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Our take away from the last 24h news
US Federal Reserves: As we were expecting in our latest FOMC comment (and Fed press conference live blogging), Dudley downplayed the importance of the interest rate forecasts (dots). These indicated that the Fed might hike the interest rates earlier. We’ve argued that the average dots include FOMC members which are not voters in 2015 nor in 2016. Furthermore, the Philadelphia Fed has indicated that Plosser (one of the most hawkish member whom have descent during the latest meeting) would be retiring next year. We have been arguing for a couple of months now that markets are extremely mispricing the Fed reaction function relative to the reaction function explained by the Fed leadership. In his interview, Dudley indicated that the economy should run “a little hot for some time before normalising rates.” Recent G-20, IMF and OECD downward revision to the US economy growth forecast indicate that the market is set to be surprise by the timing of a rate hike. We have been stressing since december 2013, that 1) the market consensus is too much short fixed income (i.e. expecting a quick rate normalisation relative to the scenario supported by economic fundamentals), and 2) this is likely to translate into a short squeeze which might take place as soon as October or November (after the mid-term elections). We consider that the USD strength is likely to reverse as soon as mid-October, when France will validate the change in EZ narrative, while the USD weakness will accelerate the closer we get to the mid-term elections, because operators will realise that a split government would make it even harder to struck bi-partisans compromises on fiscal budget, debt ceiling increase, immigration etc.
ECB: Speaking to economic and monetary affairs committee, President Draghi left the door open left the door open to do more monetary accommodation should conditions require it. This is in line with the comments we were making yesterday. We continue to see the ECB postponing any additional measure until it gets a clear analysis of the economic effects of the already announced measures (T-LTRO and QE-ABS). The introduction of structural reforms in France would help calm Germany – Northern Europe – nervousness that Sovereign QE would be used to finance deficits and fiscal transfers. We consider that by mid October market sentiment is likely to shift more positive toward EZ, when France reforms votes (budget and responsibility pact) will clear the way for Germany to support EU Commission President Juncker EUR300bn investment plan. Furthermore, we consider that as soon as the banking sector on-going AQR [Asset Quality Review] review will be finalised, the EU banks will use the T-LTRO to respond to the growing demand out of the SME sector. We disagree that Moody’s that low T-LTRO demand is indicative of a low demand because this is likely to be attributable to the banking sector focus on reinforcing their solvency before undertaking more risks (ECB loans demand survey continue to indicate demand out of the SME sector in the periphery).
BoE: As we were indicating before Scottish referendum, the recent GBP weaknesses will be reverse as soon as the Scotts will vote to remain in the Union. Markets have resumed pricing a hawkish BoE, while we see this trend to continue, we do not see the BoE hiking rate before May 2015, as the risk of a Br-exit is likely to start to weight on the GBP risk premium again. For now we see the GBP appreciation trend to continue.
Bank of Canada: kick start the downward revision to the neutral rates we are expecting for the developed world (DM). We have been emphasising in our recent research studies that new technologies will shift the Philipps Curve shape downward and enables DM central banks to postpone monetary normalisation without risking spurring an inflationary spirale.
Bank of Japan: OECD comments are in line with the views we’ve expressed in our recent research note, that BoJ will postpone a new QQE program until the government decides to undertake the second VAT hike. Such events sequencing helps the BoJ to avoid a Japan Government Bonds solvency crisis while markets commentators have increased their questioning of central banks credibility.
Brazil Central Bank: evidences continue to support our view that Brazil is heading toward stagflation. We consider that Brazil woes can better be answered by governance improvement rather than monetary activism. We see the BCB to remain on hold, unless markets start to increase BRL risk premium. We continue to consider that Brazil might be heading toward a sovereign crisis should the new leadership refrains from doing the needed – urgent – reforms.
Ebola: As the global community recognises that defeating mistrust will be instrumental in the war against terror (this reduces the jihadists argument which found traction vis-a-vis many western youth), and Ebola spread (cf. riot against educators), global coordination is intensifying to: 1) fight disinformation (we were talking about it in our recent daily briefings), 2) provide short term medical assistance (France, US, Israel, etc.) with the help of military expertise and 3) provide financial support (wealthy donors, government funding, NGO help etc.). We do believe that the most important single risk remains the use of Ebola as a dirty weapon. But, should such an action take place financiers of terrors are likely to come to the spot light. Financiers should make no mistake, this time around, unlike in 2001, there are sufficient data to bring to justice more than just those who execute acts of terror.
ISIL: the global community military action continue to enjoy a wide support every country (incl. Arab countries). Social media is joining the fight against the terrorist organisation, Muslims are making #NotInMyName viral to push the view that ISIL is a state or represent anyway Islam.
Oil prices continue to come under pressure (like we were forecasting in our recent energy update note). However, the situation on the ground continue to be fragile, with a new threats to the security of many countries from Egypt to US. The quickest the West recognises that the fight against ISIL and terrorists necessitate a fight against mistrust which spread not only in the jihadist internet web but also in the extreme right and gold bugs forums, the more the risk of isolated radicalised youth actions will decrease.
The fight against mistrust is likely to accelerate with the global governance improvement.
Russia: Ukrainian situation continues to calm down (BUT NOT deescalate). The Eastern Ukraine region self proclaimed republics autonomy perimeter continue to be the name of the game.
Too much autonomy (the current self proclaimed government are calling for a full fledge independence – which could give legitimacy to Crimea annexation-) would make Ukraine IMF program dead born (as Kiev government would be in the incapacity to deliver on governance improvement and structural reforms). At the other end, an autonomous regions which would bind by the IMF program reform will increase the ability of Kiev government to strengthen the Ukrainian economy along with the governance improvement. Thus, it would increase the likelihood of joining NATO. Russia is unlikely to let this scenario take place without a fight.
