Asia FX By Cornelius Luca - Thu 06 Sep 2012 17:37:41 CT (Source: CME/www.lucafxta.com)
The appetite for risk surged on Thursday, when the European Central Bank didn't ease borrowing costs but agreed on a new bond-buying programme to lower struggling euro zone countries' borrowing costs. ECB President Mario Draghi said this measure would serve as a "fully effective backstop". The European currencies and the commodity currencies rallied, while the yen fell. The US indexes, gold, oil and silver surged. The short-term outlook for the European and commodity currencies is sideways to slightly bullish. The medium-term outlook for most of the foreign currencies is slightly bullish. The LGR short-term model is long on most foreign currencies. Good luck!
Overnight
US: ADP said private sector employment increased by 201,000 jobs in August following a revised increase of 173,000 jobs (from 163,000 jobs originally reported) in July.
US: Initial jobless claims declined to 365,000 in the week of September 1 from the upwardly revised 377,000 in the last week of August.
US: The ISM non-manufacturing index rose to 53.7 in August from 52.6 in July.
Today's economic calendar
Australia: AiG Performance of Construction Index for August
Australia: Trade balance for July
Japan: Leading / Coincident indexes for July
Asian Stocks Head for Biggest Gain in a Month on ECB Plan (Bloomberg)
Asian stocks rose, with the regional benchmark index headed for its biggest gain in a month, after the European Central Bank announced an unlimited bond-buying program to reduce the borrowing costs for the region’s most indebted nations, boosting demand for riskier assets. Camera maker Canon Inc. (7751), which gets 31 percent of its revenue in Europe, rose 3.4 percent. Toyota Motor Corp. (7203), a carmaker that depends on North America for a quarter of its sales, added 2.1 percent after data showed U.S. jobless claims fell. BHP Billiton Ltd. (BHP), Australia’s biggest oil producer, climbed 1.5 percent as crude rose. The MSCI Asia Pacific Index rose 1.2 percent to 117.38 as of 10:01 a.m. in Tokyo, headed for its biggest gain since Aug. 6, before markets in Hong Kong and China opened. About 10 stocks advanced for each that fell on the gauge, which has dropped 0.3 percent this week.
The bond plan is “another step towards a solution to the crisis,” said Andrew Pease, chief investment strategist at Russell Investment Group in Sydney, which manages about $150 billion. “It does minimize the tail risk in Europe. There’s no doubt about it.” The MSCI Asia Pacific Index fell 1.1 percent this quarter through yesterday as signs of a global economic slowdown outweighed expectations for further stimulus measures. The Asian benchmark traded at 12.1 times estimated earnings, compared with 13.8 times for the Standard & Poor’s 500 Index (SPXL1) and 11.9 times for the Stoxx Europe 600 Index.
Nikkei 225 Rises Most Since August on ECB Plan, U.S. Data (Bloomberg)
Japan stocks rose a second day, with the Nikkei 225 (NKY) Stock Average headed for its biggest gain since August, after the European Central Bank announced details of its bond-buying plan and falling jobless claims boosted optimism in the U.S. economy. Makita Corp. (6586), a power-tool maker that gets more than 40 percent of sales in Europe, advanced 2.5 percent. Honda Motor Co., an automaker that counts North America as its biggest market, gained 3.2 percent. Hitachi Construction Machinery Co., which relies on China for 17 percent of revenue, climbed 2.4 percent after the nation’s government approved a major road construction plan. The Nikkei 225 advanced 1.5 percent to 8,811.65 as of 10:31 a.m. in Tokyo, the most since Aug. 16. The equity benchmark is headed for a 0.3 percent drop on the week. The broader Topix Index climbed 1.3 percent to 728.53, with more than four shares rising for each that fell.
