Posts Tagged ‘currencies’

Trump’s Currency Complaints Hit Unexpected Targets

February 17, 2017

Top-five trading partners China, Japan and Germany brush them off; Taiwan and Switzerland seem to be paying heed

.

Feb. 17, 2017 3:47 a.m. ET

HONG KONG—U.S. President Donald Trump’s accusations of currency manipulation appear to be reaching an audience he may not have primarily intended.

Mr. Trump vowed on the campaign trail to revive American manufacturing, in part by taking a hard line on Chinese trade practices and labeling the country a currency manipulator. Since taking office, the president has accused both China and Japan of consistently devaluing their currencies,…

Mr. Trump vowed on the campaign trail to revive American manufacturing, in part by taking a hard line on Chinese trade practices and labeling the country a currency manipulator. Since taking office, the president has accused both China and Japan of consistently devaluing their currencies , while his top trade adviser Peter Navarro has accused Germany of benefiting from what he termed the “grossly undervalued” euro .

All three countries, which rank among the U.S.’s top five trading partners, have brushed off the Trump administration’s claims.

“No one has the right to tell us that the yen is weak,” Japan’s finance minister Taro Aso told parliament on Wednesday, following last weekend’s meeting between Mr. Trump and Prime Minister Shinzo Abe . Japan hasn’t directly intervened in currency markets since 2011 following a major tsunami and resulting Fukushima nuclear disaster.

“The charge that Germany exploits the U.S. and other countries with an undervalued currency is more than absurd,” Jens Weidmann , the president of the German central bank, said earlier this month.

China hasn’t directly commented on Mr. Trump’s criticisms, but most analysts say Beijing recently has been propping up the yuan by selling foreign-currency reserves rather than looking to weaken it.

Still, some smaller economies look like they are taking notice, notably Taiwan and Switzerland. The U.S. Treasury found in October that both had engaged in persistent, one-way currency intervention, essentially by buying foreign currencies like the U.S. dollar and selling their own to maintain weak exchange rates.

Image may contain: 2 people

Analysts say the central banks of Switzerland and Taiwan are now stepping back from those activities, perhaps to avoid closer scrutiny from the Trump administration. The upshot: The Swiss franc has advanced nearly 2% against the U.S. dollar this year, while the new Taiwan dollar has surged 5.3%. Both have outperformed the euro and yen since the U.S. election in early November.

Taiwan’s central bank bought $500 million in foreign currencies in the fourth quarter, well below its quarterly average of more than $3 billion since 2012, according to Khoon Goh , head of Asia research at ANZ in Singapore, who said he suspects it is stepping back from “currency-smoothing operations.” The central bank said it doesn’t comment on currency policy.

For the first nine months of last year, the Swiss National Bank /quotes/zigman/1379668/delayed CH:SNBN +0.12% intervened heavily in currency markets to slow the franc’s rise, spending an amount roughly equivalent to its current-account surplus for the period, J.P. Morgan/quotes/zigman/272085/composite JPM -0.76% analysts note. Over the following four months, the scale dropped to around two-thirds of the surplus.

“It’s not an entirely fanciful suggestion that the SNB might be tapering intervention in order to the guard against the risk of being cited by the U.S. Treasury as a currency manipulator,” the analysts wrote in a note.

The Swiss National Bank declined to comment.

For the U.S. to label an economy a currency manipulator under the current law, it must have a large trade surplus with the U.S. and a hefty current-account surplus and persistently intervene in the currency in one direction. As of October, no economies met all three criteria.

Recent comments from officials in South Korea, which the Treasury has flagged for its hefty trade surplus with the U.S. and its current-account surplus, suggest they’re similarly eager to avoid U.S. ire, says Govinda Finn , senior analyst at Standard Life Investments in Edinburgh. The Korean won has surged 5.2% against the dollar this year.

But any gains in the Korean and Taiwanese currencies due to U.S. political pressure may not last, he said: “On a longer-term horizon, there’s a pretty strong case to say both of those currencies can and will weaken as the authorities look to support their economies.”

Jenny W. Hsu contributed to this article.

Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com

Brexit: The stock market is telling us that the British establishment will be in freefall for some time to come

June 28, 2016
 .
There are many potential visions for the UK after Brexit
.

For once, the market reaction is not an exaggeration. Investors have been seriously wrongfooted by the result of the UK referendum. But the shock of City traders on Friday morning is nothing compared with the stunned response of the people who thought they ran the country.

One way or another, we know markets will find their level — dramatically so, in the case of the pound. The British establishment will be in freefall for some time to come.

David Cameron will be blamed for setting us on this course — for putting the interests of Conservative party unity ahead of the country. For business people and policymakers outside the UK, the decision to trigger all the uncertainty of a referendum has long seemed a self-inflicted and entirely unnecessary wound. But the stark regional divide in the voting underscores that there is plenty of blame to go round.

It is not only Conservative governments that have failed to rebalance Britain’s economy in recent years — failed to give the country’s post-manufacturing hinterland a stake in London’s truly global success. It should be no surprise that large numbers have now voted to put that cosmopolitan prosperity at risk.

The economic and political questions raised by this vote will not be answered for years, possibly decades. But three immediate questions present themselves for investors and the wider world.

The first is how long the “risk-off” mood now permeating markets will last, and how much damage it will do. A prolonged decline in market confidence globally would make it more difficult for the US central bank to contemplate higher interest rates in the second half of this year, particularly with the presidential election looming. It would also put pressure on central banks with safe haven currencies, such as the yen and the Swiss franc, to ease policy to prevent them rising even further. At the extreme, it could persuade investors that the next bear market is nearer than they previously thought.

Whether that happens will depend on investors’ answers to the second immediate question, which is: how much damage will this do to real economic activity in the UK and further afield.

The best estimate has been that the shock will take at least a percentage point off the UK’s growth rate over the next year. So the annualised pace of growth in gross domestic product would fall from 1.6 per cent to about 0.6 per cent in the second half of 2016, with a similar growth rate in 2017. The fall in the pound would push inflation up to 3 or 4 per cent by the end of 2017, although given the slowdown in the economy we would expect that to be temporary.