Therefore, the Kremlin is putting a lot of emphasis on how badly an isolated Russia would impact the global economy, while the Russian economy is preparing for this outcome (e.g. Russian corporations are considering spinning of their US subsidiaries, Wealth Fund is considered to be used to self-finance needed infrastructure investment, while international experts are rushing to find financial solutions for the New Russia political strategy). From the political spectrum, the opposition is organising itself should oil prices drop sustainably below $75bbl – this scenario is possible should the geopolitical blue sky scenario take place -. But the Kremlin is “threatening” oligarchs to keep them away from joining the opposition.
Climate Change: Many activists mistakenly consider Wall Street a single entity, while it’s a group of different thinking (otherwise theoretically no price can constructs). When it comes to climate change, there are some sectors which would suffer from a change in regulation (mainly fossile sectors), these are heavily financing Gold bugs bloggers and website which challenge the Fed in the hope that it will create a crisis which would postpone the energy transition. There are much more supporters for the new technologies and the energy transitions which have proven that not only Green is good for the planet it’s much more profitable and increase ROE. Since the beginning of 2014, we have been pushing the overwhelming consensus which skewed itself with the conservatism, while much more benefit is likely to come from the new technologies and the transformation of energy sources. Obviously the current DC gridlock is not strange to this neither. We are frightened by the fact that there is an alignment of interests between ISIL and some conservatism businesses. We do hope that these businesses will never try to use this treat to push for their own interest, through we continue to be vigilant because “web-thinkers” close to these business interest have been against going to war on Terror.
US Tax inversion: As we were expecting since the announcement of Burger King deal (which has been widely reported as being solely pursuing tax inversion objective) we’ve indicated that this would sign the end of the system. US Treasury took actions to make it harder to execute such deals, while the tax reform seems in limbo due to DC gridlock. Administrative actions taken by Treasury Secretary Lew makes it harder to execute tax inversion but does not derail it entirely. We consider that G-20 initiative to undertake OECD proposal to reform the rule of “double non-taxation” (see our previous daily briefing) will help improve the tax governance (and incidentally the rise in the mistrust in the public institutions – which are seen to be colluding with businesses -).
UK: As we were arguing last Friday, UK is heading toward a form of federalism, though 10 Downing Street does not want to recognise it yet, as the negotiations are holding with Tories MP, because such reforms would transform their power.
France: Merkel praised the reform agenda, reverted to Brussels on budget. On this matter Pierre Moscovici is likely to come under heavy pressure in his Oct. 2nd hearing to strengthen the impartiality should he agree to postpone France budget. This is natural development because Germany does not want to be seen as a “hegemonic force” in EU. However, any acceptance to accelerate EU integration and infrastructure investment will only come when France will pass it reforms (cf. comments from Finance Minister Sapin). Recent political gridlock (“les frondeurs”) and strikes are the reflect of the tension brought by the transformative reform agenda which is under way. We consider that EU and France has NO SURVIVAL CHOICE face of Russia should it derail from the reforms and the EU integration agendas. Therefore, we foresee that France will get more time to adjust its fiscal deficit should it undertake spending cuts (EUR50bn until 2017) which executing the “responsibility pact” (i.e. structural reforms).
China: FinMin Lou Jiwei ruled out major stimuli while PBoC is taking targeted measures to keep the growth around government objectives. These are in line with the objective to rebalance the economy away from credit driven investment. The government seems fearing that the economic rebalancing has not taken momentum yet although 1) labor intensive manufacturers are relocating in cheaper labor countries, 2) businesses are upgrading their business models, 3) President Xi has conducted many trade – investment agreement with Neighbours (after Premier Li did the same in Africa) to secure investment projects which use Chinese manpower – engineers know-how in this domaine, 4) China is gaining more military presence and has fluxed it mussels – e.g. China “Top Gun” intercept by a US fighter jet -, 5) China has signed many RMB agreement which reinforce the currency usage and prepare its full liberalisation – after Free Trade Zones (FTZ) have proven to be a success -, 6) China has undertaken a genuine fight against bad governance and better regulation – many examples in our recent daily briefings of fight against corruption and bad governance-. We see in FinMin Lou Jiwei comment an indication that not only China wants to create a reserve currency it does want it to be strong when Chinese leaders perceive the heavy pressure place on USD by a category of investors to avoid debasing the currency through deficit financing – although we consider that this worry is misplaced -.
Australia: Asset prices continue to suffer from the market belief that Australia is a derivative to the old Chinese model. This view continue to see a high beta between Australian assets and commodity prices (or China demand for commodities). This assumes that neither China nor Australia are conducting their rebalancing agenda. We do believe that the curent weaknesses offers genuine opportunity to benefit from the other drivers to the Australian economy which are not related to commodities. We see the current Australian Dollar weakness to continue at least until the USD start to weaken again when markets will realise that it has beaten too much on a quick rate normalisation.
New Zealand: as we were expecting yesterday, National Party 3rd term, without the need of a coalition helped the NZ stocks to out-perform in a quite “bearish” day. From yesterday briefing “We see this win to clear the way for rebalancing NZ economy toward more agriculture technology investment. The result does support our constructive scenario on NZ.”
Japan: Recent news flow indicate that Japan is heading toward improving its relations with neighbours. We have been forecasting that Japan will apology for confort Women in order to clear the tension build since the end of WW-II. The recent government economic downgrade was widely expected. We see BoJ to keep the bazooka of QQE-2 un-tested until the JPY excessive depreciation and JGB solvency risk came down * investors are still short JGB expecting a Japan crisis *. However, BoJ might do some adjustment to its monetary program but nothing excessive. The news flow out of this weekend G20 meeting shows that the global community is gently pressing the government and the BoJ to pursue structural reforms, economic rebalancing, solvency improvement (through VAT 2nd hike commitment) and adequate monetary policy (not too hot – to avoid a crisis – not too cool – to avoid derailing the on-going portfolio rebalancing approach -).
Central Banks News
Philadelphia Fed President Plosser Plans to Retire in March
Federal Reserve Bank of Philadelphia President Charles Plosser, who votes on policy this year, will retire after eight years in which he became a consistent critic of the central bank’s unprecedented easing.
