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SNBDL Daily Briefing
Report prepared using big data solution Quid
Our take away from the last 24 hours news
Fed – Secret tape:
• The mistrust camp, those who believe the Fed “is rotten to it core”, struck an substantial win.
• Elizabeth Warren likely to use it to push for more conflict of interest oversight and more macro prudential regulation. Negative short term, positive medium term.
• This likely to help the Transparency Bill supporters, when GOP politics have turned their attention away from debt and deficit reduction.
• The story broke at a moment where many central bankers (incl. Duddley) have been saying that the economy has not reached the state still to speed up hiking rates.
• Fed hawk Fischer continue to fear inflation, while energy prices are plummeting pushing inflation expectation downward.
ECB:
• Coeure forecasts stronger demand for T-LTRO from December. “AQR already showed signs that it had affected the speed and quality of their deleveraging, even though the checks had not finished yet.”
• Coene, supported more stimulus if needed.
• Sell-side economists (at last!) start to question dogma and Euro-skepticism: Euro weakness does not help recovery. We have been supporting the view that EUR weakness is mainly related to the increase in the “existential threat” discount (Paul de Grauwe came with additional support to the view that “the EUR will not fly”).
• We continue to believe that EUR is likely to reverse the current weakening cours the closest we get to the Mid-Term elections (i.e. focus on the uncertainties arising should the Senate majority goes to GOP) and after France cleared the way to reforms (mid-October).
BoE: Pound benefit from the Scotland and Br-exit discount, helped by Carney hawkish talk. While we consider that BoE will not deliver the hike priced in the curve, we see the BoE pursuing the rhetoric to avoid getting too much questioning on its credibility (a problem the BoJ and ECB are facing from debt vigilantes).
Economic News:
• U.S. GDP Q2 rebound likely to be used to support the consensus view that US economy is rebounding too quickly and the Fed has to act quickly to avoid spurring inflation spiral. the GDP rebound have been driven by stronger than expected business investment and export. The second driver is unlikely to hold as the USD has rebounded from Q2 lows. Our view remain unchanged because inflation is unlikely to overshoot.
• BoJ stimulus likelihood increases but we don’t see any action before 2015 and PM Abe administration confirmation to undertake second VAT hike (to avoid pursuing the current JPY pressure).
• Fed rate consensus rate outlook continue to pressure EM currencies. From EM idiosyncratic risk, Russia continues to battle with stagflation. Russia vulnerabilities increase due to the plummeting energy prices which impact negatively fiscal balance. Please see our Russia update, where we indicate that political stability might come under pressure should oil prices settle at $75 a barrel.
Ebola: The WHO and CDC have upward revised their estimates for the development of the outbreak. The worst case scenario can push the number of cases as high as 1.4 millions by beginning 2015. This estimates remain however very sensitive to the global coordination and response. During the recent weeks, we have highlighted that the global coordination has intensifying to: 1) fight disinformation (we were talking about it in our recent daily briefings), 2) provide short term medical assistance (France, US, Israel, etc.) with the help of military expertise – when numerous Western African countries are indicating the lack of medical personel – , 3) provide financial support (wealthy donors, government funding, NGO help etc.), and 4) fast track the Ebola drug trial (the drug has had a very good result in the experimental 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 Hamas and Fatah head to a national coalition, Hamas leadership are distancing themselves away from radical groups, in order to clear the path toward Gaza reconstruction, while President Abbas intensifies his rhetoric against Israel to move ahead with a durable peace solutions. Although President Abbas speech was very hawkish, Opposition Chairman Isaac Herzog told Ynet on Sunday ”you can criticize Abbas, but at the end of the day, we prefer and the Palestinian Authority taking responsibility of Gaza, and we prefer Abbas and the PA’s full security cooperation in the West Bank, ».
Egypt President el-Sisi intensifies the fight against the Muslim Brotherhoods, the political arm of the radical islam fighters (whose fighters include the hard-core liners ISIL and Al Qaeda), Egypt is re-gaining its leading role in the Palestinian – Israeli peace process. The pressure to reduce Israel’s defence budget aims bringing the hawks to consider peace solutions. Furthermore, at last, the terror financiers are brought to justice increase the likelihood to make the current fight against terror much more effective than it has been so far.
We are very optimistic (as we have been since the beginning of the Gaza crisis) that : 1) Hamas leadership will break from extremists and will recognise Israel – as Fatah did years ago – (though some radical fractions are already burgeoning with much less financial and arm support), 2) Iran will be instrumental in settling a long-term peace process (as the nuclear negotiation heads toward a civil nuclear Iran), 3) a LT peace process will help the development of Mediterranean sea gas exploitation (as it enables to return to the Israeli – Turkish normalisation, a process which was very close in April but has been postponed by the Gaza crisis).
Fight against ISIL success likelihood increases: the global community military action continue to enjoy a wide support (i.e. UK voted for air strikes, though both SNP and UKIP criticised the move). The support is likely to intensify after the militants beheaded Herve Gourdel (a French citizen abducted in Algeria) and Philippines Militants threatened to harm a German. Threats against US and EU interests have been intensifying on the internet, but the risk is likely to focus on Cyber-Attacks, a domaine where the Western intelligence is less well prepared than for attacks such as 9/11. Turkey and Iran participation to the coalition will be instrumental to secure an important degradation of ISIL. But Turkey decision to provide asylum to Muslim Brotherhoods is making it difficult to see Turkey joining the coalition is the short term (though President Ergodan is arguing the opposite). At the other hand, Iran wants to secure some concession on the Nuclear discussion in exchange of its help (though Iran Quds brigades have already been instrumental in supporting Iraq militaries against ISIL).
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 its leadership a fight for Abou Moussab Al Zarkawi legacy. The threats spread on the internet are likely to be a part of ISIL marketing campaign for terror to hire new young westerners. 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 fighter should the global community take the fight to the Social Media in genuine coordinated 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. 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). Ukraine continues to increase its ties with EU and NATO, despite Putin threat last week. Lavrov pressed during the weekend the global coalition against ISIL to seek authorisation at the UN security council. Under such a scenario , Russia could use its veto to buy some time to ISIL to strengthen its power, or to provide Assad legitimacy through having him participating to the coalition (which would crack the coalition which “implied” objective is to change the Syrian regime).
