[image:1,l]
Photo DR Shutterstock
SNBDL Daily Briefing
Report prepared using big data solution Quid
Our take away from the last 24 hours news
US Federal Reserves: While James Bullard sees the FOMC to drop “Considerable Time” in the October meeting and Loretta Mester that the forward guidance should channel the reaction function to data, many other FOMC members have been downplaying inflationary risk or the urgency to act on rates. The main issue, which drives current Fed watchers debate, reflects a political debates around the Transparency Bill (which corresponds to the introduction of “golden rule” or an “auto-pilot” when markets have proven to be under estimating numerous factors when assessing interest rates path -e.g. consequence of the mid-term elections, geopolitical headwinds, effect of commodity prices decrease-). We consider that Bullard proposed timing (drop “Considerable Time” as early as October) is too early because: 1) the FOMC have not a clear view of what could replace the “Considerable Time” language, 2) the US economy narrative might start to suffer from the effect of what could be the uncertainties should the Senate majority goes to GOP at that period, 3) Chair Yellen will not have the opportunity to explain the changes (no press conference in October). We consider that markets over reaction to the September meeting dots, excessive short fixed income positioning, and inability to challenge an excessively optimistic escape velocity scenario increase the change that the Fed will make no change to its forward guidance by October.
We have been arguing for a couple of months now that markets are extremely mis reading the Fed reaction function relative to the reaction function explained by the Fed leadership. In this week interview, Dudley (NY – Sole regional Fed permanent voter – close to leadership thinking) 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 all 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 and markets realised the impact of a “lam duck administration” should the Senate majority goes to GOP). 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 US 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 -.
BoE: Carney is reverse the narrative which pushed GBP lower in order to avoid: first, a currency crisis – which has started to be discussed when Scotland independence was considered -. second, fuelling inflation – currency strength played an important role in the subdued inflationary scenario-. We continue to see BoE talking hawk, in order to avoid hiking rates. We consider that the UK yield curve flattening and long GBP (specifically relative to USD) are the best way to play BoE strategy.
ECB: Greece announcement to change fiscal treatment to Differed Tax Assets is very positive heading to AQR (asset quality review) results. The two countries which has been (and continue to be) seen as under pressure from the AQR are Greece and Ireland. The former’s tax change enables to provide EUR 2.5 bn additional capital.
Is EUR recent weakening due to an existential threat (too much complacency) or is it the reflect of monetary policy divergence as Draghi argued? We believe that it’s the combined result of the double issues. We have been quite vocal that markets are excessively pricing a monetary divergence, while Fed is likely to continue tightening macro prudential while being late in normalising. Furthermore, the EUR narrative amongst investors seems resuming the existential threats (Eurozone will not be able to undertake the reforms, Germany will not pay for the “lazy” other countries, AfD and Front National will succeed in destroying the EZ and EU for the benefit of Eurasia, Scotland independence and Br-exit risk etc.). We have been indicating in our Europe Update that EUR is heading toward becoming a reserve currency should France and Italy continue to undertake the reforms. For France, we should know as soon as mid-October whether the government will succeed getting the parliament backing to support the reforms. We consider that the likelihood is very high (though the narrative – rhetoric is captured by the anti – reforms). 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 positively 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).
Bank of Canada: alike ECB or BoE, BoC wants to benefit from a weak currency without using any tool (through the monetary policy divergence story – a very widely accepted view). As we were expressing many times we do not see this divergence as important as other market participants because it assumes that the Fed has reached the escape velocity and all the indications are supporting the opposite view.
Reserve Bank of Australia: In a context where Australia housing market has been pointed out to be in a bubble (after the BIS meeting), the RBA offered a detailed report in which its highlight its view that Macro Prudential should be used as first line of defence against market frothiness. This report echoes the RBA and Australian government views earlier this month (please see our earlier daily briefings), that the housing market constitute a risk of frothiness but it NOT in a bubble right now. In a context, where inflation hawks want to see higher rates we forecast that RBA action will be dismissed and market will continue to focus on any reason which could justify positioning which plays doom and gloom Australia. A scenario which could not only help fixed income investors (should Central Banks undertake new QE programs), Gold – commodity standard bugs – should the crisis spread to a full fledge monetary armageddon -, Russia – which could reduce the pressure of the sanctions – and obviously the Terrorists alike ISIL which could claim a win over a “corrupted West” (in their parlance). Markets analysts are not able to link these interest groups yet but a complete information permitted by big data enables to connect these dots.
Russia Central Bank: Nabiullina new 2014 inflation forecast and oil price decreasing stress scenario indicates that the Russian economy is heading toward stagflation. This stagflation may also increase should Iran nuclear talks yield in short term results (as we are expecting and evidences are supporting).
RBI: Suffers from monetary divergence pricing, INR depreciation pass through is likely to continue to overshadow the benefit of commodity prices plummeting until markets start pricing the US mid-term elections risk.
PBoC: China government is understood to be considering replacing Governor Zhou in the forthcoming IV-Plenum. Chatters see Guo Shuqing, Fmr. Chair of China Securities Regulatory Commission (CSRC, China’s SEC) and current governor of Shandong province to be the likely replacent. Mr. Guo Shuqing is well respected by the markets. His nomination would indicate that the PBoC has taken an accelerated path away from stimuli (a regime PBoC was into since 2008) toward accelerating RMB internalisation – through interest rates liberalisation and financial sector reforms.
Ebola: As a response to WHO and CDC worst case scenario upgrade (number of cases could reach as high as 1.4millions by beginning 2015) has motivated more global coordination.. 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 personnel – , 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 tests).
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 we were expecting since the beginning of Gaza conflict: 1) Fatah and Hamas decided to undertake a national-unity government – a process which will clear the way for normalisation in Turkey – Israel relations in the coming weeks -, 2) Hamas split between moderate, which has joined Fatah, and radicals which are joining the numerous small groups, 3) moderate Hamas has accepted 1967 territories (a first step to recognise Israel, as we were expecting), 4) Iran has shifted toward more collaboration with Sunnis (“President Rouhani called for a united world against Terror”). Next step is likely to be Iran dropping its support to Assad, a view which has already been expressed (though not widely reported) by Ayathollah Ali Khamanei on Aug. 13th (source: http://www.theguardian.com/commentisfree/2011/aug/13/khamenei-support-assad)
Please see below our yesterday note:
“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: In addition to the current Arab countries coalition, Iran and Turkey president expressed strong commitment to help during their UN General Assembly address (though details lack). President Rouhani said “ »The extremists of the world have found each other and have put out the call, ‘extremists of the world unite’. But are we united against the extremists?”. Furthermore, the report that a Woman [Mariam Mansouri] joined UAE strike against ISIL is very positive. This is because ISIL ideologues consider that Jihadists fighters killed by women cannot be considered martyrs and go to heaven (this belief has obviously no support in Islam theological books but is a widely spread belief amongst ISIL Jihadists).
We have been reporting since Tuesday, that the Social media is also joining the fight against the terrorist organisation, Muslims are making #NotInMyName viral to push the view that ISIL is NOT a State NOR represent Islam.
The terrorists organisations are currently in an escalation of violence due to the leadership fight for Abou Moussab Al Zarkawi legacy. Fortunately for the global coalition fight, the “Murders in Iraq and Syria” known as ISIL, have no ideological leadership and will struggle to hire new fighters should the global community take genuine actions to : 1) fight bad governance, to justify 2) reducing mistrust. Unfortunately, mistrust and the “institutions are rotten to their core” mantra is helped by groups as wide as: Extreme right, gold bugs, 2nd amendment supporters and Bitcoin marketers… We are surprised how some “mainstream media” have joined spreading the same “mistrust” message for a clear agenda to avoid improving governance. This pressure is accelerating G-20 actions to push for tax evasion fight (OECD initiative) and improve governance.
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. Iraq PM Al-Abadi reporting of threats to US and Paris subways have not been confirmed by US and French intelligence. ISIL threat to westerns facilities is part of the terrorist organisation communication strategy in its competition vis-a-vis AlQaeda. Western Intelligence indicates that although dormant terrorists cells exist in the Western countries, these “still” lack operational support to perpetrate substantial acts.