Dudley Plays Down Significance of Fed’s Interest-Rate Forecasts
“People shouldn’t overweight the value of those dots, especially as you get out further in terms of the time horizon,” William C. Dudley, president of the Federal Reserve Bank of New York, said in an interview with Matthew Winkler, editor-in-chief of Bloomberg News.
Dudley Says Fed Needs U.S. Economy to Run ‘A Little Hot’
“Depending on where inflation is, I can certainly imagine a scenario where the unemployment rate dips a little below” what the Fed considers maximum employment, he said today in an interview with Matthew Winkler, editor-in-chief of Bloomberg News. “We really need the economy to run a little hot for at least some period of time” to push inflation back up to the 2 percent objective, he said.
“You really do want to push the unemployment rate down toward your objective,” Dudley said at the Bloomberg Markets Most Influential Summit in New York.
US Federal Reserves: As we were expecting in our latest FOMC comment (and Fed press conference live blogging), Dudley downplayed the importance of the interest rate forecasts (dots). These indicated that the Fed might hike the interest rates earlier. We’ve argued that the average dots include FOMC members which are not voters in 2015 nor in 2016. Furthermore, the Philadelphia Fed has indicated that Plosser (one of the most hawkish member whom have descent during the latest meeting) would be retiring next year. We have been arguing for a couple of months now that markets are extremely mispricing the Fed reaction function relative to the reaction function explained by the Fed leadership. In his interview, Dudley indicated that the economy should run “a little hot for some time before normalising rates.” Recent G-20, IMF and OECD downward revision to the US economy growth forecast indicate that the market is set to be surprise by the timing of a rate hike. We have been stressing since december 2013, that 1) the market consensus is too much short fixed income (i.e. expecting a quick rate normalisation relative to the scenario supported by economic fundamentals), and 2) this is likely to translate into a short squeeze which might take place as soon as October or November (after the mid-term elections). We consider that the USD strength is likely to reverse as soon as mid-October, when France will validate the change in EZ narrative, while the USD weakness will accelerate the closer we get to the mid-term elections, because operators will realise that a split government would make it even harder to struck bi-partisans compromises on fiscal budget, debt ceiling increase, immigration etc.
UPDATE 1-ECB’s Draghi says ready to use more unconventional tools
BRUSSELS, Sept 22 (Reuters) – The European Central Bank stands ready to use additional unconventional tools if needed to spur inflation and growth in the euro zone, ECB President Mario Draghi said on Monday.
Speaking to the economic and monetary affairs committee of the European parliament, Draghi also said he expects more demand from banks for its new ultra-long loan program, known as TLTROs, when the funding is offered again in December.
Lower than expected take-up of the initial tranche of loans last week has fueled expectations the ECB may eventually take more radical stimulus measures, such as printing money to buy securities. Such quantitative easing, or QE, would face strong resistance in Germany.
http://www.cnbc.com/id/102021441
Low demand for new ECB funds a negative for euro zone – Moody’s
Though banks have another chance to get their hands on the money just before Christmas, when the ECB’s banking system Asset Quality Review (AQR) will also be out of the way, Moody’s said last week’s signs were not encouraging.
« Lacklustre demand for funds… is credit negative for euro area economies because it likely reflects a combination of too few profitable lending opportunities for banks and their continued desire to deleverage and de-risk. »
« By implication the weaker growth environment is negative for sovereigns, » Moody’s senior Vice President Marie Diron added to Reuters.
ECB: Speaking to economic and monetary affairs committee, President Draghi left the door open left the door open to do more monetary accommodation should conditions require it. This is in line with the comments we were making yesterday. We continue to see the ECB postponing any additional measure until it gets a clear analysis of the economic effects of the already announced measures (T-LTRO and QE-ABS). The introduction of structural reforms in France would help calm Germany – Northern Europe – nervousness that Sovereign QE would be used to finance deficits and fiscal transfers. We consider that by mid October market sentiment is likely to shift more positive toward EZ, when France reforms votes (budget and responsibility pact) will clear the way for Germany to support EU Commission President Juncker EUR300bn investment plan. Furthermore, we consider that as soon as the banking sector on-going AQR [Asset Quality Review] review will be finalised, the EU banks will use the T-LTRO to respond to the growing demand out of the SME sector. We disagree that Moody’s that low T-LTRO demand is indicative of a low demand because this is likely to be attributable to the banking sector focus on reinforcing their solvency before undertaking more risks (ECB loans demand survey continue to indicate demand out of the SME sector in the periphery).
Pound Rises for Fifth Day Against Euro on BOE Rate-Increase Bets
Sterling appreciated versus all but one of its 16 major counterparts as futures contracts signaled rising prospects the BOE will raise borrowing costs next year. The pound also advanced against the dollar after Scotland voted on Sept. 18 to stay part of the U.K., ending debate on whether the country would have to choose a different currency had it separated. U.K. 10-year government bonds rose after the Group-of-20 warned of potential financial-market risk from low interest rates.
BoE: As we were indicating before Scottish referendum, the recent GBP weaknesses will be reverse as soon as the Scotts will vote to remain in the Union. Markets have resumed pricing a hawkish BoE, while we see this trend to continue, we do not see the BoE hiking rate before May 2015, as the risk of a Br-exit is likely to start to weight on the GBP risk premium again. For now we see the GBP appreciation trend to continue.
UPDATE 2-Bank of Canada sees ‘neutral’ rate lower than before
(Reuters) – Interest rates may have to be about one-and-a-half percentage points lower than they have been historically in order for the Canadian economy to operate at full capacity, the Bank of Canada said on Monday.
The central bank estimated the neutral rate of interest, or the rate at which the economy can work at full capacity with stable inflation, is now 3 to 4 percent, down from a range of 4.5 to 5.5 percent in the mid-2000s.
http://www.reuters.com/article/2014/09/22/canada-cenbank-idUSL2N0RN17X20140922
Bank of Canada: kick start the downward revision to the neutral rates we are expecting for the developed world (DM). We have been emphasising in our recent research studies that new technologies will shift the Philipps Curve shape downward and enables DM central banks to postpone monetary normalisation without risking spurring an inflationary spirale.
