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Our take away from the last 24h news
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 European countries – nervousness vis-a-vis the prospect that Sovereign QE would be used to finance deficits and fiscal transfers (and refrain government from doing reforms). 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 much more widely than the 1st experience to respond to the growing demand out of the SME sector. We disagree with consensus view that low T-LTRO demand is indicative of a low demand because this is much more likely to be attributable to the banking sector focus on reinforcing their solvency before AQR and undertaking additional credit risks (ECB loans demand survey continue to indicate an increasing demand coming from SMEs in the periphery).
BoE: During his speech to British Bankers’ Association, Deputy Governor Bailey stressed the need for sanctions coordination, in order to provide banks with more visibility over capital management and therefore enable them to accelerate supporting credit to the economy.
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 dissent 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 excessively 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 (as we get closer to 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. These reforms are instrumental to create the conditions for escape velocity – without which the Fed has no justification to embark into a tightening mode -.
Turkish Central Bank: In our investment strategy and explicative note of our out-of-consensus call, we’ve indicated that although we do not believe that developed world central bank will normalise earlier their monetary policies, we believe that the on-going market pricing of such a move will put heavy pressure on Emerging markets central banks to refrain from reversing the tightening mode, they have started or have spoken about since Fed tapering. This put a heavy pressure on their government to undertake reforms and fiscal responsibility. We have advised to be cautious on EM carry trade because, ECB and BoJ monetary easing expectations impact on the carry trade seems to us over played by market participants.
Eurozone’s Grand Bargain in action: In our European Update note, published end of August, we have highlighted that the Eurozone members leaderships have reached a Grand Bargain, by which, France and Italy stick to the reform agenda, while Germany undertake more investments, in line with President designated Juncker infrastructure investment [in the digital economy as well as in bricks and mortars]. It will require genuine actions, such as France parliament passing a EUR21bn spending cuts and the “responsibility pact” beginning October before triggering the change of Germany attitude. Market consensus is dismissive, for now, that France will be able to break with its long “tradition” of deceiving when it comes to undertake reforms. We disagree with this view, as our contact on the ground, is showing much more responsibility to pass the reforms although the rhetoric is capture by the opposition forces.
Climate Change: Many activists are mistakenly considering that the private sector – Wall Street in these group parlance – is a single entity. The facts show that the private sector support to climate change is gaining traction. When it comes to climate change, there are some sectors which could suffer from a change in regulation (mainly fossile sectors), these are heavily financing Gold bugs bloggers and website which challenge the Fed monetary – i.e. supporting for a Transparency Bill which would introduce a Gold Standard system – in the hope that this create a new crisis which could postpone the forthcoming energy transition. We believe that this time is different. First, many countries have already undertaken genuine governance reforms. Second, the private sector and many political moderate forces – from the left and the right – are supporting an environment friendly agenda because not only is it perceived to help reduce climate change risks but also this agenda has proven that it can create jobs, spur growth and help economies to reach escape velocity.
Indonesia: the new administration is increasingly undertaking the path toward reducing fuel subsidies. This will help improve fiscal budget and push for more infrastructure investments. We are confident that the G-20 Australia summit will help change the current doom-and-gloom widely spread view and clear the path toward a renewed fiscal stimuli while governments are undertaking structural reforms and improving governance (i.e. fight against corruption, reduction of tax evasion etc.).
Ebola: The WHO and CDC have revised up their estimates for the development of the outbreak. The worst case scenario can push the number of cases as high as 1.4 millions by beginning 2015. This estimates remain however very sensitive to the global coordination and response. During the recent weeks, we have highlighted that the global coordination has 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 – when numerous Western African countries are indicating the lack of medical personel – , 3) provide financial support (wealthy donors, government funding, NGO help etc.), and 4) fast track the Ebola drug trial (the drug has had a very good result in the experimental test).
Notwithstanding the on-going difficulties, and the short term negative economic effect, we continue to believe that the fight against Ebola will succeed and will clear the way to the increase in Africa investment and economic support (cf. our note “This time for Africa” which stressed that Africa is heading to experience the same development China had experienced when it joined the WTO in 2001 with positive consequences for both Africa and the world economy). The global coordination triggered by the response to the terrorist risk might help responding to the Ebola risk as well (due to the threat a dirty weapon using Ebola virus constitute).
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 increase the likelihood to make the current fight against terror much more effective than it has been so far.
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).
Fight against ISIL success likelihood increases: the global community military action continue to enjoy a wide support (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 Islam.
Oil prices continue to come under pressure (in line with 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 news flow out of ISIL indicates that the terrorist organisation is getting isolated and its power is weakening. Furthermore, the recent strikes have reduced Al-Qaeda operatives which were preparing attacks against the West (according to informations out of the intelligence community).
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. For more analysis on this matter, please see our recent “Russia update note”.
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 -). Markets have reacted negatively to the actions taken against tax loopholes, because these are seen to be the only remaining way for Corporations to improve their EPS (while demand continue to be subdued). We disagree with this view because G-20 initiatives to tackle “tax optimisation” will come along with more investments and fiscal stimuli which would help spur more economic demand.
US Economy: high frequency economic data continue to show a mixed message. We’ve included an opinion article which indicates how the different economic forecast models have been weak understanding the current economic evolution. We have indicated in our article “Perceptions & realities : closing the gap between the two” that while the growth and inflation continue to be subdued to justify any urgent action from the Fed, there are genuine signs which will enable the growth to resume. In a nutshell, big data, technology, energy transition, lower commodity prices and better governance are the driver we see for the creation of goldilock conditions – not too hot, not too cold – which would enable spur sustainable growth and create the conditions for central banks to normalise (in a couple of years) the monetary policy without triggering a new financial crisis or excessive financial bubbles.
Iran “normalisation”: as part of our expectation for a oil des-inflationary boost forecast (see ou latest Energy forecast update), Iran returning to the export market plays an important role. PM Cameron announcement to meet Iran President Rouhani, in NY, – along with France President Holland meeting – increases the likelihood that: 1) the nuclear negotiations will succeed (creating a civil nuclear Iran), 2) Iran sanctions will be lifted which increase supply and oil exploration investment (because Iran has been lacking investment due to the Western sanctions), 3) Iran will join the global coalition to fight against IS – but more importantly a “normalised relations with Iran” will help to find some political solution in Syria (a necessary step to avoid making Syria a safe heaven to terrorists).
Pressure on banks to improve governance: Banks action to improve governance constitue one of our 5 points which support a brighter scenario than the one priced by the market (which we name the “mistrust bubble”). Though the banking sector suffers short term from the impact of the fines, these contribute to a genuine change in corporate governance because many boards have recognised that they are, when this time the US administration has been using fine to spur changes, next time it could lead to jail time, as US Attorney General said “there is no such thing as ‘too big to jail’”.