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. As we were expecting, Ukraine (see below from our recent daily briefing) is considering rewriting the IMF program, which half acknowledge that it will be very hard to get back influence on auto-proclaimed republics (in the Donbass region). The Russian business community starts to shift away from the “official communication” that isolated Russia will end up in doom and gloom for other countries and focuses on its own negative impacts. The business community start to see the forthcoming cold war era. To calm down any push back to the current strategy from the oligarchs, Kremlin is 1) pressing those who want to challenge Putin (e.g. Evtushenkov), 2) using budget and SWF to finance investment needs. 3) use communication war to push grass root corporations, individual and close parties (EU skeptics and extreme right and left) to press lawmakers to reverse sanctions.
Please find details from old daily briefings:
“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 Attorney General Eric Holder resigned. President Obama administration did not provide any hint on who will replace him. GOP has called President Obama to refrain from using the lame duck Congress session to press confirmation for the new Attorney General. This bring another problem should Senate majority goes to GOP because in that case the Attorney General confirmation process could become even more problematic and increase the weaknesses we foresee should GOP get the majority in both the House (a certainty) and the Senate (50/50 chance so far).
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. The widely common 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 indicates that growth potential will improve. 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.
France – Fmr. Pres. Nicolas Sarkozy come back: Paris appeals court suspends corruption prove into Sarkozy. This is clearing the way for the case to be dropped (please contact us, should you require more details on the juridical reasons of our forecast). This trend will help Sarkozy to increase his chances (already high) to secure the Presidency of the center right party (UMP). We’ve been indicating that Fmr. Pres. Sarkozy strategy evolves around championing good governance while moving away from the Radical right. We see these development as very positive for both France and EZ because Mr. Sarkozy come back will take the french opposition away from the EU-Skeptics and extreme right Front National. This has been confirmed in Mr. Sarkozy’s center right party presidential campaign first speech yesterday.
Eurozone economic weaknesses : As we were expecting in our Feb 27th note, and our recent 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 -).
China climate change: As we were indicating in our previous daily briefings, not only China has taken genuine actions to move toward more reforms but also the leadership has taken steps to help climate change. This has started when the social media has put mounting pressure after the episode of excessive pollution in Shanghai (beginning 2013, ahead of the Communist Party Congress).
China: ADB chief economist Shang Jin Wei said “At this critical juncture in China’s transition, carrying out the government’s announced structural reforms is more important than meeting the growth target,”. This is in line with our views and the evidences are indicating that China is doing executing the reforms. The IV-plenum is likely to bring more focus from the Western media to the governance improvement and the move toward a rebalanced economy.
But even if the reforms are more important we do not see the government changing its GDP target in the near term. The government is 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 neighbours, 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: Fontera payout cuts fuel concerns over NZ economic prospects. This increases the pressure on new PM Key Cabinet to accelerate the green shots of rebalancing and reforms. We have been indicating that NZ has already started a genuine shift toward new Tech agriculture, health and education services directed to Asian neighbours.The fact that PM Key secured another term supports our constructive scenario on NZ..
Japan: economic softening raises question about whether Japan will pursue a 2nd VAT hike later this year. PM Abe indicated that he was waiting for more economic data, but we believe that Japan will move ahead although it may be in steps (split the 2nd hike in different sub-steps). We see BoJ keeping 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 *. The 2nd VAT hike will require some stabilisation at the current levels, though we expect that PM Abe will undertake the 2nd hike in steps, because BoJ is unlikely to be sufficiently confident to move ahead with more QQE while JPY is accelerating its depreciation. PM Abe voiced concerned over the JPY rapid depreciation, as he pointed (rightly in our opinion) to the increase in energy cost, which deteriorate further the energy trade deficit – and increase the risk of JGB solvency -.
But, 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).
The postponing of US-Japan trade partnership may become an issue should Japan postpone the current trend of market deregulation. We have been indicating earlier this year that the The time frame for TPP was very ambitious due to the US gridlock.
Central banks news
Fed’s Lockhart says inflation risk still low
JACKSON, Miss. (AP) — Atlanta Federal Reserve President Dennis Lockhart said Thursday he has more confidence in the economy than he did a year ago, suggesting he’s not seeking an increase in interest rates until mid-2015 or later.
Speaking to the Mississippi Council on Economic Education, Lockhart said he sees little danger of inflation and says the current unemployment rate is « still some distance » from full employment. »
http://www.businessweek.com/ap/2014-09-25/feds-lockhart-says-inflation-risk-still-low
Fed Trio Urges Patience on Rates Amid Cooling Inflation
Three Federal Reserve presidents are calling for patience as the central bank weighs when to raise interest rates above zero, arguing moving prematurely poses a greater risk to the economy than waiting too long.
“We should be exceptionally patient in adjusting the stance of U.S. monetary policy —- even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives,” Charles Evans, president of the Chicago Fed, said yesterday in Washington.
Evans joined the New York Fed’s William C. Dudley and Narayana Kocherlakota of Minneapolis in warning the Fed shouldn’t make a change before being sure the economy can withstand higher borrowing costs. Both Dudley and Evans raised concerns about too-low inflation and made references to 1937, the year a tightening of monetary policy helped puncture a weak recovery from the Great Depression.
US Federal Reserves: While James Bullard sees the FOMC to drop “Considerable Time” in the October meeting and Loretta Mester that the forward guidance should channel the reaction function to data, many other FOMC members have been downplaying inflationary risk or the urgency to act on rates. The main issue, which drives current Fed watchers debate, reflects a political debates around the Transparency Bill (which corresponds to the introduction of “golden rule” or an “auto-pilot” when markets have proven to be under estimating numerous factors when assessing interest rates path -e.g. consequence of the mid-term elections, geopolitical headwinds, effect of commodity prices decrease-). We consider that Bullard proposed timing (drop “Considerable Time” as early as October) is too early because: 1) the FOMC have not a clear view of what could replace the “Considerable Time” language, 2) the US economy narrative might start to suffer from the effect of what could be the uncertainties should the Senate majority goes to GOP at that period, 3) Chair Yellen will not have the opportunity to explain the changes (no press conference in October). We consider that markets over reaction to the September meeting dots, excessive short fixed income positioning, and inability to challenge an excessively optimistic escape velocity scenario increase the change that the Fed will make no change to its forward guidance by October.
We have been arguing for a couple of months now that markets are extremely mis reading the Fed reaction function relative to the reaction function explained by the Fed leadership. In this week interview, Dudley (NY – Sole regional Fed permanent voter – close to leadership thinking) 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 all 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 and markets realised the impact of a “lam duck administration” should the Senate majority goes to GOP). 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 US 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 -.
Bank of England’s Carney says rate rise « getting closer »
Carney stuck close to previous remarks on monetary policy in his address to actuaries, much of which focused on the BoE’s plans for further regulating insurers.
Britain’s economic outlook was much improved, and a rate rise was only a matter of time, Carney said.
« The point at which interest rates … begin to normalise is getting closer, » he said. « In recent months the judgement about precisely when to raise Bank Rate has become more balanced. While there is always uncertainty about the future, you can expect interest rates to begin to increase. »
BOE’s Shafik Says Productivity to Guide Rate Path, Post Reports
Bank of England Deputy Governor Nemat Shafik said officials may have to “move more quickly” on rate increases if salary gains aren’t matched by growth in productivity, according to a newspaper interview.
The puzzle of weak wages amid strong growth in payrolls is at the center of policy makers’ debate on when to lift borrowing costs from a record low. In an interview with the Yorkshire Post published today, Shafik said that while the recovery is “encouraging,” the rate of pay growth is a key factor because officials don’t want to take any risks.
BoE: Carney is reverse the narrative which pushed GBP lower in order to avoid: first, a currency crisis – which has started to be discussed when Scotland independence was considered -. second, fuelling inflation – currency strength played an important role in the subdued inflationary scenario-. We continue to see BoE talking hawk, in order to avoid hiking rates. We consider that the UK yield curve flattening and long GBP (specifically relative to USD) are the best way to play BoE strategy.
ECB’s Draghi expects euro zone to grow modestly in second half – paper
(Reuters) – European Central Bank President Mario Draghi expects the euro zone to grow modestly in the second half of the year, helped by the ECB’s recent stimulus steps, and has pledged to do more should it become necessary.
In an interview published on Thursday by the Lithuanian business daily Verslo Zinios, Draghi warned that heightened geopolitical tensions could dampen business and consumer confidence. But he said sanctions imposed on and by Russia as a result of the Ukraine conflict had so far been limited in their impact on the euro zone economy.