UPDATE 2-Gaza war forces Bank of Israel to cut 2014 growth view
* Cuts 2014 economic growth estimate to 2.3 pct from 2.9 pct
* Still sees growth of 3 percent in 2015
* Says last two months’ rate cuts to support economy (Recasts, adds details, analyst comments)
By Steven Scheer
JERUSALEM, Sept 22 (Reuters) – Israel’s 50-day war with Hamas militants in Gaza forced the Bank of Israel to reduce its 2014 growth estimate on Monday and it left short-term interest rates unchanged on the view that two previous months of rate cuts were sufficient for now.
The central bank expects Israel’s economy to grow at a five-year low of 2.3 percent this year, down from a June estimate of 2.9 percent.
http://www.reuters.com/article/2014/09/22/israel-rates-idUSL6N0RN2Y020140922
Economics News
US EXISTING HOME SALES FALL IN AUGUST
Sales of existing homes fell 1.8 percent to a seasonally adjusted annual rate of 5.05 million, the National Association of Realtors said Monday. That snaps a four-month streak of gains. August sales are down from a July rate of 5.14 million, a figure that was revised slightly downward.
IMF’s Lagarde Warns G20 to Miss Growth Targets
G20 nations are unlikely to meet the collective growth target of 2% by 2018, said Christine Lagarde, the managing director of the International Monetary Fund.
« According to our preliminary assessment with the OECD, the commitments made to date as part of these strategies have the potential to raise the collective GDP of the G20 by about 1.8% by 2018, compared to the 2% goal set earlier this year in Sydney, » Lagarde said.
Her statement followed a meeting of the Group of 20 finance ministers and central bank governors in Cairns, Australia.
http://www.ibtimes.co.uk/g20-gdp-growth-fall-short-target-imf-chief-lagarde-1466514
French reforms will help G-20 reach goal: Finance Minister
Structural and labor market reforms underway in France will help ensure that the Group of 20 meets the goal set out in February of boosting global growth by two percentage points within five years, Michel Sapin, the country’s finance minister, told CNBC at the G-20 meeting in Australia on Sunday.
« The first thing [we must do] is… ensure that growth in 2014 and 2015 is higher… within the European framework, » he said. « We will also put in place structural reform that will provide more capacity for businesses in terms of investment for employment, for margins to be larger, and we are substantially reducing taxation and actual contributions over a period of four years. »
http://www.cnbc.com/id/102019461
« OECD exec urges BOJ to move to cushion impact of next tax hike »
TOKYO, Sept. 22 (Kyodo) −− A senior executive of the Organization for Economic Cooperation and Development on Monday urged the Bank of Japan to implement monetary stimulus steps to soften the negative impact of a further consumption tax hike scheduled in October 2015.
Noting that Japan’s economy has been stalling following the 3−percentage−point tax increase to 8 percent from April 1, it is « inevitable » that the planned tax hike to 10 percent next year will weigh on the economy again, OECD Deputy Secretary General Rintaro Tamaki said at the Japan National Press Club in Tokyo.
While urging Prime Minister Shinzo Abe’s government to proceed with the further tax increase for fiscal consolidation, an economic downturn triggered by the tax change should be avoided by « short−term measures, in particular, monetary policy, » said Tamaki, former Japanese vice finance minister for international affairs.
Bank of Japan: OECD comments are in line with the views we’ve expressed in our recent research note, that BoJ will postpone a new QQE program until the government decides to undertake the second VAT hike. Such events sequencing helps the BoJ to avoid a Japan Government Bonds solvency crisis while markets commentators have increased their questioning of central banks credibility.
Brazil Economists Cut 2014 Growth, 2015 Selic Rate Forecasts
Brazil analysts cut their estimates for expansion in 2014 and the Selic rate at year-end 2015, after the economy slipped into recession in the first half.
The analysts cut their gross domestic product forecast for the 17th straight week to 0.3 percent this year, according to the Sept. 19 central bank survey of about 100 analysts published today. That compares to the previous week’s forecast of 0.33 percent growth. For next year, economists see Brazil’s economy expanding at 1.01 percent.
Analysts also lowered their prediction for the benchmark rate at year-end 2015 to 11.25 percent from 11.50 percent.
Brazil Central Bank: evidences continue to support our view that Brazil is heading toward stagflation. We consider that Brazil woes can better be answered by governance improvement rather than monetary activism. We see the BCB to remain on hold, unless markets start to increase BRL risk premium. We continue to consider that Brazil might be heading toward a sovereign crisis should the new leadership refrains from doing the needed – urgent – reforms.
Ebola
World leaders to gather at UN in shadow of Islamic State, Ebola crises
UNITED NATIONS: World leaders gather in New York this week to tackle a host of crises: the violence Islamic State militants are wreaking in Iraq and Syria, the exponential spread of the deadly Ebola virus in Africa and deadlocked negotiations on Iran’s nuclear program.
There is little hope the 193-nation UN general assembly will achieve much in the annual five-day marathon of speeches. But on the sidelines, US officials plan to lobby allies for pledges of concrete military assistance to help defeat Islamic State, whose hardline Sunni Islamist fighters have taken over swaths of Syrian and Iraqi territory.
Sierra Leone and Liberia, hardest hit by Ebola, brace and prepare for new cases
FREETOWN, Sierra Leone (AP) — Two of the West African nations hardest hit by Ebola were bracing for new caseloads on Monday after trying to outflank the outbreak with a nationwide checkup and a large new clinic.
Ebola shutdown campaign in Sierra Leone reached 80% of target households
Sierra Leone’s three-day shutdown to try to contain an Ebola virus outbreak has ended, but it’s unclear how much the effort helped.
About six million citizens in the West African country were asked to stay indoors until Sunday night as 30,000 health workers, volunteers and teachers went door to door to look for people who may be infected and to give out information about the disease.