The Eastern Ukraine region self proclaimed republics autonomy perimeter continue to be the name of the game. Too much autonomy (the current self proclaimed government are calling for a full fledge independence – which could give legitimacy to Crimea annexation-) would make Ukraine IMF program dead born (as Kiev government would be in the incapacity to deliver on governance improvement and structural reforms). At the other end, an autonomous regions which would bind by the IMF program reform will increase the ability of Kiev government to strengthen the Ukrainian economy along with the governance improvement. Thus, it would increase the likelihood of joining NATO. Russia is unlikely to let this scenario take place without a fight. We continue to see some Ukraine debt restructuring very likely though the timing will depend on the autonomous republics aggression.
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”. By the meantime, Russia accelerate the construction of Eurasia, which is seen by many analysts (incl. “gold bugs”) as a better replacement of the EU Union (because it enables to avoid improving governance and fight against corruption).
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. Gas prices decrease, a reflect of the on-going oil prices decrease, is likely to provide the Fed with some support to postpone acting too quickly normalising monetary policy.
Bill Gross – PIMCO: On Friday, Bill Gross announced that he will leave PIMCO to join Janus. Markets have reacted to the short term fixed income force selling, which may take place, as investors may reconsider their mandate (as a result of the change in management of the funds). While this pressure is likely to be short lived, it may bring opportunity to go long rates when the market is realising that inflation is subdued and help the Fed to delay normalising rates. There have been many speculations regarding the reason of Mr. Gross departure from PIMCO. We see the shift in Bill Gross rhetoric to defy the Fed, by criticising the Fed attitude – using arguments going from asset frothiness to central bank deficit financing -, as being the most likely good reason of this departure. By being short fixed income since mid last year, PIMCO has reported weak returns spurring an increase in redemptions (which cost PIMCO profits and Bill Gross his job).
Eurozone economies : As we were expecting in our Feb 27th note, and Russia update, the Eurozone economies are suffering from the Russia – Ukraine crisis. We have been saying that the tension with Russia will have short term negative effects 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 -).
Catalonia calls for independence referendum is increasing pressure on both Madrid and EU to move forward to offer better conditions and better narrative to the public. We see PM Rajoy taking constitutional actions to deter Catalonia from conducting the referendum, at a moment where more the referendum is gaining support from the independence forces all over the world. Madrid may accept to open discussion to devote additional autonomy to Catalonia in order to reduce the pressure. This story is likely to push EUR existential threat higher short term, but we consider that EUR is likely to rebound by the end of this year, when these threats will be repriced as less likely.
EU – Iran: Rouhani is using his “strong hand » to secure a positive deal for Iran. Indeed, EU needs to lift Iran sanctions in order to mitigate the cost of the Russian sanctions. In addition, Iran is negotiating its help (which is instrumental) to defeat ISIL in exchange of some concessions from the U.S. We continue to believe that Iran negotiation will be successful, and would settle into a nuclear civil Iran deal in exchange of lifting the sanctions. Such a scenario would accelerate Energy Prices decrease as well as a increase the demand for energy-commodity Capex (Iran has been under-investing for more than 20Y).
Hong-Kong political reforms protest
Pro-democracy protests gained more traction this weekend. Mainland sticks to its view that any political reform should bind by the “basic law”. We do not see HK and Mainland China governments to accept any substantial change in the short term. However, unlike with Tian’anmen square protest, we see Chinese leadership being less “harsh” fighting the protests. In the medium term, we see China devoting more democratic say in HK. Our forecast is built on the view that the Chinese government is fearing a HK political change as a threat of its reform agenda. President Xi wants to be seen as the strong man to fight conservatism push back to the reform, specifically ahead of the IV-th Plenum, which will focus on improving governance (which creates an important shift of power from “princelings” to the reformists).
China:Manufacturing data support our view that China is soft landing while rebalancing. Labor statistics showed that the manufacturers have started to rebalance their activities away from labor intensive (an objective already stressed by the Chinese leadership). These are in line with the objective to rebalance the economy away from credit driven investment. The government seems fearing that the economic rebalancing has not taken momentum yet although 1) labor intensive manufacturers are relocating in cheaper labor countries, 2) businesses are upgrading their business models, 3) President Xi has conducted many trade – investment agreement with Neighbours (after Premier Li did the same in Africa) to secure investment projects which use Chinese manpower – engineers know-how in this domaine, 4) China is gaining more military presence and has fluxed it mussels – e.g. China “Top Gun” intercept by a US fighter jet -, 5) China has signed many RMB agreement which reinforce the currency usage and prepare its full liberalisation – after Free Trade Zones (FTZ) have proven to be a success -, 6) China has undertaken a genuine fight against bad governance and better regulation – many examples in our recent daily briefings of fight against corruption and bad governance-. We see in FinMin Lou Jiwei comment an indication that not only China wants to create a reserve currency it does want it to be strong when Chinese leaders perceive the heavy pressure place on USD by a category of investors to avoid debasing the currency through deficit financing – although we consider that this worry is misplaced -.
Australia: Australia continues to be seen, by markets, as a derivative to the old Chinese model (i.e. commodity provider). This view explains the high beta between Australian assets and commodity prices (or China demand for commodities). This assumes that neither China nor Australia are conducting their rebalancing agenda. We do believe that the current 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 rebalancing the economy 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.. This constructive scenario narrative is currently overshadowed by the “search for yield” (or interest rates differential).
Japan: inflation softening along with economic downgrade was widely expected as a result of the 1st VAT hike (cf our strategic note Dec 26th 2013). We see BoJ to keep the bazooka of QQE-2 un-tested until the JPY excessive depreciation and JGB solvency risk came down * investors are still short JGB expecting a Japan crisis *. 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 -.
However, BoJ might do some adjustment to its monetary program but nothing excessive. The news flow out of this weekend G20 meeting shows that the global community is gently pressing the government and the BoJ to pursue structural reforms, economic rebalancing, solvency improvement (through VAT 2nd hike commitment) and adequate monetary policy (not too hot – to avoid a crisis – not too cool – to avoid derailing the on-going portfolio rebalancing approach -). Japan continues to face heavy public pressure to rebalance its energy reliance to nuclear. While we believe that Japan will continue to press for reopening nuclear plants (when Nuclear Watchdog gives his green light), the medium to long term trend is that Japan will use Trade negotiation with neighbours to secure new energy sources while using this pressure to deregulate and move forward with Abenomics 3rd arrow (please see our Japan update for more on our views).