Clearly, there is huge uncertainty around those estimates, and about the likely impact on growth in the eurozone, which we reckon to be in the order of 0.4 percentage points of GDP over a similar period.

If this rough assessment is right, the Brexit vote has produced a large shock, but a local one. There will be an economic and financial impact on the rest of the world, and especially Europe, but it should be manageable. Whether the political implications will also be containable, particularly in Europe, is another matter.

Brexit: short shock or a reset in asset values?

That brings us to the third, and probably most important, question: what, exactly, will the UK leave to? There has been a lot of discussion already of the mechanics of Britain’s exit and how long it will all take. But the thorniest questions for the Leave side right now are not technical. They are profoundly philosophical.

Many leading figures in the Leave coalition want Britain to throw off the shackles of Brussels and seize the opportunities that the modern global economy presents. Yet many of the voters who chose Brexit are hoping for exactly the opposite.

There are many potential visions for the UK after Brexit — not all of them disastrous. But there is none that would allow the country to be both open and closed — both to embrace the future and to turn back time. The real indictment of the Remain campaign is that, in all these months, they never got this basic incoherence in the Leave side across.

The writer is the chief markets strategist for Europe, JPMorgan Asset Management

https://next.ft.com/content/84dcc868-39dd-11e6-9a05-82a9b15a8ee7

Global Turmoil “Frightening Investors” — “More volatility ahead” — “Dreadful” US hiring figures — Shrinking Middle Class

June 4, 2016

.

London is bracing itself for the return of financial market volatility Credit REX, Shutterstock

By 
The Telegraph

How a summer of shocks threatens to bring mayhem to the markets

Two words are back on the lips of every investor in the City.“Event risk” has begun to dominate trading floor conversations, as a slew of central bank decisions, legal rulings, and political upheavals threaten to bring an end to the calm that has descended upon the markets.

May is the one calm month we have before a pretty volatile June,” says

After a brief break from the turbulence that dominated the start of the year, when fears over the strength of the global economy and the idea of a sharp slowdown in China unnerved money managers, volatility is set to return to the scene.Mellow May is now expected to give way to what industry veterans are already calling “flaming June”, as a calm start to the month is to be followed by shifts throughout currencies, stocks and bonds.

Experts say that they expect June to be a “big month” for the markets, and that things are unlikely to settle down any time soon.

 

Hillary Clinton at Rutgers University in Newark, N.J., June 1.
Hillary Clinton at Rutgers University in Newark, N.J., June 1. She warned that Trump is unhingedPHOTO:EUROPEAN PRESSPHOTO AGENCY

Investors will face an alarming number of binary events – those with only two potential outcomes – between now and July.

The most important decisions will be those made by policymakers in the US, on whether to raise interest rates, and votes cast by the British public, on the UK’s continued membership of the European Union.

Also on the schedule are the Spanish general elections, where voters could reject austerity imposed upon them by Brussels, and the potential for radical new monetary stimulus from the Bank of Japan.

None of these events can be discounted, and every one is difficult for investors to prepare for.

Hillary Clinton supporters attacked, beat and bloodied Donald trump supporters this past Thursday.

Take, for example, the coming ruling of a German court on one of the measures introduced by the European Central Bank during the depths of the eurozone crisis.

The tool – part of a pledge by Mario Draghi, the ECB President, to do “whatever it takes” to preserve the euro – is controversial in some German corners, despite never having been used.

The Outright Monetary Transactions programme (OMT) would have allowed the ECB to buy unlimited amounts of debt from an embattled European government, a promise that helped to restore faith in the eurozone.

However, the German constitution forbids transfers from German taxpayers to other governments. If the Karlsruhe-based court does rule against OMT, then it could undermine confidence in the kind of economies that the programme was designed to support.

Justin Knight, a UBS strategist, says that he doubts that a ruling against OMT would have a sizeable market impact. Peripheral bond markets are in a much stronger position than they were in 2012, and countries have adopted meaningful economic reforms since.

However, Knight admits that he can not be certain of the market outcome, as “of course you are never 100pc certain”. The German decision, due on June 21, is just one moment in a month with a “particularly high” number of risks that could upset the recent stability of financial markets.

Navigating stormy waters

Marchel Alexandrovich, a Jefferies economist, says that the stability in markets is unlikely to persist, rather, “May is the one calm month we have before a pretty volatile June”.

Navigating the various pitfalls June presents will require markets to take each event as it comes, while maintaining an awareness of how each outcome will tilt the balance in the decisions to come.

It feels to me as if you can’t destroy the energy in markets, but you can bottle it for a whileKit Juckes

Alexandrovich says that markets will “almost have to sit back and watch how events unfold”.

The first for them to process is the Federal Reserve’s meeting on June 15. While dreadful US hiring figures have deadened anticipation of a rate rise this month, the testimony of Janet Yellen, the Fed chair, will shift expectations for a move in July.

If the central bank does raise rates this summer, or if it does not, then there will be “an element of surprise”, says Alexandrovich.

Market pricing suggests there is almost a one in three chance that the Fed makes a move over the next two months. Some investors will be gambling on the possibility. An increase in rates would favour them, but mean that others would have to adjust their portfolios swiftly.

The dollar would rise, and concerns would turn to emerging markets, which would be likely to struggle, given that they have gorged themselves on cheap debt since the Great Recession.

The move could reignite the concerns that rocked markets at the beginning of the year, when investors considered the possibility of another global downturn a very real threat.

A decision not to raise US interest rates may be little better. Again, a large subset of money managers will be caught off guard. In this instance professionals may question the Fed’s reasoning for not making the move.

Traders could take reluctance to press on with a quarter percentage point increase in rates as a sign that the Fed has lost confidence in the US economy.

“That would not be a particularly calm outcome either,” says Alexandrovich.

Once the Fed’s meeting is out of the way, the Jefferies analyst says that markets will turn to the EU referendum on June 23. This vote would not just have repercussions for the UK, but for the whole of Europe, he adds.

“It potentially has a big impact on the elections in Germany and France next year, and will mean more attention on the extreme parties in those contests.”

