked vulnerable to selling as market players braced for a widely expected interest rate cut by the European Central Bank.
"The bigger questions have to be over potential surprises. If the ECB were to signal something more aggressive like another LTRO, in this environment that could get a euro positive response," said Daragh Maher, currency strategist at HSBC.
Top Won Forecaster Sees 5% Loss as Europe Crisis Damps Exports (Source: Bloomberg)
South Korea’s won will post its worst quarter in a year as Europe’s financial crisis saps demand for exports, according to Credit Suisse Group AG, the top forecaster. The currency will fall 5.4 percent to 1,200 per dollar in three months, the weakest level since October, Ray Farris, the Singapore-based head of Asia Pacific fixed-income strategy, said in a July 4 interview. The second-largest Swiss bank had the closest estimates in the last six quarters as measured by Bloomberg Rankings. The projection is more bearish than the 1,170 median estimate in a Bloomberg survey of 27 analysts. Slowing growth in the euro area has prompted the South Korean government to cut forecasts for gross domestic product in 2012 and those for exports, which contribute about 50 percent to the $1 trillion economy. A 4 percent rally in the won over the past month will fade as risk aversion once again becomes the dominant theme for Asian markets, according to Sydney-based Westpac Banking Corp. (WBC), the second-best forecaster.
“Most indicators point to weaker Asian export growth, and with domestic demand extremely weak in South Korea, slower exports will have a disproportionately negative impact on the economy,” Farris said. “We still have concerns about the euro area, predominantly from a growth perspective.”
Treasuries Poised for Weekly Advance Before Jobs Report (Source: Bloomberg)
Treasuries headed for a weekly gain on speculation the U.S. government’s monthly employment report today will show hiring slowed in the second quarter to less than half the pace of the prior three months. Waning U.S. economic growth is increasing pressure on the Federal Reserve to implement a third round of bond purchases as the central bank strives to reduce long-term interest rates to support the expansion. The European Central Bank and People’s Bank of China cut their benchmark borrowing costs yesterday, while the Bank of England increased its asset-purchase program. The Fed bought $2.3 trillion of bonds in two rounds of so-called quantitative easing, known as QE1 and QE2, from 2008 to 2011. “The economic situation is weak,” said Hiromasa Nakamura, who helps oversee the equivalent of $41.2 billion in Tokyo as an investor at Mizuho Asset Management Co., a unit of Japan’s third-largest publicly traded bank. “There is a high probability they will do QE3 this year.”
Benchmark 10-year notes yielded 1.60 percent as of 9:53 a.m. in Tokyo, according to Bloomberg Bond Trader data. The 1.75 percent note due in May 2022 changed hands at 101 13/32.
U.S. Exit Risks Afghan Economy as Cash Pumped Into Dubai Villas (Source: Bloomberg)
Afghan central bank inspector Fahim Satari stands in Kabul airport in front of a local businessman headed for Dubai, counting by hand the stack of $100 bills that police found the passenger carrying to the gate. Satari declares the cash to be under the $20,000 limit imposed to stem the flood of money leaving through the terminal, which swelled to $4.6 billion in the year to March and equals almost one-fourth of the economy. While Satari’s team has slowed the airborne outflow, Kabul brokers who arrange informal transfers say business has jumped. In a country where only 7 percent of the population has a bank account and 15 percent of the economy depends on opium, cash is fleeing Afghanistan. The lost billions are undercutting U.S. efforts to stabilize the country as it prepares to withdraw its troops by 2014 and exit an 11-year war with the Taliban.
President Hamid Karzai needs to build an economy capable of financing long-term security and spurring the development that can help unite a nation fractured by decades-old ethnic rivalries. “The money leaving the country shows that Afghans fear the war will escalate after NATO troops leave,” Saifuddin Saihoon, an economics professor at Kabul University, said by phone. The government and international community need to reassure companies that their assets will be protected or risk a business collapse, he said.
ADP Says U.S. Companies Added 176,000 Workers in June (Source: Bloomberg)
Companies in the U.S. added more workers than forecast in June, which may ease concern the labor market is deteriorating, a private payrolls report showed. The 176,000 increase followed a revised 136,000 gain the prior month that was higher than initially estimated, according to figures released today by Roseland, New Jersey-based ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for a 100,000 advance. A pickup in hiring that’s sustained will help generate the wage growth needed to spur consumer spending, which accounts for about 70 percent of the world’s largest economy. A Labor Department report due tomorrow may show that private payrolls accelerated in June from a month earlier, while the unemployment rate held at 8.2 percent, economists projected. “The economy is weakening but we’re not falling off a cliff,” said Neil Dutta, head U.S. economist at Renaissance Macro Research LLC in New York.