Central banks news
Fed – Secret tape:
- The mistrust camp, those who believe the Fed “is rotten to it core”, struck an substantial win.
- Elizabeth Warren likely to use it to push for more conflict of interest oversight and more macro prudential regulation. Negative short term, positive medium term.
- This likely to help the Transparency Bill supporters, when GOP politics have turned their attention away from debt and deficit reduction.
- The story broke at a moment where many central bankers (incl. Duddley) have been saying that the economy has not reached the state still to speed up hiking rates.
- Fed hawk Fischer continue to fear inflation, while energy prices are plummeting pushing inflation expectation downward.
- Markets likely to focus on the Q2-GDP rebound which does not take into consideration the effect of the current geopolitical fears to continue to support fixed income short position (a view we don’t share).
Secret tapes of Fed meetings on Goldman prompt call for U.S. hearings.
(Reuters) – An influential U.S. senator wants to hold hearings into « disturbing » issues raised by secretly taped conversations between Federal Reserve supervisors and officials at Goldman Sachs Group Inc (GS.N), a bank the Fed was tasked with policing.
Elizabeth Warren, a Democrat on the Senate Banking Committee, on Friday called for hearings after portions of the recordings from 2011 and 2012 were made public. Fellow Democrat Sherrod Brown, also a committee member, called for a « full and thorough investigation » into the allegations they raised.
GOLDMAN: That Fed Official Who Secretly Recorded Us Desperately Wanted To Work Here).
People on Wall Street are buzzing about a new piece from ProPublica’s Jake Bernstein laying out alleged conflicts of interest between the New York Federal Reserve and the banks, Goldman Sachs in particular. The report revolves around the secret recordings of Carmen Segarra, a bank examiner for the New York Fed who was fired after just seven months on the job.
« ProPublica and This American Life sent Goldman Sachs detailed questions about the bank’s conflict-of-interest policies, Segarra and events in the meetings she recorded, » Bernstein wrote.
Goldman’s response is understandably defensive. But it also reads a bit aggressive.
Here’s a response from Goldman’s David Wells according to Bernstein: « Goldman Sachs has long had a comprehensive approach for addressing potential conflicts … A quick Google search, however, shows publicly available Goldman Sachs documents outlining the management of conflicts … To get a balanced view of her claims, you should read what her supervisor wrote after discovering that what she had said about Goldman was just plain wrong. »
An interesting line from Wells’ response: « Ms. Segarra, who unsuccessfully interviewed for employment at Goldman in 2007, 2008 and 2009, told her supervisors at the Fed That the firm … »
While Wells doesn’t say it explicitly, this detail seems to be intended to characterize Segarra as someone who could be holding some resentment.
« Segarra said that she recalls interviewing with the bank four times, but that it shouldn’t be surprising, » Bernstein wrote. « She has applied for jobs at most of the top banks on Wall Street multiple times over the course of her career, she said. »
ECB:
- Coeure forecasts stronger demand for T-LTRO from December. “AQR already showed signs that it had affected the speed and quality of their deleveraging, even though the checks had not finished yet.”
- Coene, supported more stimulus if needed.
- Sell-side economists (at last!) start to question dogma and Euro-skepticism: Euro weakness does not help recovery. We have been supporting the view that EUR weakness is mainly related to the increase in the “existential threat” discount (Paul de Grauwe came with additional support to the view that “the EUR will not fly”).
- We continue to believe that EUR is likely to reverse the current weakening cours the closest we get to the Mid-Term elections (i.e. focus on the uncertainties arising should the Senate majority goes to GOP) and after France cleared the way to reforms (mid-October).
ECB’s Coeure sees stronger demand for TLTROs from December
(Reuters) – The European Central Bank expects to see stronger demand for its new long-term loans once it has completed an unprecedented round of health checks on lenders, after which they should also be in a stronger position to lend, a top policymaker said on Friday.
The ECB is assessing the books of the euro zone’s 131 largest banks to try to weed out soured loans and check how the banks would fare under certain shock scenarios, before the central bank takes over as the bloc’s banking supervisor in November.
ECB Willing to Weigh More Stimulus If Needed, Coene Says
“If we estimate that it’s insufficient, inevitably we will add other instruments at our disposal to increase the balance sheet of the central bank, if it’s necessary,” Coene told a conference yesterday at Cercle de Lorraine in Brussels.
Draghi May Discover Weaker Euro Doesn’t Buy Enough Recovery
Sept. 26 (Bloomberg) — Mario Draghi may find a falling currency can’t buy much of an economic recovery.
The euro has dropped toward a two-year low against the dollar since the European Central Bank president boosted stimulus earlier this month. Economics textbooks say that should lift Europe’s struggling growth rate by boosting exports and speed inflation by raising import prices. Such effects will be more welcome if falling commodities deal a disinflationary blow.
It’s time for those textbooks to be revised, according to economists at Societe Generale SA led by Michala Marcussen, who reckon a devaluation of the euro will not be as stimulatory as it once was and perhaps as much as the ECB is hoping.
For one thing, the single currency may not be that weak yet. While it has fallen 7.5 percent against the dollar this year, it has slipped just 4 percent on a trade-weighted basis.
Another brake on any descent is that the euro’s long-term rate may actually have risen since the global financial crisis to $1.35 from $1.31, Societe Generale calculates. That’s because in aggregate the euro area is running a current-account surplus and its budget deficit and debt are lower than in other major economies.
For Draghi, a lesson could be learned by looking at Bank of Japan Governor Haruhiko Kuroda. Although a falling yen on his watch initially bolstered growth and inflation in Japan, exports fell in August and the inflationary impact of rising import costs may be easing.
“It’s also worth recalling that a weaker euro is not a solution to structural rigidities,” said Marcussen. “Countries that have in the past relied excessively on exchange-rate depreciation as a policy tool have generally done so at their peril.”
BoE: Pound benefit from the Scotland and Br-exit discount, helped by Carney hawkish talk. While we consider that BoE will not deliver the hike priced in the curve, we see the BoE pursuing the rhetoric to avoid getting too much questioning on its credibility (a problem the BoJ and ECB are facing from debt vigilantes).
Pound Climbs to Two-Year High Versus Euro After Carney Comments
Sept. 27 (Bloomberg) — The pound gained for a second week versus the euro to its strongest level in two years as the Bank of England moves toward raising interest rates, amid slower growth in the euro area where stimulus is being expanded.
