Asia FX By Cornelius Luca - Sun 26 Aug 2012 17:29:55 CT (Source:CME/www.lucafxta.com)
The foreign currencies open little changed in the Far East after all but the Canadian dollar fell on Friday. Friday was unusual because the US stock markets gained while most of the foreign currencies advanced. But it's the end of the summer vacation, so the slip in correlation should not be important. The ECB drama continues, as the debt crisis is far from being alleviated. The short-term outlook for most foreign currencies is sideways. The medium-term outlook for most of the foreign currencies is sideways. The LGR short-term model is long across the board. Good luck!
Overnight
US: New orders for durable goods rose 4.2% in July, up from +1.6% in June. Excluding transportation orders, durable goods orders fell 0.4% in July, with revised figures for June showing a 2.2% decline. Non-defense durable goods orders rose 5.7%.
Today's economic calendar
UK: Hometrack Housing Prices for August
China: Leading Economic Index for July
Japan: Machine tool orders for July
Asian Stocks Climbe on U.S., China Stimulus Speculation (Source:Bloomberg)
Asian stocks advanced as China’s Premier Wen Jiabao and Federal Reserve Chairman Ben S. Bernanke raised investor hopes that central banks will move to boost growth in the world’s two largest economies. Sharp Corp., a Japanese television maker that gets 20 percent of sales in China, climbed 2.6 percent. Fraser & Neave Ltd. rose 1.1 percent in Singapore after the beverage maker said it will distribute S$4 billion ($3.2 billion) of the proceeds from the sale of its stake in Asia Pacific Breweries to shareholders. Gains were limited as Samsung Electronics Co. slumped 6.4 percent in Seoul after a U.S. jury ruled that the world’s top maker of smartphones infringed Apple Inc. (AAPL) patents.
The MSCI Asia Pacific Index (MXAP) gained 0.2 percent to 120.46 as of 10:22 a.m. in Tokyo, with almost three shares rising for each that fell. The gauge climbed 10 percent from a June low through Aug. 24 on bets monetary authorities in the U.S., Europe and China will take action to propel economic expansion. Investors are awaiting comments from Bernanke as U.S. policymakers meet on Aug. 30 for an annual summit in Jackson Hole, Wyoming. “Clearly the chances of further quantitative easing are higher than they were six months ago,” said George Boubouras, Melbourne-based head of investment strategy at UBS AG’s Australian wealth management unit. “The market is looking to Bernanke’s speech at Jackson Hole for additional guidance on policy.” The Swiss bank has about $1.5 trillion in assets under management.
The Nikkei 225 Stock Average (NKY) jumped 0.7 percent and Australia’s S&P/ASX 200 Index advanced 0.5 percent. Taiwan’s Taiex Index rose 0.3 percent, while South Korea’s Kospi Index slipped 0.1 percent. Markets in Hong Kong and China are yet top en.
Japanese Stocks Climb on Fed, China Stimulus Speculation (Source:Bloomberg)
Japanese stocks gained the most in over a week as Federal Reserve Chairman Ben S. Bernanke and China Premier Wen Jiabao reassured investors that central banks will move to boost growth in the world’s two largest economies. Fuji Heavy Industries Ltd., which makes Subaru vehicles and counts North America as its biggest market, gained 1.7 percent. Sumitomo Realty & Development Co., Japan’s third-biggest developer by revenue, rose 1.4 percent. Olympus Corp. (7733) jumped 3.3 percent after it agreed to sell the telecommunications business of its ITX Corp. unit. “The economy is deteriorating globally, including in China, boosting expectations countries will take stimulus measures to support the markets,” said Seiichiro Iwamoto, who helps oversee about $34 billion at Mizuho Asset Management Co. in Tokyo. “Expectations for stimulus are boosting shares of developers, banks, carmakers and technology companies.”