Almost straight after the Brexit vote, investors will have the Spanish general election on June 26 to contend with. The last elections, in December, resulted in no government being formed, and pundits believe there is a decent chance that anti-austerity parties make inroads at the ballot box this month.

In Japan, officials may decide to deploy “helicopter money”, government spending stimulus funding by central bank printed money. Experts believe that the Bank of Japan could unveil the policy on June 16 in their fight against deflation; deploying a tool unseen in the modern era, and one economists may struggle to anticipate the full effects of.

Investors stuck without options

Unlike most events that investors have to process, these binary events are much more stressful. Kit Juckes, a Societe Generale strategist, says that everyday economic statistics are far easier to process.

“With a piece of data that is a little stronger or weaker, you move your position a little more,” he says. Yet with discrete events, like elections, no such option is available. There are only two possible outcomes of an ‘in’ or ‘out’ referendum, like the coming June 23 vote.

[Investors] take might what they might once have thought were disproportionate risks  — Kit Juckes

Juckes says: “If you’re convinced that one of the outcomes is very difficult, that is very hard to work with.” With the outcome of the EU referendum still far from clear, it is difficult for investors to know how to hedge themselves.

In normal times, this might not be so troublesome, says Juckes. Yet with interest rates around the world practically flat, and sub-zero in places, investors are having to take much greater risks in order to deliver returns for clients.

This world is one of “risk on, risk off” behaviour, where, when the world is quiet for five minutes you own riskier assets in order to make some kind of a return, and when it gets scary again, you have to scarper, the strategist explains.

Money managers have to “either put up with really poor investment returns, or they take what they might once have thought were disproportionate risks”, says Juckes. They are walking across a rickety rope bridge, he says, with danger on either side of it.

“That bridge is getting narrower and narrower.”On one side is the fear that the global economy slows so much that we have huge concerns about emerging markets and on the other side is that interest rates can’t stay down here forever, and, particularly in the US, rates have to go up.”

As a result, Juckes says that markets have become “hypersensitive to this sort of random, idiosyncratic event risk”.

The threat of a sudden slowdown in China, oil prices moving up or down sharply, or perhaps even the collapse of the Brazilian government right before the 2016 Olympics are set to begin in Rio are all risks that could upset the balance.

For portfolio managers, the correct response may be to sit out some of June altogether, says Alexandrovich, who believes that the “logical way to approach this uncertainty is to basically take risk off the table” and avoid holding eurozone periphery debt. Juckes says that markets will have to “feel their way through” these events.

It’s the politics, stupid

On the surface, the various risks that approach this summer may look unconnected.

However, the increasing political fragmentation in Europe is starting to look related. Growing support for parties of the right in northern Europe, and forces of the left in the south “have the same original provenance”, says Knight.

Market professionals have been relatively unversed in understanding politicsJustin Knight
.

The spread of populism has travelled beyond the European continent. The rise of Presidential hopeful Donald Trump across the Atlantic threatens to frighten investors, even if the summer brings only minimal jitters.This year’s White House race will come to a climax in November.  If Trump faces off against Democrat candidate Hillary Clinton, as is expected, the real estate mogul’s views on the US debt – suggesting he could renegotiate government obligations  – could undermine the global status of the dollar as a safe haven currency.

The former reality TV show host has even gone so far as to suggest that the American government could print money to avoid default.

This shaping of market events by politics is another factor that has made coping with event risk a struggle. Knight says that, up until 2009, “market professionals have been relatively unversed in understanding politics”.

Most are economists, mathematicians or physicists by training, Knight explains, and while they might understand economic statistics very well, and are able to fluently speak the language of models, yield curves and price to earning multiples, “the world of politics was largely foreign to them”.

While investors have improved their understanding, Knight says that this area “is still not their field of expertise”. It is hard to apply scientific techniques to understanding how the minds of voters change, making it “much more difficult” than economics 101.

For policymakers, just as much as traders, playing guessing games with how June will pan out is likely to affect their decisions.

Central banks as well as hedge funds have had to bring in political experts, think-tanks and academics to garner insight into a field once alien to them.

The hardest thing is to guess how long that volatility can stay bottled upKit Juckes

Fed officials have said that the uncertainty around the Brexit vote could affect when they decide to raise rates. Similarly, a UK decision to leave the EU could affect a decision to implement a financial transactions tax, a verdict on which is due by June 30. Westminster has fiercely opposed such a measure, which would see a charge levied on the sale of shares.

Looming over each of these individual events is the as-yet- unresolved question of China’s economic stability. The world’s second-largest economy, which has struggled with funding crunches each June since 2011, is still thought of as being in a vulnerable state.

Societe Generale believes that there is a 30pc chance of a “hard landing” in the coming year; a rapid slowdown in the Chinese economy could easily derail the wider global economy.

Juckes says that this year reminds him of the last, when worries about China cooled between February and July, and then kicked off again, climaxing on Black Monday in August.

“It feels to me as if you can’t destroy the energy in markets, but you can bottle it for a while,” says Juckes. “If you shake it it can all go a bit wrong. We aren’t necessarily going to take the top off of it in June, we may navigate through.

“But the hardest thing is to guess how long that volatility can stay bottled up. Calm isn’t a sign that everything is OK.”

http://www.telegraph.co.uk/business/2016/06/04/how-a-summer-of-shocks-threatens-to-bring-mayhem-to-the-markets/

 (Read the Associated Press report cited above)

 (Experts say this has added to the “burden” the government places upon businesses.)

American wages remain at 1997 levels as recovery fails to lift middle class
http://www.theguardian.com/us-news/2015/sep/16/american-economy-wages-poverty-middle-class-census-bureau

Asia Stocks Lower Amid Fears of U.S. Rate Hike Fragility of China’s Economy

May 18, 2016

The Associated Press

May 18, 2016

KUALA LUMPUR, Malaysia — Asian shares fell Wednesday amid concerns that higher-than-expected U.S. inflation could trigger rate hikes. Shares in Tokyo also fell, ceding initial gains from better-than-expected GDP data, and China markets succumbed to a fresh bout of pessimism.