Draghi also said there was a risk that insufficient structural reforms could weigh on the euro zone’s business environment.
« According to the preliminary information received over the summer, economic conditions have been somewhat weaker than expected, » Draghi was quoted as saying. « Overall, however, we expect modest growth in the second half of the year. »
« It is now in the hands of governments to act decisively on further structural reforms, » Draghi said. « Governments should not unravel the progress made in fiscal consolidation, but use any leeway to make fiscal policies more growth-friendly. »
http://uk.reuters.com/article/2014/09/25/uk-ecb-draghi-idUKKCN0HK08120140925
Greece moves to help banks’ capital position ahead of ECB tests
(Reuters) – Greece has tabled an amendment to a bill allowing its banks to convert so-called deferred tax assets into tax credits and so strengthen their capital base ahead of European Central Bank stress tests in October.
The bill, expected to be voted on by Sep. 30, could save lenders around 2.5 billion euros ($3.2 billion) in core capital over 2015-16 and brings Greece into line with European peers Portugal, Italy and Spain, which have already adopted the measure.
ECB’s test may not be final word on health of Europe’s banks
* Banks in better shape after raising billions of capital
* ECB health test not likely to put ‘blood on the wall’
* Frankfurt dismayed by bank tricks to polish finances
FRANKFURT, Sept 25 (Reuters) – It has been billed as a make or break moment for Europe’s banks: the publication of rigorous industry-wide health checks next month after three previous tests failed to spot problem lenders.
http://www.cnbc.com/id/102032851
ECB: Greece announcement to change fiscal treatment to Differed Tax Assets is very positive heading to AQR (asset quality review) results. The two countries which has been (and continue to be) seen as under pressure from the AQR are Greece and Ireland. The former’s tax change enables to provide EUR 2.5 bn additional capital.
Is EUR recent weakening due to an existential threat (too much complacency) or is it the reflect of monetary policy divergence as Draghi argued? We believe that it’s the combined result of the double issues. We have been quite vocal that markets are excessively pricing a monetary divergence, while Fed is likely to continue tightening macro prudential while being late in normalising. Furthermore, the EUR narrative amongst investors seems resuming the existential threats (Eurozone will not be able to undertake the reforms, Germany will not pay for the “lazy” other countries, AfD and Front National will succeed in destroying the EZ and EU for the benefit of Eurasia, Scotland independence and Br-exit risk etc.). We have been indicating in our Europe Update that EUR is heading toward becoming a reserve currency should France and Italy continue to undertake the reforms. For France, we should know as soon as mid-October whether the government will succeed getting the parliament backing to support the reforms. We consider that the likelihood is very high (though the narrative – rhetoric is captured by the anti – reforms). 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 positively 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).
Bank of Canada says its policy can diverge from Fed’s
OTTAWA (Reuters) – Canadian monetary policy can diverge from that of its neighbor to the south, even as the U.S. Federal Reserve’s exit from its extraordinary stimulus measures will likely raise market interest rates in Canada and weigh on the loonie, a Bank of Canada official said on Wednesday.
Deputy Governor Timothy Lane also warned that the unwinding of the Fed’s policy could pose risks to the financial system globally as asset prices and volatility now reflect liquidity spawned by the accommodative actions of central banks in the United States and other countries.
While Lane said the U.S. Federal Reserve’s exit from extraordinary monetary policies is « good news » for Canada as it is a sign a sustained U.S. economic expansion is underway, he added that the normalization of U.S. policy will act to tighten Canadian monetary and financial conditions.
http://ca.reuters.com/article/domesticNews/idCAKCN0HJ23X20140924
Bank of Canada: alike ECB or BoE, BoC wants to benefit from a weak currency without using any tool (through the monetary policy divergence story – a very widely accepted view). As we were expressing many times we do not see this divergence as important as other market participants because it assumes that the Fed has reached the escape velocity and all the indications are supporting the opposite view.
RBA’s Glenn Stevens sceptical but open to limits on investor loans
Reserve Bank of Australia Governor Glenn Stevens may consider some limits home loans to investors to stop distortions in the housing market.
Mr Stevens told told the Melbourne Economic Forum at Melbourne University that he was concerned about double-digit growth in home finance to investors.
He acknowledged measures known as « macro-prudential » tools, which do things like limit the proportion of a property’s value that can be borrowed, may help curb lending.
« I have certain scepticism about macro-prudential tools as a panacea, but I remain open to using them if it seems sensible to do so and that’s the kind of thing we have in mind right now, » he said.
Reserve Bank of Australia: In a context where Australia housing market has been pointed out to be in a bubble (after the BIS meeting), the RBA offered a detailed report in which its highlight its view that Macro Prudential should be used as first line of defence against market frothiness. This report echoes the RBA and Australian government views earlier this month (please see our earlier daily briefings), that the housing market constitute a risk of frothiness but it NOT in a bubble right now. In a context, where inflation hawks want to see higher rates we forecast that RBA action will be dismissed and market will continue to focus on any reason which could justify positioning which plays doom and gloom Australia. A scenario which could not only help fixed income investors (should Central Banks undertake new QE programs), Gold – commodity standard bugs – should the crisis spread to a full fledge monetary armageddon -, Russia – which could reduce the pressure of the sanctions – and obviously the Terrorists alike ISIL which could claim a win over a “corrupted West” (in their parlance). Markets analysts are not able to link these interest groups yet but a complete information permitted by big data enables to connect these dots.
UPDATE 1-Russia’s central bank chief says 2014 inflation may exceed 7.5 percent
* Nabiullina says 2014 inflation may exceed 7.5 percent
* Central bank works on « stress » scenario of sharp crude price drop
MOSCOW, Sept 25 (Reuters) – Russian consumer price inflation may exceed 7.5 percent this year, its central bank governor said on Thursday, the latest admission by policymakers that international tensions over Ukraine are damaging the economy.
http://www.cnbc.com/id/102031868
Russia Central Bank: Nabiullina new 2014 inflation forecast and oil price decreasing stress scenario indicates that the Russian economy is heading toward stagflation. This stagflation may also increase should Iran nuclear talks yield in short term results (as we are expecting and evidences are supporting).
Rupee hits 1-1/2 month low; central bank steps in to support
MUMBAI: The rupee hit its lowest level in one-and-a-half months on Thursday, weighed down by a sharp fall in the domestic share market and demand for the greenback from importers, but the central bank stepped in to limit further losses.
Traders said the central bank likely sold dollars via state-run banks starting around 61.40 rupee levels to prevent a further fall in the local currency.
RBI: Suffers from monetary divergence pricing, INR depreciation pass through is likely to continue to overshadow the benefit of commodity prices plummeting until markets start pricing the US mid-term elections risk.
China Considers Replacing Central Bank Governor Zhou: WSJ
China may replace central bank Governor Zhou Xiaochuan as part of wider personnel changes as President Xi Jinping places allies in top government positions, the Wall Street Journal reported today.
The government hasn’t yet made a final decision about Zhou, the Journal said, citing the officials. The government’s personnel changes may come at the time of a major party meeting next month, it said. Zhou accompanied Premier Li Keqiang on a tour of Shanghai’s free-trade zone on Sept. 18 before its one-year anniversary.
PBoC: China government is understood to be considering replacing Governor Zhou in the forthcoming IV-Plenum. Chatters see Guo Shuqing, Fmr. Chair of China Securities Regulatory Commission (CSRC, China’s SEC) and current governor of Shandong province to be the likely replacent. Mr. Guo Shuqing is well respected by the markets. His nomination would indicate that the PBoC has taken an accelerated path away from stimuli (a regime PBoC was into since 2008) toward accelerating RMB internalisation – through interest rates liberalisation and financial sector reforms.
Economic news
U.S. Mortgage Rates Drop From a Four-Month High
Mortgage rates in the U.S. dropped from a four-month high, reducing borrowing costs as demand for housing improves.
The average rate for a 30-year fixed mortgage was 4.2 percent this week, Freddie Mac said in a statement today. That’s down from 4.23 percent, the highest since early May. The average 15-year rate slipped to 3.36 percent from 3.37 percent, the McLean, Virginia-based mortgage-finance company said.