The Nikkei 225 Stock Average (NKY) gained 0.6 percent to 9,125.05 as of 10:25 a.m. in Tokyo, rising the most since Aug. 17. Trading volume was more than 20 percent below the 30-day average ahead of a meeting this week of Fed policy makers at Jackson Hole, Wyoming. The broader Topix (TPX) Index advanced 0.4 percent to 760.37, with more than twice as many shares gaining as falling. The Topix has fallen 13 percent from this year’s peak on March 27 on concern earnings will be hurt by Europe’s debt crisis and slowing growth in China and the U.S. The decline has cut the price of shares on the gauge to 0.9 times book value, compared with 2.2 for the Standard & Poor’s 500 Index and 1.4 for the Europe Stoxx 600 Index. A number less than one means companies can be bought for less than the value of their assets.
China’s Stock Futures Drop as Slowdown Spurs Earnings Concerns (Source:Bloomberg)
China’s stock-index futures fell, signaling equities will decline, as weaker profit from China Petroleum & Chemical Corp. (600028) to Xinjiang Goldwind Science & Technology Co. underscored concern about the economic slowdown. Futures on the CSI 300 Index (SHSZ300) expiring in September, the most active contract, lost 0.7 percent to 2,278.80 as of 9:27 a.m. local time. China Petroleum, Asia’s biggest oil refiner, posted the lowest half-yearly profit since 2008. Goldwind, the country’s second-biggest maker of wind turbines, reported first- half profit slumped 83 percent. “Investors are becoming more worried about earnings for this quarter after the poor performance of first-half profits,” said Wu Kan, Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “Government tools to boost the economy are limited: policymakers could cut interest rates and bank reserve ratios but they’re worried that would spur inflation.”
The Shanghai Composite Index dropped 1 percent to 2,092.10 on Aug. 24, the lowest close since March 2009. The CSI 300 Index declined 1.2 percent to 2,275.68. The Hang Seng China Enterprises Index (HSCEI) of Chinese companies traded in Hong Kong retreated 1.6 percent. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, fell 0.2 percent in New York. Premier Wen Jiabao urged extra measures to support exports and help meet economic targets as evidence mounts that the nation’s slowdown is deepening.
U.S. Stocks Snap Six-Week Rally Amid Europe Concern (Source:Bloomberg)
The Standard & Poor’s 500 Index snapped a six-week gain amid concern European leaders may fail to tame the region’s debt crisis and as investors speculated whether central banks will provide further economic stimulus. Equities rallied the final day on bets the Federal Reserve will act to boost growth. Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ) slumped at least 7.8 percent for the week while discount chain Big Lots Inc. (BIG) plunged 21 percent on disappointing forecasts. Best Buy Co. (BBY), the retailer resisting a takeover attempt by its founder, sank 15 percent after profit trailed estimates. Apple Inc. (AAPL) rose 2.3 percent and set a record U.S. market value. The S&P 500 declined 0.5 percent to 1,411.13, after the benchmark index for American equities briefly topped a four-year high during the week. The Dow Jones Industrial Average dropped 117.23 points, or 0.9 percent, to 13,157.97.
“There’s lack of data or news to push the market,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in a phone interview. His firm oversees $636 billion. “The European situation is not resolved. The market wants the global economic environment to look weak enough to trigger central bank action, but not so weak that it’s going to threaten earnings.” Stocks started the week lower as Germany’s Bundesbank stepped up criticism of the European Central Bank’s bond-buying program. German Chancellor Angela Merkel said Europe is in one of its deepest crises and while the path to a solution is “long and arduous,” the region will emerge stronger. In the U.S., Fed minutes showed many policy makers backed monetary easing and Chairman Ben S. Bernanke cited the ability to stimulate growth.
