Asia Stocks Decline Second Day on Greece, Australia Forecast Cut (Bloomberg)
Asian stocks fell, with the regional benchmark index headed for the biggest two-day loss in more than three months, amid concern Greece’s bailout may be delayed and as Australia’s central bank cut its growth forecast. Electronics maker Samsung Electronics Co. (005930), which gets 19 percent of its sales in Europe, dropped 1.3 percent. Fanuc Corp. (6954), a maker of factory robots that depends on Asia for half of its revenue, lost 2 percent before China reports data on inflation, industrial production and retail sales today. Nexon Co., a developer of online games, slumped 16 percent after cutting its profit forecast. The MSCI Asia Pacific Index fell 0.7 percent to 120.97 as of 10:14 a.m. in Tokyo before markets in Hong Kong and China opened. About five stocks dropped for each that gained on the measure, which has declined 1.3 percent this week.
“Investors have just gotten nervous,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “The data until now looks like China’s economy is bottoming, so today’s numbers will be important in saying whether that remains the correct interpretation.” The MSCI Asia Pacific gauge gained 12 percent through yesterday from this year’s low on June 4 as central banks added stimulus to spur growth and China’s economic data showed a slowdown in the world’s second-largest economy may be bottoming. The index traded at 13.3 times estimated earnings as of today, compared with 13.2 for the Standard & Poor’s 500 Index and 12.1 for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.
Japan Stocks Fall Fifth Day on Stronger Yen, Greek Rescue (Bloomberg)
Japanese stocks fell, with the Nikkei 225 (NKY) Stock Average heading for its longest losing streak in nine weeks, after exporters declined on a stronger yen and amid concern Greece’s bailout will be delayed. Sony Corp. (6758), Japan’s biggest consumer-electronics exporter, lost 1.8 percent. Sumitomo Rubber Industries Ltd. fell 5.9 percent after missing estimates for full-year profit. Nexon Co. plunged 15 percent after the online-gaming company trimmed its forecast and was cut to underperform at CLSA. The Nikkei 225 fell 1.1 percent to 8,736.34 as of 9:45 a.m. in Tokyo, declining a fifth day. The price of the gauge’s November options, also known as the “special quotation,” settled at 8,745.24. The broader Topix (TPX) Index lost 1 percent to 727.91, heading for a 3.2 percent weekly decline.
“Investors have just gotten nervous,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “You’ve got residual concern about the U.S. fiscal cliff and this delay in payments to Greece. The worries were there before. It sounds a bit irrational, but that’s the way markets often work. Once they start going down, the falling momentum triggers more selling.” The Topix rose 2.3 percent through yesterday from Sept. 6 after the European Central Bank started a global wave of stimulus to boost growth, with the U.S. Federal Reserve and the Bank of Japan following suit. Shares on the equity gauge traded at 0.6 times book value, compared with 2.1 for the Standard & Poor’s 500 Index and 1.5 for the Europe Stoxx 600 Index.
U.S. Stocks Decline Amid Greece, Fiscal Cliff Concerns (Bloomberg)
The Standard & Poor’s 500 Index had the biggest two-day decline in a year as investors speculated Greece’s bailout will be delayed and that President Barack Obama’s re-election endangers tax breaks for investors. Apple Inc. (AAPL), the world’s most valuable company, retreated 3.6 percent, extending its plunge since its September high to 23 percent. McDonald’s Corp. (MCD), the world’s largest restaurant chain, dropped 2 percent after its monthly store sales declined for the first time in nine years. Prudential Financial Inc. (PRU), the second- largest U.S. life insurer, decreased 4.8 percent after lowering its assumptions for equity and bond returns.
The S&P 500 declined 1.2 percent to 1,377.51 at 4 p.m. New York time, dropping 3.6 percent in two days. The benchmark gauge for American equities retreated below its average price of the last 200 days of 1,380.71. The Dow Jones Industrial Average decreased 121.41 points, or 0.9 percent, to 12,811.32. Volume for exchange-listed stocks in the U.S. was 6.9 billion shares, or 15 percent above the three-month average. “It’s hard bargaining for Greece,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion. “The risk of a recession is still out there. Apple might be a victim of its own success because it’s risen so much. With its huge market cap, as Apple goes, so goes the broader market.”