Ebola toll passes 2,800 but ‘contained’ in Senegal, Nigeria : WHO
(Reuters) – An outbreak of Ebola in West Africa has been largely contained in Senegal and Nigeria, the World Health Organization (WHO) said on Monday, but the disease is still spreading elsewhere and has now killed over 2,811 people in the region.
Senegal and Nigeria, the most recent of five nations to record cases of Ebola, implemented strict measures to isolate the ill and track down further possible cases — steps that Guinea, Liberia and Sierra Leone have failed to impose, allowing the disease to take hold in cities and rural communities.
http://www.reuters.com/article/2014/09/22/us-health-ebola-idUSKCN0HH2HQ20140922
Ebola: As the global community recognises that defeating mistrust will be instrumental in the war against terror (this reduces the jihadists argument which found traction vis-a-vis many western youth), and Ebola spread (cf. riot against educators), global coordination is intensifying to: 1) fight disinformation (we were talking about it in our recent daily briefings), 2) provide short term medical assistance (France, US, Israel, etc.) with the help of military expertise and 3) provide financial support (wealthy donors, government funding, NGO help etc.). We do believe that the most important single risk remains the use of Ebola as a dirty weapon. But, should such an action take place financiers of terrors are likely to come to the spot light. Financiers should make no mistake, this time around, unlike in 2001, there are sufficient data to bring to justice more than just those who execute acts of terror.
Gaza
WEEK OF DIPLOMACY: ISRAEL-HAMAS TALKS, ABBAS AT UN
RAMALLAH, West Bank (AP) — It’s a busy week in Mideast diplomacy, book-ended by the launch of Israel-Hamas talks about a border deal for blockaded Gaza and the Palestinian president’s U.N. speech about a new strategy for dealing with Israel.
Jurors Find Arab Bank Liable in New York Terrorism Funding Trial
NEW YORK, Sept. 22, 2014 /PRNewswire/ — Nearly 300 U.S. citizens who were victimized in 24 terrorist attacks in Israel and the Palestinian Territories have prevailed in a civil lawsuit against Amman, Jordan-based Arab Bank PLC after a New York federal jury found that the bank knowingly provided material financial support to the Palestinian militant group Hamas.
Cairo talks to include Hamas-Fatah negotiations on Gaza rule
Head of Palestinian delegation to ceasefire talks says while Abbas wants real authority in Gaza, Hamas refuses to cede control of security forces in Strip.
http://www.ynetnews.com/articles/0,7340,L-4573418,00.html
Hamas Rejects Israeli Demand to Disarm Ahead of Truce Talks
Hamas leader Khaled Mashaal ruled out Israel’s demand that the militant Islamist group disarm in comments ahead of indirect talks with Israel in Cairo to extend last month’s cease-fire in the Gaza Strip.
Gaza: As Egypt President el-Sisi intensifies the fight against the Muslim Brotherhoods, the political arm of the radical islam fighters (whose fighters include the hard-core liners ISIL and Al Qaeda), Egypt is re-gaining its leading role in the Palestinian – Israeli peace process. The pressure to reduce Israel’s defence budget aims bringing the hawks to consider peace solutions. Furthermore, at last, the terror financiers are brought to justice which increase the likelihood to make the current fight against terror much more effective.
We are very optimistic (as we have been since the beginning of the Gaza crisis) that : 1) Hamas leadership will break from extremists and will recognise Israel – as Fatah did years ago – (though some radical fractions are already burgeoning with much less financial and arm support), 2) Iran will be instrumental in settling a long-term peace process (as the nuclear negotiation heads toward a civil nuclear Iran), 3) a LT peace process will help the development of Mediterranean sea gas exploitation (as it enables to return to the Israeli – Turkish normalisation, a process which was very close in April but has been postponed by the Gaza crisis).
Iraq
Islamist Group Kidnaps Frenchman in Algeria
A splinter group from al-Qaida’s North African branch kidnapped a French citizen and said Monday that it would kill him unless France halts it airstrikes against the Islamic State group in Iraq.
In a video that appeared on social media, a masked member of a group calling itself Jund al-Khilafah, or Soldiers of the Caliphate, addressed the threat to French President Francois Hollande and said the hostage would be killed unless the airstrikes were halted within 24 hours.
http://abcnews.go.com/International/wireStory/officials-french-citizen-kidnapped-algeria-25678344
PM Abbott outlines anti-terror action
Islamic State extremists have urged supporters to directly target Australians in a message released ahead of Prime Minister Tony Abbott attending security talks at the United Nations.
The statement came as Mr Abbott told parliament Australians would have to put up with inconvenience and tougher security for « some time to come » and was verified as genuine by intelligence officials.
Islamic State calls for more attacks on Egyptian security forces
CAIRO:Islamic State (IS) called on insurgents in Egypt’s Sinai Peninsula on Monday to press ahead with attacks against Egyptian security forces and to continue beheadings, an appeal likely to deepen concerns over ties between the militant groups.
Exclusive: Iran seeks give and take on Islamic State militants, nuclear program
(Reuters) – Iran is ready to work with the United States and its allies to stop Islamic State militants, but would like more flexibility on Iran’s uranium enrichment program in exchange, senior Iranian officials told Reuters.
http://www.reuters.com/article/2014/09/21/us-iran-nuclear-exclusive-idUSKBN0HG0YN20140921
UPDATE 2-U.S. opposes linking Iran cooperation on Islamic State to nuclear talks
« The United States will not be in the position of trading aspects of Iran’s nuclear program to secure commitments to take on ISIL, » Earnest said, using an acronym for Islamic State (IS).
http://in.reuters.com/article/2014/09/22/iran-nuclear-usa-idINL2N0RN1BR20140922
ISIL: the global community military action continue to enjoy a wide support every country (incl. Arab countries). Social media is joining the fight against the terrorist organisation, Muslims are making #NotInMyName viral to push the view that ISIL is a state or represent anyway Islam.