European Stocks Decline for First Week Since June (Source:Bloomberg)
European stocks fell for the first week since June as Greece’s prime minister asked the leaders of Germany and France for a two-year reprieve from cutting government spending and Japan’s trade deficit widened. Commodity companies and steelmakers declined, as Rio Tinto Group and ArcelorMittal each lost more than 4 percent. Kazakhmys Plc (KAZ) and Petropavlovsk Plc (POG) plunged after both companies reported a slide in first-half profit. Spanish lenders retreated. Heineken NV advanced 3.4 percent after analysts raised their recommendations on the shares. The Stoxx Europe 600 Index (SXXP) dropped 1.8 percent to 268 this past week, snapping its longest winning streak since 2006. The benchmark measure has still advanced 15 percent from this year’s low on June 4 after a summit of euro-area policy makers agreed to ease repayment terms for Spanish banks and European Central Bank President Mario Draghi pledged to do whatever it takes to preserve the euro.
“The recent equity market weakness is a product of profit taking and the expectation that growth could be weak, but inflation will be maintained by stimulus moving forward,” said Daniel Weston, a portfolio adviser at Schroeder Equities GmbH in Munich. “Japan’s trade numbers highlighted slowing global growth, and comments from Europe and the U.S. have leaned towards further accommodative policy.”
Emerging-Market Stocks Fall to 3-Week Low on Earnings (Source:Bloomberg)
Emerging-market stocks declined the most in three weeks on signs the global economic slowdown is worsening as orders for capital goods in the U.S. slipped and HSBC Holdings Plc cut its 2012 growth forecast for China. The MSCI Emerging Markets Index (VXEEM) slid 0.9 percent, the biggest slump since Aug. 2, to 965.47. Steelmakers Usinas Siderurgicas de Minas Gerais SA and Cia. Siderurgica Nacional SA led decliners on Brazil’s Bovespa stock index. Gauges in China and South Korea slumped more than 1 percent. Pegatron Corp. (4938) fell to a one-month low in Taipei, the most on the MSCI index, after saying it expects computer shipments to fall. Demand for U.S. capital goods such as machinery and communications gear dropped in July by the most since November, indicating companies are pulling back on investment. Fed Chairman Ben S. Bernanke may clarify the central bank’s thinking in an Aug. 31 speech. HSBC reduced its 2012 gross domestic product growth forecast for China to 8 percent from 8.4 percent in a report.
“The market mood is linked to growth concerns in a highly volatile environment as sentiment has been hovering between hope and disappointment,” Mohamed Saidi, a Brussels-based fund manager at Dexia Asset Management, which oversees about $860 million of equity assets in developing nations, said by phone. “It is clear that the U.S. data is going to hurt the optimism of investors. The worsening global growth requires stronger policy response and all we are seeing are useless meetings and declarations and no real action.”
Treasuries Maintain Gains Before Bernanke Policy Speech (Source:Bloomberg)
Treasuries held gains after rising last week on speculation Federal Reserve Chairman Ben S. Bernanke will use his speech in Jackson Hole, Wyoming, on Aug. 31 to outline the case for further central bank action to support the economy. Bernanke said the Fed has the ability to take steps to boost the expansion, in a letter last week. The central bank has already conducted two rounds of bond purchases to pump cash into the banking system under the policy of quantitative easing, programs known as QE1 and QE2. The U.S. is scheduled to sell $99 billion of notes over three days starting tomorrow. “There’s a greater possibility of QE3,” following Bernanke’s comments, said Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $63.1 billion. Daiwa SB is betting Treasury rates will rise as the economy improves, he said.
Benchmark 10-year yields were little changed at 1.69 percent as of 10:10 a.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 was 99 13/32. The rate declined 12 basis points, or 0.12 percentage point, last week. It compares with the record low of 1.38 percent set July 25.
Euro Remains Lower Before German Business Confidence Data (Source:Bloomberg)
The euro remained lower following a drop at the end of last week before a report today that may show German business confidence fell to a two-year low, adding to evidence Europe’s debt crisis is hurting the region’s economies. The 17-nation currency also maintained a decline versus the majority of its 16 peers before German Finance Minister Wolfgang Schaeuble meets his French counterpart today to discuss Greek budget targets. The yen weakened for a second day after data showed last week that investors more than halved their bullish bets on the Japanese currency. “We can see fundamentals deteriorating in the euro region,” said Kengo Suzuki, a currency strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “The euro is in a long-term downtrend.” The euro traded at $1.2511 as of 9:41 a.m. in Tokyo after dropping 0.4 percent to $1.2512 in New York on Aug. 24. It was at 98.60 yen following a 0.2 percent slide to 98.44. The dollar bought 78.81 yen from 78.67.