Equities extended yesterday’s tumble as investors turned to the budget debate and Europe’s crisis following President Obama’s re-election. Energy, financial and technology shares had the biggest losses in the S&P 500 in two days, falling at least 4.2 percent. The Dow dropped 3.3 percent in the period.
Recap Stock Index Market Report (CME)
The December S&P 500 traded choppy to higher during the early morning hours, helped by technical buying following yesterday's slide and better than expected US economic readings. US futures prices rallied to their high of the session in the wake of the Wall Street open. Meanwhile, disappointing October sales figures from McDonalds and a more than 2.5% slide in the shares of Apple soured the tone. Late morning headlines suggesting that the European Union might delay further aid to Greece pressured the major indices back down toward yesterday's low. Further uncertainty surrounding the US fiscal cliff and potential impact on economic growth seemed to pressure the December S&P 500 into new low territory for the decline. The market will get the latest earnings results from Walt Disney after the close, and a round of Chinese economic readings Thursday evening.
European Stocks Drop as Carmakers Slide (Bloomberg)
European (SXXP) stocks fell, extending yesterday’s biggest decline in two weeks, as a selloff in auto manufacturers overshadowed results from Swiss Re Ltd. and Hermes International (RMS) SCA that beat analysts’ estimates. PSA Peugeot Citroen SA (UG) and Valeo SA (FR) both lost more than 4 percent as analysts downgraded their shares. Swiss Re gained 1.9 percent after saying smaller losses from natural disasters helped net income surge in the third quarter. Hermes advanced 2 percent as sales rose because of increased demand in Asia. The Stoxx Europe 600 Index fell 0.2 percent to 270.58 at the close in London, after earlier climbing as much as 0.6 percent. The gauge has rallied 16 percent from this year’s low on June 4 as European Central Bank President Mario Draghi said he would do everything to protect the single currency and the Federal Reserve opted for a third round of asset purchases.
“I have trouble being very optimistic,” said Matthieu Giuliani, a fund manager at Banque Palatine SA in Paris, which oversees $5.1 billion. “The general tone of company outlooks is cautious. The situation hasn’t changed fundamentally.” Of the 229 Stoxx 600 companies that have reported earnings this season, about 53 percent have exceeded analysts projections, according to data compiled by Bloomberg. Some 39 companies in the equity benchmark were scheduled to report their results today, data compiled by Bloomberg show. National benchmark indexes fell in every western-European market except Portugal and Switzerland. France’s CAC 40 retreated 0.1 percent. The U.K.’s FTSE 100 slid 0.3 percent and Germany’s DAX lost 0.4 percent.
Emerging Stocks Decline Most in Three Months as GS Slumps (Bloomberg)
Emerging-market stocks slid the most in three months, led by industrial companies, after GS Engineering & Construction Corp. (006360) said profit tumbled and U.S. elections paved the way for a showdown over the nation’s budget deficit. GS Engineering slumped to the lowest level in more than three years in Seoul and set a gauge of industrial stocks for its biggest drop since July. Brazilian homebuilder MRV Engenharia & Participacoes SA fell the most since Aug. 2 while Russia’s Micex Index (INDEXCF) sank to a three-month low, led by OAO Sberbank, the country’s biggest lender. The MSCI Emerging Markets Index (MXEF) of 818 developing-nation stocks declined 1.2 percent to 995.31 at the close of trading in New York, its biggest drop since July 23. Re-elected for a second term on Nov. 6, President Barack Obama now faces negotiations to avoid the so-called fiscal cliff, more than $600 billion of tax increases and spending cuts that are set to kick in automatically in January.
“Most negativity in emerging markets is coming from developed markets,” Lars Christensen, chief emerging-markets analyst at Danske Bank A/S said by phone from Copenhagen. “There are concerns about the fiscal cliff situation in the U.S.” The iShares MSCI Emerging Markets Index exchange-traded fund, the ETF tracking developing-nation shares, slid 1.3 percent to the lowest level since Sept. 12. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, a measure of options prices on the fund and expectations of price swings, rose 5.9 percent.