“We can see this rally extend for a little bit,” Guy Stear, the head of Asia Pacific research at Societe Generale SA in Hong Kong, said in a Bloomberg TV interview. “The fact that the ECB wants to absorb more risk and the fact that they managed to get it done despite the Bundesbank opposition -- all that in the short term is positive. In the short term Asian stocks are going to do better.” Stocks advanced after ECB President Mario Draghi yesterday said policy makers agreed to an unlimited bond-purchase program as they try to regain control of interest rates in the euro area. The program will target sovereign bonds with maturities of one to three years in its most ambitious plan yet to save the euro.
S&P 500 Climbs to Four-Year High as ECB Details Bond Plan (Bloomberg)
The Standard & Poor’s 500 Index climbed to its highest level since 2008 as the European Central Bank announced specifics of its bond-buying plan and data boosted optimism in the American economy. JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Cisco Systems Inc. jumped at least 4.2 percent, leading gains in the Dow Jones Industrial Average. All 10 S&P 500 groups increased as Alcoa Inc. (AA) and Owens-Illinois Inc. (OI) climbed more than 2.8 percent to pace advances among raw-material shares. Chipmaker SanDisk Corp. (SNDK) rallied 8.4 percent after OCZ Technology Group Inc. (OCZ) blamed a shortage of certain flash-memory components for lower-than- estimated sales. The S&P 500 climbed 2 percent, the most since June, to 1,432.12 at 4 p.m. in New York. The Dow added 244.52 points, or 1.9 percent, to 13,292, its highest level since December 2007. The Nasdaq-100 Index (NDX) climbed 2.3 percent to almost a 12-year peak.
More than five shares rose for each that declined on U.S. exchanges, with volume at 7.1 billion shares, or 18 percent above the three-month average. “We are in a period where we are peeling away the onion little by little, all the uncertainties, what’s going to happen in Europe and what’s going to happen here,” Dan Veru, chief investment officer at Palisade Capital Management LLC in Fort Lee, New Jersey, said in a phone interview. His firm oversees $3.5 billion. “I think Draghi is serious about putting Europe on the positive path.” Draghi said policy makers agreed to an unlimited bond- purchase program as they try to regain control of interest rates in the euro area. He said the ECB will have a “fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability.” The bond plan is the most ambitious yet in the central bank’s fight to save the euro after nearly three years of turmoil.
S&P 500 Within 10% of Record as Birinyi Sees Bears Capitulating (Bloomberg)
The $1.9 trillion restored to U.S. equity prices in 2012 has pushed the Standard & Poor’s 500 Index within 10 percent of a record, more than 7 percentage points closer than any country among the world’s biggest stock markets. The benchmark gauge for American equities climbed 2 percent to 1,432.12 yesterday as the European Central Bank detailed its bond-buying plan and data boosted optimism in the labor market. More gains are likely as bearish investors give up and start buying, according to Laszlo Birinyi, president of Birinyi Associates Inc. in Westport, Connecticut. “They realize it isn’t working,” Birinyi, an equity trader for Salomon Brothers Inc. in the 1980s, said in a telephone interview. “The excuses of no volume and earnings aren’t going to be good -- that’s not happening, and maybe it’s time to join the party.”
U.S. equities are climbing as Federal Reserve Chairman Ben S. Bernanke’s policy of holding rates near zero helps profits and economic growth rebound from the first global recession since World War II. Gross domestic product in the U.S. is forecast to increase 2.2 percent this year while earnings in the S&P 500 may reach $103.48 a share, the most ever, according to the average of analyst estimates compiled by Bloomberg. Yesterday’s advance left the S&P 500 9.3 percent from its all-time high of 1,565.15 (SPX), reached Oct. 9, 2007. Among gauges in the 10 largest equity markets, the U.K.’s FTSE 100 Index is 17 percent away from its peak, while Canada’s S&P/TSX Composite has 24 percent to climb, according to data compiled by Bloomberg.