KEEPING SCORE: Japan’s Nikkei 225 stock index shed 0.1 percent to 16,644.69. The Shanghai Composite index dropped 1.9 percent to 2,788.20 and Hong Kong’s Hang Seng lost 1.7 percent to 19,786.00. South Korea’s Kospi lost 0.6 percent to 1,956.73. Australia’s S&P/ASX 200 fell 0.7 percent to 5,356.20.

JAPAN’S SURPRISE: Annual growth in the first quarter of the year was a faster-than-expected 1.7 percent, the government reported. Solid consumer demand and higher government spending helped offset weak business investment and sluggish exports.

CHINA GLOOM: Recent data have come in weaker than hoped, underscoring the fragility of China’s economy. Meanwhile, investors appeared disappointed by a lack of fresh market-boosting initiatives from Beijing during a visit by a top Communist Party official, Zhang Dejiang, to Hong Kong.

WALL STREET: The Dow Jones industrial average lost 180.73 points, or 1 percent, to 17,529.98. The S&P 500 index gave up 19.45 points, or 0.9 percent, to 2,047.21. The Nasdaq composite pulled back 59.73 points, or 1.3 percent, to 4,715.73.

ANALYST VIEWPOINT: “U.S. investor nerves were triggered by a stronger than expected read on headline CPI for April. The question of whether underlying US inflation surprises to the upside this year is near the top of the list for major market issues at the moment. If it does, U.S. rate hikes could be in prospect,” Ric Spooner, chief market analyst for CMC Markets, said in a research note.

ENERGY: U.S. crude oil rose 6 cents to $48.37 a barrel in electronic trading on the New York Mercantile Exchange. It rose 59 cents to $48.31 a barrel in New York. Brent crude, used to price international oils, gained 5 cents to $49.32. It rose 31 cents to $49.28 a barrel in London.

CURRENCIES: The dollar was flat at 109.14 yen. The euro slipped to $1.1285 from $1.1314.

Global Economy: US dollar down as world plays dangerous game of pass the package

May 4, 2016

.

Markets are betting that the Fed’s Janet Yellen will never turn tough. They may be wrong. AFP photo

By Ambrose Evans-Pritchard
The Telegraph

 

The US dollar has plunged to a 16-month low in the latest wild move for the global financial system, tightening the currency noose on the eurozone and Japan as they struggle to break out of a debt-deflation trap.

The closely-watched dollar index fell below 92 for the first time since January 2015, catapulting gold through $1300 an ounce in early trading and setting off steep falls on stock markets in Asia and Europe.

The latest data from the US Commodity Futures Trading Commission shows that speculative traders have switched to a net “short” position on the dollar.

This is a massive shift in sentiment since the end of last year when investors were betting heavily that the US Federal Reserve was on track for a series of rate rises, which would draw a flood of capital into dollar assets.

Markets have now largely discounted a rate rise in June, and are pricing in just a 68pc likelihood of any increases this year.

 

The dollar slide has been a lifeline for foreign borrowers with $11 trillion (£7.5 trillion) of debt in US currency, notably companies in China, Brazil, Russia, South Africa, and Turkey that feasted on cheap US liquidity when the Fed spigot was open, and were then caught in a horrible squeeze when the Fed turned to tap off again  and the dollar surged in 2014 and 2015.

dollar

The dollar index has plunged as markets call the Fed’s bluff Credit: stockcharts.com

But it increases the pain for the eurozone and Japan as their currencies rocket. The world is in effect playing a high-stakes game of pass the parcel, with over-indebted countries desperately trying to export their deflationary problems to others by nudging down exchange rates.

The Japanese yen appreciated to 105.60, the strongest since September 2014 and a shock to exporters planning on an average of this 117.50 this year. The wild moves over recent weeks have blown apart the Japan’s reflation strategy. Analysts from Nomura said Abenomics is now “dead in the water”.

The eurozone is also in jeopardy, despite enjoying a sweet spot of better growth in the first quarter. The euro touched $1.16 to the dollar early in the day. It has risen over 7pc in trade-weighted terms since the Europe Central Bank first launched quantitative easing in a disguised bid to drive down the exchange rate.

ECB

The euro trade-weighted index has been rising ever since QE began, much to the horror of EU leaders Credit: ECB

Prices fell by 0.2pc in April and deflation is becoming more deeply-lodged in the eurozone economy, with no safety buffers left against an external shock. The European Commission this week slashed its inflation forecast to 0.2pc this year from 1.0pc as recently as November.

There is little that the Bank of Japan or the ECB can do to arrest this unwelcome appreciation. The Obama Administration warned them at the G20 summit in February that it any further use of negative interest rates would be regarded by Washington as covert devaluation, and would not be tolerated.

“These central banks have reached the limits of what they can do with monetary policy to influence their exchange rates, and this is putting their entire models at risk,” said Hans Redeker, currency chief at Morgan Stanley.

“Europe and Japan are operating in a Keynesian liquidity trap. We are nearing a danger point like 2012 when it could lead to an asset market sell-off. We’re not there yet,” he said.

dollar

Speculators are now betting that the dollar will fall, a dramatic shift in sentiment Credit: ANZ Research

Stephen Jen from SLJ Macro Partners said the Fed is pursuing a “weak dollar policy”, reacting to global events in a radical new way. “They are forcing currency appreciation onto weaker economies. It is irrational,” he said.

Yet it may not last long if the US economy comes roaring back in the second quarter a after a soft patch. “I doubt this is really the end of multi-year run for the dollar,” he said.

Neil Mellor from BNY Mellon says the soaring euro is in the end self-correcting since the eurozone cannot withstand the pain for long, and as this becomes evident the this the currency will start sliding again.

Mr Mellor said BNY’s custodial flow data has picked up a surge in outflows of capital by ‘real-money investors’ from the eurozone over the last eight weeks, especially from Spain and Portugal where politics has turned fractious.

This suggests that short-term speculative flows are at this point driving up the euro. BNY has $29 trillion of assets under custody – the world’s biggest – and has a unique insight into underlying flows.