The housing market is recovering as foreclosures subside and employment growth fuels demand. Sales of new homes in the U.S. surged in August, jumping 18 percent to a 504,000 annualized pace, the highest level since May 2008, Commerce Department figures showed yesterday.
http://www.bloomberg.com/news/2014-09-25/u-s-mortgage-rates-drop-from-a-four-month-high.html
Capital Goods Orders Point to U.S. Investment Gain: Economy
American factories received more orders for machinery, communications gear and electrical equipment in August as an improving economy gave companies the confidence to expand.
A 0.6 percent advance in bookings for non-military capital goods excluding aircraft followed a 0.2 percent decrease in July that was smaller than previously estimated, according to data from the Commerce Department issued today in Washington. Another report showed firings remain low.
Growing sales paced by demand for automobiles and housing are prompting companies to invest in new equipment and hire more workers, which will give the world’s largest economy a boost in the second half of the year. Other data today showed a softening in consumer sentiment, reflecting a drop among lower-income households that may prevent more broad-based gains in spending.
http://www.bloomberg.com/news/2014-09-25/orders-for-u-s-capital-goods-climb-more-than-forecast.html
Soybeans Fall to Four-Year Low as Weather Buoys Outlook
Soybean futures fell to a four-year low as favorable weather aids farmers in gathering a crop forecast at the largest ever in the U.S., the world’s top grower. Corn and wheat declined.
Warm, dry Midwest conditions in the next five days should help maturing crops and harvesting, Bryce Anderson, a meteorologist at DTN, said in a note. The Department of Agriculture estimates soybean output this year will rise 19 percent to 3.913 billion bushels from 2013. Farmers collected 3 percent of the oilseeds as of Sept. 21, down from an average of 8 percent in the prior five years, according to the USDA.
“The very favorable weather outlook over the next five to seven days is pushing the idea that we’ll see some meaningful harvest progress between now and next week,” Greg Grow, the director of agribusiness for Archer Financial Services Inc. in Chicago, said in a telephone interview. “The demand is coming at these prices, but the supply is looming extremely large.”
News Analysis: ADB trims down Philippine GDP growth forecast for 2014, 2015
MANILA, Sept. 25 (Xinhua) — The Manila-based Asian Development Bank (ADB) has trimmed down its 2014 gross domestic product (GDP) growth forecast for the Philippines from its April projection of 6. 4 percent to 6.2 percent.
In an update of the Asian Development Outlook 2014, the bank’s flagship publication released Thursday, the ADB also said that the Philippines’ GDP would grow by 6.4 percent in 2015, lower than the 6.7 percent it projected in April.
http://news.xinhuanet.com/english/indepth/2014-09/25/c_133672292.htm
Coal ruling to hit India’s nascent economic recovery: Report
MUMBAI: The Supreme Court verdict cancelling 214 coal blocks may adversely impact India’s economic recovery as it will hit key sectors and its « tremors » will be felt in states as well, a rating agency said today.
In a landmark judgement, the apex court yesterday quashed allocation of 214 out of the 218 coal blocks which were alloted to various companies since 1993. The top court, however, allowed these cancelled blocks to continue extracting coal till March 31, 2015.
Ebola
Ebola spread stabilizing in Guinea as toll nears 3,000: WHO
(Reuters) – The spread of Ebola seems to have stabilized in Guinea, one of three West African states worst-hit by the disease, but a lack of beds and resistance in affected communities means its advance continues elsewhere, the World Health Organization said.
Underscoring drastic measures being taken to halt the worst outbreak on record of the deadly virus, Sierra Leone put three more districts — home to over a million people and major mining operations — under indefinite quarantine.
http://uk.reuters.com/article/2014/09/25/us-health-ebola-who-idUKKCN0HK0SV20140925
Canada pledges $27 million to fight Ebola
UNITED NATIONS: Canada announced Thursday it will contribute Can$30 million (US$27 million) to the United Nations and non-government agencies fighting the spread of Ebola in West Africa.
International Development Minister Minister Christian Paradis made the comments in New York where world leaders attended a meeting on the epidemic convened by UN Secretary-General Ban Ki-moon later Thursday.
Ambassador Nancy Powell Appointed as Ebola Coordinator for the Department of State
Secretary Kerry named Ambassador Nancy Powell to lead the Ebola Coordination Unit at the Department of State. In this role, Ambassador Powell will lead the State Department’s outreach to international partners, including foreign governments, to ensure a speedy and truly global response to this crisis.
Ebola crisis calls for ‘strong’ action, Obama tells United Nations
(CNN) — The West Africa Ebola outbreak is « a growing threat to regional and global security, » U.S. President Barack Obama said Thursday, telling a high-level meeting on the deadly epidemic at the U.N. General Assembly that only an international response can prevent « a humanitarian catastrophe across the region. »
« If ever there were a public health emergency deserving of an urgent, strong and coordinated international response, this is it, » the President said.
http://edition.cnn.com/2014/09/25/world/africa/ebola-outbreak/index.html
Ebola: As a response to WHO and CDC worst case scenario upgrade (number of cases could reach as high as 1.4millions by beginning 2015) has motivated more global coordination.. 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 personnel – , 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 tests).
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
Hamas, Fatah agree Palestinian Authority to take control of Gaza
Hamas has agreed to the establishment of a Palestinian state within the ’67 borders, Fatah negotiator says.
Palestinian factions Hamas and Fatah reached an agreement on Thursday by which the Palestinian Authority will take control over the Gaza Strip. The deal also includes Hamas’ consent for a Palestinian state within the 1967 borders, according to a Fatah official.
http://www.haaretz.com/news/middle-east/1.617732
Fatah-Hamas agreement gives unity government control over Gaza
The Gaza ceasefire struck in August between Israel and the Palestinians called for the Palestinian Authority, led by President Mahmoud Abbas, to take over civil administration in Gaza from the Islamist Hamas.
Officials from Hamas and Abbas’ Fatah movement announced the deal on Thursday in Cairo, where they had been meeting under the auspices of Egypt’s intelligence services.
http://www.reuters.com/article/2014/09/25/us-mideast-gaza-cairo-talks-idUSKCN0HK1JI20140925
Iran’s president appeals for ‘united’ world against extremism in name of Islam
Iran’s president urged Thursday for global action against extremism waged in the name of Islam and hinted that a deal over Tehran’s nuclear program could bring greater Iranian cooperation on fighting terrorism.
But Hassan Rouhani also highlighted the deep rifts that stand in the way, blaming U.S. wars and Western-directed policies in the region as creating breeding grounds for militant groups.
“Terror has become globalized,’’ Rouhani said in an address to the United Nations General Assembly. “Extremists of the world have found each other and have put out the call: Extremists of the world unite. But are we united against the extremists?’’
Gaza: As we were expecting since the beginning of Gaza conflict: 1) Fatah and Hamas decided to undertake a national-unity government – a process which will clear the way for normalisation in Turkey – Israel relations in the coming weeks -, 2) Hamas split between moderate, which has joined Fatah, and radicals which are joining the numerous small groups, 3) moderate Hamas has accepted 1967 territories (a first step to recognise Israel, as we were expecting), 4) Iran has shifted toward more collaboration with Sunnis (“President Rouhani called for a united world against Terror”). Next step is likely to be Iran dropping its support to Assad, a view which has already been expressed (though not widely reported) by Ayathollah Ali Khamanei on Aug. 13th (source: http://www.theguardian.com/commentisfree/2011/aug/13/khamenei-support-assad)
Please see below our yesterday note:
“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
Turkey may do more against Islamic State, but how much uncertain
UNITED NATIONS: Turkey appears to be inching toward a greater role in the US-led coalition against the Islamic State after the group freed 46 Turkish hostages, but it remains unclear how far it will go to combat the militants.
As the United States builds a military coalition including Gulf Arab states to fight the radical Sunni militant group, Turkey has been conspicuous by its absence, playing no public role in US-led air strikes on Syria this week.
« We are seriously considering military cooperation with the United States to combat IS, » a senior Turkish official told Reuters on Wednesday, referring to the group by its acronym.
Iran blames ‘errors’ of outsiders for rise of Islamic State
(Reuters) – Iran President Hassan Rouhani blamed the rise of the Islamic State group and other militants on « certain intelligence agencies », saying the solution to stopping them must come from the Middle East region itself and not the West.