“You should see some employment growth but it won’t be enough to lower the unemployment rate in any meaningful way.”
Fewer Americans Than Forecast File Unemployment Claims (Source: Bloomberg)
Fewer Americans filed first-time claims for unemployment insurance payments and companies added more workers than forecast, easing concern the labor market is faltering further. Applications for jobless benefits fell 14,000 in the week ended June 30 to 374,000, Labor Department figures showed today. Private employers expanded payrolls by 176,000 last month, according to figures released today by Roseland, New Jersey- based ADP Employer Services, exceeding the most optimistic estimate in a Bloomberg News survey of economists. “Before today it was pretty clear the labor market had softened over the past few months,” said Daniel Silver, an economist at JPMorgan Chase & Co. in New York. “Today’s reports show a little bright spot. The fear of a much weaker payroll number has been reduced.”
Labor Department data tomorrow may show the pace of hiring accelerated in June while remaining at less than half the average for the first quarter of the year. The report covers both private and government employers. Other figures today showed service industries expanded at a slower pace in June, underscoring Federal Reserve concern that economic growth isn’t strong enough to reduce unemployment.
Service Industries in U.S. Grew Less Than Forecast in June (Source: Bloomberg)
Service industries in the U.S. expanded in June at the slowest pace since January 2010, a sign the biggest part of the economy is struggling to gain momentum. The Institute for Supply Management’s non-manufacturing index dropped to 52.1, less than projected, from 53.7 in May, the Tempe, Arizona-based group said today. The median forecast of 70 economists surveyed by Bloomberg News called for 53. Readings above 50 signal expansion. Companies from Family Dollar Stores Inc. (FDO) to FedEx Corp. (FDX) are seeing waning demand, underscoring concern about Europe’s debt crisis, cooling global markets and an absence of U.S. fiscal policy clarity that’s also hurting manufacturing. Limited hiring and income growth indicate households will be reluctant to step up purchases, which account for about 70 percent of the economy.
“Business activity in the services, construction and government sectors of the economy decelerated in June but is still growing at a modest pace,” Steven Wood, principal economist at Insight Economics LLC in Danville, California, said in an e-mail to clients. “A cyclical economic expansion is currently in place but it has softened in the past three months.”
On Bus Tour in Ohio, Obama Pushes Trade, Hammers Bain (Source: Bloomberg)
President Barack Obama told voters in the battleground state of Ohio today that his administration filed a claim with the World Trade Organization against China, charging it with unfair tariffs on U.S. autos, a welcome message in the U.S. rust belt. “Americans aren’t afraid to compete. We believe in competition,” Obama said while campaigning in Maumee, Ohio. “But we’re going to make sure competition is fair.” The WTO complaint came as Obama began a two-day bus trip in Ohio and Pennsylvania. The “Betting on America” tour, as his campaign has dubbed it, runs through areas reliant on the auto industry. The label is designed to draw a contrast with presumed Republican presidential nominee Mitt Romney, a former private- equity executive whose business made investments overseas. Romney’s experience “has been in owning companies that were called ‘pioneers of outsourcing,’” Obama said. “My experience has been in saving the American auto industry, and as long as I’m president, that’s what I’m gonna be doing.”
China Cuts Benchmark Rates for Second Time in Month (Source: Bloomberg)
China cut benchmark interest rates for the second time in a month and allowed banks to offer bigger discounts on their borrowing costs, stepping up efforts to reverse a slowdown in the world’s second-biggest economy. The one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points effective tomorrow, the People’s Bank of China said on its website today. The discount banks can offer on loans was widened to 30 percent from 20 percent, according to the statement. China is moving more aggressively to promote growth as Europe’s turmoil crimps exports and domestic property restrictions curb the housing market. Today’s cuts coincided with decisions by the European Central Bank and Bank of England to increase monetary stimulus and preceded government data next week that may show expansion decelerated for a sixth quarter.
“Although most people were expecting further cuts, very few were expecting the second one to come so soon,” said Mark Williams, Asia economist at Capital Economics Ltd. in London. One possible reason for today’s action is that “policy makers have had an early look at the June data and didn’t like what they saw, suggesting the economy is weaker than they previously thought.”