European Stocks Gain as ECB Agrees on Bond-Purchase Plan (Bloomberg)
European stocks rallied the most in a month after European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond-purchase program as they try to regain control of interest rates in the euro area. UniCredit SpA (UCG) and Societe Generale SA (GLE) led gains in banks, climbing more than 7 percent. Lonmin Plc (LMI), the platinum producer whose main mine has been shut since Aug. 10 because of a strike that led to 44 deaths, soared 7.3 percent after agreeing to open wage talks with labor unions. Whitbread Plc (WTB) jumped 5.3 percent after sales climbed. The Stoxx Europe 600 Index (SXXP) surged 2.3 percent to 271.67 at the close, its biggest increase since Aug. 3. The gauge has rallied 16 percent from this year’s low on June 4 as Draghi pledged to do everything possible to preserve the euro. “We are having a relief rally,” said Alan Higgins, chief investment officer at Coutts & Co. in London. “There is relief that what Draghi has said is just in line with the rumors.
The new plan is essentially to help countries finance themselves at the front-end.” National benchmark indexes climbed in all 18 western- European markets, and all 19 industry groups in the Stoxx 600 advanced. Germany’s DAX rallied 2.9 percent and the U.K.’s FTSE 100 gained 2.1 percent. France’s CAC 40 jumped 3.1 percent. The ECB program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said at a press conference in Frankfurt. “Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability.”
Emerging Stocks Climb Most in Four Weeks on ECB Bond Plan (Bloomberg)
Emerging-market stocks rose the most in four weeks after European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond-purchase program, easing concern the region’s debt crisis will curb exports from developing nations. The MSCI Emerging Markets Index advanced 1.2 percent to 950.45 in New York, the biggest gain since Aug. 6. Brazil’s Bovespa climbed 2.6 percent to a one-week high as oil companies Petroleo Brasileiro SA (PETR4) and OGX Petroleo & Gas Participacoes SA followed crude higher. Russia’s Micex Index (INDEXCF) jumped 2.4 percent and Mexico’s IPC (MEXBOL) index added 1 percent as Industrias CH SAB (ICHB), the country’s largest steelmaker, rose to an all-time high.
The ECB needs to be in a position to ensure the transmission of its interest rates in all euro-area countries, Draghi said after the bank held the benchmark at a record low of 0.75 percent. The central bank forecast a deeper economic contraction for 2012 than three months ago. Nations in the MSCI index send about 30 percent of their exports to the European Union, according to the World Trade Organization. “The markets generally believe the ECB stands ready to do whatever it takes,”Gavin Redknap, an emerging-markets strategist at Nikko Asset Management, said by phone from London. “While the bond buying is good news, the fact that they did not cut rates despite lower growth forecast is not so good.”
Korean Won Gains on Fitch Upgrade, ECB Plan; Bonds Fall (Bloomberg)
The won rose to a three-week high after Fitch Ratings upgraded South Korea and the European Central Bank stepped up efforts to tackle the euro region’s debt crisis. Government bonds fell as investors favored higher- yielding assets.
Fitch raised South Korea’s rating to AA-, one step above Japan and China, less than two weeks after a Moody’s Investors Service upgrade. ECB President Mario Draghi said yesterday unlimited debt purchases by the bank will help address “severe distortions” in sovereign bond markets that partly stem from unfounded fears about the euro. U.S. jobless claims fell last week and companies added more workers than forecast in August, reports showed yesterday. The Kospi (KOSPI) index rallied 1.9 percent.
“The ECB’s announcement was more or less expected in the market, but combined with good U.S. economic data and Fitch’s rating upgrade in Korea, sentiment toward risk assets improved,” said Ryoo Hyun Jung, chief currency dealer at Citibank Korea Inc. in Seoul.
The won strengthened 0.3 percent to 1.131.07 per dollar as of 10:21 a.m. in Seoul, according to data compiled by Bloomberg. It touched 1,129.03 earlier, the strongest since Aug. 14, and gained 0.3 percent this week. One-month implied volatility, a measure of exchange-rate swings used to price options, slid 75 basis points, or 0.75 percentage point today, to 6.83 percent.