« The extremists of the world have found each other and have put out the call, ‘extremists of the world unite’. But are we united against the extremists? » Rouhani asked in a speech to the 193-member United Nations General Assembly on Thursday.
http://uk.reuters.com/article/2014/09/25/uk-un-assembly-rouhani-idUKKCN0HK1O020140925
IRAQI PM: PLOT TO ATTACK US, PARIS SUBWAYS
NEW YORK (AP) — Iraq’s prime minister said Thursday that captured Islamic State militants have told Iraqi intelligence agents of an alleged plot to attack subways in the United States and Paris, but French and American officials said they had no such information.
A senior Obama administration official said no one in the U.S. government is aware of such a plot, adding that the claim was never brought up in meetings with Iraqi officials this week in New York. President Barack Obama met with Prime Minister Haidar al-Abadi on Wednesday. The administration official was not authorized to discuss the matter publicly by name and spoke on condition of anonymity.
There was no immediate comment from France. A half-dozen French officials contacted by The Associated Press said they knew of no plot.
UAE’s First Female Pilot Fighting Isis Militants Wins Fans Online
The United Arab Emirate (UAE)’s ambassador to the United States, Yousef Al Otaiba, confirmed the news on Thursday (25 September) saying Mansouri is the country’s first female fighter pilot deployed in the fight against Isis.
« I can officially confirm that the UAE strike mission on Monday night was led by female fighter pilot Mariam Al Mansouri. She is a fully qualified, highly trained, combat-ready pilot and she is on a mission. We will bring whatever it takes to defeat ISIS and other forms of extremism, » said Otaiba, reported UAE’s The National newspaper.
http://www.ibtimes.co.uk/uaes-first-female-pilot-fighting-isis-militants-wins-fans-online-1467248
French, U.S. planes strike Islamic State, Britain to join coalition
NEW YORK/BEIRUT (Reuters) – French fighter jets struck Islamic State targets in Iraq on Thursday, and the United States hit them in Syria, as a U.S.-led coalition to fight the militants gained momentum with an announcement that Britain would join.
The French strikes were a prompt answer to the beheading of a French tourist in Algeria by militants, who said the killing was punishment for Paris’ decision last week to become the first European country to join the U.S.-led bombing campaign.
http://ca.reuters.com/article/topNews/idCAKCN0HJ1H120140925
France may join Syrian airstrikes – defense minister
France’s possible participation in airstrikes on Islamic State targets in Syria is “on the table,” Reuters quoted the defense minister as saying on Thursday. Jean-Yves Le Drian’s statement came hours after President Francois Hollande ruled out such strikes. “The opportunity is not there today. We already have an important task in Iraq and we will see in the coming days how the situation evolves,” Le Drian told RTL Radio, speaking about the possibility France might join raids in Syria.
http://rt.com/news/line/2014-09-25/#71428
Islamic State militant who beheaded Americans believed identified: FBI
Washington: FBI Director James Comey said the United States has determined the identity of the Islamist militant who beheaded two American journalists in Syria, but declined to provide any additional information on the masked operative who spoke in a British accent.
« I believe we have identified him, » Mr Comey said during a briefing with reporters at FBI headquarters in Washington, the first time that a US official has narrowed the investigation of that killer to a specific suspect.
UK police arrest 9 men suspected of terror offenses in London
London (CNN) — Nine men have been arrested in the United Kingdom on suspicion of terror offenses, London’s Metropolitan Police said Thursday.
The men, ages 22 to 51, were detained Thursday morning in London on suspicion of being members of a banned organization, supporting a banned organization and encouraging terrorism. They were taken to police stations in central London and remain in custody, a police statement said.
Eighteen homes, business premises and community buildings across London are being searched as part of the investigation. Officers are also searching a home in Stoke on Trent in the English Midlands.
http://us.cnn.com/2014/09/25/world/europe/uk-terror-arrests/index.html?hpt=hp_t2
Islamic State crisis: US hits IS oil targets in Syria
The US-led coalition against Islamic State (IS) has targeted 12 oil refineries in Syria on a third night of air strikes against the militants.
Raids carried out by US, Saudi and UAE aircraft killed 14 of the group’s fighters and five civilians in eastern Syria, activists said.
According to the Pentagon, the refineries generated up to $2m (£1.2m) per day in revenue for the militants.
http://www.bbc.com/news/world-middle-east-29357934
Brent steady near $97 after bounce from lowest in over 2 yrs
* Abundant supply pressures Brent prices
* Market shrugs off potential supply risks in Syria
* Saudi August oil output falls, Libya production rises
SINGAPORE, Sept 24 (Reuters) – Brent crude steadied near $97 a barrel after bouncing from its lowest in 26 months, but abundant supply continued to drag on prices.
The latest U.S.-led air strikes against militants targeted Islamic State-controlled oil refineries in eastern Syria in a move to choke off a crucial source of revenue for the militant group, U.S. officials said.
http://in.reuters.com/article/2014/09/25/markets-oil-idINL3N0RQ07120140925
Fight against ISIL success likelihood increases: In addition to the current Arab countries coalition, Iran and Turkey president expressed strong commitment to help during their UN General Assembly address (though details lack). President Rouhani said “ »The extremists of the world have found each other and have put out the call, ‘extremists of the world unite’. But are we united against the extremists?”. Furthermore, the report that a Woman [Mariam Mansouri] joined UAE strike against ISIL is very positive. This is because ISIL ideologues consider that Jihadists fighters killed by women cannot be considered martyrs and go to heaven (this belief has obviously no support in Islam theological books but is a widely spread belief amongst ISIL Jihadists).
We have been reporting since Tuesday, that the Social media is also joining the fight against the terrorist organisation, Muslims are making #NotInMyName viral to push the view that ISIL is NOT a State NOR represent Islam.
The terrorists organisations are currently in an escalation of violence due to the leadership fight for Abou Moussab Al Zarkawi legacy. Fortunately for the global coalition fight, the “Murders in Iraq and Syria” known as ISIL, have no ideological leadership and will struggle to hire new fighters should the global community take genuine actions to : 1) fight bad governance, to justify 2) reducing mistrust. Unfortunately, mistrust and the “institutions are rotten to their core” mantra is helped by groups as wide as: Extreme right, gold bugs, 2nd amendment supporters and Bitcoin marketers… We are surprised how some “mainstream media” have joined spreading the same “mistrust” message for a clear agenda to avoid improving governance. This pressure is accelerating G-20 actions to push for tax evasion fight (OECD initiative) and improve governance.
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. Iraq PM Al-Abadi reporting of threats to US and Paris subways have not been confirmed by US and French intelligence. ISIL threat to westerns facilities is part of the terrorist organisation communication strategy in its competition vis-a-vis AlQaeda. Western Intelligence indicates that although dormant terrorists cells exist in the Western countries, these “still” lack operational support to perpetrate substantial acts.
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
REUTERS SUMMIT-Russian business fears return to isolation during « evil empire »
* Support for Putin rises over Crimea, Ukraine
* Russian economy stagnating, isolation growing
* Business leaders gloomy about next few years
MOSCOW, Sept 25 (Reuters) – Russian businessmen are backing Vladimir Putin over Ukraine but fear the country is being forced down a path towards less democracy, more central control of the economy and isolation that recalls the Soviet « evil empire ».
Like many other business leaders, Vladimir Potanin, one of Russia’s richest men, says Western sanctions and attempts to force the president to change policy risk opening a rift between Moscow and the West that will be difficult to repair.
« What is happening now, namely the isolation of our country from contacts with Europe, America and several other countries, causes real regret, » Potanin, a metals magnate who built his empire soon after the Soviet Union collapsed in 1991, said in an interview at the Reuters Russia Investment summit.
« Because, in a sense, we are returning to the days when Soviet people were regarded as coming from ‘the evil empire’ and now people are starting to place this cloak on Russians’ shoulders again, » he said, using the phrase coined by former U.S. President Ronald Reagan during the Cold War.
Ukraine Buffer to Cement Front Lines and Putin Influence
The buffer zone being carved out to bring peace to eastern Ukraine may also cement the conflict’s front lines and preserve Russian President Vladimir Putin’s influence over the region for years to come.
More than 3,500 people have died in the 10-month crisis that sent the economy into a tailspin before a tenuous cease-fire this month. As the Ukrainian army prepares to pull back to create a buffer zone, a move pro-Russian rebels say they would match, it’s leaving behind parts of Ukraine’s industrial and coal-producing heartland known as Donbas — a region that’s home to more than 50 suppliers for Russia’s defense industry.
Russia Rejects Evtushenkov House Arrest Appeal on Birthday
AFK Sistema (AFKS) Chairman Vladimir Evtushenkov remains under house arrest on charges of money laundering after a Moscow judge rejected the billionaire’s request for bail.