Eurozone PMIs : As we were expecting in our Feb 27th note, and Russia update, the Eurozone economies are suffering from the Russia – Ukraine crisis. We have been saying that the tension with Russia will have short term negative effets as the manufacturers (specifically in Germany) has to mitigate the effect of the sanctions. BUT we continue to express confidence in our views that the Eurozone PMI are likely to rebound in October or November, thanks to the combined effect of: 1) Banks resuming lending as they will have dealt with the Asset Quality Review and will start to benefit from the combination of T-LTRO conditions and SMEs demand, 2) the new EU Commission undertakes genuine actions to speed up European integration (e.g. designated President Tusk Energy Union project), and infrastructure investment (designated President Juncker EUR300bn investment project), 3) a reduction in the excessive risk premium built due to the negative effects of the tension with Russia, and 4) the global collaboration which will bring more support to the energy transition, governance improvement and fight against terror (positive for jobs and growth and negative for energy prices – because it reduces the geopolitical risk premium -).
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:Manufacturing data support our view that China is soft landing while rebalancing. Labor statistics showed that the manufacturers have started to rebalance their activities away from labor intensive (an objective already stressed by the Chinese leadership). 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: Australia continues to be seen, by markets, as a derivative to the old Chinese model (i.e. commodity provider). This view explains the 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. Meanwhile, from our previous daily briefing, we have gathered sufficient support to the view that the drivers of the Australian GDP are moving toward: 1) education, health and finance services provider to Asian neigbhours, 2) innovation and digital sector, 3) energy resources export to Japan (the later contributes to our constructive view that the current negative Japan Energy Trade deficit will rebalance in the medium term – reducing Japanese Government bonds solvency risk – ).
New Zealand: National Party 3rd term, without the need of a coalition helped the NZ stocks to out-perform in a quite “bearish” day. From Monday 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: 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 -). Japan continues to face heavy public pressure to rebalance its energy reliance to nuclear. While we believe that Japan will continue to press for reopening nuclear plants (when Nuclear Watchdog gives his green light), the medium to long term trend is that Japan will use Trade negotiation with neighbours to secure new energy sources while using this pressure to deregulate and move forward with Abenomics 3rd arrow (please see our Japan update for more on our views).
Central Banks News
Draghi Sees ECB Becoming More Active in Fight for Euro
The ECB is moving to a more “active and controlled management of our balance sheet,” Draghi said in his quarterly testimony to European lawmakers. “Unacceptably high unemployment and continued weak credit growth are likely to curb the strength of the recovery. The risks surrounding the expected expansion are clearly on the downside.”
ECB’s Visco says disinflation weighing on high-debt countries
« This is particularly worrisome for countries with high public debts, whose sustainability requires a return to steady economic growth, and which may also suffer, as is presently the case in the euro area, from excessive disinflation, » [ECB Governing Council member and governor of Bank of Italy Ignazio Visco said on Tuesday] said at a conference in Rome.
« And this is why structural reforms and accommodative monetary policy are so much in demand these days, » he said.
http://www.reuters.com/article/2014/09/23/ecb-visco-idUSR1N0PZ01A20140923
ECB OMT Challenge to Be Heard by EU Top Court on Oct. 14
The European Court of Justice, the EU’s highest tribunal, will consider arguments in the case filed by a lawmaker and a group of German academics at an Oct. 14 hearing, the court said on its website.
After a ruling from the EU court, the case will be sent back to the German judges who have to make a final ruling on the national cases pending over the issue.
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 European countries – nervousness vis-a-vis the prospect that Sovereign QE would be used to finance deficits and fiscal transfers (and refrain government from doing reforms). 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 much more widely than the 1st experience to respond to the growing demand out of the SME sector. We disagree with consensus view that low T-LTRO demand is indicative of a low demand because this is much more likely to be attributable to the banking sector focus on reinforcing their solvency before AQR and undertaking additional credit risks (ECB loans demand survey continue to indicate an increasing demand coming from SMEs in the periphery).
UPDATE 1-BoE’s Bailey wants better global coordination over bank fines
(Reuters) – Regulators from the United States and elsewhere should coordinate better how they levy fines on banks for misconduct to avoid making it harder to rebuild strength in the banking system, Bank of England Deputy Governor Andrew Bailey said.
Bailey said at a British Bankers’ Association on Tuesday that better discussion was needed among regulators to ensure big fines don’t get in the way of banks building up their capital buffers.
« I am trying to build capital in firms and it’s draining out the other side (in fines and penalties), » Bailey said.
The « major message » is that a collegial approach is required to assessing and implementing penalties so that prudential regulators are involved to assess the consequences of such penalties, Bailey said.
http://www.reuters.com/article/2014/09/23/boe-banking-fine-idUSL6N0RO1Y620140923
BoE: During his speech to British Bankers’ Association, Deputy Governor Bailey stressed the need for sanctions coordination, in order to provide banks with more visibility over capital management and therefore enable them to accelerate supporting credit to the economy.
3- And 5-Year CD Rates Increase Following Fed Meeting
NEW YORK, Sept. 23, 2014 /PRNewswire/ — RateWatch, a premier banking data and analytics service owned by TheStreet, Inc. (NASDAQ: TST) reported today that national averages for 3 and 5 year CDs increased by one basis point each as the Federal Reserve continued to keep the short-term federal funds rate at a range of zero to 0.25% since late 2008.
http://www.reuters.com/article/2014/09/23/ny-thestreet-cd-rates-idUSnPnbVwzwj+90+PRN20140923
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 dissent 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 excessively 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 (as we get closer to 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. These reforms are instrumental to create the conditions for escape velocity – without which the Fed has no justification to embark into a tightening mode -.
Turkish Inflation Plotting With Fed to Lift Auction Costs
The Turkish central bank’s failure to rein in the second-fastest inflation rate in major emerging markets is threatening to boost government borrowing costs at bond auctions this week and next.
Central bank Governor Erdem Basci is juggling government pressure to lower borrowing costs to spur growth with the need to keep them elevated to curb inflation, which has been partly driven by the lira’s 12 percent slide in the past year. Concern over the timing and pace of rate increases by the Federal Reserve also risks affecting investor appetite toward the nation’s bonds.
Turkish Central Bank: In our investment strategy and explicative note of our out-of-consensus call, we’ve indicated that although we do not believe that developed world central bank will normalise earlier their monetary policies, we believe that the on-going market pricing of such a move will put heavy pressure on Emerging markets central banks to refrain from reversing the tightening mode, they have started or have spoken about since Fed tapering. This put a heavy pressure on their government to undertake reforms and fiscal responsibility. We have advised to be cautious on EM carry trade because, ECB and BoJ monetary easing expectations impact on the carry trade seems to us over played by market participants.