Dollar, Yen Hold Drops Against Majors as ECB Plan Boosts Stocks (Bloomberg)
The dollar and the yen remained lower after dropping yesterday against most major peers as the European Central Bank’s announcement of a new bond-buying plan damped demand for haven assets and boosted equities. The dollar held declines against higher-yielding currencies before the U.S. government releases its monthly jobs report. The euro traded near a two-month high after ECB President Mario Draghi said policy makers agreed to the unlimited purchase of government debt to reduce interest rates for struggling nations and help prevent a break-up of the European currency bloc. “The markets turned risk-on after Draghi delivered what was expected,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp., a currency-margin company. “The dollar and yen are being sold.” The dollar was little changed at $1.2629 per euro as of 10:02 a.m. in Tokyo from $1.2631 yesterday, when it touched $1.2652, the weakest since July 2. It has dropped 0.4 percent this week.
The yen slid to 99.63 per euro from 99.60, poised for a 1.1 percent weekly decline. It yesterday touched 99.81, the weakest since July 5. The Japanese currency fetched 78.89 per dollar, compared to 78.86 yesterday and 78.39 on Aug. 31. The MSCI Asia Pacific Index (MXAP) of stocks gained 1.2 percent following a 1.9 percent jump in the MSCI World Index (MXWO) yesterday.
Aussie, N.Z. Dollars Hold Gains as Stocks Rise on ECB (Bloomberg)
The Australian and New Zealand dollars remained higher following gains yesterday as Asian stocks extended a global rally after the European Central Bank’s bond-buying plan spurred risk appetite. The so-called Aussie traded near the highest level in almost a week before the U.S. government releases its monthly jobs report amid speculation continued labor-market weakness will encourage the Federal Reserve to add stimulus. The South Pacific currencies held gains against most major peers after commodity prices yesterday climbed for the first day this week. “The Australian dollar is going to be well supported today,” said Andrew Salter, a strategist in Sydney at Australia & New Zealand Banking Group Ltd. “The decision by the ECB to engage in some form of asset-purchase program is going to underpin risk sentiment. That’s going to benefit the Australian dollar.”
The Aussie bought $1.0290 as of 10:13 a.m. in Sydney after climbing 0.9 percent to $1.0284 yesterday, when it touched $1.03, matching the strongest since Aug. 31. The currency traded at 81.17 yen from 81.10. The New Zealand dollar, known as the kiwi, fetched 80.11 U.S. cents following yesterday’s 0.9 percent advance to 80.15 cents. It was little changed at 63.20 yen. Both South Pacific currencies are poised for a 0.3 percent decline against the greenback this week. Australian government bonds dropped, pushing the yield on 10-year government debt to its highest level since Aug. 29. The rate advanced as much as 11 basis points to 3.20 percent.
Treasuries Set for Weekly Drop as Stocks Rally on ECB Bond Plan (Bloomberg)
Treasuries were set for the first weekly drop in three after European officials unveiled plans to buy bonds to curb the region’s sovereign-debt crisis, spurring a global stock rally and sapping demand for safer assets. Benchmark 10-year debt completed a three-day slide yesterday after European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond-purchase program. Treasury losses were limited amid speculation a U.S. report today will show hiring wasn’t fast enough to lower the unemployment rate and reduce the probability that the Federal Reserve will expand monetary stimulus. “We expect a gain in Treasury yields,” said Yoshinori Shigemi, a strategist for non-yen debt at RBS Securities Japan Ltd. in Tokyo. “We see a higher chance that the risk-on environment will continue” after the ECB plan, he said.