The Munich-based Ifo institute is forecast to say today that its business climate index for Germany slid to 102.7 in August, a level unseen since March 2010, according to the median estimate of economists in a Bloomberg News survey. That compares with a reading of 103.3 in July. Germany’s Schaeuble will meet French Finance Minister Pierre Moscovici today. Schaeuble said a new aid package for Greece “isn’t the right path” for solving the debt crisis, Tagesspiegel am Sonntag reported over the weekend, citing an interview.
Aussie Gains Versus Peers on Bets Fed to Add Stimulus (Source:Bloomberg)
Australia’s dollar gained versus most of its 16 major peers after Federal Reserve Chairman Ben S. Bernanke said there’s “scope for further action” from the U.S. central bank, boosting demand for higher-yielding assets. Australia’s currency rose against the yen before Bernanke speaks in Jackson Hole, Wyoming this week. Demand for the so- called Aussie and its New Zealand counterpart was tempered before a report today that may show German business confidence fell to a two-year low, adding to signs Europe’s debt crisis is damping the region’s prospects for growth. “The reason why the Aussie has been so well-supported is precisely because the U.S. dollar has been weak on expectations for the Fed to ease monetary policy,” said Andrew Salter, a strategist in Sydney at Australia & New Zealand Banking Group Ltd. (ANZ) “It should underpin the Aussie dollar for a while, at the very least up until Jackson Hole.”
Australia’s currency added 0.1 percent $1.0415 as of 10:54 a.m. in Sydney from the closing level last week after falling 0.2% to $1.0403 in the five days ended Aug. 24. It gained 0.3 percent to 82.05 yen. The New Zealand dollar, nicknamed the kiwi, was at 81.10 U.S. cents after rising 0.5 percent to 81.12 last week. It advanced 0.1 percent to 63.91 yen. Ten-year government note yields in Australia rose two basis points, or 0.02 percentage point, to 3.26 percent. New Zealand’s swap rate, a fixed payment made to receive floating rates, was little changed at 2.72 percent.
FOREX-Euro rally pauses, more gains seen ahead
LONDON, Aug 24 (Reuters) - The euro eased against the dollar as some investors took profits on Thursday's rally to a seven-week high, although lingering optimism that policymakers are moving closer to tackling the debt crisis limited losses.
"After three particularly good days it would not surprise me today if we have a bit of a pullback to get better levels to buy in," said Daragh Maher, currency strategist at HSBC.
Wen Says China Need Measures to Promote Export Growth (Source:Bloomberg)
China’s Premier Wen Jiabao urged extra measures to support exports and help meet economic targets as evidence mounts that the nation’s slowdown is deepening. “The third quarter is a crucial period for realizing full- year targets on export growth,” Wen said during an inspection tour of Guangdong, the nation’s biggest exporting province, the official Xinhua News Agency said Aug. 25. “Facing the current difficulties, China should substantially improve the environment for companies’ operation and improve companies’ confidence.” Wen’s visit was the latest in his tours of export-reliant provinces on the coast as he tries to boost confidence in an economy at risk of the weakest expansion in 13 years. Policy makers have limited the scale of stimulus after interest-rate cuts in June and July as they seek to support growth without fueling inflation or driving a rebound in property prices.
“The most important thing right now and the purpose of Wen’s trips is to reboot the confidence of businesses and focus more on employment,” said Helen Qiao, chief China economist with Morgan Stanley in Hong Kong. “We’ve seen a significant deterioration in exports and the government really has very few tools to stimulate external demand, but it’s an important gesture that the government shows it’s trying to help.” The MSCI Asia Pacific Index rose 0.3 percent as of 10:10 a.m. in Tokyo on speculation that policy makers in Asia and the U.S. will do more to support growth.