Economic News
Slovenian GDP to Grow ‘Much Faster` in 2014: Central Bank
Slovenia’s central bank said the economy this year is set to expand at almost triple the pace of April’s forecast, fueled by exports and recovering domestic demand.
Gross domestic product will advance an annual 1.6 percent in 2014, then slow to 1.3 percent next year before accelerating to 1.8 percent in 2016, Ales Delakorda, the chief of research at Banka Slovenije, said in the capital Ljubljana today. That compares with a 0.6 percent 2014 forecast six months ago and 1.4 percent for 2015. GDP grew an annual 2.9 percent in the second quarter.
“We have seen improved demand for exports to Europe, which is set to slow by year’s end and affect our growth in 2015,” central bank Vice Governor Mejra Festic said today. “Though we are seeing much greater trust in the bank sector, the debt levels at Slovenian companies is still relatively high and that is also somewhat constraining growth.”
http://www.businessweek.com/news/2014-09-23/slovenian-gdp-to-grow-much-faster-in-2014-central-bank
REFILE-Germany not to blame for France’s economy problems -German industry chief
Europe’s largest economy is under pressure from the likes of France and Italy to loosen the fiscal reins and use government coffers to boost investment. But Finance Minister Schaeuble has stuck to his line that reform is the best way to foster growth.
« Germany is not to blame for the French economy’s structural problems, » Ulrich Grillo, the head of the BDI association, told a conference in Berlin attended by Chancellor Angela Merkel. « It’s also not Germany’s responsibility to solve these problems.”
« Germany is sending its transport routes to rack and ruin – they’re crumbling, » he said, adding that it should spend more on fast internet connections and the shift to renewable energy, as well as providing tax incentives for research and innovation.
http://uk.reuters.com/article/2014/09/23/eurozone-germany-france-idUKL6N0RO1VO20140923
French economy flat-lines as business activity falters
(Reuters) – French business activity slowed again in September amid weakness in the key service sector, two surveys showed on Tuesday, as the euro zone’s second-biggest economy posted zero growth for the second quarter in a row.
In the face of weak demand, companies are proving reluctant to heed the call of President Francois Hollande’s government to drive a recovery with investment as pledges to cut their payroll tax do little to revive their confidence.
http://uk.reuters.com/article/2014/09/23/uk-pmi-flash-france-idUKKCN0HI0GJ20140923
Experts urge Italy to stay focused on reforms amid IMF discouraging growth forecast
Like the Organization for Economic Cooperation and Development, the Bank of Italy, Italy’s National Statistics Institute, and the Italian Treasury before it, the IMF cited weak domestic demand, slow growing industrial production, massive government debt, tight access to credit, and high unemployment levels as factors in the country’s unlikelihood to show positive growth for a full year for the first time since 2007.
« I think the support for Renzi’s reforms is the most important part of the IMF report, Giuseppe De Arcangelis, an international economics expert with Rome’s La Sapienza University, told Xinhua. « The trouble is Italy needs the reforms in order to spark growth and it needs economic growth to take an aggressive stance on reform because it becomes hard to soften the blows economically. »
http://news.xinhuanet.com/english/business/2014-09/23/c_133666226.htm
Eurozone’s Grand Bargain in action: In our European Update note, published end of August, we have highlighted that the Eurozone members leaderships have reached a Grand Bargain, by which, France and Italy stick to the reform agenda, while Germany undertake more investments, in line with President designated Juncker infrastructure investment [in the digital economy as well as in bricks and mortars]. It will require genuine actions, such as France parliament passing a EUR21bn spending cuts and the “responsibility pact” beginning October before triggering the change of Germany attitude. Market consensus is dismissive, for now, that France will be able to break with its long “tradition” of deceiving when it comes to undertake reforms. We disagree with this view, as our contact on the ground, is showing much more responsibility to pass the reforms although the rhetoric is capture by the opposition forces.
Climate Change Is Single Biggest Risk To Global Economy – Paulson At CGI2014
New York City (Kitco News) – Few were more tightly involved with managing the financial crisis than Henry Paulson, Treasury Secretary during President George W. Bush’s administration. Speaking Monday, he said the stresses that nearly brought down the U.S. financial sector are now playing out in climate.
During a panel discussion at the Clinton Global Initiative’s annual meeting in New York, Paulson made parallels between the 2008 financial crisis and today’s climate crisis. The build-up of greenhouse gas emissions mirrors the debt excesses of 2008. And flawed U.S. government policies, encouraging the overuse of carbon-based fuels are much like the banking incentives, which encouraged borrowing to finance homes.
The panel, which focused on how confronting climate change makes for good economics, was moderated by Judith Rodin of the Rockefeller Foundation and featured Henry Paulson of the Paulson Institute and the Prime Minister of Denmark, Helle Thorning-Schmidt.
World leaders gather for ‘crucial’ UN climate meeting
« Today, we must set the world on a new course, » UN Secretary-General Ban Ki-moon told leaders from 120 countries, « I am asking you to lead ».
It is the first high-level gathering since the Copenhagen summit in 2009.
With so many nations attending the summit at the UN headquarters and so little time at the one-day meeting, three separate sessions will run simultaneously in three different rooms.
The Rockefeller family, which made its vast fortune from oil, was reported to have announced their intention to sell investments in fossil fuels and reinvest in clean energy.
http://www.bbc.com/news/world-29319363
Obama: No nation has ‘free pass’ on climate change
UNITED NATIONS (AP) — In a forceful appeal for international cooperation on limiting carbon pollution, President Barack Obama warned starkly on Tuesday that the globe’s climate is changing faster than efforts to address it. « Nobody gets a pass, » he declared. « We have to raise our collective ambition. »
Speaking at a United Nations summit, Obama said the United States is doing its part and that it will meet its goal to cut carbon pollution 17 percent from 2005 levels by 2020. He also announced modest new U.S. commitments to address climate change overseas. The summit aims to galvanize support for a global climate treaty to be finalized next year.
But Obama’s strongest comments came as he sought to unify the international conclave behind actions to reduce global warming.
Climate Change: Many activists are mistakenly considering that the private sector – Wall Street in these group parlance – is a single entity. The facts show that the private sector support to climate change is gaining traction. When it comes to climate change, there are some sectors which could suffer from a change in regulation (mainly fossile sectors), these are heavily financing Gold bugs bloggers and website which challenge the Fed monetary – i.e. supporting for a Transparency Bill which would introduce a Gold Standard system – in the hope that this create a new crisis which could postpone the forthcoming energy transition. We believe that this time is different. First, many countries have already undertaken genuine governance reforms. Second, the private sector and many political moderate forces – from the left and the right – are supporting an environment friendly agenda because not only is it perceived to help reduce climate change risks but also this agenda has proven that it can create jobs, spur growth and help economies to reach escape velocity.