The 10-year note yield was little changed at 1.68 percent at 10:01 a.m. in Tokyo. The 1.625 percent note due August 2022 traded at 99 17/32. The yield has risen 13 basis points since Aug. 31 after falling 26 basis points in the previous two weeks. The MSCI Asia Pacific Index of shares climbed 1.2 percent. The ECB’s bond-buying plan, called Outright Monetary Transactions, will focus on government notes with maturities of one to three years, Draghi said yesterday. The ECB will only intervene in the secondary market if a country has asked Europe’s bailout fund to buy its debt on the primary market, ensuring strict conditions are agreed to, he said. Labor Department data due today may show the U.S. added 130,000 jobs last month, trailing the 163,000 increase in July, economists in a Bloomberg News survey forecast. The jobless rate held steady at 8.3 percent, economists projected.
Jobless Claims in U.S. Fall as Companies Add Staff: Economy (Bloomberg)
Claims for unemployment benefits fell to the lowest level in a month and American companies added more workers than forecast, easing concern the labor market may be stagnating. Jobless claims decreased by 12,000 to 365,000 in the week ended Sept. 1, the Labor Department reported today in Washington. Private employers expanded payrolls by 201,000 in August, according to figures from Roseland, New Jersey-based ADP Employer Services, exceeding the 140,000 median gain forecast by economists in a Bloomberg survey. Another report showing U.S. services expanded at a faster pace boosted the outlook one day before the Labor Department releases data on a job market that Federal Reserve Chairman Ben S. Bernanke has said is cause for “grave concern.” Stocks rallied after the figures and as European Central Bank policy makers agreed to an unlimited bond-purchase program to ease the region’s debt crisis.
“We’re starting to see some stability in the labor market,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, who correctly forecast the level of jobless claims. “The labor market is that it continues to move in the right direction, but probably not as fast as Fed officials would like. We’re going to get a better handle on that tomorrow.” The Standard & Poor’s 500 Index climbed 2 percent to a four-year high of 1,432.12 at the 4 p.m. close in New York. The yield on the benchmark 10-year Treasury note increased to 1.67 percent from 1.60 percent late yesterday.
Services in U.S. Expanded More Than Forecast in August (Bloomberg)
Service industries in the U.S. expanded in August at a faster pace than forecast, offering support to an economy that lost momentum in the first half of the year. The Institute for Supply Management’s non-manufacturing index climbed to a three-month high of 53.7 from 52.6 in July, the Tempe, Arizona-based group said today. Readings above 50 signal expansion, and economists projected 52.5 for August, according to the median estimate in a Bloomberg survey. A sustained pickup in service industries will help make up for three straight months of contraction in manufacturing and may create more employment opportunities as the jobless rate exceeds 8 percent. At the same time, FedEx Corp. (FDX) is among companies seeing waning demand as rising gas prices, cooling global economies and diminished business investment hold back U.S. growth.
“Services have held in there,” Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh, said before the report. “The service sector is actually doing better than manufacturing in terms of growth, which is a change from what’s been going on in the past few years.” Economists’ estimates in the Bloomberg survey ranged from 51 to 53.5. The gauge has averaged 53.3 since the recession ended in June 2009.
Harper Seeks More Gains From China in Exchange for Oil (Bloomberg)
Canadian Prime Minister Stephen Harper said his government will seek to correct trade imbalances with China as he manages a wave of takeover spending from the Asian country. Harper, speaking at the Bloomberg Canada-Asia Conference in Vancouver, said Canada needs to diversify trade to Asia because of sluggish growth in much of the rest of the world, adding that the relationship also needs to become reciprocal. “The Chinese are acutely aware, in my own experience, of the fact the trade and investment flows are disproportionately in their favor,” Harper said in an interview with Bloomberg Television’s Erik Schatzker. “They recognize that has to change,” he said, adding “we will also be seeking things from them.”
Harper’s ability to bolster economic relations with China, which he calls a national priority, is being tested by concern the Asian country may gain too much influence over Canada’s oil sands, the world’s third-largest pool of oil reserves. A poll by Sun News Network last week showed a majority of Canadians surveyed want him to reject a $15.1 billion takeover of Calgary- based oil company Nexen Inc. (NXY) by China’s Cnooc Ltd. Harper today said he’s aware Canadians are wary of Chinese investment and said it’s incumbent on China to show it can play by “the same rules” as Canadians.