Aussie Drops Versus Peers After RBA Cuts Growth Forecast (Bloomberg)
Australia’s dollar slid versus most of its 16 major counterparts after the Reserve Bank reduced its 2013 growth forecast in its quarterly monetary policy statement. The so-called Aussie weakened for a third day against its U.S. peer, paring a weekly advance, amid rising expectations the central bank will lower borrowing costs at a meeting next month to bolster the economy. New Zealand’s currency fell as a drop in Asian stocks outweighed figures that indicated an increase in house prices and card spending. “The risks are that we see 2013 as a year of potentially below-trend growth,” said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. (WBC) in Singapore. “This will nudge up the odds that we see a December rate cut. Some of the headlines are certainly going to take the shine off the currency as well.” Westpac predicts the RBA will cut the overnight cash-rate target by 25 basis points on Dec. 4 and lower it by an additional quarter-percentage point to 2.75 percent by March 31, Cavenagh said.
The Australian dollar fell 0.2 percent to $1.0387 as of 11:50 a.m. in Sydney, poised for a 0.5 percent weekly advance. New Zealand’s currency lost 0.2 percent today to 81.37 U.S. cents. It has dropped 1.4 percent since Nov. 2, the biggest decline among the U.S. dollar’s major peers. The MSCI Asia Pacific Index of shares declined 0.6 percent. The RBA predicted year-average gross domestic product growth of 2.25 percent to 3.25 percent in 2013, lower than its August estimate of 2.75 percent to 3.25 percent, according to a statement today.
Euro Trades Near Two-Month Low on Greece Bailout Concern (Bloomberg)
The euro traded 0.2 percent from the lowest level in two months before Greece’s lawmakers vote on next year’s budget amid concern the nation the nation may fail to meet bailout requirements. The yen headed for its biggest weekly gain since July against the 17-nation euro after a European Union official said a decision on unlocking funds for Greece may not be made until late November, prompting investors to seek safer assets. Australia’s dollar declined for a third day after the nation’s Reserve Bank cut its 2013 growth forecast and before China reports on October inflation today. Reports on Greece “cast new doubts on an already troubled area,” said Hans Kunnen, chief economist at St. George Bank Ltd. in Sydney. “The Greek economy is in a dire state, with or without aid, and that is making everybody continually nervous. The euro will stay under pressure.”
The euro traded at $1.2739 as of 9:39 a.m. in Tokyo from $1.2747 at the close in New York yesterday, when it touched $1.2717, the weakest since Sept. 7. It has dropped 0.8 percent since Nov. 2. The yen fetched 101.25 per euro from 101.30, set for a 2 percent gain this week, the sharpest advance since the five days ended July 6. The Japanese currency was little changed at 79.50 per dollar. Euro-area finance ministers may not make a decision on unlocking funds for Greece until late this month as they await a full report on the country’s compliance with the terms of its bailout, according to the EU official.
Record Overseas Sales Boost U.S. Growth: Economy (Bloomberg)
Exports from the U.S. climbed to a record in September, contributing to an unexpected decline in the trade deficit that gave the world’s largest economy a boost at the end of the third quarter. The gap shrank 5.1 percent to $41.5 billion, the smallest since December 2010 and lower than any estimate in a Bloomberg survey of economists, Commerce Department figures showed today in Washington. The gain in sales to overseas buyers was broad- based, with improvement in everything from soybeans to fuel and civilian aircraft. Growing demand from emerging markets in South and Central America may be helping to overcome a slowdown in Europe and China that is hurting companies such as Emerson Electric Co. (EMR) At the same time, U.S. consumers are spending more as the job market stabilizes, boosting the inflow of goods made abroad as retailers restock in advance of the year-end holidays.