Indonesia fuel price rise may aid GDP next year – c.bank official
(Reuters) – A fuel price rise in Indonesia may help economic growth next year if the savings from subsidies are redirected into infrastructure, a senior central bank official said on Tuesday.
The new administration, which will take office in October, plans to raise fuel prices by as much as 3,000 rupiah ($0.25) per litre by November, a senior adviser to President-elect Joko Widodo’s team, said last week.
http://uk.reuters.com/article/2014/09/23/indonesia-economy-idUKL3N0RO1X320140923
Indonesia: the new administration is increasingly undertaking the path toward reducing fuel subsidies. This will help improve fiscal budget and push for more infrastructure investments. We are confident that the G-20 Australia summit will help change the current doom-and-gloom widely spread view and clear the path toward a renewed fiscal stimuli while governments are undertaking structural reforms and improving governance (i.e. fight against corruption, reduction of tax evasion etc.).
Ebola
Ebola crisis: WHO warns number of cases could skyrocket in next 6 weeks
New England Journal of Medicine analysis says cases could hit 21,000 by November
« We’re beginning to see some signs in the response that gives us hope this increase in cases won’t happen, » said Christopher Dye, WHO’s director of strategy and study co-author, who acknowledged the predictions come with a lot of uncertainties.
« This is a bit like weather forecasting. We can do it a few days in advance, but looking a few weeks or months ahead is very difficult. »
UPDATE 1-Ebola drug trials to be fast-tracked in West Africa
LONDON, Sept 23 (Reuters) – Experimental Ebola drugs including compounds from Mapp Biopharmaceutical, Sarepta and Tekmira will be tested in affected West African states for the first time in a bid to fast-track trials, the Wellcome Trust said on Tuesday.
« It is a huge challenge to carry out clinical trials under such difficult conditions, but ultimately this is the only way we will ever find out whether any new Ebola treatments actually work, » said Jeremy Farrar, the Wellcome Trust’s director.
« What’s more, rapid trials, followed by large-scale manufacturing and distribution of any effective treatments, might produce medicines that could be used in this epidemic. »
http://af.reuters.com/article/commoditiesNews/idAFL6N0RO2ZJ20140923
Ebola cases could reach 550,000 to 1.4 million in 4 months: CDC
The Ebola epidemic in West Africa could reach up to 1.4 million cases by late January 2015 under a worst-case scenario, says a report by the U.S. Centers for Disease Control that comes as experts from the World Health Organization call for drastic improvements in measures to prevent the virus from becoming endemic.
WHO revises up number of health workers killed by Ebola in Sierra Leone
* WHO says 61 health workers have died in Sierra Leone
* West Africa outbreak has killed more than 2,800 people
* Risk to health workers ‘hampering search for volunteers’
Ebola toll passes 2,800 but « contained » in Senegal, Nigeria – WHO
In Nigeria, 20 cases were recorded and eight people died. There have been no deaths from one confirmed case in Senegal.
« On the whole, the outbreaks in Senegal and Nigeria are pretty much contained, » a WHO statement said.
However, the U.N. agency said the world’s worst outbreak of the virus remains a « public health emergency of international concern », which will guarantee it the body’s priority attention.
http://in.reuters.com/article/2014/09/22/health-ebola-idINKCN0HH2HW20140922
Liberia facing massive shortage of foreign help against Ebola -UN
http://af.reuters.com/article/commoditiesNews/idAFL6N0RO2M920140923
UPDATE 1-WTO cuts world trade growth forecasts for 2014 and 2015
Trade in goods will grow by 3.1 percent this year, much less than the 4.6 percent the WTO forecast in April. It cited « weaker-than expected GDP growth and muted import demand in the first half, » according to a statement.
Trade was likely to grow 4.0 percent in 2015 rather than the 5.3 percent expected previously, still far below the 20-year average of 5.2 percent and « risks abound in the form of geopolitical tensions, regional conflict and health crises (Ebola). »
http://www.cnbc.com/id/102025590
Ebola: The WHO and CDC have revised up their estimates for the development of the outbreak. The worst case scenario can push the number of cases as high as 1.4 millions by beginning 2015. This estimates remain however very sensitive to the global coordination and response. During the recent weeks, we have highlighted that the global coordination has 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 – when numerous Western African countries are indicating the lack of medical personel – , 3) provide financial support (wealthy donors, government funding, NGO help etc.), and 4) fast track the Ebola drug trial (the drug has had a very good result in the experimental test).
Notwithstanding the on-going difficulties, and the short term negative economic effect, we continue to believe that the fight against Ebola will succeed and will clear the way to the increase in Africa investment and economic support (cf. our note “This time for Africa” which stressed that Africa is heading to experience the same development China had experienced when it joined the WTO in 2001 with positive consequences for both Africa and the world economy). The global coordination triggered by the response to the terrorist risk might help responding to the Ebola risk as well (due to the threat a dirty weapon using Ebola virus constitute).
Gaza
Palestinians seek $3.8B in aid for Gaza
NEW YORK (AP) — Palestinian Prime Minister Rami Hamdallah said Tuesday he has asked for $3.8 billion in urgent aid to help rebuild Gaza following its devastating 50-day war with Israel this summer.
Hamdallah told The Associated Press that Saudi Arabia has pledged $500 million and other nations have indicated they would join in. He spoke at the end of a donor meeting lead by Norway on the sidelines of a gathering of world leaders at the United Nations.
http://www.sfgate.com/news/world/article/Abbas-Seeks-Israeli-pullout-resolution-Thursday-5775207.php
Israel Kills Two Palestinians for Murdering Jewish Teens
Ending more than three months of manhunt, Israeli security forces today [Sept. 23rd] shot dead two Palestinians blamed for the June kidnapping and killings of three Israeli teenagers that spiralled into a 50-day conflict with Hamas, killing more than 2,100 people.
Turkey hints at Iraq Mosul hostage exchange
Turkish President Recep Tayyip Erdogan has hinted that 49 hostages, mostly Turks, may have been freed by Islamic State (IS) as part of a prisoner swap.
http://www.bbc.com/news/world-europe-29322562
UPDATE 3-Egyptian-mediated Gaza talks to resume in late October
CAIRO, Sept 23 (Reuters) – Israel and the Palestinians agreed on Tuesday to resume talks late next month on cementing a Gaza ceasefire, allowing time for Palestinian factions to resolve internal differences which could threaten the Egyptian-mediated negotiations.
http://af.reuters.com/article/commoditiesNews/idAFL6N0RO27W20140923
Abbas: Prime Minister Netanyahu, end the occupation, make peace
Addressing students in New York, Palestinian president says will present UN with new timetable for peace talks, AFP reports.
http://www.haaretz.com/news/diplomacy-defense/1.617305
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 increase the likelihood to make the current fight against terror much more effective than it has been so far.