Sterling advanced against most of its 16 major peers after BOE Governor Mark Carney said the point where interest rates “begin to normalize is getting closer.” It weakened versus the dollar as bets the Federal Reserve will raise rates next year boosted demand for the U.S. currency. U.K. 10-year government bonds posted their first weekly gain this month.
“Euro-sterling has been the real driver this week,” said Steven Saywell, the global head of foreign-exchange strategy at BNP Paribas SA in London. “You’ve had euro weakness and also relatively hawkish comments from Carney. That’s made the market re-think about the timing of the first U.K. rate hike. If you are bullish sterling, you want to play it short euro-sterling.”
Economic News
Economic News:
- U.S. GDP Q2 rebound likely to be used to support the consensus view that US economy is rebounding too quickly and the Fed has to act quickly to avoid spurring inflation spiral. the GDP rebound have been driven by stronger than expected business investment and export. The second driver is unlikely to hold as the USD has rebounded from Q2 lows. Our view remain unchanged because inflation is unlikely to overshoot.
- BoJ stimulus likelihood increases but we don’t see any action before 2015 and PM Abe administration confirmation to undertake second VAT hike (to avoid pursuing the current JPY pressure).
- Fed rate consensus rate outlook continue to pressure EM currencies. From EM idiosyncratic risk, Russia continues to battle with stagflation. Russia vulnerabilities increase due to the plummeting energy prices which impact negatively fiscal balance. Please see our Russia update, where we indicate that political stability might come under pressure should oil prices settle at $75 a barrel.
ECONOMY’S Q2 REBOUND WAS EVEN FASTER THAN THOUGHT
Sep. 26, 2014 6:17 PM ET
WASHINGTON (AP) — The U.S. economy’s bounce-back last quarter from a dismal winter was even faster than previously thought, a sign that growth will likely remain solid for rest of the year.
The economy as measured by gross domestic product grew at a 4.6 percent annual rate in the April-June quarter, the Commerce Department said Friday. It was the fastest pace in more than two years and higher than the government’s previous estimate of 4.2 percent.
The upward revision reflected stronger-than-expected business investment and exports last quarter.
The healthy second-quarter growth marked a sharp rebound from the January-March quarter, when the economy shrank at a 2.1 percent rate in the midst of a brutal winter that idled factories and kept consumers at home.
Wall Street cheered the upbeat economic report, which helped spur the Dow Jones industrial average to a 1 percent gain.
As the third quarter nears an end, economists envision a strengthening economy through the end of 2014 and into 2015. Many think the economy is growing in the current July-September quarter at a rate of around 3 percent.
Inflation Slowing More Than Forecast Shows Risk for BOJ: Economy
Sept. 26 (Bloomberg) — Japan’s inflation slowed more than expected in August, highlighting the risks facing Bank of Japan Governor Haruhiko Kuroda in his push for prices to rise 2 percent.
Consumer prices excluding fresh food rose 3.1 percent from a year earlier, the statistics bureau said today in Tokyo, undershooting the median projection for a 3.2 percent increase in a Bloomberg News survey of 31 economists. Stripped of the effect of April’s sales tax increase, inflation was 1.1 percent, according to the BOJ’s estimates.
Weak consumption after the tax rise is weighing on inflation, adding weight to most economists’ views that the nation won’t achieve the 2 percent price target. Kuroda has said that prices are on track to reach it around the year starting April 2015.
“Prices are under pressure to fall” as there is no prospect for a solid pickup in consumer spending, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former BOJ official. “It’s likely the BOJ’s scenario will fall apart and they will be forced to add stimulus in December or January.”
Copper Rebounds From 14-Week Low Before U.S. GDP Data
Copper rebounded from the lowest price since June before U.S. data that’s forecast to show faster growth in the world’s second-biggest user.
The metal in London rose as much as 0.7 percent after closing yesterday at the lowest since June 16. Gross domestic product grew 4.6 percent in the second quarter, more than the previous estimate of 4.2 percent released in August, according to a Bloomberg survey of analysts before a Commerce Department report today. Durable goods orders last month fell by a record, government data showed yesterday.
“Copper is trying to find support around $6,700,” said Kazuhiko Saito, an analyst at Fujitomi Co., a commodities broker in Tokyo. The market was also supported before the release of the improved U.S. growth outlook, he said.
Asian Currencies Decline for Fourth Week on Fed Rate Outlook
Asian currencies declined for a fourth week, led by the Philippine peso and Malaysia’s ringgit, as an improving U.S. economy bolstered speculation the Federal Reserve will raise interest rates next year.
A gauge of dollar strength climbed to a four-year high as data this week showed August’s new-home sales in the world’s largest economy were the strongest since 2008. An increase in interest rates by the Fed may reduce the attraction of higher-yielding emerging-market assets. Currencies in Malaysia, the Philippines and Taiwan all slid to their weakest levels in more than four months versus the greenback.
Ringgit Forwards Record Sixth Weekly Drop on Fed Rate Outlook
Russian Seen Tilting Toward Recession as Oil Dip Hits Budget
Sept. 26 (Bloomberg) — The easing of tensions in Ukraine will offer little respite to Russia as the lowest oil prices in more than two years threaten to tilt the $2 trillion economy toward recession, according to a Bloomberg survey of analysts.
Russia needs Urals, its main export crude blend, to trade at $100 per barrel or higher to avoid a recession, according to 58 percent of respondents in a survey of 19 economists. Given the level of U.S. and European sanctions over Ukraine, at least 19 percent of analysts said the current price is sufficiently low to put Russia’s financial stability at risk.
The decline in oil prices is exacting a toll on the world’s biggest energy exporter, which gets about half of its budget revenue from oil and natural gas taxes. That’s limiting Russia’s ability to withstand sanctions by exhausting public finances as the non-oil deficit, the shortfall excluding revenue from the energy industry, exceeds 10 percent of economic output.
“Even if the oil price should recover to low three-digit prices again, Moscow’s hands are rather tied — the budget is already ailing and the potential funding needs of the banking system could quickly eat up all free resources,” Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, said by e-mail. “And its rainy day fund is just too small to be a game changer.”
Three years ago, the Economy Ministry estimated that only a plunge of oil prices to $60 would halt Russia’s expansion.