“The outlook in emerging markets is stronger than in Europe, and that’s where we would expect to see export growth,” said Jeremy Lawson, senior U.S. economist at BNP Paribas in New York, who projected the gap would decline to $42 billion, matching the lowest among economists surveyed. “Consumer goods imports were strong. Some of that may be in preparation for holiday shopping. The picture is getting better there.” The improvement in trade may boost third-quarter growth by 0.4 percentage point, according to economists at JPMorgan Chase & Co. in New York. Combined with prior data showing a pickup in construction and in inventories, the JPMorgan analysts now project the economy expanded at a 2.8 percent annual rate in July through September, up from an initial Commerce Department estimate of 2 percent.
U.S. Jobless Claims Fall as Storm Starts to Affect Data (Bloomberg)
Fewer Americans than forecast filed claims for unemployment insurance last week as the effects of Hurricane Sandy started to show up. Applications for jobless benefits fell by 8,000 to 355,000 in the week ended Nov. 3, the Labor Department said today in Washington. One state said the loss of electricity due to the storm suppressed filings, while others said workers who lost their jobs as a result of the weather were starting to apply, a Labor Department spokesman said as the data were released to the press. The spokesman declined to identify the state affected by the power loss, saying it was department policy not to name individual states.
It may take three to four weeks to see the full impact, the spokesman said, which indicates claims may jump back in coming weeks as more storm-related applications begin to be processed. A Labor Department report last week showed the economy added more jobs than projected in October and the unemployment rate rose as hundreds of thousands of Americans rejoined the job search as prospects improved. “When you see bad weather, there’s usually a drop in claims, and then you typically see a rebound in the next few weeks,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, who correctly forecast the number of initial filings. “Underneath the surface, job destruction has been trending very low. Layoffs aren’t the problem -- it’s the relatively weak pace of job creation.”
Economists forecast claims would be little changed from the prior week at 365,000, according to the median estimate in a Bloomberg survey. Projections ranged from 335,000 to 450,000 in the survey of 51 economists. The prior week’s reading was unrevised at 363,000.
U.S. Consumer Comfort Climbs to Highest Level Since April (Bloomberg)
Consumer confidence climbed last week as Americans’ ratings of the economy reached the highest level in more than four years.
The Bloomberg Consumer Comfort Index rose to minus 34.4 in the period ended Nov. 4, the best reading since April, from minus 34.7 the previous week. Twenty percent of those surveyed had a positive view of the world’s largest economy, the most since March 2008.
The gains may further invigorate household spending and propel retailers like Macy’s Inc. ahead of the year-end holidays. The end of the contentious presidential race, combined with an improving job market, may continue to boost sentiment even as the lingering effects of superstorm Sandy limit any short-run rebound, according to economist Joseph Brusuelas.
“With the election now in the rear-view mirror and the holidays ahead, the underlying improvement in the trend across all major consumer confidence readings will reassert itself in coming weeks,” said Brusuelas, a senior economist at Bloomberg LP in New York. “That being said, given the damage from the storm, a transitory downdraft in consumer comfort should be expected.”
In a separate report today, Labor Department figures showed the number of Americans filing first-time applications for unemployment benefits declined last week as the effects of Hurricane Sandy started to show up. Jobless claims dropped by 8,000 to 355,000 in the week ended Nov. 3.
Stocks rose as JPMorgan Chase & Co. paced a rally in financial shares. The Standard & Poor’s 500 Index gained 0.1 percent to 1,396.42 at 9:33 a.m. in New York.
Obama Asia Trip to Mark First Myanmar Stop by U.S. President (Bloomberg)
President Barack Obama will become the first sitting U.S. president to visit Myanmar, one of three stops on a Southeast Asia trip this month. Obama will meet with President Thein Sein and opposition leader and former political prisoner Aung San Suu Kyi in Rangoon, Myanmar, as part of U.S. efforts to encourage the transition to democracy in the country, formerly known as Burma. Rangoon is the middle stop on the Nov. 17-20 trip that is built around the East Asia Summit in Phnom Penh, Cambodia, where Obama will meet with leaders of the Association of Southeast Asian Nations. The White House announced plans for the trip yesterday. The president’s first foreign trip following his Nov. 6 re- election also includes a stop in Thailand, where he will meet with Prime Minister Yingluck Shinawatra in Bangkok.