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 & Syria
U.S. airstrikes expand to Syrian city of Aleppo
Even as it launched sweeping new airstrikes against Islamic State militants in Syria, the U.S. military said Tuesday that it had expanded the campaign to the northern Syrian city of Aleppo, targeting an offshoot of Al Qaeda said to be plotting « imminent » attacks against American and Western targets.
http://www.latimes.com/world/middleeast/la-fg-airstrikes-syria-isis-20140923-story.html
French Foreign Ministry Confirms Authenticity of Video With Captured Frenchman: Reports
MOSCOW, September 23 (RIA Novosti) -The video, showing the images of a French national kidnapped earlier in Algeria, is authentic, said the French Ministry of Foreign Affairs, as quoted by Reuters on Tuesday.
UPDATE 6-Oil falls as Libyan, Iraqi output outweighs strikes on Syria
* Libya and Iraqi oil output, exports rise
* U.S. and Arab allies start Syria strikes
* U.S. gasoline jumps on Irving St. John refinery unit shutdown
* China’s factory activity rises in September
http://www.cnbc.com/id/102025267
U.S. and Arab allies launch first strikes on militants in Syria
WASHINGTON/BEIRUT (Reuters) – The United States and its Arab allies bombed militant groups in Syria for the first time on Tuesday, killing scores of Islamic State fighters, members of a separate al Qaeda-linked group and opening a new front amid shifting Middle East alliances.
http://ca.reuters.com/article/topNews/idCAKCN0HI03A20140923
ASSAD BACKS ALL EFFORTS TO FIGHT TERRORISM
DAMASCUS, Syria (AP) — President Bashar Assad said Tuesday he supports any international effort against terrorism, apparently trying to position his government on the side of the U.S.-led coalition conducting airstrikes against the Islamic State group in Syria.
Kurdish fighters halt IS advance in northern Syria
DAMASCUS, Sept. 22 (Xinhua) — Syria’s Kurdish militia managed to push back forces of the Islamic State (IS) militant group on Monday, preventing them from advancing into a strategic Kurdish city in northern Syria, a representative for the Syrian Kurdish Democratic Union said.
http://news.xinhuanet.com/english/world/2014-09/22/c_127018685.htm
UPDATE 2-U.S. opposes linking Iran cooperation on Islamic State to nuclear talks
(Reuters) – The United States said on Monday it would refuse to seek Iran’s cooperation in fighting Islamic State forces by being more flexible in the negotiations of six world powers with Tehran on its nuclear program.
http://in.reuters.com/article/2014/09/22/iran-nuclear-usa-idINL2N0RN1BR20140922
Fight against ISIL success likelihood increases: the global community military action continue to enjoy a wide support (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 Islam.
Oil prices continue to come under pressure (in line with 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 news flow out of ISIL indicates that the terrorist organisation is getting isolated and its power is weakening. Furthermore, the recent strikes have reduced Al-Qaeda operatives which were preparing attacks against the West (according to informations out of the intelligence community).
Russia
Putin warns Ukraine against implementing EU deal – letter
BRUSSELS (Reuters) – Moscow will curtail Ukraine’s access to vital Russian markets if Kiev implements any part of a trade agreement with the European Union, President Vladimir Putin warned in a letter, toughening his stance on a deal at the centre of East-West tensions.
In a letter to Ukrainian President Petro Poroshenko, seen by Reuters on Tuesday, Putin warned that even changing national legislation to prepare for the EU-Ukraine trade deal, known as the association agreement, would trigger an immediate response from Moscow.
http://af.reuters.com/article/worldNews/idAFKCN0HI1T420140923
Russia warns US-led coalition: Those who carry out strikes in Syria face blowback
The Russian Foreign Ministry has said that those countries initiating one-sided military scenarios take international legal responsibility for their consequences. It comes as the US-led coalition begins its anti-ISIS strikes in Syria.
« Attempts to achieve one’s own geopolitical goals in violation of the sovereignty of countries in the region only exacerbate tensions and further destabilize the situation, » the statement said.
http://rt.com/news/189932-strikes-syria-russia-nato/
Syrian Ambassador to Russia: US Airstrikes on IS Targets Uncoordinated With Damascus
MOSCOW, September 23 (RIA Novosti) – The Ambassador of the Syrian Arab Republic in Russia Riyad Haddad denied any coordination with the United States Air Force regarding the US airstrikes against the Islamic State (IS) targets in Syria on Tuesday, but confirmed that Damascus knew of the upcoming operation in advance.
« There has been no coordination with the US Air Force, and what is being said [of such coordination] is not true, » the ambassador said in an interview with RIA Novosti adding that « The United States has informed the permanent Syrian Ambassador to the United Nations Bashar Jaafari that the United States and some of its supporters are going to carry out airstrikes on IS targets in Syria. »
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. For more analysis on this matter, please see our recent “Russia update note”.
US News
Crackdown Targets Inversions Designed to Limit U.S. Taxes
The Treasury Department announced steps that will make it harder for U.S. companies to move their addresses outside the country to reduce taxes, clamping down on the practice known as inversions.
Obama Administration Moves To Try To Stop Companies From Leaving America
The Obama administration moved on Monday to try to discourage companies from leaving America by limiting the benefits of tax-lowering deals.
The U.S. Treasury Department issued new rules that are aimed at slowing the wave of so-called inversion deals that has seen U.S. companies redomicile in overseas jurisdictions like Ireland by entering into mergers and transactions with foreign companies.
The rules, which will only apply to future deals, target certain techniques that inverting companies have used to reduce their U.S. taxes, like accessing the overseas earnings of foreign subsidiaries without paying U.S. taxes. The Treasury rules will also make it harder for U.S. entities to invert by strengthening the requirement that former owners of a U.S. company own less than 80% of the company after the inversion deal has taken place.
Still, as Treasury Secretary Jacob Lew conceded on a conference call on Monday, the Obama administration’s unilateral move will only have limited effects when it comes to curbing inversion deals. The President, who has called companies that enter into inversion deals “corporate deserters,” has said that he decided to act in such a manner after being unable to get Congress to support anti-inversion legislation.
Treasury acts to stop overseas tax ‘inversions’ [from yesterday daily briefing]
« 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
Obama targets ‘tax inversions’ by US firms, but real reform needs Congress (+video)
The Obama administration aims to reduce the appeal of a corporate shift overseas to avoid US taxes, as it buys time for Congress to reform a corporate tax code that some claim is driving business away.