Judge Yuri Pasyunin of the Moscow City Court ruled to leave the initial arrest terms in place until Nov. 16, without considering a request from investigators to allow Evtushenkov to go to work or make phone calls.
Evtushenkov was charged with money laundering Sept. 16 as investigators probe deals with shares of OAO Bashneft, a regional oil producer controlled by Sistema. The richest Russian to face criminal charges since Yukos Oil Co. founder Mikhail Khodorkovsky more than a decade ago, Evtushenkov maintains his innocence. The defense sought his release on bail of 300 million rubles ($7.8 million), according to the judge.
Ukraine PM says likely to readjust IMF program
(Reuters) – Ukraine will probably have to readjust its $17-billion loan program with the International Monetary Fund due to the country’s costly conflict with pro-Russian separatists in the east, the prime minister said on Wednesday.
« Probably, We do understand that we have to readjust the program, » Ukrainian Prime Minister Arseny Yatseniuk said, according to a webcast of his speech at the Council on Foreign Relations in New York.
« Because when we started the program with the IMF, it was a peace program, » he said. « For today, this is a wartime government and a wartime program. »
http://www.reuters.com/article/2014/09/24/us-ukraine-imf-idUSKCN0HJ2H020140924
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. As we were expecting, Ukraine (see below from our recent daily briefing) is considering rewriting the IMF program, which half acknowledge that it will be very hard to get back influence on auto-proclaimed republics (in the Donbass region). The Russian business community starts to shift away from the “official communication” that isolated Russia will end up in doom and gloom for other countries and focuses on its own negative impacts. The business community start to see the forthcoming cold war era. To calm down any push back to the current strategy from the oligarchs, Kremlin is 1) pressing those who want to challenge Putin (e.g. Evtushenkov), 2) using budget and SWF to finance investment needs. 3) use communication war to push grass root corporations, individual and close parties (EU skeptics and extreme right and left) to press lawmakers to reverse sanctions.
Please find details from old daily briefings:
“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
Attorney General Eric Holder announces resignation
Washington (CNN) — Attorney General Eric Holder announced Thursday that he will resign after six years at the helm of the Justice Department.
Holder has agreed to remain in his post until the confirmation of his successor.
« In the months ahead I will leave the Department of Justice, » Holder said at the White House, thanking President Barack Obama for the « greatest honor of my professional life. »
http://edition.cnn.com/2014/09/25/politics/eric-holder-resignation/index.html?eref=edition
Who might replace Eric Holder?
(CNN) — The surprise announcement on Thursday that Eric Holder will resign as attorney general has D.C. buzzing. And the big question on everyone’s mind: Who will replace him?
- Massachusetts Gov. Deval Patrick
- Solicitor General Donald Verrilli Jr.
- California Attorney General Kamala Harris
- Kathy Ruemmler, former White House counsel
- Preet Bharara, U.S. attorney for the Southern District of New York
- Homeland Security Secretary Jeh Johnson
- Loretta Lynch, U.S. attorney for the Eastern District of New York
http://us.cnn.com/2014/09/25/politics/eric-holder-replacement/index.html?hpt=hp_t1
Copper Falls to 14-Week Low as Durable-Goods Orders Drop
Copper prices dropped to a 14-week low after a report showed demand for durable goods in August tumbled by a record in the U.S., the world’s second-biggest consumer of the metal.
The orders for items meant to last at least three years plunged more than 18 percent after surging almost 23 percent in the prior month, government data showed today. Aluminum, tin, nickel, lead and zinc dropped in London, while the dollar climbed to the highest since June 2010 against a basket of 10 currencies, eroding the investment appeal of commodities.
CONGRESS RELEASES WAR FUNDS TO FIGHT EBOLA
WASHINGTON (AP) — Top lawmakers in Congress have approved the use of leftover Afghanistan war money to fight Ebola in West Africa.
But just $50 million of President Barack Obama’s $1 billion request has been approved for immediate use, under the opaque process by which congressional panels OK transfers between agency accounts. a House Appropriations Committee spokeswoman said
US government sues Kansas bitcoin business
A company that offered bitcoin-generating computers is being sued by the US Federal Trade Commission, which says it bilked more than 20,000 consumers out of as much as $US50 million ($A54.10 million).
The Leawood-based company, Butterfly Labs, failed to deliver the machines or sent worthless equipment, according to the FTC’s complaint filed in US District Court in Kansas City.
The court had issued a temporary restraining order that shut down the business, according to an FTC statement, The Kansas City Star has reported.
US Attorney General Eric Holder resigned. President Obama administration did not provide any hint on who will replace him. GOP has called President Obama to refrain from using the lame duck Congress session to press confirmation for the new Attorney General. This bring another problem should Senate majority goes to GOP because in that case the Attorney General confirmation process could become even more problematic and increase the weaknesses we foresee should GOP get the majority in both the House (a certainty) and the Senate (50/50 chance so far).
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. The widely common 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 indicates that growth potential will improve. 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
UK’s Cameron recalls parliament to sanction air strikes against Islamic State
(Reuters) – Prime Minister David Cameron said he wanted Britain to join U.S.-led air strikes against the Islamic State militant group after the Iraqi government requested London’s help and he recalled parliament to secure its approval for military action.
Parliament, which was in recess, will reconvene on Friday to vote on allowing Britain’s Royal Air Force to hit Islamic State targets in northern Iraq. The action has the backing of all three main parties and is expected to comfortably pass.
http://in.reuters.com/article/2014/09/25/iraq-crisis-britain-idINKCN0HK08M20140925
$4 billion China-Spain business deals
China and Spain signed business deals worth about €3.2 billion ($4 billion) on Thursday during a visit by Spanish Prime Minister Mariano Rajoy to the Asian powerhouse to drum up support for his country’s economy.
[PM Rajoy] was welcomed to the capital by Premier Li Keqiang late on Thursday following a morning gathering of Chinese and Spanish business executives in Shanghai, where Rajoy called for Chinese investment in Spain, saying the Spanish economy was back on track after its problems during the eurozone debt crisis.
“Few countries offer such a good investment opportunity as Spain with its open and competitive market,” Rajoy said in Spanish, adding that the food and consumer industries were areas where the companies of both countries could increase cooperation.
Companies that took part in the meetings included Spain’s largest bank, Banco Santander, Inditex, the owner of global fashion chain Zara, and Chinese e-commerce juggernaut Alibaba Group Holding, which listed on the New York stock exchange last week.
Paris appeals court suspends corruption probe into Sarkozy – report
A French court has suspended an investigation launched in July against former French President Nicolas Sarkozy for corruption and influence-peddling, AFP reported on Wednesday. The Paris appeals court decided the previous day to drop the probe and does not have to give a reason, a source close to the inquiry said. The decision came days after he announced his political comeback. Sarkozy still remains mired in several other judicial matters, including for alleged corruption.
France – Fmr. Pres. Nicolas Sarkozy come back: Paris appeals court suspends corruption prove into Sarkozy. This is clearing the way for the case to be dropped (please contact us, should you require more details on the juridical reasons of our forecast). This trend will help Sarkozy to increase his chances (already high) to secure the Presidency of the center right party (UMP). We’ve been indicating that Fmr. Pres. Sarkozy strategy evolves around championing good governance while moving away from the Radical right. We see these development as very positive for both France and EZ because Mr. Sarkozy come back will take the french opposition away from the EU-Skeptics and extreme right Front National. This has been confirmed in Mr. Sarkozy’s center right party presidential campaign first speech yesterday.
Eurozone economic weaknesses : As we were expecting in our Feb 27th note, and our recent 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 -).
China News
Chinese FM calls for UN’s leading role in global war on terrorism
Sept. 24 (Xinhua) — Chinese Foreign Minister Wang Yi said here Wednesday that the United Nations and its Security Council should play a leading role in the global war on terrorism.
While speaking at a UN Security Council summit on terrorism, Wang underlined that as terrorism raises its ugly head once again, the international community must adhere to the practices that have been proven effective and abide by international law and norms governing international relations.
« First, we must ensure sound coordination, » he stressed.
« The United Nations and its Security Council have to play a leading role in the global war on terrorism, » he said. « This is the only way to maintain unity, achieve effective coordination and take concerted actions. »
Secondly, Wang noted, the international community must adopt a multi-pronged approach.