Ebola
Ebola: The WHO and CDC have upward revised their estimates for the development of the outbreak. The worst case scenario can push the number of cases as high as 1.4 millions by beginning 2015. This estimates remain however very sensitive to the global coordination and response. During the recent weeks, we have highlighted that the global coordination has intensifying to: 1) fight disinformation (we were talking about it in our recent daily briefings), 2) provide short term medical assistance (France, US, Israel, etc.) with the help of military expertise – when numerous Western African countries are indicating the lack of medical personel – , 3) provide financial support (wealthy donors, government funding, NGO help etc.), and 4) fast track the Ebola drug trial (the drug has had a very good result in the experimental 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).
U.S. says diseases like Ebola should be viewed as security threats
(Reuters) – The Obama administration urged the international community Friday to view outbreaks of Ebola, MERS and other deadly diseases as global security threats that require broad and rapid responses to protect the safety of populations and economies.
Top U.S. officials from the White House, Pentagon and State Department met with representatives from 44 countries and multilateral agencies, including the United Nations and World Bank, to call for implementation of 7-year-old global standards for dealing with deadly epidemics and other health dangers, including biological attacks.
‘Collateral’ death toll expected to soar in Africa’s Ebola crisis
(Reuters) – Deaths from infectious diseases like malaria, diarrhoea and pneumonia are likely to soar in West African countries where a vast outbreak of Ebola has crushed health systems and killed nurses and doctors.
Specialists on deadly diseases say deaths from malaria alone, which even before the Ebola crisis killed around 100,000 a year in the West Africa region as a whole, could increase four-fold in Ebola-hit countries as people miss out on life-saving treatments.
LIBERIA: TOP DOCTOR GOES UNDER EBOLA QUARANTINE
MONROVIA, Liberia (AP) — Liberia’s chief medical officer is placing herself under quarantine for 21 days after her office assistant died of Ebola.
Bernice Dahn, a deputy health minister who has represented Liberia at regional conferences about combating the epidemic, told The Associated Press on Saturday that she did not have any Ebola symptoms but wanted to ensure she was not infected.
The World Health Organization says 21 days is the maximum incubation period for Ebola, which has killed more than 3,000 people across West Africa and is hitting Liberia especially hard. WHO figures released Friday said 150 people died in the country in just two days.
Ebola outbreak needs to be global priority, Obama says
The Ebola outbreak in West Africa illustrates how infectious diseases can easily cross borders and needs to be a global priority, U.S. President Barack Obama says.
Obama was speaking Friday at Global Health Security Agenda Summit held at the White House.
Representatives from more than 40 countries are attending the summit, which aims to prevent avoidable catastrophes and epidemics, detect threats early with real-time disease tracking and diagnostic testing, and respond rapidly and effectively.
Chinese FM calls for more global assistance as Ebola epidemic rages
« China calls on the World Health Organization, the United Nations and other international agencies to work closely with the international community, put forward new initiatives to strengthen global health security and provide more assistance to developing countries, particularly African countries, » he added.
Obama says ‘significant gap’ in global effort to fight Ebola
Reuters) – U.S. President Barack Obama warned on Thursday that there was still a « significant gap between where we are and where we need to be » in the international response to the Ebola outbreak in West Africa and appealed for more countries to help.
An outbreak that began in a remote corner of Guinea has taken hold of much of neighboring Liberia and Sierra Leone, killing nearly 3,000 people in just over six months. Senegal and Nigeria have recorded cases but, for now, contained them.
« Stopping Ebola is a priority for the United States, » Obama told a meeting on Ebola on the sidelines of the United Nations General Assembly in New York. « More nations need to contribute critical assets and capabilities, whether it’s air transport, medical evacuation, health care workers, equipment, or treatment.
Chinese FM calls for world efforts to pursue peace, development
UNITED NATIONS, Sept. 27 (Xinhua) — Chinese Foreign Minister Wang Yi on Saturday called for concerted world efforts to jointly pursue peace and development, and uphold rule of law and justice in global affairs.
Wang, addressing the current high-level debate of the UN General Assembly, noted that this year marks the centenary of the outbreak of World War I, and next year will be the 70th anniversary of the end of World War II.
To jointly pursue peace and development and uphold rule of law and justice, he said, « we should treat each as equals, » uphold the principles of sovereignty and territorial integrity, safeguard the right of all countries to independently choose their social systems and development paths.
Gaza
Gaza: As Hamas and Fatah head to a national coalition, Hamas leadership are distancing themselves away from radical groups, in order to clear the path toward Gaza reconstruction, while President Abbas intensifies his rhetoric against Israel to move ahead with a durable peace solutions. Although President Abbas speech was very hawkish, Opposition Chairman Isaac Herzog told Ynet on Sunday ”you can criticize Abbas, but at the end of the day, we prefer and the Palestinian Authority taking responsibility of Gaza, and we prefer Abbas and the PA’s full security cooperation in the West Bank, ».
Egypt President el-Sisi intensifies the fight against the Muslim Brotherhoods, the political arm of the radical islam fighters (whose fighters include the hard-core liners ISIL and Al Qaeda), Egypt is re-gaining its leading role in the Palestinian – Israeli peace process. The pressure to reduce Israel’s defence budget aims bringing the hawks to consider peace solutions. Furthermore, at last, the terror financiers are brought to justice increase the likelihood to make the current fight against terror much more effective than it has been so far.
We are very optimistic (as we have been since the beginning of the Gaza crisis) that : 1) Hamas leadership will break from extremists and will recognise Israel – as Fatah did years ago – (though some radical fractions are already burgeoning with much less financial and arm support), 2) Iran will be instrumental in settling a long-term peace process (as the nuclear negotiation heads toward a civil nuclear Iran), 3) a LT peace process will help the development of Mediterranean sea gas exploitation (as it enables to return to the Israeli – Turkish normalisation, a process which was very close in April but has been postponed by the Gaza crisis).
Fatah, Hamas agree on national unity gov’t for Gaza
Palestinian political rivals Fatah and Hamas agreed Thursday to remove all obstacles preventing the return of the Palestinian Authority to the Gaza Strip in the form of a national unity government headed by Prime Minister Rami Hamdallah.