BNY

Underlying investment flows show that capital is leaving the eurozone, yet speculators are still bidding up the euro Credit: BNY Mellon

The fate of the dollar now hinges on the Fed. Markets are betting that chairwoman Janet Yellen will continue to hold fire, but this could be a misjudgement.

Boston Fed chief Eric Rosengren, a long-time dove, has warned twice over recent days that markets underestimating the pace of rate rises this year. The warnings were echoed by the Dallas Fed chief Robert Kaplan in London on Friday.

A key reason for the Fed’s retreat in March was a tightening in financial conditions – worth three rate rises in the words of Fed governor Lael Brainard – but this has since reversed. The panic over China has subsided. Commodities have begun to recover. The weaker dollar is itself a shot in the arm for the US.

Professor Tim Duy from Fed Watch said the institution is itching to return to plan with three quarter-point rate rises, preferably as soon as June, September, and December, knowing that any further delay could leave it behind the curve.

“Be forewarned. If the data shifts, they will be looking hard at June. I would not be surprised to see the doves shedding their feathers to reveal the hawk beneath,” he said.

If Professor Duy is right, the dollar could come back with a vengeance, and a great number of hedge funds and speculators may be caught on the wrong side of some very large bets on currencies, bonds, and equities across the world.

http://www.telegraph.co.uk/business/2016/05/03/aep-us-dollar-plunges-as-world-plays-dangerous-game-of-pass-the/

Global stocks mostly advanced on Friday after the Federal Reserve’s decision on slowing the pace of rate hikes — Japan down

March 18, 2016

Associated Press

A pedestrian is refracted on an electronic stock at a securities firm in Tokyo Friday, March 18, 2016. Asian stocks mostly advanced on Friday as higher prices for commodities, including crude oil, pushed Wall Street stocks higher overnight. But shares in Tokyo fell as the yen’s strength worried investors. (AP Photo/Eugene Hoshiko)

Associated Press March 18, 2016, at 5:45 a.m.

By YOUKYUNG LEE, AP Business Writer

SEOUL, South Korea (AP) — Global stocks mostly advanced on Friday after the Federal Reserve’s decision on slowing the pace of rate hikes underpinned sentiment, boosting prices for oil and other commodities. But shares in Tokyo fell as the yen’s strength worried investors.

KEEPING SCORE: Britain’s FTSE 100 rose 0.2 percent to 6,213.77 and Germany’s DAX was up less than 0.1 percent at 9,894.80. France’s CAC 40 added 0.2 percent to 4,450.83. Wall Street was set to start moderately higher. Dow futures gained 0.2 percent and S&P futures also rose 0.2 percent.

ASIA’S DAY: Japan’s Nikkei 225 fell 1.3 percent to 16,724.81 while South Korea’s Kospi added 0.2 percent to 1,992.12. Hong Kong’s Hang Seng index rose 0.8 percent to 20,671.63. The Shanghai Composite index in mainland China rose 1.7 percent to 2,955.15 while Australia’s S&P/ASX 200 gained 0.3 percent to 5,183.10. Stocks in Taiwan, Singapore and Indonesia were higher.

ANALYST’S TAKE: “A lot of the worries on the worry list from early this year have faded,” Shane Oliver, head of investment strategy at AMP Capital in Sydney, Australia, said in a daily commentary. Oliver cited the stabilization of the Chinese renminbi, the halt in the U.S. dollar’s rise, eased fears about a U.S. recession and higher crude oil and commodity prices.

JAPAN: The stronger yen added to selling pressure in Tokyo, given concerns over the likely impact on profits of major exporters. Toyota Motor Corp.’s shares fell 2.3 percent, Nissan Motor Corp. was down 1.8 percent and robot maker Fanuc Corp. lost 1.2 percent.

FED EFFECT: The Federal Reserve’s decision on Wednesday for a more gradual pace of rate increases weakened the U.S. dollar, which in turned pushed up demand for commodity products that are traded in dollar terms. “The fact that we have seen one of the biggest two-day sell-offs in the U.S. dollar in the last seven years is the focal point for markets,” said Chris Weston, chief market strategist at IG in Melbourne, Australia, said.

OIL: Benchmark U.S. crude shed 21 cents to $39.99 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.74, or 4.5 percent to finish at $40.20 per barrel on Thursday, closing above $40 a barrel for the first time since early December. Brent crude, the benchmark for international oils, fell 17 cents to $41.36 per barrel in London. Oil prices crossed a threshold of $40 per barrel earlier in the day, higher than they were at the end of 2015, but still far lower they have been for most of the last decade.

CURRENCIES: The dollar extended losses that began with the Federal Reserve’s decision to slow the pace of its rate increases while the yen gathered strength as investors sought safe haven assets. The dollar rose to 111.32 yen from 111.30 yen. The euro fell slightly, to $1.1276 from $1.1319.

What’s behind the global stock market selloff?

February 12, 2016
Money | Thu Feb 11, 2016 7:30pm EST

Global stock markets are on their shakiest footing in years.

Investors are fleeing stocks and running to safe-havens like bonds and gold, driven by concerns about economic growth and the effectiveness of central banks’ policies.

At the same time, tumbling energy prices are upending the economies of oil-producing countries, further slicing into global economic growth.

Only six weeks ago cheap oil prices were still expected to cushion the global economy, and the Federal Reserve’s decision in December to raise interest rates for the first time since the end of the financial crisis in 2008 was widely seen as a vote of confidence in the world’s largest economy.

In addition to the fall in U.S. stock markets, major stock indexes worldwide have also been hit hard, despite efforts by the Bank of Japan and the European Central Bank to spur growth through lower interest rates.

Large institutions and sovereign wealth funds, who borrowed in euro and yen, have been selling riskier assets, and are now buying back those currencies, undermining central bank efforts.

With Thursday’s decline, the S&P 500 stock index has lost 10.5 percent so far in 2016, its worst start to a year in history, according to Bespoke Investment Group, an investment advisory in Harrison, New York. The 10-year note’s yield has fallen to 1.63 percent, its lowest closing level since May 2013.

Here are some of the chief issues weighing on the market now.