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 -). Markets have reacted negatively to the actions taken against tax loopholes, because these are seen to be the only remaining way for Corporations to improve their EPS (while demand continue to be subdued). We disagree with this view because G-20 initiatives to tackle “tax optimisation” will come along with more investments and fiscal stimuli which would help spur more economic demand.
WRAPUP 2-Sturdy U.S. factory, services data bolster growth picture
* Manufacturing activity at four-year highs in September
* Factory employment highest since 2012
* Mid-Atlantic services sector activity accelerates
WASHINGTON, Sept 23 (Reuters) – U.S. manufacturing activity hovered at a near 4-1/2-year high in September and factory employment surged, supporting views of sturdy economic growth this quarter.
http://www.reuters.com/article/2014/09/23/usa-economy-idUSL2N0RO12M20140923
US August housing starts fall as builders focus on rental market
Americans decide not to buy, sending work on apartments and condominiums down 31.7pc
Housing starts slumped in August from the highest level in almost seven years in the United States, reflecting a setback in multifamily projects that are at the forefront of the rebound in real estate.
Beginning home construction fell 14.4 per cent, the most since April last year, to a 956,000 annualised rate following July’s revised 1.12 million pace that was the strongest since November 2007, the Department of Commerce said. Work on apartments and condominiums, which tends to be volatile, dropped 31.7 per cent after jumping 44.9 per cent in July.
Where’s the Economic Growth?
Some economists become obsessed with market efficiency and others with market failure. Generally held to be members of opposite schools – “freshwater” and “saltwater,” Chicago and Cambridge, liberal and conservative, Austrian and Keynesian – both sides share an essential economic vision. They see their discipline as successful insofar as it eliminates surprise – insofar, that is, as the inexorable workings of the machine override the initiatives of the human actors. “Free market” economists believe in the triumph of the system and want to let it alone to find its equilibrium, the stasis of optimum allocation of resources. Socialists see the failures of the system and want to impose equilibrium from above. Neither spends much time thinking about the miracles that repeatedly save us from the equilibrium of starvation and death.
http://www.forbes.com/sites/johnmauldin/2014/09/23/wheres-the-economic-growth/
US Economy: high frequency economic data continue to show a mixed message. We’ve included an opinion article which indicates how the different economic forecast models have been weak understanding the current economic evolution. We have indicated in our article “Perceptions & realities : closing the gap between the two” that while the growth and inflation continue to be subdued to justify any urgent action from the Fed, there are genuine signs which will enable the growth to resume. In a nutshell, big data, technology, energy transition, lower commodity prices and better governance are the driver we see for the creation of goldilock conditions – not too hot, not too cold – which would enable spur sustainable growth and create the conditions for central banks to normalise (in a couple of years) the monetary policy without triggering a new financial crisis or excessive financial bubbles.
Europe News
British PM Cameron to meet Iran’s Rouhani to ask for help against Islamic State
(Reuters) – British Prime Minister David Cameron will meet Iranian President Hassan Rouhani in the next two days in New York and ask him for help to fight Islamic State, the first meeting between leaders of the two nations since Tehran’s 1979 Islamic revolution.
Cameron will meet Rouhani on the sidelines of the United Nations General Assembly, a source in the British leader’s office told Reuters, speaking after the United States and Arab partners struck IS targets inside Syria.
Cameron is in New York to try to bolster international action against IS and to clarify his own country’s position when it comes to air strikes, something London has so far held off participating in.
http://www.reuters.com/article/2014/09/23/us-britain-iran-idUSKCN0HI0O620140923
Hollande, Rouhani Discuss Iranian Nuclear Program at UN General Assembly
PARIS, September 23 (RIA Novosti) – French President Francois Hollande discussed Iran’s nuclear program with his Iranian counterpart Hassan Rouhani on Tuesday, on the sidelines of the UN General Assembly in New York.
« The President of the Republic [of France] hoped that the negotiations [on Iran’s nuclear issue] can come to a resolution quickly. He reiterated the position of France: Iran must implement concrete measures to demonstrate in a certain and verifiable way that it will not acquire a military nuclear capability, » a statement from Hollande’s office said.
Iran “normalisation”: as part of our expectation for a oil des-inflationary boost forecast (see ou latest Energy forecast update), Iran returning to the export market plays an important role. PM Cameron announcement to meet Iran President Rouhani, in NY, – along with France President Holland meeting – increases the likelihood that: 1) the nuclear negotiations will succeed (creating a civil nuclear Iran), 2) Iran sanctions will be lifted which increase supply and oil exploration investment (because Iran has been lacking investment due to the Western sanctions), 3) Iran will join the global coalition to fight against IS – but more importantly a “normalised relations with Iran” will help to find some political solution in Syria (a necessary step to avoid making Syria a safe heaven to terrorists).
Britain’s Labour leader bids to be next PM, tacks left
(Reuters) – Opposition Labour party leader Ed Miliband cast himself as Britain’s prime minister-in-waiting eight months before an election, pledging to wring money from wealthy home owners, hedge funds and tobacco companies to fund better health care.
Tuesday’s speech, the last Miliband will deliver at a party conference before a national election next year, shifted Labour further to the left and away from the center, where one of his predecessors, former prime minister Tony Blair, had anchored it.
« There is a choice of leadership at this election, a real stark choice of leadership; leadership that stands for the privileged few or leadership that fights for you and your family, » Miliband, 44, told delegates at Labour’s annual conference in Manchester, in northern England.
http://www.reuters.com/article/2014/09/23/us-britain-politics-idUSKCN0HI1HD20140923
Barclays takes $77 million hit from British and U.S. fines
LONDON/NEW YORK (Reuters) – British bank Barclays (BARC.L: Quote) was hit with a combined $77 million in fines from British and U.S. regulators on Tuesday as the lender continues to be dogged by problems from its past.
Barclays was fined 38 million pounds ($62 million) by Britain’s Financial Conduct Authority (FCA) for exposing customers to unnecessary risks by failing to ensure that client assets were properly safeguarded and adequate records kept.
Hours later it was hit with a $15 million fine from the U.S. Securities and Exchange Commission (SEC) for lax internal compliance processes after its takeover of the U.S. operations of Lehman Brothers in September 2008.
http://ca.reuters.com/article/businessNews/idCAKCN0HI10S20140923
Pressure on banks to improve governance: Banks action to improve governance constitue one of our 5 points which support a brighter scenario than the one priced by the market (which we name the “mistrust bubble”). Though the banking sector suffers short term from the impact of the fines, these contribute to a genuine change in corporate governance because many boards have recognised that they are, when this time the US administration has been using fine to spur changes, next time it could lead to jail time, as US Attorney General said “there is no such thing as ‘too big to jail’”.