Islamic nations lobby Palestinians to go to ICC
OIC secretary-general says 57-nation bloc supports PA President Abbas’ plan to ask UN to impose deadline on Israeli withdrawal from West Bank. The world’s largest bloc of Islamic countries has been lobbying the Palestinians to join the International Criminal Court so it can prosecute Israeli politicians and military leaders for war crimes, crimes against humanity and genocide, the bloc’s leader said Saturday.
Palestinian President Mahmoud Abbas’ ‘Counterproductive’ UN Speech Provokes US
The United States has described Palestinian President Mohmoud Abbas’ speech at the the 69th United Nations General Assembly as « provocative » and « counterproductive » towards reaching peace with Israel.
The US Department of State spokesperson Jen Psaki said in a statement on Friday that Abbas’ speech, in which he alleged Israel of conducting a « war of genocide » in Gaza, was « offensive ».
This comes close on the heels of weeks of conflict in the area where Israel unleashed a series of aerial attacks on Gaza early in July and later launched a ground invasion into the Palestinian territory. Over 2,130 Palestinians lost their lives in the nearly month-long war.
« Abbas’ speech today included offensive characterisations that were deeply disappointing and which we reject, » Psaki said adding that his remarks « undermine efforts to create a positive atmosphere and restore trust between the parties. »
Herzog: Despite UN speech, we prefer Abbas
Opposition chairman blames Netanyahu government for deteriorating relations with Palestinians, says Israel wants Abbas, PA in Gaza.
« You can criticize Abbas, but at the end of the day, we prefer and the Palestinian Authority taking responsibility of Gaza, and we prefer Abbas and the PA’s full security cooperation in the West Bank, » Opposition Chairman Isaac Herzog told Ynet on Sunday.
Iraq & Syria
Fight against ISIL success likelihood increases: the global community military action continue to enjoy a wide support (i.e. UK voted for air strikes, though both SNP and UKIP criticised the move). The support is likely to intensify after the militants beheaded Herve Gourdel (a French citizen abducted in Algeria) and Philippines Militants threatened to harm a German. Threats against US and EU interests have been intensifying on the internet, but the risk is likely to focus on Cyber-Attacks, a domaine where the Western intelligence is less well prepared than for attacks such as 9/11. Turkey and Iran participation to the coalition will be instrumental to secure an important degradation of ISIL. But Turkey decision to provide asylum to Muslim Brotherhoods is making it difficult to see Turkey joining the coalition is the short term (though President Ergodan is arguing the opposite). At the other hand, Iran wants to secure some concession on the Nuclear discussion in exchange of its help (though Iran Quds brigades have already been instrumental in supporting Iraq militaries against ISIL).
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 its leadership a fight for Abou Moussab Al Zarkawi legacy. The threats spread on the internet are likely to be a part of ISIL marketing campaign for terror to hire new young westerners. 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 fighter should the global community take the fight to the Social Media in genuine coordinated 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. 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).
Islamic State continues attack on Syrian border
US-led air strikes hit targets near town of Kobani, but fail to stop insurgents
New US-led air strikes against Islamic State fighters failed to stop them from pressing their assault on a strategic Syrian town near the Turkish border, hitting it with shell fire for the first time.
The US Central Command said the air strikes destroyed an IS building and two armed vehicles near the border town of Kobani, which the insurgents have been besieging for the past 10 days.
British Parliament approves Iraq airstrikes against ISIS
Britain, Belgium and Denmark on Friday joined the U.S.-led coalition of nations that are launching airstrikes on Islamic State in Iraq and Syria (ISIS), committing warplanes to the struggle against the extremists.
The European lawmakers flatly described the moves in Iraq as critical to security on home soil, arguing that facing down terrorists has become a matter of urgency. British Prime Minister David Cameron made a passionate plea for action in drastic terms — noting that the militants had beheaded their victims, gouged out eyes and carried out crucifixions to promote goals « from the Dark Ages. »
Spokesperson: Scotland’s Largest Political Party Undecided on Airstrikes Issue
LONDON, September 26 (RIA Novosti) – Scotland’s largest political party, the Scottish National Party (SNP), has refused to confirm whether it will back British airstrikes against Islamic State (IS) positions in Iraq during the Friday Parliamentary vote on the issue.
« We will look at the debate as it unfolds in the Chamber today. No decision has been made but we will make a full statement later, » SNP spokesperson Catriona Matheson told RIA Novosti Friday.
Farage Accuses Cameron of Using Commons Recall to Undermine UKIP
Nigel Farage accused the government of trying to undermine him by using terrorist warnings and the prospect of military strikes in Iraq to distract attention from his fast-rising U.K. Independence Party.
UKIP’s two-day annual conference begins today in Doncaster, northern England, the last before next May’s general election. On Sept. 24, Prime Minister David Cameron, attending the United Nations General Assembly in New York, announced the recall of Parliament for today to authorize airstrikes against Islamic State extremists.
Kamikaze Isis: Nine Japanese ‘Joined Islamic State’ Claims Israel
An Israeli official has claimed that nine Japanese nationals have joined the ranks of the Islamic State (also known as Isis) in the Middle East, according to Japan’s former air force chief Toshio Tamogami.
Tamogami maintained on his blog that Nissim Ben Shitrit, director-general of Israel’s foreign ministry, confided to him earlier in September that the Japanese citizens travelled to Syria and Iraq to wage jihad.
Anti-jihadist coalition widens as strikes hit Syria oil assets
London (AFP) – The US-led coalition against the Islamic State group widened on Friday with Britain, Belgium and Denmark approving plans to join air strikes in Iraq.
But Washington said up to 15,000 « moderate » rebels would be needed to beat back the jihadists in Syria, where the Pentagon said air raids had disrupted lucrative oil-pumping operations that have helped fund the militants.
Iran’s President calls airstrikes on ISIS ‘theater,’ says broader campaign needed
(CNN) — Airstrikes against ISIS militants are a « psychological operation, » not a military one, Iranian President Hassan Rouhani told CNN’s Christiane Amanpour in an interview that aired Friday.
« It is a common threat for all of us, » he said. « And this requires a unison effort from all of us. »
« We need a vast campaign of operations … the aerial bombardment campaign is mostly, I would say, a form of theater, rather than a serious battle against terrorism. »
Iran and the United States have found their foreign policies surprisingly aligned in the past several months, as both try to beat back the advance of the Sunni extremists that have gained a foothold in Iraq and war-torn Syria.