China’s Goal of 10% Trade Growth Drifts Out of Reach (Bloomberg)
Chinese toy merchant Pan Junping says this is usually among his busiest times as customers in the U.S. and Europe load up on orders for Christmas. This year, he’s quieter than ever. “The situation is possibly worse than 2009, and confidence is zero,” said Pan, 39, who’s frozen salaries and expects a 30 percent decline in annual sales for his trading company in Yiwu city, in the eastern province of Zhejiang. “It’s not busy at all.” Europe’s debt crisis is diminishing China’s prospects for reaching a target of 10 percent trade growth this year and strengthening the case for investment stimulus, monetary easing and more tax relief for companies such as Pan’s. A report due Sept. 10 may show a 2.9 percent gain in exports in August from a year earlier, down from an average 18 percent growth over the past two years, based on the median estimate in a Bloomberg News survey.
The trade slowdown is weighing on companies such as Tianjin-based China Cosco Holdings Co. (1919), the country’s largest listed shipper, after the European Union this year slipped behind the U.S. as the nation’s biggest export market. “If you have some bad news, that growth is really bad, the government is likely to introduce some stimulus package,” said Helen Qiao, chief China economist with Morgan Stanley in Hong Kong. She forecasts 4.1 percent growth in overseas shipments in 2012, compared with 20.3 percent last year.
China Gets Worst Ranking in Global Poll Since 2010 (Bloomberg)
Global investors are losing faith in China, giving the country’s markets their worst rating in more than two years in the latest Bloomberg poll. About a quarter of those surveyed say they expect Chinese markets to be among the worst performers over the next year. That’s the highest negative reading that the country has received in the quarterly Bloomberg Global Poll since January 2010 and was second only to the 45 percent rating that the European Union received in the Sept. 4 survey. China “will suffer disproportionately from a global slowdown in growth,” said Benjamin Dunn, a poll participant and chief operating officer in Crested Butte, Colorado, for portfolio management company Alpha Theory, in an e-mail. It “will be unable to prevent a hard landing” of its economy.
The U.S. again came out on top in the poll of 847 investors, analysts and traders who are Bloomberg subscribers: 46 percent say its markets will be among those offering the best returns over the next year, the same as in the previous survey in May. Close to three-quarters expect the Federal Reserve to act next week to support the economy, either by extending its pledge of low interest rates, buying bonds, or by doing both. Commodities in general and gold in particular gained favor with investors in the poll. Eighteen percent of those surveyed expect commodities to offer the highest returns over the next year. That’s up from 13 percent in May and was second only to stocks, which won the backing of a third of investors. Gold came in third, with 16 percent, up from 11 percent in May.
China Approves Plan to Build New Roads to Boost Economy (Bloomberg)
China approved plans to build 2,018 kilometers (1,254 miles) of roads, its second major construction project announced this week, as the government boosts spending on infrastructure to help revive economic growth. The projects include highways in Zhejiang and Xinjiang provinces, according to statements on the National Development & Reform Commission’s website. The approvals were given during June-August period. The agency also cleared plans for nine sewage treatment, two waterway and five port and warehouse projects, without disclosing the required investments. The announcements came a day after the NDRC, the country’s top economic planner, backed plans for subway projects in 18 cities and after an increase in the rail-construction budget as the government tackles growth that has eased to the slowest pace in three years. The move will help accelerate infrastructure investment growth to more than 20 percent year-on-year from 15 percent, according to HSBC Holdings Plc.
“Beijing policy makers are stepping up efforts to speed infrastructure investment to hold up growth,” Qu Hongbin and Sun Junwei, economists at HSBC, said in a note yesterday. “We expect a fast filtering-through process to generate a modest growth recovery in the coming months.” The approvals on Sept. 5 for a total of 25 new subway and inter-city rail projects are worth more than 800 billion yuan ($126 billion), or 1.7 percent of 2011 gross domestic product, they said. The spending will run from the second half of the year to 2018.