German private sector expands in September, points to moderate Q3 growth: PMI
Eurozone Growth Is Slowing, Survey of Purchasing Managers Suggests
PARIS — The eurozone’s economic expansion continued to lose traction in September, a private-sector report said on Tuesday, the latest indication that the stagnation of the second quarter might be taking hold.
A survey of purchasing managers conducted by Markit Economics, a data analysis firm, showed that output in services and manufacturing was barely positive in September. Markit’s composite output index for the 18-nation currency area fell to 52.3, the lowest level this year, from 52.5 in August.
While a number above 50 still signals expansion, Markit said that at that level, the eurozone’s gross domestic product was likely to grow “at best” at a 0.3 percent quarterly rate in the third quarter, equivalent to a 1.2 percent annual rate. The eurozone economy stagnated in the second quarter, as Germany and Italy contracted and France did not grow.
Eurozone PMIs : As we were expecting in our Feb 27th note, and Russia update, the Eurozone economies are suffering from the Russia – Ukraine crisis. We have been saying that the tension with Russia will have short term negative effets as the manufacturers (specifically in Germany) has to mitigate the effect of the sanctions. BUT we continue to express confidence in our views that the Eurozone PMI are likely to rebound in October or November, thanks to the combined effect of: 1) Banks resuming lending as they will have dealt with the Asset Quality Review and will start to benefit from the combination of T-LTRO conditions and SMEs demand, 2) the new EU Commission undertakes genuine actions to speed up European integration (e.g. designated President Tusk Energy Union project), and infrastructure investment (designated President Juncker EUR300bn investment project), 3) a reduction in the excessive risk premium built due to the negative effects of the tension with Russia, and 4) the global collaboration which will bring more support to the energy transition, governance improvement and fight against terror (positive for jobs and growth and negative for energy prices – because it reduces the geopolitical risk premium -).
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
Manufacturing Rebound Relieves Growth Concerns in China
A Chinese manufacturing gauge unexpectedly increased this month, suggesting export demand is helping the economy withstand a property slump.
The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.5, matching the highest estimates in a Bloomberg News survey of analysts and up from August’s final reading of 50.2. Asian stocks pared declines, the Australian dollar rallied and copper advanced.
Today’s report contrasts with August data that showed weaker growth and may ease pressure for stimulus that’s broader than the limited liquidity injections and expedited spending on railways that Premier Li Keqiang’s government has enacted. With the euro region and Japan battling to shore up expansions, a trough in China’s slowdown would aid a patchy global recovery.
Palm-Greasing End Means Xi Graft Crackdown May Aid Growth
The champagne has stopped flowing in Beijing, and Joerg Wuttke couldn’t be happier about it.
President Xi Jinping’s crackdown on everything from gift giving to excessive wining and dining is leveling the business playing field, said Beijing-based Wuttke, president of the European Chamber of Commerce in China. Even as antitrust probes zero in on foreign companies from Microsoft Corp. (MSFT) to Qualcomm Inc. (QCOM), the government’s anti-corruption campaign is making one aspect of business easier in the world’s second-biggest economy.
“It takes the stress away,” said Wuttke, head of a chamber whose members include Airbus Group NV (AIR) and Bayerische Motoren Werke AG. “You’re not afraid that somebody gets an order because he found a better champagne or something like that. It’s not Singapore yet, but it’s a very positive development.”
China September factory activity edges up but employment shrinks
BEIJING (Reuters) – China’s manufacturing sector unexpectedly picked up some momentum in September even as factory employment slumped to a 5-1/2-year low, a potential source of worry for Communist leaders who prize social stability above all else.
http://ca.reuters.com/article/businessNews/idCAKCN0HI02S20140923
Strong demand for overseas trips during Golden Week
Outbound tourism in the upcoming Golden Week – the first week of October – is expected to hit a new high in terms of the number of travelers this year, boosted by the easier visa procedures and increased flight routes to popular destinations, top industry experts said on Monday.
Destinations in Asia continue to dominate online searches by mainland tourists with Taipei and Seoul being the top choices, according to Hotels.com, a leading provider of hotel accommodations. The company has based its findings on data from its Chinese website and on search volumes for outbound destination hotels between Oct 1 and 7.
http://usa.chinadaily.com.cn/china/2014-09/23/content_18644412.htm
China Finance Online Announces New Partnership with Zhongshan Securities
BEIJING, Sept. 23, 2014 /PRNewswire/ — China Finance Online Co., Limited (« China Finance Online », or the « Company ») (NASDAQ GS: JRJC), a leading web-based financial services company that provides Chinese retail investors online access to securities, commodities, and wealth management products, today announced that it has entered into a strategic partnership agreement with Zhongshan Securities Co., Limited (« Zhongshan Securities »), to integrate with China Finance Online’s newly-launched web-based trading platform, « Securities Master, » or « Zhengquantong, » with Zhongshan Securities’ trading and settlement system. Along with the Company’s previous partnership with CITIC Securities, Co., Ltd. (SHA: 600030), this partnership will allow China Finance Online to offer a competitive commission rate to investors, strengthen its platform’s online trading capabilities and further expand its broad user base.
Western Sanctions Will Not Impede Russia’s Plans to Increase Oil Shipments to China
YUZHNO-SAKHALINSK, September 23 (RIA Novosti) – Western economic sanctions over Moscow’s alleged role in the Ukrainian crisis will not affect Russia’s plans to increase the throughput of the pipeline East Siberia – Pacific Ocean to 80 million tonnes of oil per year by 2020, in order to increase the shipments of Russian oil to China, Deputy Minister of Energy Kirill Molodtsov said on Tuesday.
Defiant students give Hong Kong leader ultimatum
(Reuters) – Hong Kong’s striking students on Tuesday gave the city’s leader 48 hours to honour his promise to listen to the people, threatening to surround and paralyse key government buildings if he failed to respond to their demands for greater democracy.
http://uk.reuters.com/article/2014/09/23/uk-hongkong-china-idUKKCN0HI03N20140923
Reports on Xi’s ‘regional war’ remarks are ‘wild guess’: China
China today termed as « wild guess » reports that President Xi Jinping’s comments asking the PLA to improve its ability to win a regional war were made in the context of the border standoff with India and said the leadership of the two countries have reached a consensus to solve the boundary dispute through friendly consultations.
« You said Indian media are asking this question but I believe that this may be a wild guess, » Chinese Foreign Ministry Spokesperson Hua Chunying told a media briefing here when asked about the context of Xi’s remarks.
Xi yesterday asked the People’s Liberation Army (PLA) to be combat ready to win a « regional war » and make sure that all decisions from the central leadership are strictly followed.