FBI Warns of Possible Cyberattacks in Retaliation for U.S. Strikes on ISIS
The FBI is warning that extremist hacker groups may mount cyberattacks in response to the U.S. air campaign against ISIS and other jihadist groups in Iraq and Syria. In a bulletin to law enforcement and U.S. businesses exclusively obtained by NBC News, the agency said it has no information on specific cyberthreats against U.S. targets. But it cited “recent nonspecific and probably aspirational threats made on social media platform to carry out cyber as well as physical attacks in response to the U.S. military presence in the Middle East.”
French Muslims denounce « cowardly murder » of tourist
(Reuters) – Thousands of Muslims gathered across France on Friday to denounce the beheading of tourist Herve Gourdel by militants in Algeria who said their act was a response to French strikes against Islamic State fighters.
France’s five-million-strong Muslim population is the largest in Europe. Some on the French right have suggested the community has not condemned Gourdel’s murder this week strongly enough, a charge its leaders reject.
« He was the victim of a cowardly murder, » Dalil Boubakeur, rector of the Grand Mosque of Paris told hundreds of Muslims gathered outside the mosque after noon prayers.
Russia
Russia: Ukrainian situation continues to calm down (BUT NOT deescalate). Ukraine continues to increase its ties with EU and NATO, despite Putin threat last week. Lavrov pressed during the weekend the global coalition against ISIL to seek authorisation at the UN security council. Under such a scenario , Russia could use its veto to buy some time to ISIL to strengthen its power, or to provide Assad legitimacy through having him participating to the coalition (which would crack the coalition which “implied” objective is to change the Syrian regime).
The Eastern Ukraine region self proclaimed republics autonomy perimeter continue to be the name of the game. Too much autonomy (the current self proclaimed government are calling for a full fledge independence – which could give legitimacy to Crimea annexation-) would make Ukraine IMF program dead born (as Kiev government would be in the incapacity to deliver on governance improvement and structural reforms). At the other end, an autonomous regions which would bind by the IMF program reform will increase the ability of Kiev government to strengthen the Ukrainian economy along with the governance improvement. Thus, it would increase the likelihood of joining NATO. Russia is unlikely to let this scenario take place without a fight. We continue to see some Ukraine debt restructuring very likely though the timing will depend on the autonomous republics aggression.
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”. By the meantime, Russia accelerate the construction of Eurasia, which is seen by many analysts (incl. “gold bugs”) as a better replacement of the EU Union (because it enables to avoid improving governance and fight against corruption).
Russia, Ukraine agree interim gas deal: EU energy chief
Russia is ready to resume gas deliveries to Ukraine if Kiev pays its energy giant Gazprom back debts worth $3.1 billion (2.4 billion euros) by late December, European Energy Commissioner Guenther Oettinger said Friday.
According to the interim agreement, which has to be approved by the governments in Moscow and Kiev, Gazprom is ready to deliver at least five billion cubic metres of gas in the coming months, Oettinger said after he met with both energy ministers in Berlin.
Gazprom will also want advance payments for the new gas at $385 per 1,000 cubic metres — less than the 485 dollars that Gazprom had earlier demanded but more than the price of around $268 it had charged before the change of government in Ukraine.
Ukrainian President sets sights on closer EU ties
Moscow: Ukraine’s President, Petro Poroshenko, says his office has been in constant communication with Russian President Vladimir Putin to sustain a truce in eastern Ukraine, and Ukraine is now keen to pursue membership in the European Union.
Mr Poroshenko said he planned to meet with Putin in the next three weeks, and expressed confidence that the ceasefire with pro-Russian rebels would hold.
At the same time, he voiced several positions certain to irk the Kremlin, which has worked aggressively to prevent Ukraine from shifting politically and economically toward Europe. He said Ukraine would never relinquish the embattled eastern regions of Donetsk and Luhansk; plans to grant those regions greater autonomy would have firm limits; and Ukraine must move as quickly as possible toward European integration.
Ukraine leader clings to European goal despite Putin
KIEV (Reuters) – Ukrainian President Petro Poroshenko has secured a temporary peace in the troubled east which he says gives him a chance to move Ukraine towards its dream of a place in Europe – but Russia’s Vladimir Putin still holds cards that could thwart him.
Ukraine Pushes for NATO Membership as Gas Talks Commence
Ukraine began the process to strengthen ties with NATO and said it wanted to join the alliance in the “short term” after President Petro Poroshenko declared the worst of its separatist war was over.
While Ukraine has received no sign it will be able to join the North Atlantic Treaty Organization any time soon, its push risks exacerbating the worst standoff between Russia and its Cold War foes since the fall of the Iron Curtain. Sporadic fighting between pro-Russian rebels and government troops in the eastern Donetsk region of the former Soviet republic is threatening a shaky cease-fire reached three weeks ago.
“The cabinet has submitted a draft law to parliament that envisages the cancellation of our non-aligned status and ensuring a European integration course to create grounds for Ukraine’s integration into the Euro-Atlantic security space,” the administration in Kiev said in an e-mailed statement today. “Ukraine’s aim is to receive special partner status with NATO now and membership in the short term.”
Russia’s Lavrov questions legality of U.S. airstrikes on Syria
(Reuters) – Russia questioned on Friday the legality of U.S. and Arab air strikes in Syria to target Islamic State militants because the action was taken without the approval and cooperation of Moscow’s ally Damascus.
The United States, which has long called for the dismissal of Syrian President Bashar al-Assad, began air and missile strikes on strongholds of Islamic State in Syria this week, backed up by some Gulf Arab allies. Washington forewarned Damascus of the action, but did not seek approval for it.
« We believe that any action taken globally, including use of force, to overcome terrorist threats should be done in accordance with international law, » Russian Foreign Minister Sergei Lavrov told reporters on the sidelines of the United Nations General Assembly.
Syria Ready To Cooperate In Fight Against IS: Russia’s Foreign Ministry
UNITED NATIONS, September 27 (RIA Novosti) – Syrian Foreign Minister Walid Muallem said during his meeting with his Russian counterpart Sergei Lavrov on the sidelines of UN General Assembly that his country was ready to cooperate in fight against Islamic State (IS) militant group with anyone who has a reasonable stance on this issue, Russia’s Deputy Foreign Minister Gennady Gatilov told journalists.
“Muallem said that they are ready to cooperate in fight against IS with anyone who counters these terrorists and have a constructive stance,” Gatilov stated.