Singh Adviser Warns Against Portfolio Investor Tax-Rule Changes (Source: Bloomberg)
India should refrain from changing the way foreign investors in stocks and bonds are taxed, a key adviser to Prime Minister Manmohan Singh said, as the nation prepares rules to clamp down on tax avoidance. “We should clarify that it is not the intention to change the tax treatment of bona fide foreign institutional investors,” Montek Singh Ahluwalia, 68, deputy chairman of India’s Planning Commission, said in an interview in New Delhi yesterday. “I hope they will clarify it in a way in which FIIs will be reassured that their investment is welcome.” Prime Minister Singh has made reviving investment in India a priority after taking charge of the finance ministry on June 26 with growth at a nine-year low. Ahluwalia also said he hopes India will “very soon” allow foreign companies to open supermarkets selling multiple brands, an industry closed off to overseas businesses and one that Singh is trying to open up.
The prime minister decided to lead the finance ministry after Pranab Mukherjee resigned to vie for the presidency. Mukherjee outlined steps to tackle tax avoidance, the so-called General Anti-Avoidance Rule, or GAAR, in the budget in March, before retreating on the proposals in May by delaying implementation until 2013 to salvage investor confidence.
Central Banks Deliver 45-Minute Salvo as Growth Weakens (Source: Bloomberg)
Global central banks went on the offensive against the faltering world economy, cutting interest rates and increasing bond buying as a round of international stimulus gathers pace. In a 45-minute span, the European Central Bank and People’s Bank of China cut their benchmark borrowing costs, while the Bank of England raised the size of its asset-purchase program. Two weeks ago, the Federal Reserve expanded a program lengthening the maturity of bonds it holds and Chairman Ben S. Bernanke indicated more measures will be taken if needed. “The actions had the look and feel of a coordinated global easing campaign,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “The central banks are trying to arrest the synchronized slowdown in global economic growth that has taken shape.”
Almost five years since the financial crisis first forced them into action, policy makers are reacting anew as Europe’s debt crisis persists, U.S. hiring slows and emerging markets soften. The jury is out on whether the additional monetary medicine will work or if even more will be needed. The steps by the U.K. and euro area pushed JPMorgan Chase & Co. (JPM)’s average interest rate for developed economies to a crisis- era low of 0.48 percent and will add to the balance sheets of major central banks, which have already swelled 40 percent since mid-2007.
Draghi Move to Zero Rates Fuels Talk of QE in ECB Armory (Source: Bloomberg)
The European Central Bank’s step into the world of zero interest rates is fueling speculation it may eventually be forced to follow the Federal Reserve and the Bank of England with large-scale asset purchases. The ECB yesterday reduced its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero, with President Mario Draghi saying the cuts may have only a “muted” economic impact. While deflecting questions about further measures such as quantitative easing, Draghi said “there is no feeling that we are running short of policy options” and “we still have all our artillery ready to contain inflationary risks” in either direction. “They have practically exhausted their conventional armory,” said Julian Callow, chief European economist at Barclay Plc (BARC) in London. “Cutting the deposit rate to zero has practically brought them to the door of QE, even though that is not what they may have intended.”
The ECB’s rate cuts came within 45 minutes of China lowering borrowing costs and the Bank of England restarting its asset purchases, adding to a new round of global monetary stimulus. With Europe’s debt crisis curbing growth across the continent and damping the outlook for the world economy, the ECB was under pressure to ease policy even though Draghi last month voiced misgivings about the effectiveness of a rate reduction.
Lagarde Consumed by Crisis Steers IMF Tough Love to EU (Source: Bloomberg)
Discussing climate change was a welcome break for Christine Lagarde from the European debt crisis that has consumed her first year as director of the International Monetary Fund. “I’m very pleased to be here today, not only because we’re not going to talk at all about the euro zone, not at all about Greece, not at all about Spain,” she said in a June 12 talk to the Center for Global Development in Washington, drawing laughs from her audience. Then Europe caught up with her, again. Four days after the event, Lagarde, 56, canceled plans to join leaders at a summit on sustainable development in Rio de Janeiro. Instead, she flew to Luxembourg to urge finance ministers of the 17 euro countries to take further steps to save their monetary union, which has already required almost 500 billion euros ($629 billion) in funds for indebted nations and their banks.
Made-in-London Scandals Risk City’s Reputation as Finance Center (Source: Bloomberg)
London risks losing its status as the world’s top financial center as the $360 trillion interest-rate fixing probe follows a series of market abuses by banks that eroded trust in a city already shrinking faster than rivals. JPMorgan Chase & Co. (JPM)’s trading loss of at least $2 billion, the alleged $2.3 billion fraud at UBS AG (UBSN) and the investigation of at least a dozen banks including Barclays Plc (BARC) for rigging global interest rates all happened in London in the last year. The effect is taking a toll on the capital of a country enduring its first double-dip recession since the 1970s, which fired more financial-services workers than any other country in 2011 and again this year.