Oil prices continue to come under pressure (like we were forecasting in our recent energy update note). However, the situation on the ground continue to be fragile, with a new threats to the security of many countries from Egypt to US. The quickest the West recognises that the fight against ISIL and terrorists necessitate a fight against mistrust which spread not only in the jihadist internet web but also in the extreme right and gold bugs forums, the more the risk of isolated radicalised youth actions will decrease.
The fight against mistrust is likely to accelerate with the global governance improvement. Furthermore, any advance in Iran nuclear talks will help Iran joining the fight against ISIL. The recent global messages out of ISIL indicates that the terrorist organisation is getting isolated and its power is weakening.
Russia
UPDATE 3-Oil falls below $98 on sluggish demand, ample supply
* Weak economic outlooks in Europe, China weigh
* Investors look past possible OPEC output cut
* Libya fighting closes refinery, cuts oil output
LONDON, Sept 22 (Reuters) – Brent crude fell below $98 a barrel on Monday, dropping for the third session in four, as sluggish demand and ample supplies outweighed expectations of a cut in oil output from the Organization of the Petroleum Exporting Countries (OPEC).
http://www.cnbc.com/id/102020434
More Ukrainian soldiers killed, Poroshenko defends peace plan
(Reuters) – Ukraine reported more deaths among its troops and separatists on Sunday despite a ceasefire, but President Petro Poroshenko defended his peace plan, saying a military solution was no option and Western support could have been at risk.
The Kiev military accused separatists and Russian troops of violating the Sept. 5 ceasefire in eastern Ukraine by continuing to shoot at government forces. Kiev would not go ahead with setting up a proposed buffer zone until the violations stopped.
« In the last 24 hours we have lost two Ukrainian soldiers, eight have been wounded, » military spokesman Andriy Lysenko told reporters on Sunday.
http://in.reuters.com/article/2014/09/22/ukraine-crisis-idINKCN0HH07N20140922
Vladimir Putin to attend Group of 20 summit in Brisbane despite opposition
Russian President Vladimir Putin plans to attend a Group of 20 summit in the Australian city of Brisbane, Interfax news agency said yesterday, despite calls for the hosts to prevent him attending because of Russia’s role in the Ukraine crisis.
« The president is continuing to prepare for the upcoming summit of the G20 in Australia, » the agency quoted Kremlin spokesman Dmitry Peskov as saying.
Russia: Ukrainian situation continues to calm down (BUT NOT deescalate). The Eastern Ukraine region self proclaimed republics autonomy perimeter continue to be the name of the game.
Too much autonomy (the current self proclaimed government are calling for a full fledge independence – which could give legitimacy to Crimea annexation-) would make Ukraine IMF program dead born (as Kiev government would be in the incapacity to deliver on governance improvement and structural reforms). At the other end, an autonomous regions which would bind by the IMF program reform will increase the ability of Kiev government to strengthen the Ukrainian economy along with the governance improvement. Thus, it would increase the likelihood of joining NATO. Russia is unlikely to let this scenario take place without a fight.
Therefore, the Kremlin is putting a lot of emphasis on how badly an isolated Russia would impact the global economy, while the Russian economy is preparing for this outcome (e.g. Russian corporations are considering spinning of their US subsidiaries, Wealth Fund is considered to be used to self-finance needed infrastructure investment, while international experts are rushing to find financial solutions for the New Russia political strategy). From the political spectrum, the opposition is organising itself should oil prices drop sustainably below $75bbl – this scenario is possible should the geopolitical blue sky scenario take place -. But the Kremlin is “threatening” oligarchs to keep them away from joining the opposition.
US News
BUSINESSES AND INVESTORS PRESSING FOR GREEN POLICY
NEW YORK (AP) — Hundreds of corporations, insurance companies and pension funds are calling on world leaders gathering for a U.N. summit on climate change this week to attack the problem by making it more costly for businesses and ordinary people to pollute.
The idea, long advocated by policymakers, economists and environmental activists, is that the world can’t hope to slow the heating of the planet until its cost is incorporated into the everyday activities that contribute to it, such as using gas- or coal-generated electricity, driving a car, shipping a package or flying around the globe.
Big Oil’s heirs join call for action as climate summit opens
For 140 years, the Rockefellers were the oil industry’s first family, scions of a business empire that spawned companies called Exxon, Mobil, Amoco and Chevron. So it was no trivial matter when a group of Rockefeller heirs decided recently to begin severing financial ties to fossil fuels.
‘Largest-ever’ climate-change march rolls through NYC
http://www.usatoday.com/story/news/nation/2014/09/21/nyc-climate-change-march/16008009/
Scenes from #FloodWallStreet: ‘Corporate capitalism = Climate chaos ‘
http://money.cnn.com/2014/09/22/investing/climate-protest-wall-street/index.html
Climate Change: Many activists mistakenly consider Wall Street to be a single entity, while it’s a group of different thinking (otherwise theoretically no price can be constructed). When it comes to climate change, there are some sectors which would suffer from a change in regulation (mainly fossile sectors), these are heavily financing Gold bugs bloggers and website which challenge the Fed in the hope that it will create a crisis which would postpone the energy transition. There are much more supporters for the new technologies and the energy transitions which have proven that not only Green is good for the planet it’s much more profitable and increase ROE. Since the beginning of 2014, we have been pushing the overwhelming consensus which skewed itself with the conservatism, while much more benefit is likely to come from the new technologies and the transformation of energy sources. Obviously the current DC gridlock is not strange to this neither. We are frightened by the fact that there is an alignment of interests between ISIL and some conservatism businesses. We do hope that these businesses will never try to use this treat to push for their own interest, through we continue to be vigilant because some “web-thinkers” close to these business interest have been against going to war on Terror.
Treasury acts to stop overseas tax ‘inversions’
« These first, targeted steps make substantial progress in constraining the creative techniques used to avoid U.S. taxes, » Treasury Secretary Jack Lew said.
The changes Treasury announced will make it harder for a U.S. company seeking inversion to escape paying U.S. tax on foreign earnings they have already made. For instance:
No more playing ‘hopscotch’: Companies only have to pay U.S. tax on their foreign earnings when they bring them back to the United States.