WHAT IS THE BIGGEST REASON FOR THE SELLOFF?

The slump in equity prices which began late last year has deepened as banks grapple with negative interest rates in parts of Europe and Japan and the flattening of the U.S. Treasury yield curve.

“One of the new themes in markets is that (quantitative easing) has damaged the banks and that therefore it exacerbates the risk-off environment,” said Steve Englander, managing director and global head of G10 FX strategy at Citigroup in New York.

Negative interest rates on central bank deposits and on government bond yields undermine the traditional ability of banks to profit from the difference between borrowing costs and lending returns.

With a decline of 18 percent on the year, S&P 500 financials are by far the worst performing sector in 2016.

While the Federal Reserve has avoided introducing negative rates on reserves, in Congressional testimony on Thursday, Fed Chair Janet Yellen told lawmakers that the Fed would look into negative interest rates if needed.

“I wouldn’t take those off the table,” she said.

WASN’T ENERGY THE PROBLEM?

Higher levels of U.S. oil output, thanks to fracking technology, along with over-production by Saudi Arabia, contributed to a world-wide oil glut, sparking a steep fall in energy and other commodity prices at the start of last year.

At $27 a barrel, oil prices are now near 13-year lows and some analysts say they expect to see prices drop further.

Tumbling oil prices resulted in sharp contractions in the economies of oil-producing countries, and pushed up yields on corporate debt, leading to defaults in the energy sector.

“Investors whose livelihood revolve around oil and gas and commodities are liquidating because they need the cash,” said Stephen Massocca, chief investment officer at Wedbush Equity Management in San Francisco.

WHAT’S NEXT FOR THE FED?

Markets now do not expect the Fed to go ahead with its planned interest rate rises this year. The federal funds futures market now shows traders are not expecting the Fed to raise rates until at least February of next year. At one point on Thursday, futures contracts were even pricing in a slight chance of a rate cut this year, and investors said some of the rally in gold prices resulted from the possibility of a rate cut.

The move in fed funds futures has been accompanied by a rapid decline in the spread between short-dated and long-dated U.S. Treasury securities. The difference between the 2-year Treasury note yield and 10-year note yield has narrowed to 0.95 percentage points, the tightest it has been since December 2007. The flattening of the yield curve has often preceded recessions in the past.

The narrowing yield curve spread shows investors are less confident of economic growth, even though Yellen told Congress on Wednesday that U.S. economy looks strong enough that Fed may stick to its plan to gradually raise interest rates.

“Part of the problem is that the Fed is in a no-man’s land right now: not dovish enough for the doves and not hawkish enough for the hawks, so it’s not satisfying any point of view in the investment markets,” said Terri Spath, chief investment officer at Santa Monica-based Sierra Investment Management.

WHEN WILL THE FALL IN STOCKS END ?

There are few signs yet that investors are dumping their holdings wholesale, typically a mark of a market bottom, said Alan Gayle, director of asset allocation at RidgeWorth Investments in Atlanta.

“It still seems to be focused on specific issues, whether it’s credit or it’s oil. But clearly there is a more defensive tone that the market is taking and we’re watching for signs of capitulation,” he said.

Similarly, Credit Suisse noted that hedge funds have been selling in February, but the scope of that selling “lacks the much anticipated capitulation trade that would signal a bottom.”

Credit Suisse also noted that macro-focused hedge funds have built up large U.S. equity short positions which have been a decent indicator of market direction in the past.

Even if the severity of the selling tapers off, 2016 will likely continue to be a bad year for stocks, said Mohannad Aama, managing director at Beam Capital Management in New York. The S&P 500 stock index is down approximately 10.3 percent for the year to date, while the Nasdaq Composite is down more than 15 percent over the same time.

“Although we’ve being seeing good job numbers, the general feeling is that the U.S. economy is nearing a peak and there is not much left as far as trends to be talked about,” Aama said.

(This version of the story was refiled to add dropped word in paragraph 2)

(Reporting by Lewis Krauskopf, Ann Saphir, Howard Marcus, Saqib Ahmed, Jennifer Ablan, Chuck Mikolajzcak and David Randall. Writing by David Randall and David Gaffen.)

A global recession is on the way and will be like nothing we’ve seen before — Obama, others have “illusion of sustainability”

February 6, 2016

Debt, defaults, and devaluations: why this market crash is like nothing we’ve seen before

A pernicious cycle of collapsing commodities, corporate defaults, and currency wars loom over the global economy. Can anything stop it from unravelling?

A global recession is on the way. This truism of economics holds at any point in which the world is not in the grips of a contraction.

.

The real question is always when and how deep the upcoming downturn will be.

“The crash will come, but it would be nice if it came two years from now”, Thomas Thygesen, head of economics at SEB told over 200 commodity investors and analysts in London last month..

 

His audience was rapt with unusual attention. They could be forgiven for thinking the slump had not already arrived.

Commodity prices have crashed by two thirds since their peaks in 2014. Oil has borne the brunt of the sell-off, suffering the worst price collapse in modern history. Brent crude has fallen from $115 a barrel in the summer of 2014, to just $27.70 in mid-January.

.
   “We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before”
—Thomas Thygesen

Plenty of investors sitting in the blue-lit, cavernous surrounds of Bloomberg’s London HQ would have had their fingers burnt by the price capitulation.

“They tell you should start your presentations with a joke, but making jokes at a commodities seminar is hardly appropriate these days,” Thygesen told his nervous audience.

Major oil price falls have a number of historical precedents. Today’s glutted oil market is often compared to the crash of 1986, the last major episode over global over-supply. Back in the late 90s, a barrel of Brent crude fell to as low as $10 in the wake of the Asian financial crisis.

A perfect storm

But is the current oil price collapse really like anything the world economy has ever experienced?

For many market watchers, a confluence of factors – led by oil, but encompassing China, the emerging world, and financial markets – are all brewing to create a perfect storm in a global economy that has barely come to terms with the Great Recession.

“We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before,” says Thygesen.

Unlike previous pre-recessionary eras, the current sell-off has seen commodity prices, equities and credit conditions all move in dangerous lockstep.