With the conflict in Iraq over and the war in Afghanistan winding down, Obama has been moving to reassert U.S. power in Asia. The region is a key part of Obama’s strategy to expand U.S. imports in competition with China, the world’s second largest economy. The U.S. has been seeking to build influence in Myanmar. Thein Sein took power there last year when his party won an election that ended about five decades of direct military rule. He has dismantled a fixed exchange rate, eased media censorship and held talks with opponents.
PBOC’s Zhou Says China’s Economy Improving as Data Due (Bloomberg)
China’s central bank governor and statistics chief signaled October data to be published from today will show growth improving this quarter in the world’s second-largest economy. Some indicators are rebounding and the economy is stabilizing, Zhou Xiaochuan, head of the People’s Bank of China, said yesterday in Beijing at a briefing during the Communist Party’s 18th Congress. Ma Jiantang, head of the National Bureau of Statistics, said separately that people will be “more confident” about the fourth-quarter expansion. The ruling party yesterday started a weeklong meeting to choose its fifth generation of leaders amid signs that the economy is recovering from a seven-quarter slowdown. Service industries rebounded from the weakest expansion in at least 19 months, an official purchasing managers’ survey showed Nov. 3 and two separate reports showed a pickup in manufacturing.
“The new leadership will see to it that the economy will not deteriorate further,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in a research note this week. “We expect slightly better growth from the data, amid infrastructure spending from the fiscal boost, and a more resilient consumption sector, but maintain that a recovery will be mild.” Yi Gang, deputy governor of the central bank, said separately yesterday that fourth-quarter economic performance will be “relatively good.”
Russia Set to Skip Rate Increase on Inflation Surprise (Bloomberg)
Russia, the largest emerging economy to raise interest rates this year, will probably refrain from increasing borrowing costs today after inflation unexpectedly slowed in October for the first time in six months. Bank Rossii will leave the refinancing rate at 8.25 percent at a meeting in Moscow, half a percentage point above the record low, according to 21 of 23 economists in a Bloomberg survey. Two predict a quarter-point increase. Policy makers will hold their main short-term lending and deposit rates at 5.5 percent and 4.25 percent, two separate surveys showed. Russia raised its refinancing rate for the first time in 16 months in September as a surge in price growth pushed inflation beyond the 6 percent upper limit of the regulator’s target range. Chairman Sergei Ignatiev, whose third and final term at the helm of Bank Rossii ends in 2013, needs to check price gains next year as the economy slows and his counterparts from Poland to the Philippines reduce borrowing costs.
“October showed that inflation expectations are easing, and that inflation is slowing after the earlier surge,” Oleg Vyugin, chairman of MDM Bank and a former Bank Rossii first deputy chairman, said in a telephone interview. “There’s no reason to touch rates.” Three-month borrowing costs may fall 2 basis points, or 0.02 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. That compares with a jump of 21 basis points forecast on Oct. 4, the day before Bank Rossii’s last rate meeting. The cost to fix floating interest payments in rubles for a year using rate swaps was 7.53 percent yesterday.
RBA Lowers 2013 Growth Forecast on Weaker Mining, Budget Cut (Bloomberg)
The Reserve Bank of Australia reduced its 2013 growth forecast as lower investment in iron ore, coal and natural-gas projects and the government’s pledge to deliver an election-year budget surplus restrain the economy. “Most of this revision to the outlook is accounted for by a change in the profile for mining investment,” the RBA said today in its quarterly monetary policy statement, predicting a peak in resource spending at about 8 percent of gross domestic product from a prior 9 percent. The central bank said “a slightly weaker” domestic economy and labor market should help contain inflation. The government’s bid for a A$44 billion ($46 billion) budget swing back to the black “appears to be weighing on growth over the second half” of this year, the report showed. “The current level of the exchange rate could also have a more contractionary effect on output than anticipated,” it showed.