“My heart sinks every time there is a scandal and the perpetrators are in London, even if it is not always the U.K.’s responsibility, it is under our noses,” Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee, said in an interview. “There is an effect on the U.K.’s reputation, and it reinforces the view that even after all the apologies there is much to do.” London, ranked as the world’s number one financial center by research firm Z/Yen Group Ltd., was where American International Group Inc. (AIG) and Lehman Brothers Holdings Inc. booked transactions that helped lead to their downfall. This week saw Bank of England and U.K. government officials tied to the interest-rate fixing scandal that cost Robert Diamond, London’s best-known banker, his job at Barclays. With the European debt crisis on its doorstep, London now faces calls to cull its bonus culture, rein in risk-taking and beef up a light- touch regulatory system that fueled a decade-long boom.
Draghi Says Rate Cuts May Have ‘Muted’ Impact on Economy (Source: Bloomberg)
European Central Bank President Mario Draghi said today’s cut in interest rates to a record low may have only a limited impact on the euro-area economy as it slides toward recession. “It’s clear that when demand is weak the transmission of price signals to the aggregated economy is muted,” Draghi said at a press conference in Frankfurt after lowering the benchmark and deposit rates by 25 basis points to 0.75 percent and zero respectively. The cuts will reduce the cost of central bank loans for struggling banks, Draghi said. China also lowered rates today and the Bank of England restarted its asset purchases, adding to a new round of global monetary stimulus. With Europe’s debt crisis curbing growth across the continent and damping the outlook for the world economy, the ECB was under pressure to ease monetary conditions, even though Draghi last month voiced misgivings about the effectiveness of a rate reduction.
“The impact of today’s decision on the euro area will not be large” and “there is now little left for the ECB to do in terms of lowering interest rates,” said Julian Callow, chief European economist at Barclay’s Capital in London. “If the economy does not turn around during the second half, the Governing Council will have to address the case for outright large-scale asset purchases.”
Denmark Cuts Rates to Record Lows as Zero Threshold Breached (Source: Bloomberg)
Denmark’s central bank cut its main borrowing costs to record lows and brought the rate it offers on certificates of deposit below zero, as policy makers test uncharted territory to fight a capital influx. The benchmark lending rate was cut to 0.2 percent from 0.45 percent, while the deposit rate was reduced to minus 0.2 percent from 0.05 percent, Copenhagen-based Nationalbanken said in a statement today. The move followed a quarter of a percentage point cut in the European Central Bank’s main rate to 0.75 percent. Nationalbanken doesn’t hold scheduled meetings and only adjusts rates to defend the krone’s peg to the euro.
“There’s no experience of how negative deposit rates will affect the financial markets and the krone,” Jacob Graven, chief economist at Sydbank A/S, said in a phone interview today before the decision was announced. “It’s a sign of the strong Danish economy. This is good. The opposite situation would be far worse, if the central bank would have to hike rates to defend the krone. We have a luxury problem.” Denmark has stepped up its battle to prevent the krone from strengthening beyond its currency band as the nation’s haven status attracts investors. Danske Bank A/S (DANSKE), the country’s biggest lender, said last week it now has a risk scenario that envisages Denmark abandoning the peg should the cost of fighting currency appreciation grow too high. The bank doesn’t view this as a likely outcome, it said.
BOE Restarts QE as Euro Crisis Threatens to Prolong Slump (Source: Bloomberg)
The Bank of England restarted bond purchases two months after halting its expansion of stimulus as the deteriorating outlook spurred policy makers to ramp up efforts to kick start a recovery. The Monetary Policy Committee led by Governor Mervyn King raised its asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds and said the purchases will take four months to complete. Separately, the European Central Bank cut its key interest rate below 1 percent for the first time and China lowered benchmark rates for the second time in a month. The Bank of England’s resumption of quantitative easing is a part of a twin-pronged effort that includes a new credit- boosting program by the central bank to pull Britain out of a recession. With inflation easing and reports this week showing that factory, services and construction activity weakened in June, policy makers were spurred to act by continued concerns about the threat from the euro-area debt crisis.
“It’s a good decision and they need to do it because the recovery is taking so long,” said George Buckley, an economist at Deutsche Bank AG in London. “This is as much a decision to offset the future downside risks from the euro area as it is to try and support the rather flagging recovery.”