China Price War Draining Jobs in Germany’s Solar Valley: Energy (Bloomberg)
When Thomas Behling returned to his home state of Saxony-Anhalt in 2006, he was drawn by a job in the solar industry and the chance to participate in Germany’s renewable energy boom. He was fired in July. Behling’s employer, Sovello GmbH, produced its last solar panel on Aug. 26, sending 1,000 workers home after attempts to find an investor to save the seven-year-old company failed. Next door, Q-Cells SE (QCE), once the world’s largest solar-cell maker, is being acquired by Hanwha Group of South Korea as soaring debt brought it to the brink of bankruptcy. At least 12 German solar companies filed for protection from creditors in the past year.
Their demise, fueled by price competition from China and a cut in German subsidies from April, has hobbled Saxony-Anhalt’s effort to turn a 350-hectare (1.4 square miles) business park near the town of Bitterfeld-Wolfen into Europe’s solar-power nucleus. Even as Chancellor Angela Merkel pins Germany’s exit from nuclear energy on power derived from the sun and wind, a global glut of solar panels is killing the fledgling firms. “I believed that I was working in an industry with a future,” Behling, a 31-year-old industrial mechanic, said in an interview. “That it’s over now is very sad.” The European Union yesterday threatened to impose tariffs on solar panels from China, echoing a similar move by the U.S., as it opened a probe into whether Chinese manufacturers are selling them below cost, a practice known as dumping. Tariffs however will come too late for Sovello and many German firms.
Brazil to Seek New Tax Cuts to Help Fuel Growth, Rousseff Says (Bloomberg)
Brazilian President Dilma Rousseff said she’ll seek new tax cuts while maintaining fiscal discipline in a bid to fuel faster growth in Latin America’s biggest economy. Brazil will push banks to lower lending rates and cut electricity rates for producers and households, she said in a national address today.
Brazil Signals Record-Low Interest Rates Are Here to Stay (Bloomberg)
Brazil’s central bank signaled it’s ready to keep interest rates at a record low, rejecting the view that a jump in food prices and faster economic growth will lead to an acceleration in inflation. Policy makers, in the minutes to their Aug. 28-29 meeting at which they cut interest rates for a ninth straight time, said that bad weather in the U.S. and Brazil is weighing on the price of food and beverages. All the same, the supply shock is less intense than one in 2010 and the country’s long-term price outlook remains favorable with inflation slowing toward the 4.5 percent target, the bank said.
While traders remain split on whether Brazil will reduce its benchmark rate a quarter point in October, they have trimmed bets central bank President Alexandre Tombini will be forced to increase borrowing costs early next year to keep inflation in check. The bank’s board voted unanimously last week to cut the Selic rate 50 basis points to a record 7.5 percent and has lowered borrowing costs 500 basis points over the past year, more than any other Group of 20 nation, to revive an economy that has been stagnant for the past year. “The name of the game is to stop cutting the Selic in the short term, but keeping it low in the future,” Andre Perfeito, chief economist at Gradual Investimentos, said in a phone interview from Sao Paulo. The swap rate on the contract maturing in January 2014, the most traded in Sao Paulo, fell four basis point to 7.78 percent at 9:55 a.m. local time. The real, which has declined 8.5 percent this year against the greenback, was little changed at 2.0392 per U.S. dollar.
Draghi Lured by Fractious EU Leaders to Build Bridge to Euro 2.0 (Bloomberg)
The European Union’s 19th crisis summit was winding down when European Central Bank President Mario Draghi made an unusual request. He wanted some alone time with EU President Herman Van Rompuy to thank him for charting the path toward a shock-proof euro zone. Only later did the significance of the blueprint sketched out at the June summit in Brussels emerge. The commitment to tighter bank supervision, budget coordination and a nebulous “political union” was instrumental in persuading Draghi that governments are putting the currency on a sounder footing, leading to yesterday’s ECB decision to buy bonds to help them get there. “We need two legs,” Draghi said in presenting the new tactics. “Governments have to undertake the policy reforms. There is no intervention by the central bank, by any central bank, that is actually effective without concurrent policy action by the governments.”