But inverted companies can get around this rule by having a foreign subsidiary it controls make a « hopscotch » loan to the new foreign parent instead of to the U.S. company.
Treasury will now consider such loans as « U.S. property » in many instances and treat the money as a taxable dividend.
No more slimming down the U.S. company: In order to successfully invert, the U.S. partner must own less than 80% of the merged company. Treasury’s new rules will make it a little harder to stay under that threshold.
And no more fattening up the foreign partner: Likewise, the foreign partner’s size may be increased by the inclusion of its « passive assets » — money that isn’t used for business operations, such as securities the firm owns.
http://money.cnn.com/2014/09/22/news/economy/treasury-inversions/index.html
US Tax inversion: As we were expecting since the announcement of Burger King deal (which has been widely reported as being solely pursuing tax inversion objective) we’ve indicated that this would sign the end of the system. US Treasury took actions to make it harder to execute such deals, while the tax reform seems in limbo due to DC gridlock. Administrative actions taken by Treasury Secretary Lew makes it harder to execute tax inversion but does not derail it entirely. We consider that G-20 initiative to undertake OECD proposal to reform the rule of “double non-taxation” (see our previous daily briefing) will help improve the tax governance (and incidentally the rise in the mistrust in the public institutions – which are seen to be colluding with businesses -).
Europe News
British PM Cameron tries to quell party revolt over new powers for Scotland
MANCHESTER England (Reuters) – British Prime Minister David Cameron tried to head off a rebellion in his Conservative party over a promise of new powers for Scotland, highlighting the difficulty of giving Scots what they want after last week’s referendum on Scottish independence.
http://ca.reuters.com/article/topNews/idCAKCN0HH27D20140922
Hague warns of devolution for England
Conservatives may seek greater powers for English MPs over English laws
The Conservatives will make demands for greater powers for English MPs over English laws a central part of next year’s British general election – unless Labour agrees to changes, William Hague has warned.
http://www.irishtimes.com/news/world/uk/hague-warns-of-devolution-for-england-1.1938034
UK: As we were arguing last Friday, UK is heading toward a form of federalism, though 10 Downing Street does not want to recognise it yet, as the negotiations are holding with Tories MP, because such reforms would transform their power.
UPDATE 1-Valls tells Germans France isn’t EU’s « sick child »
* French premier asks Germans to understand reform drive
* Merkel defers to Brussels on France missing deficit targets
* German finmin sees little scope for growth stimulus
BERLIN, Sept 22 (Reuters) – France’s Manuel Valls used his first visit to Berlin as prime minister on Monday to try to convince Germany his government is serious about making its economy more competitive, declaring that France « is not the sick child of Europe. »
Chancellor Angela Merkel praised the reform steps he outlined but said it was up to the European Commission to judge whether Paris should be granted yet more time to bring its public deficit down to EU treaty limits.
European Union officials and the European Central Bank are pressing France to step up economic reforms and budget consolidation and Germany to increase public investment as part of a strategy to revive a stagnant euro zone economy.
http://www.cnbc.com/id/102021357
Air France strike crisis deepens as both sides dig in
(Reuters) – A bitter Air France labour dispute deepened on Monday as management pledged to press ahead with its low-cost airline ambitions and pilots said that an eight day-old strike over the proposals would continue indefinitely as a result.
Air France’s Franco-Dutch parent Air France-KLM (AIRF.PA) wants to develop its own low-cost brand, Transavia, with hubs in France, the Netherlands and Europe in an attempt to maintain market share for Europe’s second-largest carrier by revenue in the face of fierce competition in the sector.
http://uk.reuters.com/article/2014/09/22/uk-air-france-klm-strike-idUKKCN0HH0WQ20140922
Moscovici Faces Favoritism Questions From EU Lawmakers
“Do you confirm that you will make no difference between member states?” the Economic and Monetary Affairs Committee will ask Moscovici, according to draft questions obtained by Bloomberg News. The parliament is holding nomination hearings for commissioners starting on Sept. 29, with Moscovici scheduled for Oct. 2. Hearings continue for commission vice president nominees on Oct. 6-7.
http://www.businessweek.com/news/2014-09-22/moscovici-faces-favoritism-questions-from-eu-lawmakers
France: Merkel praised the reform agenda, reverted to Brussels on budget. On this matter Pierre Moscovici is likely to come under heavy pressure in his Oct. 2nd hearing to strengthen the impartiality should he agree to postpone France budget. This is natural development because Germany does not want to be seen as a “hegemonic force” in EU. However, any acceptance to accelerate EU integration and infrastructure investment will only come when France will pass it reforms (cf. comments from Finance Minister Sapin). Recent political gridlock (“les frondeurs”) and strikes are the reflect of the tension brought by the transformative reform agenda which is under way. We consider that EU and France has NO SURVIVAL CHOICE face of Russia should it derail from the reforms and the EU integration agendas. Therefore, we foresee that France will get more time to adjust its fiscal deficit should it undertake spending cuts (EUR50bn until 2017) which executing the “responsibility pact” (i.e. structural reforms).
China News
Xi stresses military headquarters’ loyalty to Party
BEIJING, Sept. 22 (Xinhua) — President Xi Jinping stressed the loyalty of headquarters of the People’s Liberation Army (PLA) at a meeting with PLA chiefs of staff here on Monday.
Headquarters of PLA forces must have absolute loyalty and firm faith in the Communist Party of China, guarantee a smooth chain of command and make sure all decisions from the central leadership are fully implemented, said Xi, also chairman of the Central Military Commission (CMC).
http://news.xinhuanet.com/english/china/2014-09/22/c_133663216.htm
As China pushes, Indian troops make tactical retreat at one spot
NEW DELHI: China is getting increasingly aggressive on the border even as Indian troops hold forth with equal force. The continuing high-altitude military faceoff at Chumar in eastern Ladakh, with around 1,000 Chinese soldiers ranged against an equal number of Indian troops in sub-zero temperatures for the last 12 days, has led Army chief General Dalbir Singh Suhag to cancel his proposed visit to Bhutan.