« The global war on terrorism should be fought with an integrated approach that includes measures taken in the political, security, economic, financial, intelligence and ideological fields with a view to addressing both the symptoms and root causes of terrorism, especially removing its root causes and breeding ground, » he said, adding that military actions must comply with the UN Charter and the relevant Security Council resolutions.
http://news.xinhuanet.com/english/china/2014-09/25/c_133670152.htm
India, China Serious About Climate Change, Says UN Official
WASHINGTON: A top UN official has played down the absence of the heads of state of India and China from the Climate Summit in New York this week, saying the two countries are very serious about an agreement on global warming.
UN Secretary-General Special Envoy on Climate Change Mary Robinson said: « China believes that a very senior representative is coming, the vice premier, the third in the Chinese establishment and the first on climate and development issues. So, they regard that as being very senior. »
« And in the case of Prime Minister (Narendra) Modi, he’s coming to the General Assembly, and I’m sure he will reference climate later (in his address to the UN General Assembly), » Robinson said in an interviewed to PBS news channel.
The top UN official said « the communications from both (India and China) have been, we do want a climate agreement, we’re very serious about it. So I don’t take it as being negative in that sense. »
WRAPUP 1-China steel demand shrinks for first time in 14 years as slowdown stings
* Apparent crude steel consumption down in Jan-Aug
* Iron ore supply has exceeded demand in China
* Global ore miners convinced Chinese demand will remain firm
DALIAN, China Sept 25 (Reuters) – China’s steel consumption dropped this year for the first time since at least 2000 due to slower economic growth, leading to a surplus of iron ore in the country and a more than 40 percent plunge in prices of the steelmaking raw material.
But top global miners like Vale and Rio Tinto , which have invested billions of dollars to ramp up output to sell more iron ore to China, are still convinced that Chinese demand has yet to peak with an urbanisation drive there expected to last at least another decade.
http://www.cnbc.com/id/102031795
ADB Cuts Growth Forecast for SE Asia; China Steady
The Asian Development Bank trimmed its economic growth forecast for Southeast Asia this year and next due to slower domestic demand in some of its bigger economies. Its forecasts for China, the world’s second largest economy, were unchanged.
Southeast Asia’s growth this year is now projected at 4.6 percent, down from an earlier forecast of 5.0 percent and actual growth of 5.0 percent in 2013, the development lender said Thursday.
Gross domestic product growth is expected to slow in Indonesia, the Philippines, Singapore, Thailand and Vietnam, but pick up in Malaysia where exports have rebounded.
Next year, better performance of major industrial economies and Thailand’s recovery from its slump are forecast to spur Southeast Asian growth to 5.3 percent. ADB’s earlier forecast was 5.4 percent.
The bank said 45 developing countries in Asia still comprise the world’s fastest growing region and its stable growth masks shifting fortunes across subregions.
China is still expected to grow 7.5 percent this year and 7.4 percent in 2015, as the bank projected in April.
« Slowing external demand has hurt some economies in the region but as a whole Asia and the Pacific is on track for firm growth in 2014 and 2015, » said Shang-Jin Wei, ADB’s chief economist.
http://abcnews.go.com/International/wireStory/adb-cuts-growth-forecast-southeast-asia-25744227
Structural reforms more important than growth in China: ADB
BEIJING – Steady consumption and rising external demand will support economic growth in China this year, especially if the government continues its accommodating macroeconomic policy package, the Asian Development Bank (ADB) said in Beijing on Thursday.
According to the Asian Development Outlook 2014, ADB’s annual publication, its growth forecast for China’s gross domestic product (GDP) was unchanged at 7.5 percent in 2014 and 7.4 percent in 2015.
« At this critical juncture in China’s transition, carrying out the government’s announced structural reforms is more important than meeting the growth target, » said ADB’s chief economist Shang-Jin Wei.
http://www.chinadaily.com.cn/business/2014-09/25/content_18663099.htm
China climate change: As we were indicating in our previous daily briefings, not only China has taken genuine actions to move toward more reforms but also the leadership has taken steps to help climate change. This has started when the social media has put mounting pressure after the episode of excessive pollution in Shanghai (beginning 2013, ahead of the Communist Party Congress).
China: ADB chief economist Shang Jin Wei said “At this critical juncture in China’s transition, carrying out the government’s announced structural reforms is more important than meeting the growth target,”. This is in line with our views and the evidences are indicating that China is doing executing the reforms. The IV-plenum is likely to bring more focus from the Western media to the governance improvement and the move toward a rebalanced economy.
But even if the reforms are more important we do not see the government changing its GDP target in the near term. The government is 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
Temporary Protection Visas: What does the Government’s new legislation package involve?
Immigration Minister Scott Morrison has introduced legislation to Parliament to resurrect temporary protection visas (TPVs) and create a new visa called a safe haven enterprise visa (SHEV).
The Coalition has struck a deal with the Palmer United Party to try to ensure the legislation passes the Senate.
Mr Morrison has stressed that neither TPVs nor SHEVs allow for permanent settlement in Australia and will, therefore, not act to encourage the people smuggling trade.
BHP is not only leaner, it’s greener
The environmental report that BHP Billiton releases with its annual report shows that the giant group casts a long shadow. No surprise there. The progress that BHP has made in the past decade is amazing.
Rio Tinto has made similar environmental progress and runs the same aggressive production strategy, and the ramifications of BHP and Rio production increases are apparent in the iron ore market. Iron ore prices have fallen as BHP and Rio have expanded their low-cost production. Higher-cost production in China and elsewhere has become uneconomic and is being suspended, handing BHP and Rio market share.
BHP’s US corruption probe nears settlement
Australia’s biggest company, BHP Billiton, has indicated it is close to settling a long-running corruption probe by US regulators.
BHP has been under investigation by the United States Securities and Exchange Commission since 2009 over claims it breached anti-corruption rules by providing corporate hospitality to government officials at the Beijing Olympic Games.
There have been separate claims surrounding BHP’s handling of an exploration permit, which is believed to a bauxite project in Cambodia that is no longer under development by the company.
Tough new terror laws clear the Senate
Australian spies will soon get stronger powers to help fight against terrorism.
The government’s first tranche of tougher anti-terrorism laws, which beef up the domestic spy agency’s powers, passed the Senate on Thursday with bipartisan support.
Anyone who identifies an ASIO agent could also face a decade in prison under the new laws, a tenfold increase in the existing maximum penalty.
Attorney-General George Brandis said in a « newly dangerous age » it was vital that those protecting Australia were equipped with the powers and capabilities they needed.
The bill will now be sent to the House of Representatives, where passage is all but guaranteed.
The legislation addresses a number of recommendations of a bipartisan joint parliamentary inquiry into Australia’s national security laws.
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 neighbours, 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
Dairy payout cuts fuel concerns for New Zealand economic growth
WELLINGTON, Sept. 24 (Xinhua) — Dairy giant Fonterra announced Wednesday it is looking to slash payouts to New Zealand’s pillar dairy farming sector on the back of weakening global demand, prompting concerns over New Zealand’s economic growth.
Fonterra Co-operative Group Ltd. cut its forecast farmgate milk price for the 2014-2015 season from 6 NZ dollars (4.84 U.S. dollars) to 5.30 NZ dollars (4.28 U.S. dollars) per kilogram of milk solids.
Chairman John Wilson said the lower forecast reflected continuing volatility, with the Fonterra’s GlobalDairyTrade price index falling 6 percent in the past two fortnightly auctions.
http://news.xinhuanet.com/english/business/2014-09/24/c_133668322.htm
New Zealand: Fontera payout cuts fuel concerns over NZ economic prospects. This increases the pressure on new PM Key Cabinet to accelerate the green shots of rebalancing and reforms. We have been indicating that NZ has already started a genuine shift toward new Tech agriculture, health and education services directed to Asian neighbours.The fact that PM Key secured another term supports our constructive scenario on NZ..
Japan News
Japan, U.S. remain apart in trade talks, dealing blow for TPP
(Reuters) – Japan and the United States failed to make progress in bilateral talks, both sides said on Wednesday, dealing a blow for hopes of sealing an ambitious multilateral trade deal this year.
« Japan made a flexible proposal, but we weren’t able to make further progress, » Trade Minister Akira Amari told reporters on Wednesday evening after two days of talks in Washington. « Further negotiations are undecided.