While it relaunched the crisis management after 2 1/2 years of trial-and-error and bickering between creditor and debtor governments, the ECB’s strategy bore traces of the compromises and half-measures that continue to gnaw at the currency union. The next moves are out of the bank’s control. They depend on decisions in places like Madrid and Rome. And the leaders of the 17 governments locked into the supposedly unbreakable euro don’t yet have a roadmap for remaking Economic and Monetary Union, only a pledge to come up with one.
Recession Indicator Unreliable With Fed Rates: Cutting Research (Bloomberg)
The bond market indicator that has predicted every U.S. recession since 1970 may have lost its forecasting prowess, thanks to the Federal Reserve. Two rounds of quantitative easing by the U.S. central bank mean the gap between the 10-year Treasury bond yield and the rate on the three-month bill “has been severely distorted and therefore can no longer be relied on to convey a truthful assessment of the risks of recession,” wrote Stephen Jen and Fatih Yilmaz, founders of London-based SLJ Macro Partners LLP, in an Aug. 29 report. The yield curve’s traditional and consistent reactions to Fed policy changes and investor expectations about inflation and the economy have made it a tool for prognosis in the past. For instance, an inverted yield curve, in which short-term securities yield more than those with longer maturities, is seen as a recession gauge because it reflects expectations for higher interest rates and slowing inflation.
What’s changed is the Fed’s ultra-easy monetary policy, which has brought interest rates close to zero. That has “significantly distorted the shape of the yield curve,” SLJ said. Other business cycle indicators also have “pretty serious shortcomings,” the authors said. That’s because they are not well equipped to capture the growing impact of the financial sector and its wealth effect, the U.S.’s reliance on services, supply-side shocks in the labor market and globalization. The SLJ report proposed an alternative approach, based on the idea that expansions have a “natural cycle” in which the chance of recession increases the longer growth runs. That suggests the risk of a downturn could be closer to 50 percent in coming quarters compared to the zero chance ascribed by the yield curve.
Wealthy Unmoved by U.K. Tax Increase as Luxury-Home Sales Surge (Bloomberg)
The British government’s plan to raise a tax on luxury-home purchases sparked a last-minute dash by real-estate brokers to wrap up deals before the deadline hit in March. They needn’t have bothered. Sales of homes valued at 2 million pounds ($3.2 million) more than doubled in May from a year earlier, according to the most recent data available from the Land Registry. After a 40 percent decline in April, sales rebounded as overseas investors took advantage of the U.K.’s status as a haven from economic and political turmoil. “Money is leaving the euro zone and being spent on a safe asset,” Matthew Pointon, an economist at researcher Capital Economics, said. “Safe-haven flows outweigh the increase in the stamp duty.” Luxury homes have held their value better than cheaper residential properties in the U.K. because of a scarcity of prime real estate for sale, particularly in London. That has led to record prices paid for homes in the city’s Mayfair, Kensington and Knightsbridge districts.
Chancellor of the Exchequer George Osborne’s annual budget targeted luxury-home purchases to help narrow Britain’s record deficit. He raised a transaction tax known as stamp duty on homes sold for more than 2 million pounds to 7 percent from 5 percent. The use of corporations set up in offshore tax havens such as the Cayman Islands to avoid the tax spawned a 15 percent levy on purchases of homes by companies.
Draghi to deliver bond plan at crunch ECB meeting (Reuters)
European Central Bank chief Mario Draghi faces the most decisive moment of his presidency on Thursday when he tries to heal divisions among policymakers and deliver on his promise to save the euro.