Hong Kong students on strike for democracy
Students from more than 20 Hong Kong universities launch week-long class boycott to demand greater democracy.
Blasts in China’s Xinjiang kill two; govt censures officials
(Reuters) – Two people were killed and several more injured in at least three explosions in China’s troubled far western region of Xinjiang on Sunday, state media reported, but gave few details.
The blasts came as China punished 17 regional officials and police « for being accountable » for a July 28 attack by masked militants that led to almost 100 deaths of police, officials and civilians, and for the subsequent killing of a pro-Beijing imam.
http://www.reuters.com/article/2014/09/22/us-china-xinjiang-idUSKCN0HH06220140922
Yuan Rebounds as Finance Chief Rules Out Major Economic Stimulus
The yuan strengthened, rebounding from its biggest weekly loss in three months, after Finance Minister Lou Jiwei said China is experiencing stable growth and there won’t be major policy adjustments.
Lou, currently attending the Group of 20 meeting in Cairns, Australia, said Asia’s largest economy is operating within a reasonable range while facing some downward pressure, according to a statement on the People’s Bank of China website yesterday. The PBOC injected 500 billion yuan ($81 billion) into the nation’s five largest commercial lenders last week using its standing lending facility to help reduce borrowing costs.
China: FinMin Lou Jiwei ruled out major stimuli while PBoC is taking targeted measures to keep the growth around government objectives. These are in line with the objective to rebalance the economy away from credit driven investment. The government seems fearing that the economic rebalancing has not taken momentum yet although 1) labor intensive manufacturers are relocating in cheaper labor countries, 2) businesses are upgrading their business models, 3) President Xi has conducted many trade – investment agreement with Neighbours (after Premier Li did the same in Africa) to secure investment projects which use Chinese manpower – engineers know-how in this domaine, 4) China is gaining more military presence and has fluxed it mussels – e.g. China “Top Gun” intercept by a US fighter jet -, 5) China has signed many RMB agreement which reinforce the currency usage and prepare its full liberalisation – after Free Trade Zones (FTZ) have proven to be a success -, 6) China has undertaken a genuine fight against bad governance and better regulation – many examples in our recent daily briefings of fight against corruption and bad governance-. We see in FinMin Lou Jiwei comment an indication that not only China wants to create a reserve currency it does want it to be strong when Chinese leaders perceive the heavy pressure place on USD by a category of investors to avoid debasing the currency through deficit financing – although we consider that this worry is misplaced -.
Australia News
China talks down stimulus chances; shares, commodities slide
Global markets retreated overnight after China’s authorities hosed down hopes of more stimulus, US data disappointed and commodity prices continued fall.
http://www.abc.net.au/news/2014-09-23/china-talks-down-stimulus-chances-shares-metals-slide/5762410
Chinese steel man says production won’t reach billion tonnes predicted by big miners
« Over the next 10 years, according to our studies, China’s steel production can be over 800 million tonnes for a long time, but it cannot go over 900 million tonnes, » he said at the International Mining and Resource Conference in Melbourne on Monday.
Mr Li said while steel production and iron ore demand was still growing in China, it was now doing so at much slower rates.
« The China market not as good as before, » he said.
Australia: Asset prices continue to suffer from the market belief that Australia is a derivative to the old Chinese model. This view continue to see a high beta between Australian assets and commodity prices (or China demand for commodities). This assumes that neither China nor Australia are conducting their rebalancing agenda. We do believe that the curent weaknesses offers genuine opportunity to benefit from the other drivers to the Australian economy which are not related to commodities. We see the current Australian Dollar weakness to continue at least until the USD start to weaken again when markets will realise that it has beaten too much on a quick rate normalisation.
New Zealand News
Asian indices suffer heavy losses, but New Zealand bucks trend
Asian markets started the data-light week on the back foot, with major indices posting steep losses. However, a post-election boost helped New Zealand shares outperform their Asian peers, rallying over 1 percent.
http://www.cnbc.com/id/102019699
New Zealand: as we were expecting yesterday, National Party 3rd term, without the need of a coalition helped the NZ stocks to out-perform in a quite “bearish” day. From yesterday briefing “We see this win to clear the way for rebalancing NZ economy toward more agriculture technology investment. The result does support our constructive scenario on NZ.”
Japan News
« Abe proposes talks with Putin on sidelines of APEC summit in Nov. »
TOKYO, Sept. 22 (Kyodo) −− Prime Minister Shinzo Abe has proposed holding direct talks with
Russian President Vladimir Putin on the sidelines of an annual summit meeting of the Asia−Pacific
Economic Cooperation forum to be held in November in Beijing, the top government spokesman
said Monday.
The proposal, made during their telephone talks Sunday, appears to indicate Abe’s eagerness to
maintain bilateral dialogue despite difficulties in arranging Putin’s visit to Japan in the fall after Tokyo
imposed sanctions on Moscow over the crisis in Ukraine.
Abe leaves for U.N. General Assembly, summit talks in N.Y.
Prime Minister Shinzo Abe left Monday for a series of U.N. General Assembly meetings and talks with other world leaders as Japan steps up its diplomatic efforts to seek reform of the U.N. Security Council.
Japan: Recent news flow indicate that Japan is heading toward improving its relations with neighbours. We have been forecasting that Japan will apology for confort Women in order to clear the tension build since the end of WW-II. The recent government economic downgrade was widely expected. We see BoJ to keep the bazooka of QQE-2 un-tested until the JPY excessive depreciation and JGB solvency risk came down * investors are still short JGB expecting a Japan crisis *. However, BoJ might do some adjustment to its monetary program but nothing excessive. The news flow out of this weekend G20 meeting shows that the global community is gently pressing the government and the BoJ to pursue structural reforms, economic rebalancing, solvency improvement (through VAT 2nd hike commitment) and adequate monetary policy (not too hot – to avoid a crisis – not too cool – to avoid derailing the on-going portfolio rebalancing approach -).