Amari met with U.S. Trade Representative Michael Froman, who last week urged Tokyo to ramp up efforts to break the standoff between the two biggest economies in the 12-country Trans-Pacific Partnership.
http://uk.reuters.com/article/2014/09/25/uk-japan-trade-usa-idUKKCN0HK04W20140925
Japan, North Korea to meet next week on abductees
TOKYO (Reuters) – Japanese and North Korean officials will meet next week for an update on the North’s probe into the fate of Japanese citizens it kidnapped decades ago, Japan’s top government spokesman said on Thursday.
North Korea agreed in July to reopen an investigation into the fate of Japanese citizens it kidnapped in the 1970s and 1980s to help train spies, prompting Japan to ease some sanctions on the North.
http://af.reuters.com/article/worldNews/idAFKCN0HK0HU20140925
Japan, China hold second maritime affairs talks, with isles row on agenda
Japan and China have held their second intergovernmental talks on maritime affairs to discuss security and crisis management in the East China Sea, including waters around the Japan-controlled Senkaku Islands, the Foreign Ministry in Tokyo said.
« Japanese, Australia reaffirm close ties for regional peace »
NEW YORK, Sept. 24 (Kyodo) −− Japanese Prime Minister Shinzo Abe and his Australian
counterpart Tony Abbott agreed Wednesday to work closely together to maintain peace and stability
in the Asia−Pacific region, along with India and the United States.
« First of all, trilateral cooperation between Japan, Australia and the United States is very important
for peace and stability in the region, » Abe was quoted by a Japanese government official as telling
Abbott in their meeting in New York.
In Abenomics’ shadow, Japanese women fight ‘maternity harassment’
Prime Minister Shinzo Abe has talked up the role of women in his push to revive a weak economy, pledging they would occupy 30 percent of all leadership positions by 2020, but Osakabe and others say the reality for regular female workers is bleak.
« Rather than focusing on a small portion of elite women who are top managers, I’d like them to start by dealing with problems affecting women like us at the bottom, » the 37-year-old Osakabe said.
http://www.cnbc.com/id/102030611
S&P affirms ratings on Japan but outlook remains negative
Tokyo (AFP) – Standard & Poor’s said Thursday that it had affirmed its long-term sovereign credit ratings on Japan at ‘AA-‘ but the outlook remained negative, despite efforts to boost the nation’s growth, dubbed Abenomics.
S&P also affirmed its short-term unsolicited sovereign credit ratings on the world’s third largest economy at ‘A-1+’. « Our ratings on Japan balance the country’s strong external position, its prosperous and diversified economy, political stability, and its stable financial system against a very weak fiscal position that the country’s ageing population and persistent deflation exacerbate, » S&P said.
[From yesterday report]
Forex – Dollar slips lower vs. yen after Abe remarks
Investing.com – The dollar moved lower against the yen on Wednesday after Japanese Prime Minister Shinzo Abe voiced concerns over the economic impact of recent weakness in the yen.
Japan: economic softening raises question about whether Japan will pursue a 2nd VAT hike later this year. PM Abe indicated that he was waiting for more economic data, but we believe that Japan will move ahead although it may be in steps (split the 2nd hike in different sub-steps). We see BoJ keeping 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 *. The 2nd VAT hike will require some stabilisation at the current levels, though we expect that PM Abe will undertake the 2nd hike in steps, because BoJ is unlikely to be sufficiently confident to move ahead with more QQE while JPY is accelerating its depreciation. PM Abe voiced concerned over the JPY rapid depreciation, as he pointed (rightly in our opinion) to the increase in energy cost, which deteriorate further the energy trade deficit – and increase the risk of JGB solvency -.
But, 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).
The postponing of US-Japan trade partnership may become an issue should Japan postpone the current trend of market deregulation. We have been indicating earlier this year that the The time frame for TPP was very ambitious due to the US gridlock.
About this report
The report and analysis have been prepared using Quid a big data solution. This report focuses on the most important issues out of 10,000 articles produced by top contributors amongst 35,000 sources during the last 24hours (or from Friday 3am LDN to Monday 3am for Monday’s reports).
***
Disclaimer
Copyright 2014 SNBDL Ltd (“SNBDL”). All rights reserved.
This report may provide information, commentary and discussion of issues relating to the state of the economy and the capital markets. All opinions, projections and estimates constitute the judgment of the author as of the date of the report and are subject to change without notice. SNBDL is under no obligation to update this report and readers should therefore assume that SNBDL will not update any fact, circumstance or opinion contained in this report.
The content of this report is provided for discussion purposes only. Any forward looking statements or forecasts included in the content are based on assumptions derived from historical results and trends. Actual results may vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision, and no investment decisions should be made based on the content of this report.
This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and particular needs of any specific person. Under no circumstances does any information represent a recommendation to buy or sell securities or any other asset, or otherwise constitute investment advice. Investors should seek financial advice regarding the appropriateness of investing in specific securities or financial instruments and implementing investment strategies discussed or recommended in this report.
This report should not be regarded by recipients as a substitute for the exercise of their own judgment and readers are encouraged to seek independent, third-party research on any companies discussed or impacted by this report.
Securities and other financial instruments discussed in this report are not insured and are not deposits or other obligations of any insured depository institution. Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counter-party default risk and liquidity risk. No security, financial instrument or derivative is suitable for all investors. In some cases, securities and other financial instruments may be difficult to value or sell and reliable information about the value or risks related to the security or financial instrument may be difficult to obtain. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that the price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. Past performance is not necessarily a guide to future performance.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. Investors in such securities and instruments effectively assume currency risk.
Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional.
Individuals identified as economists in this report do not function as research analysts. Under U.S. law, reports prepared by them are not research reports under applicable U.S. rules and regulations.
In accordance with rules established by the U.K. Financial Services Authority, macroeconomic analysis is considered investment research.
Materials prepared by SNBDL research personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of SNBDL.
To the extent this report discusses any legal proceeding or issues, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Investors should consult their own legal advisers as to issues of law relating to the subject matter of this report. SNBDL research personnel’s knowledge of legal proceedings in which any SNBDL entity and/or its directors, officers and employees may be plaintiffs, defendants, co—defendants or co—plaintiffs with or involving companies mentioned in this report is based on public information. Facts and views presented in this material that relate to any such proceedings have not been reviewed by, discussed with, and may not reflect information known to, professionals in other business areas of SNBDL in connection with the legal proceedings or matters relevant to such proceedings.
The information herein (other than disclosure information relating to SNBDL and its affiliates) was obtained from various sources and SNBDL does not guarantee its accuracy. This report may contain links to third—party websites. SNBDL is not responsible for the content of any third—party website or any linked content contained in a third—party website. Content contained on such third—party websites is not part of this report and is not incorporated by reference into this report. The inclusion of a link in this report does not imply any endorsement by or any affiliation with SNBDL.
Any unauthorised use or disclosure is prohibited.
TERMS AND CONDITIONS OF USE
YOU AGREE YOU ARE USING THIS REPORT AND THE SNBDL SUBSCRIPTION SERVICES AT YOUR OWN RISK AND LIABILITY. NEITHER SNBDL NOR ANY DIRECTOR, OFFICER, EMPLOYEE OR AGENT OF SNBDL ACCEPTS ANY LIABILITY WHATSOEVER FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, MORAL, INCIDENTAL, COLLATERAL OR SPECIAL DAMAGES OR LOSSES OF ANY KIND, INCLUDING, WITHOUT LIMITATION, THOSE DAMAGES ARISING FROM ANY DECISION MADE OR ACTION TAKEN BY YOU IN RELIANCE ON THE CONTENT OF THIS REPORT, OR THOSE DAMAGES RESULTING FROM LOSS OF USE, DATA OR PROFITS, WHETHER FROM THE USE OF OR INABILITY TO USE ANY CONTENT OR SOFTWARE OBTAINED FROM THIRD PARTIES REQUIRED TO OBTAIN ACCESS TO THE CONTENT, OR ANY OTHER CAUSE, EVEN IF SNBDL IS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR LOSSES AND EVEN IF CAUSED BY ANY ACT, OMISSION OR NEGLIGENCE OF SNBDL OR ITS DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS AND EVEN IF ANY OF THEM HAS BEEN APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING.
If you have received this report in error, or no longer wish to receive this report, you may ask to have your contact information removed from our distribution list by emailing driss.lamrani@snbdl.com