The RBA cited the currency’s strength -- even as commodity prices dropped last quarter -- as a factor in decisions by mining companies to put off some projects. The central bank has cut the overnight cash rate target by 1.5 percentage points since Nov. 1, 2011, as it aims to help industries such as construction rebound in an economy where resource investment is predicted to peak at a lower level next year. “While the impact of monetary policy changes takes some time to work through the economy, there are signs that easier conditions have been having some of the expected effects, and further effects can be expected over time,” the central bank said. “Lower interest rates, rising rental yields and an improvement in conditions in the established housing market are expected to support rising dwelling investment.”
Malaysia Clears Path for IPOs of Business Trusts: Southeast Asia (Bloomberg)
Malaysia will introduce rules governing initial public offerings of business trusts by next month as it seeks to extend a wave of share sales that saw the country surpass Hong Kong and Singapore in IPOs this year. Companies including toll road operators and power producers are ideal candidates for setting up business trusts as investors roiled by Europe’s debt crisis seek stable returns, said Eugene Wong, executive director of corporate finance and investments at Malaysia’s Securities Commission. Kuala Lumpur has been home to three of Asia’s four biggest IPOs this year as proceeds more than tripled from 2011 to 21.1 billion ringgit ($6.9 billion), data compiled by Bloomberg show. Business trusts, a structure through which companies have raised more than $9 billion in Singapore since 2004, may help Malaysia draw more offerings, according to Wong. “There is an actual need and we have to keep the market current,” Wong said in an interview. “We have to provide more avenues of capital raising.”
Business trusts pool cash-generating assets and typically distribute a large portion of profits as payouts, making them similar to real estate investment trusts. They also comply with Islamic laws, Wong said. Shariah-compliant trusts prohibit income from investments in gambling, financial services based on interest payments, hotels and bars. Wong declined to say when he expects Malaysia’s first business trust IPO to take place.
Greek Aid Payment Call Won’t Be Made Next Week, EU Official Says (Bloomberg)
Euro-area finance ministers may not make a decision on unlocking funds for Greece until late November as they await a full report on the country’s compliance with the terms of its bailout, a European Union official said. Finance chiefs won’t make the call to release 31.5 billion euros ($40.1 billion) of aid for Greece that has been frozen since June when they meet in Brussels on Nov. 12, the official said yesterday on condition of anonymity because the deliberations are private. Ministers will await a final report from the so-called troika that oversees euro-area bailouts on Greece’s efforts to meet the conditions of its second bailout since 2010 before taking action, the official said. While a preliminary version may be available for the Nov. 12 meeting, it won’t be enough for ministers to base their decision on, the official said.
Greece is under pressure to make more efforts to rein in its budget deficit and deregulate the economy. While German Chancellor Angela Merkel last month traveled to Athens to signal her willingness to keep the Greece in the euro, the country is still struggling to reach its debt-reduction targets amid a combination of Greek political resistance to more cuts and recession that has brought record unemployment. “We’re not out of the woods yet,” German Finance Minister Wolfgang Schaeuble said in Hamburg yesterday. “I don’t see how we can take the decision already next week.”
IMF Adds to Pressure on Spain to Seek Bailout, ECB Help (Bloomberg)
The International Monetary Fund urged euro-region countries facing high borrowing rates to seek a bailout that will activate the European Central Bank’s bond- purchase program, adding to pressure on Spain, which has been resisting the move. In a note prepared for finance officials of the Group of 20 nations who met in Mexico Nov. 4-5 and released today, the IMF said countries “under stress” should turn to the region’s rescue mechanisms if needed while continuing to shore up their public finances. “Access to funding at reasonable costs is essential to allow economies to adjust successfully,” the IMF wrote. “While economies in the periphery must continue to adjust their fiscal balances at a pace they can bear, in the current fragile environment, putting in place the right policies may not be sufficient to fully restore the confidence of markets, not least because of implementation risks.”