Consumer Spending Probably Sped Up in July: U.S. Economy Preview (Source:Bloomberg)
Spending by U.S. consumers probably climbed in July by the most in five months, easing concern the biggest part of the economy is backsliding, economists said before a report this week. Purchases rose 0.5 percent after being little changed in June, according to the median estimate from 65 economists surveyed by Bloomberg before Aug. 30 figures from the Commerce Department. Other reports may indicate a recovery in housing is helping make up for a slowdown in manufacturing. An improvement in personal spending, which makes up about 70 percent of the world’s largest economy, shows Americans are looking beyond the global slowdown as incomes keep growing. Chairman Ben S. Bernanke in a speech at the end of the week may help inform views on what options Federal Reserve policy makers have at their disposal to spur the recovery.
“Consumers are still participating in the recovery,” said Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York. “Economic data has been too hot to get the Fed to jump in, but too cold to convince them that we’re really in a sustainable recovery. The economy is struggling to get back up on its feet.” A rebound in the labor market in July augmented household purchasing power last month. Payrolls rose by 163,000 workers in July, the most since February, according to Labor Department data. This week’s spending report may show incomes increased 0.3 percent after gaining 0.5 percent in June, the most in three months, the economists projected.
Singapore Sees Taxes Rising on Social Spending as Nation Ages (Source:Bloomberg)
Singapore will need to raise taxes in the next two decades as the government boosts social spending to support an aging population, Prime Minister Lee Hsien Loong said as he proposed measures to boost the country’s birth rate. The prime minister pledged to ensure sufficient affordable housing for citizens, invest in pre-school education and add nursing homes for the elderly. He urged Singaporeans to build a more compassionate society, reject anti-foreigner sentiment and have more babies, saying the nation needs to re-invent itself to progress as the economy faces slower growth after years of rapid expansion. “As our social spending increases significantly, sooner or later, our taxes must go up,” Lee said late yesterday in his annual televised National Day Rally address, which ran for more than two hours. “Not immediately, but if we are talking about 20 years, certainly within that 20 years, whoever is the government will at some point have to raise taxes because the spending will have to be done.”
The government has sought to address public concern that Singapore’s economic progress has left its poorest citizens vulnerable to rising living costs while an influx of foreigners increased competition for jobs, education and housing. After the ruling party last year suffered its smallest electoral win since independence in 1965, Lee tightened rules on hiring overseas workers and boosted aid for the poor.
Japanese Home Purchases Rise Before Corolla-Size Tax: Mortgages (Source:Bloomberg)
Record low mortgage rates and the prospect of a consumption tax increase that will add the price of a new Toyota Corolla to the cost of an average home spurred Sumiko Morigaki into action. “Tax hikes have been looming, so that gave me a push to buy,” said Morigaki, 43, a manager at an apparel retailer in Tokyo, who bought a three-bedroom condominium in Kanagawa prefecture, neighboring Tokyo, earlier this year. New housing loans jumped 14.7 percent in the second quarter this year from a year ago, the most since March 2006, buoying a housing market entering its third decade of deflation. About 1.3 trillion yen ($16.5 billion) of extra home purchases are expected by the end of March 2014, in the year when the sales tax increases to 8 percent from 5 percent, according to estimates by NLI Research Institute, a Tokyo-based research and consulting unit of Nippon Life Insurance Co.
“The housing market has been dead for so long it shouldn’t take much to put a flame under it,” said Nicholas Smith, a strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo. “Banks, particularly regional banks, stand to benefit from the rush of home loans ahead of the tax hike.” Housing investments rose 3.8 percent to 13.1 trillion yen in the fiscal year ended March 31, marking the first increase in five years, according to government data. Japan’s banks offered 2.98 trillion yen worth of new loans for home purchases in the three months ended June 30, bringing loans outstanding to 107.1 trillion yen, according to the Bank of Japan. An index of residential land prices has slid by half from its 1991 peak, Japan Real Estate Institute data show.