« Headquarters of all PLA forces should improve their combat readiness and sharpen their ability to win a regional war in the age of information technology, » Xi, who returned from India last week after a three-day visit, was quoted as saying by the state-run Xinhua news agency.
China:Manufacturing data support our view that China is soft landing while rebalancing. Labor statistics showed that the manufacturers have started to rebalance their activities away from labor intensive (an objective already stressed by the Chinese leadership). 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
700 Queensland coal mining jobs go at BHP’s BMA joint venture
BHP Billiton is cutting 700 workers across its Queensland metallurgical coal business, as the miner continues to take an axe to costs in the face of depressed prices for the commodity and a stubbornly high Australian dollar.
Melbourne shooting: Man being investigated over terrorism shot dead after stabbing police officers outside Endeavour Hills police station
An 18-year-old man who was being investigated over terrorism has been shot dead after stabbing two police officers in Melbourne’s outer south-east.
http://www.abc.net.au/news/2014-09-23/one-person-shot-dead-two-stabbed-endeavour-hills/5764408
Australia can quit coal without adverse effects on economy, says Jeffrey Sachs report
Australia can end its reliance on coal while maintaining economic growth and lifestyles on par with today’s standards, according to a major report to be handed to world leaders at a special climate summit in New York.
The report, led by globally renowned economist Professor Jeffrey Sachs, is one of 15 called for by UN Secretary-General Ban Ki-moon to provide options for how the world’s major carbon emitters can decarbonise their economies.
StanChart in advanced talks to sell HK consumer unit to Australia’s Pepper: sources
(Reuters) – Standard Chartered (STAN.L) is in advanced talks to sell its Hong Kong consumer finance business to finance firm Pepper Australia Pty Ltd in a deal that could fetch between $500 million to $700 million, people familiar with the deal said.
http://uk.reuters.com/article/2014/09/23/us-stanchart-m-a-hongkong-idUKKCN0HI07I20140923
Australia: Australia continues to be seen, by markets, as a derivative to the old Chinese model (i.e. commodity provider). This view explains the 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. Meanwhile, from our previous daily briefing, we have gathered sufficient support to the view that the drivers of the Australian GDP are moving toward: 1) education, health and finance services provider to Asian neigbhours, 2) innovation and digital sector, 3) energy resources export to Japan (the later contributes to our constructive view that the current negative Japan Energy Trade deficit will rebalance in the medium term – reducing Japanese Government bonds solvency risk – ).
New Zealand News
Interview: Halting New Zealand’s « dangerous » disengagement from politics
WELLINGTON, Sept. 23 (Xinhua) — New Zealand’s future could lie in the hands of about a million people — but they don’t seem to care.
That’s the estimated number of eligible voters who failed to cast a ballot in Saturday’s general election — enough people to have reversed the center-right National Party’s landslide re- election, or perhaps to have reinforced it.
Turnout of about 77.04 percent of 3.07 million registered voters was higher than the 74.2 percent who cast their ballot in the 2011 election, but the trend shows a steady decline since peaking at 93.7 percent in the 1984 election.
http://news.xinhuanet.com/english/world/2014-09/23/c_133665141.htm
JOHCM International Equity Managers Cite New Zealand as Next Hotspot for Tech Companies
NEW YORK–(BUSINESS WIRE)–Sep. 23, 2014– Christopher Lees and Nudgem Richyal, co-managers of the $1.3 billion JOHCM International Select Fund (JOHIX), have highlighted New Zealand as the next hotspot for technology companies. Singapore-based Richyal recently spent a research week in New Zealand meeting companies that are disrupting many well-established global technology players. He commented:
New Zealand: National Party 3rd term, without the need of a coalition helped the NZ stocks to out-perform in a quite “bearish” day. From Monday 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
Japan: anti-nuclear demonstration in Tokyo
http://english.peopledaily.com.cn/n/2014/0923/c90777-8786777.html
Abe to vow at U.N. more active role by Japan in Africa peacekeeping
NEW YORK – Prime Minister Shinzo Abe plans to vow in a speech at the United Nations on Friday that Japan will take a more active role in U.N.-led peacekeeping operations in Africa and support U.S. President Barack Obama’s initiative to quickly deploy peacekeepers in the region, a draft of the speech showed Tuesday.
« Japan’s foreign minister to discuss Ukraine with Kerry »
NEW YORK, Sept. 23 (Kyodo) −− Visiting Japanese Foreign Minister Fumio Kishida and U.S.
Secretary of State John Kerry will hold talks Tuesday to confirm coordination between the two
nations over the situation in Ukraine.
Kishida is expected to inform Kerry of Japan’s plan, as a member of the Group of Seven industrial
nations, to step up sanctions against Russia for its actions in Ukraine, Japanese officials said.
At the same time, Kishida will likely seek U.S. understanding of Prime Minister Shinzo Abe’s
intention to meet with Russian President Vladimir Putin on the sidelines of the Asia−Pacific
Economic Cooperation forum summit in Beijing in November, the officials said.
Japan wants to advance bilateral issues with Russia, including that of territory, while recognizing the
need to put pressure on Moscow in line with the United States and the European Union.
Kishida and Kerry are also expected to discuss the issue of North Korea’s abductions of Japanese
nationals in the 1970s and 1980s as well as Pyongyang’s nuclear and missile programs.
UPDATE 2-Starbucks buying full control of Japan unit for $914 mln
Despite Japan’s economic difficulties, those shops have profit margins that are among the highest in the world, Starbucks executives said on a conference call with analysts.
Starbucks also has opportunities to add more shops, expand product sales through grocery and food service channels and to boost the company’s relatively small share of canned coffee and other ready-to-drink products that are popular in Japan, they added.
http://www.reuters.com/article/2014/09/23/starbucks-japan-idUSL2N0RO2ZD20140923
Japan to help bolster patent offices in Eastern Europe
GENEVA — Japan will send experts to four Eastern European nations to help establish entities that conduct pre-filing international patent searches, speeding up reviews of applications.
Japan Patent Office Commissioner Hitoshi Ito signed memorandums of understanding here on Tuesday with his counterparts from Poland, the Czech Republic, Slovakia and Hungary. Officials are gathering for the World Intellectual Property Organization’s general assembly that started this week.
Japan: 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 -). Japan continues to face heavy public pressure to rebalance its energy reliance to nuclear. While we believe that Japan will continue to press for reopening nuclear plants (when Nuclear Watchdog gives his green light), the medium to long term trend is that Japan will use Trade negotiation with neighbours to secure new energy sources while using this pressure to deregulate and move forward with Abenomics 3rd arrow (please see our Japan update for more on our views).
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