Spanish Prime Minister Mariano Rajoy is keeping investors guessing as to whether he will request a bailout that would trigger the ECB’s Outright Monetary Transaction. He said on Nov. 6 that he needs to know how much the central bank would push down Spain’s bond yields before his government applies for aid and signs up to the conditions attached. “Lower interest rates and easier financial conditions are key factors to facilitate balance sheet repair and support growth in the periphery,” said the IMF, which co-finances bailouts in Greece, Portugal and Ireland. The Washington-based IMF also said the threat of automatic tax increases and spending cuts in the U.S. set to take effect next year is a “major source of risk” on global growth.
ECB Stands Ready to Buy Bonds as Economy Weakens (Bloomberg)
European Central Bank President Mario Draghi said the economic outlook is worsening and the bank stands ready to activate its bond-purchase program if governments fulfil the necessary conditions. “We are ready to undertake” Outright Monetary Transactions, “which will help to avoid extreme scenarios,” Draghi said at a press conference in Frankfurt today after policy makers left the benchmark interest rate at a historic low of 0.75 percent. “The risks surrounding the economic outlook remain on the downside” and underlying inflation pressures “should remain moderate,” he said. Draghi indicated the ECB is likely to lower its economic forecasts next month as the sovereign debt crisis curbs growth in Germany, the region’s largest economy. He stopped short of signalling a further rate cut, saying the ECB’s monetary policy is already “very accommodative” and the announcement of its bond program has led to “a series of improvements” on financial markets.
Still, “the chances are high that the ECB will need to come up with additional measures to support the euro-zone economy,” said Carsten Brzeski, an economist at ING Group in Brussels. “A rate cut, even if it will not come next month, could be part of the measures.”
ECB Holds Rates as Economy Worsens, Spain Resists Aid Request (Bloomberg)
The European Central Bank kept interest rates on hold today as the economic outlook worsens and Spain resists asking for a bailout that would open the door to ECB bond purchases. Policy makers meeting in Frankfurt left the benchmark rate at its historic low of 0.75 percent, as predicted by 62 of 63 economists in a Bloomberg News survey. One forecast a cut to 0.5 percent. ECB President Mario Draghi will brief reporters on the decision at 2:30 p.m. Draghi yesterday fueled speculation that the ECB might put rate reductions back on the agenda, saying the debt crisis is starting to hurt Germany -- the pillar of economic strength in the euro area -- and inflation risks are “very low.” Still, Draghi has acknowledged in the past that rate moves are less effective than they should be because distorted financial markets are interrupting the transmission of ECB policy.
“In normal times, with the economic outlook in Europe, a rate cut would probably be justified,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “But we’re not in normal times and a rate cut won’t achieve anything.” The Bank of England today left its key interest rate at a record low of 0.5 percent and refrained from expanding its quantitative-easing program.
BOE Halts Bond Purchases as Officials Focus on Lending: Economy (Bloomberg)
The Bank of England halted expansion of its bond-buying program as officials shifted focus to stimulating bank lending to support a recovery that remains lackluster. The nine-member Monetary Policy Committee led by Governor Mervyn King said that it doesn’t plan to buy any more bonds beyond the 375 billion pounds ($600 billion) already purchased, concluding a third round of quantitative easing. The decision was forecast by 35 of 45 economists in a Bloomberg News survey. The rest predicted an increase of as much as 50 billion pounds. Today’s move suggests the London-based central bank may focus on credit-boosting initiatives such as the Funding for Lending Scheme to ignite growth. Increased inflationary pressures may also have prompted policy makers to hold fire even as surveys point to renewed weakness after the U.K. economy surged 1 percent in the third quarter.
“The outlook for the U.K. economy is still uncertain,” Roger Bootle, founder of Capital Economics Ltd. and a former U.K. Treasury adviser, said in an interview on Bloomberg Television’s “City Central” in London. “I suspect the fourth quarter is going to be weak, and if that’s the case, the discussion will come back to QE. I think we’re on course for more QE in the new year.” The Bank of England also kept its benchmark interest rate a record low of 0.5 percent. The pound erased its decline against the dollar after the announcements and traded at $1.5996 as of 12:45 p.m. in London. U.K. 10-year gilts erased an advance, pushing the yield up 3 basis points to 1.786 percent.