Japan Contraction Risk Rises on Faltering Global Demand: Economy (Source:Bloomberg)
Aug. 27 (Bloomberg) -- Japan’s risk of an economic contraction this quarter has increased as faltering demand from Europe to China drags down exports, strengthening the case for more government measures to support growth. JPMorgan Securities Japan Co. forecasts a 0.3 percent annualized decline in gross domestic product in the three months through September after previously seeing 1 percent growth. BNP Paribas SA estimates a 0.9 percent fall after earlier predicting no change. China’s failure to secure an economic rebound is adding to austerity measures in Europe and unemployment in the U.S. in limiting prospects for Japanese trade and growth. Pressure may build for an extra government budget and additional stimulus from the Bank of Japan as subsidies for purchases of fuel- efficient cars wind down, damping consumer spending.
“We’ve revised down our forecast because the global economy is looking weaker than we anticipated,” said Ryutaro Kono, chief Japan economist at BNP and a former government nominee for the central bank board. “We expected a gradual rebound for the emerging economies but the recent data aren’t signaling it. Europe continues to slump and exports to the U.S. also are slowing.” Japan will downgrade its assessment of the domestic economy for the first time in 10 months in a report to the cabinet tomorrow, according to the Nikkei newspaper. The nation had a wider-than-estimated trade deficit in July as shipments to the European Union fell 25 percent from a year earlier and those to China slid 12 percent.
South Korean Consumer Confidence Slides to Seven-Month Low (Source:Bloomberg)
South Korean consumer confidence dropped to the lowest level in seven months as Europe’s debt crisis and a slowdown in China dragged on exports. The sentiment index was at 99 in August from 100 in July, the Bank of Korea said in an e-mailed statement today. A reading below 100 indicates pessimists outnumber optimists. The data highlight pressure on Finance Minister Bahk Jae Wan to take extra measures to spur the economy after growth cooled to the slowest pace in almost three years in the second quarter and exports tumbled in July. He’s resisting lawmakers’ calls for a supplementary budget as he preserves ammunition to counter any deeper slowdown. “Confidence is likely to stay subdued throughout this year with business conditions worsening,” said Lee Min Koo, an economist at Eugene Investment & Securities Co. in Seoul. South Korea’s Kospi index fell 0.5 percent as of 9:14 a.m. local time as Samsung Electronics Co. tumbled after losing a lawsuit in the U.S.
Na Seong Lin, acting chairman of the ruling party’s policy committee, said Aug. 23 that a “sizable” extra budget is needed soon. The economy grew 2.4 percent in the second quarter from a year earlier, according to a preliminary estimate. The final figure is due Sept. 6. Waning inflation is giving policy makers more room to move should extra stimulus be needed. A 1.5 percent gain in consumer prices from a year earlier in July was the least in 12 years. The central bank will review interest rates next month. The consumer confidence index is based on survey responses from 2,062 households in 56 cities. It was conducted by mail and telephone between Aug. 13 and Aug. 20.
Merkel Reins-in Greek Exit Talk as Euro Enters ‘Decisive Phase’ (Source:Bloomberg)
Chancellor Angela Merkel told officials in her coalition calling for a Greek exit from the euro to “weigh their words,” as she signaled a renewed determination to keep the single currency intact. Asked about comments by a party leader calling for Greece to leave the 17-nation single currency, Merkel told ARD television that such comments were damaging as crisis fighting reaches a “decisive phase.” Alexander Dobrindt, general secretary of the governing Bavarian Christian Social Union, told Bild newspaper that Greece wouldn’t be part of the euro in 2013. “Everybody should weigh their words very carefully,” Merkel told ARD yesterday in Berlin. The Greek government under Prime Minister Antonis Samaras is undertaking “serious efforts” to reduce its debt, she said, and reiterated Germany’s desire to stand by the country where the crisis originated.