The S&P 500 trading pit at the Chicago Mercantile Exchange

Although a 75pc oil price collapse should represent an unmitigated positive for the world’s fuel thirsty consumers, the sheer scale of the price rout is already imperiling the finances of producer nations from Nigeria to Azerbaijan, and is now threatening to unleash a wave of bankruptcies across corporate America.

It is the prospect of this vicious feedback loop – where low oil prices create financial tail risks that spill over into the real economy – which could now propel the world into a “full blown crisis” adds Thygesen.

So will it materialise?

The world economy is throwing up reasons to worry, as the globe’s largest emerging markets have shown signs of deterioration over the last six months, says Olivier Blanchard, the former long-serving chief economist of the International Monetary Fund.

My biggest fear is precisely that the dramatic shift in mood becomes self-fulfilling
Olivier Blanchard

“China’s growth is probably less than officially reported. Russia and Brazil are doing very badly. South Africa is flirting with recession. Even India may not be doing as well as was forecast,” says Blanchard, who left the Fund after seven years late last year.

As it stands however, he says market ructions still represent a classic case of “herd” behaviour.

“Investors worry that other investors know something bad, and so just sell, although they themselves have no new information.”

Blanchard spent seven years firefighting the worst financial crisis in history at the IMF

But a tipping point may well be approaching. According to Blanchard’s calculations, a 20pc decline in stock markets that persists for more than six months, will translate into a decline in consumption of between 0.5pc to 1.0pc.

“This would be a serious shock. My biggest fear is precisely that the dramatic shift in mood becomes self-fulfilling”.

The first domino to fall

For now, oil-induced financial stress is concentrated in the energy sector.

With Brent set to languish around $30-35 barrel for the rest of the year, prices will persist below the $40-60 barrel break-even point that renders the bulk of US oil and gas companies profitable.

Spreads on high yield US energy corporates have soared to unprecedented highs. “They make Lehman look like a walk in the park” says Thygesen.

More than a third of the entire US high yield bond index is now vulnerable to crude prices remaining low or falling even further, according to calculations from Oxford Economics.

As a result, 2016 is set to see the first wave of corporate bankruptcies in the oil and gas sector. Highly leveraged US shale companies will be the first be picked off. Should escalating defaults have a further depressant effect on oil prices, it could unleash a tidal wave of corporate bankruptcies in the world’s largest economy.

Conditions that usually pave the way for mounting defaults are currently met in the US
Oxford Economics

Indebtedness is not just the scourge of the US. Globally, the oil and gas industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving the sector’s combined debt to $3 trillion, according to the Bank of International Settlements. They warn of an “illusion of sustainability” that could quickly turn toxic as the credit cycle unravels.

The question exercising the minds of economists and investors is the extent to which this contagion could metastasize beyond the energy sector, as banks cut off credit access, loans turn bad, and financial conditions enter a critical tightening phase.

“Conditions that usually pave the way for mounting defaults – such as growing bad debt, tightening monetary conditions, tightening of corporate credit standards and volatility spikes – are currently met in the US”, says Bronka Rzepkowski at Oxford Economics.

Such levels of financial distress, more often than not, portend a global recession.

In every instance of the US high yield spread rising above its long-term average, a recession or financial crisis has been nigh, says Rzepkowski, who cites 2011 as the only time the markets sent out a false signal, lulled by the Federal Reserve’s mega quantitative easing programme.

US shale break-even prices remain closer to $60 a barrel

We are not there yet, but worryingly for market watchers, a series of other indicators are also flashing red.

Global equity markets have endured their worst start to a year since the dotcom crash. To paraphrase Nobel prize-winning US economist Paul Samuelson, Wall Street has predicted nine out of the last five recessions, but the current turbulence has an ominous precedent.

Over the last 45 years, the S&P500 has suffered a loss of more than 12.5pc on 13 occasions. Six of these have given way to a recession in the US, providing a more than 50pc probability that a global downturn is just around the corner.

In Europe, stocks have now fallen by 10pc in the last six months.

“Of the 14 previous occasions equities have had a similar decline, seven have been associated with recession, with lacklustre returns thereafter,” says Dennis Jose at Barclays.

He notes investors have begun to pile into “defensive” stocks, such as healthcare and consumer industries.

“The weighting in defensives has increased to the highest levels seen since 1980 suggesting that investors may have already embraced the risk of a recession.”

Dollar danger

Macroeconomic indicators from the world’s largest economy are also beginning to turn sour. The US has already fallen prey to a manufacturing collapse. Service sector data for December showed the slowdown is spreading to the dominant driver of economic growth.

“The shine has come off the US”, says David Folkerts-Landau, chief economist at Deutsche Bank.

He notes the economy is “firing on one cylinder” with consumers the sole bright spot in an environment of still weak capital investment, and a crippling exchange rate that is hurting exporters and squeezing corporate profits.

“It is not a very healthy situation,” says Folkerts-Landau, who forecasts US growth will fall below 2pc this year. “That is a precarious number.”

A crucial part of the story has been the relentless appreciation of the US dollar. The greenback has risen by more than 22pc on a trade weighted basis since mid-2014.

The effects have been felt far beyond the US. The soaring dollar has put record pressure on China’s exchange rate peg, forcing Beijing to burn through its reserves with interventions amounting to $140bn-a-month in December to protect the renminbi.

Meanwhile, China’s capital outflows have accelerated to $676bn, according to the Institute of International Finance.

.

.

This policy bind – known as the “Impossible Trinity” of managing a fixed exchange rate, maintaining independent monetary policy, and a open capital account – means a devaluation of some magnitude is all but inevitable.

• Has China lost control of its currency?

“It will definitely be in the double digits”, says Folkerts-Landau. “We will be lucky if the depreciation will be in the lower double-digits by the end of the year.”

“Once you anticipate that, and you are sitting in Indonesia or Latin America, it has an immediate impact on how you think about the world”.

A weaker renminbi would unleash a new wave of deflation in an already fragile global environment, and hasten the pressure on emerging market exchange rates as the world’s currency wars would renew apace.