Euro leaders are preparing for a critical month in the three-year-old crisis that will involve the formulation of a European Central Bank bond-buying plan, a progress report by Greece’s international creditors and a looming German court decision on bailout funding on Sept. 12. Bundesbank President Jens Weidmann opened a new line of attack over the ECB’s plans, warning in Der Spiegel that monetary financing of budgets can “become addictive like a drug.” Merkel told ARD she welcomes input from Weidmann, lauding him for continuing “to make demands on policy makers.”
Merkel Warns Government Allies to ‘Weigh Their Words’ on Greece (Source:Bloomberg)
German Chancellor Angela Merkel warned her coalition partners advocating a Greek exit from the euro to “weigh their words,” as she signaled a renewed determination to keep the single currency intact. Asked about comments by a leader of her Bavarian Christian Social Union governing partner calling for Greece to depart, Merkel told ARD television that such remarks were damaging as crisis fighting has reached a “decisive phase.” Alexander Dobrindt, the CSU’s general secretary, told today’s Bild newspaper that Greece wouldn’t be part of the 17-nation euro area next year. “Everybody should weigh their words very carefully,” Merkel told ARD today in Berlin. The Greek government under Prime Minister Antonis Samaras is undertaking “serious efforts” to reduce its debt, she said, and repeated that Germany will stand by the country where the crisis originated.
Merkel also called the permanent bailout fund, the European Stability Mechanism, “absolutely necessary” to overcome the crisis and signaled that she’s confident that the Federal Constitutional Court will approve the measure when it decides on the matter on Sept. 12. “I think we’ve brought forward good arguments” for the ESM, Merkel said, alluding to the euro-area’s fiscal pact. The German leader said the European Central Bank has a “very clear” mandate to ensure the single currency’s stability and that any plan decided under ECB President Mario Draghi will conform with that mandate.
Spain Deficit Pain Bites Consumers in Prelude to Rajoy Austerity (Source:Bloomberg)
Spanish Prime Minister Mariano Rajoy’s austerity drive will intensify this week as a sales-tax increase tightens the squeeze on consumers whose spending is already plummeting. The move to raise the value-added tax Sept. 1 will follow a flurry of data showing the pressure building on household finances in the euro area’s fourth-biggest economy, home to a third of its unemployed. Reports due include mortgage lending today, a breakdown of second-quarter gross domestic product tomorrow, inflation on Aug. 30 and retail and current-account data on Aug. 31. Spain’s government will also release public finance figures illustrating the extent of Rajoy’s challenge as he tries to curb the euro region’s third-largest budget deficit and considers whether to seek further international aid. Consumers have already endured a recession lasting three quarters as a prelude to his tax increase due this week and an annual cut in public wages for the month of December.
“I expect a fairly dramatic weakening of GDP in the third and fourth quarters and further ahead as all components of domestic demand fall,” Ebrahim Rahbari, a London-based Citigroup Inc. economist, said by telephone. “Fiscal tightening will hurt substantially in Spain, and most of its effects are still to come.” Rajoy last month abandoned his forecast for a return to growth in 2013 as he unveiled spending cuts and tax increases through 2014 that will triple his planned austerity effort to a total of 15 percent of annual gross domestic product. New measures starting in September will add 102 billion euros to the 48 billion-euro adjustment initially planned for this year, which began taking effect in the second quarter.
Spain in talks with euro zone over sovereign aid -sources (Reuters)
Spain is negotiating with the euro zone over conditions for international aid to bring down its borrowing costs though the country has not made a final decision to request a bailout, three sources with knowledge of the matter said on Thursday.
Merkel and Hollande unite in tough message for Greece (Reuters)
Angela Merkel and Francois Hollande presented a united front towards Greece on Thursday, telling Athens it should not expect leeway on its bailout agreement unless it sticks to tough reform targets.
Weidmann Says ECB Purchases Could Become ‘Addictive Like a Drug’ (Source:Bloomberg)
Bundesbank President Jens Weidmann said a proposed new wave of sovereign bond purchases by the European Central Bank may increase governments’ reliance on such funding and won’t help solve the euro-area debt crisis. “We shouldn’t underestimate the danger that central bank financing can become addictive like a drug,” Weidmann said in an interview with Der Spiegel. “Such policy is too close to state financing via the money press for me.” ECB President Mario Draghi said earlier this month that the central bank may intervene in the secondary market to lower yields in countries that ask Europe’s bailout fund to buy its bonds in the primary market. While such a move would ensure conditionality, the Bundesbank has been critical of the plan.
“In democracies, parliaments rather than central banks should decide on such an encompassing mutualization of risks,” Spiegel cited Weidmann as saying in an e-mailed summary of the interview today. The plans are becoming “concerted actions by the state rescue mechanisms and the central bank. That causes a link between fiscal and monetary policy.” Weidmann said that while he doesn’t see an immediate danger of inflation, central bankers risk losing their focus on their primary objective if they become political problem solvers, according to the Hamburg-based magazine. The ECB shouldn’t be forced to “guarantee that states remain in the euro area at all costs,” Weidmann said. In the decision on whether Greece should leave the euro, it will “certainly play a role that no further damage is done to confidence in the framework of the currency union and that the requirements of aid programs retain their credibility,” he said.
The Bundesbank chief also said that central bankers must be ready to explain in public the convictions they express in the ECB Governing Council.
BOE’s Dale Says Savers Benefited From QE, Interest-Rate Cuts (Source:Bloomberg)
Bank of England Chief Economist Spencer Dale said U.K. savers have benefited from the reduction in the benchmark interest rate to a record low and the central bank’s bond-buying program because those measures prevented a deeper economic collapse. The stimulus also stopped asset prices from falling as much as they otherwise would have during the recession, protecting the value of savings and wealth invested in financial assets, Dale said in an article in The Sunday Telegraph, published in London today. Describing some commentary on the impact of quantitative easing on pensions as “misleading,” he said gains in the value of assets held in pension funds have offset lower annuity rates. Dale’s article comes days after the Bank of England published a paper defending QE against criticism that it hurt savers, saying these costs must be weighed against the economic benefits. The report was a response to a government request that the central bank explain the impact of its bond purchases.
“Our economy today would be in a far worse state without QE and a bank rate at 0.5 percent,” Dale said. “The recession would have been even deeper, the rise in unemployment even greater.” The U.K. is “still laboring under the effects of the financial crisis,” he said. The task of monetary policy is to stimulate the economy to return it to a state of stable growth, low inflation and a “more normal level of interest rates.”
Hollande Tells Samaras to Show Greek Commitment to Get Support (Source:Bloomberg)
French President Francois Hollande told Greek Prime Minister Antonis Samaras that his government must demonstrate commitment to overhauling its economy so Europe can do its part and move on from the debt crisis. “Greece needs once again to demonstrate the credibility of its program and the determination of its leaders to go all the way,” Hollande said at a joint press conference with Samaras after talks in Paris today. “Once these commitments, which are not only financial but about structural reforms that the Greeks want, have been ratified by parliament and confirmed, Europe must do its part.” While Hollande repeated his view that he wants Greece to stay in the euro, his remarks underline the hardening of France’s position since Greece’s budget troubles were first made public in late 2009. Samaras, for his part, said that he’s determined to keep his country in the 17-nation single currency.
“Many say Greece won’t make it, that it can’t stay in the euro,” Samaras said. “I came here to say Greece will make it, it will stay in the euro zone.” Samaras also addressed Hollande’s concern directly, saying the Greek government will meet its obligations. “Of course we need to make an effort,” he said. “We can keep our promises and goals, reduce our deficit and debt, accomplish structural reforms.”