Federal reverse?

What, if anything, could halt this pernicious cycle of events from unfolding?

In the short-term, analysts are unanimous: all eyes are on the US Federal Reserve. The central bank’s first rate hike in seven years last December has come to look frighteningly premature in the space of just eight weeks.

I have no doubt that the Fed would expand QE
—Olivier Blanchard

Events have forced the Fed’s policymakers to take to the airwaves and soothe fears that another four rate hikes are on the way this year. It is a welcome sign for jittery markets, but may not be enough to convince them that the Fed will be nimble enough to reverse course and begin easing should financial conditions worsen.

Others, like Blanchard, are more sanguine about the ability of central banks to ride to the rescue again.

 

“I have no doubt that, if there was such a decrease in consumption, or if the strong dollar proved to affect net exports more than is forecast, or any other adverse event for that matter, the Fed would wait to do further increases” he says.

“And if things got really bad, I have no doubt that the Fed would expand QE.”

Oil prices meanwhile are widely expected to rebound from their depths by the second half of the year, as dwindling investment and the buckling of the vulnerable shale players begins to bite on production levels.

This in itself presents its own set of challenges. The lower oil prices fall, the faster buyers are expected to flood back in, with violent upward movements already in evidence over the last ten days.

In the longer term, even the postponement of the next global recession will do little to assuage fears that world could find itself defenceless against another round of mania, panics or crashes.

Two of the world’s three major central banks have slashed interest rates in to negative territory. Monetary tools will need to be deployed more creatively, perhaps going as far as injecting stimulus directly into the veins of the economy.

Should the world ride out the perfect storm of 2016, next time round, answers will be difficult to find.

Related:


U.S. President Barack Obama delivers a statement on the economy following the release of the January jobs report, in the Brady Press Briefing Room at the White House in Washington, February 5, 2016. REUTERS/Jonathan Ernst

.

Citi: World economy seems trapped in ‘death spiral’

February 5, 2016

By CNBC

The global economy seems trapped in a “death spiral” that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned.

Some analysts — including those at Citi — have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S.

“The world appears to be trapped in a circular reference death spiral,” Citi strategists led by Jonathan Stubbs said in a report on Thursday.

“Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)… and repeat. Ad infinitum, this would lead to Oilmageddon, a ‘significant and synchronized’ global recession and a proper modern-day equity bear market.”

Stubbs said that macro strategists at Citi forecast that the dollar would weaken in 2016 and that oil prices were likely bottoming, potentially providing some light at the end of the tunnel.

“The death spiral is in nobody’s interest. Rational behavior, most likely, will prevail,” he said in the report.

Crude oil prices have tumbled by around 70 percent since the middle of 2014, during which time the U.S. dollar has risen by around 20 percent against a basket of currencies.

http://www.cnbc.com/2016/02/05/citi-world-economy-trapped-in-death-spiral.html

Global Stocks Fall on Oil Price Weakness — Worry grows for the health of the global economy

February 2, 2016

Renewed decline in oil prices triggers a slide in energy shares

.

 
An oil pump in Bahrain. The price of oil continues to fall as hopes for a deal on production cuts fade. Photo: Associated Press

Stocks around the world fell Tuesday as sliding oil prices added to concerns about the health of the global economy.

Brent crude oil was down 3.1% at $33.19 a barrel and West Texas Intermediate fell below the $31 mark as hopes for a deal on production cuts faded.

Stocks in Europe and Asia moved lower, while futures pointed to a 0.7% opening loss for the S&P 500. Changes in futures don’t necessarily reflect market moves after the opening bell.

Steep declines in the oil price have hit equity markets hard this year as investors fear it might signal slack in demand from the world’s largest energy consumers.

While low oil prices should boost consumer spending and help companies save on costs, the underlying concern among investors is whether the decline in oil prices and economic weakness in China foreshadow a global recession, said David Donabedian, chief investment officer at Atlantic Trust Private Wealth Management.

While Mr. Donabedian doesn’t believe a global recession is imminent, he expects stocks to struggle to regain traction in the coming weeks given the persistent headwinds around China, oil, and the corporate earnings season.

The Stoxx Europe 600 fell 1.5% halfway through the session, with losses concentrated in the energy and banking sectors.

Adding to the downbeat tone, BP reported a sharp quarterly loss, sending shares in the company down 7.9%, while UBS Group also reported a fall in fourth-quarter net profit.

“People are nervous about global growth,” said Stephen Macklow-Smith, head of European equities strategy at J.P. Morgan Asset Management, noting many of the emerging markets that have struggled this year are also large producers of raw materials.

Falling oil prices recently prompted Nigeria to request emergency funding from the World Bank, while the Russian ruble fell to its weakest ever level against the dollar this year.

Stock markets are likely to continue to move in tandem with the oil price “until clearer direction emerges on the underlying health of the economy,” said Mr. Macklow-Smith.

Earlier, stocks in Asia ended mostly lower. Japan’s Nikkei Stock Average closed down 0.6%, while the commodity-heavy S&P ASX ASX -3.23 % 200 fell 1% after the Reserve Bank of Australia held interest rates steady as expected.

The Shanghai Composite Index, however, climbed 2.3% after China’s central bank injected more liquidity into the financial system ahead of the weeklong Lunar New Year holiday.

Tuesday’s moves followed a flat finish on Wall Street, as falling oil prices cut into Friday’s gains.

After U.S. markets closed, Alphabet reported a surge in profitability at its main Google Internet businesses last year. Shares gained in after-hours trading, helping Alphabet surpass Apple as the most valuable publicly traded company in the world.

In currencies, the dollar was down 0.1% against the yen at ¥120.8230, while the euro was up 0.1% against the dollar at $1.0916 after data showed the eurozone’s unemployment rate continued to edge down.

In metals, spot gold in London was down 0.5% at $1,124.38 an ounce, while the London Metal Exchange’s three-month copper contract was up 0.8% at $4600 a metric ton.

Write to Riva Gold at riva.gold@wsj.com

http://www.wsj.com/articles/global-stocks-fall-on-oil-price-weakness-1454403900