Ukrainian Bonds Slump as Russia Mulls Seeking Early Repayment
Ukrainian bonds extended the third week of declines after Russia said it may demand an early repayment of a $3 billion bailout loan it gave its neighbor before relations before the two countries disintegrated.
The yield on Ukraine’s Eurobonds due July 2017 climbed 14 basis points to 15.41 percent at 4:51 p.m. in Kiev, approaching a record 16 percent reached on Feb. 19. Russia has an option to call early its bailout bonds, which mature in December 2015, if Ukraine’s debt tops 60 percent of gross domestic product.
The weakness of the hryvnia, which lost 36 percent against the dollar this year, indicates the debt threshold has been breached, Finance Minister Anton Siluanov told reporters in Moscow today. Russia is awaiting third-quarter data before deciding whether to trigger the early payback clause, he said. His Ukrainian counterpart, Oleksandr Shlapak, said on Sept. 23 his country may ask the International Monetary Fund for additional aid next year.
Russian MPs ratify Eurasian Economic Union agreement
Russia’s Duma has ratified an agreement on the Eurasian Economic Union, which will create the largest common market in the ex-Soviet sphere and provide for the free movement of goods, services, capital and labor between Russia, Belarus and Kazakhstan.
The agreement, which comes as an extension of the Customs Union, requires approval from the other two union members. If ratified, it will come into effect on January 1, 2015.
Leonid Slutsky, the chairman of the State Duma’s Committee on Commonwealth of Independent States Affairs, Eurasian Integration and Ties with Compatriots, called the ratification of the agreement an “event of historic importance,” Itar-Tass reported.
“It is a mighty project from a geopolitical point of view. Several countries of the FSU [Former Soviet Union] and other countries have announced their aspirations to join the Union,” the MP said. The Union will also become “a major obstacle on the road toward creating a unipolar world,” he added.
US News
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. Gas prices decrease, a reflect of the on-going oil prices decrease, is likely to provide the Fed with some support to postpone acting too quickly normalising monetary policy.
Bill Gross – PIMCO: On Friday, Bill Gross announced that he will leave PIMCO to join Janus. Markets have reacted to the short term fixed income force selling, which may take place, as investors may reconsider their mandate (as a result of the change in management of the funds “U.S. Stocks Rebound on GDP as Bonds Fall on Pimco Concern”). While this pressure is likely to be short lived, it may bring opportunity to go long rates when the market is realising that inflation is subdued and help the Fed to delay normalising rates. There have been many speculations regarding the reason of Mr. Gross departure from PIMCO. We see the shift in Bill Gross rhetoric to defy the Fed, by criticising the Fed attitude – using arguments going from asset frothiness to central bank deficit financing -, as being the most likely good reason of this departure. By being short fixed income since mid last year, PIMCO has reported weak returns spurring an increase in redemptions (which cost PIMCO profits and Bill Gross his job).
Bill Gross, the ‘Bond King’, jumps from Pimco to Janus (+video)
Bill Gross, one of the bond market’s most renowned investors, is leaving the investment firm he founded and with which his name has been effectively synonymous, for rival firm Janus Capital Group. The announcement comes days after news broke that US regulators were investigating Pimco and Gross.
NY officials downplay subway attack reports
NEW YORK — Iraq’s prime minister said Thursday that captive militants for the Islamic State of Iraq and Syria (ISIS) told his intelligence agents of an alleged plot to attack subways in the United States and Paris.
U.S. law enforcement officials told CBS News they are investigating the threat, but as of overnight, there was still no intelligence on any credible specific plot against the U.S. A half-dozen French officials contacted by The Associated Press said they knew of no plot.
FBI Director James Comey told reporters Thursday afternoon that he was unaware of any threat directed at U.S. subways.
Prime Minister Haidar al-Abadi said he was told of the purported plot by officials in Baghdad, and that it was the work of foreign fighters who had joined ISIS in Iraq, including French and U.S. nationals.
Gas prices headed below $3 a gallon
The price of a gallon of gasoline may soon start with a « 2 » across much the country.
Gasoline prices typically decline in autumn, and this year they are being pulled even lower by falling global oil prices. By the end of the year, up to 30 states could have an average gasoline price of less than $3 a gallon.
The average in Springfield, Missouri, is already below $3, according to Tom Kloza, chief oil analyst at the Oil Price Information Service and GasBuddy.com. Several other cities are on the brink.
« And there will be more, many more, » Kloza said. Cities in high-priced states such as California and New York will not be among them, though, which will probably keep the national average above $3.
Clashes in Ferguson on heels of chief’s apology
FERGUSON, Mo. — Police and protesters clashed briefly Thursday night in Ferguson just hours after the St. Louis suburb’s police chief issued an apology to the family of Michael Brown.
The black 18-year-old Brown was shot dead by a white police officer Aug. 9.
The St. Louis Post-Dispatch reports that Ferguson Police Chief Tom Jackson appeared outside the police department in civilian clothes late Thursday and assured protesters that there would be changes in the wake of Brown’s death.
Europe News
Eurozone economies : As we were expecting in our Feb 27th note, and Russia update, the Eurozone economies are suffering from the Russia – Ukraine crisis. We have been saying that the tension with Russia will have short term negative effects 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 -).
Catalonia calls for independence referendum is increasing pressure on both Madrid and EU to move forward to offer better conditions and better narrative to the public. We see PM Rajoy taking constitutional actions to deter Catalonia from conducting the referendum, at a moment where more the referendum is gaining support from the independence forces all over the world. Madrid may accept to open discussion to devote additional autonomy to Catalonia in order to reduce the pressure. This story is likely to push EUR existential threat higher short term, but we consider that EUR is likely to rebound by the end of this year, when these threats will be repriced as less likely.
EU – Iran: Rouhani is using his “strong hand » to secure a positive deal for Iran. Indeed, EU needs to lift Iran sanctions in order to mitigate the cost of the Russian sanctions. In addition, Iran is negotiating its help (which is instrumental) to defeat ISIL in exchange of some concessions from the U.S. We continue to believe that Iran negotiation will be successful, and would settle into a nuclear civil Iran deal in exchange of lifting the sanctions. Such a scenario would accelerate Energy Prices decrease as well as a increase the demand for energy-commodity Capex (Iran has been under-investing for more than 20Y).
Spain’s Catalonia region calls independence referendum
BARCELONA – The head of Spain’s northeastern autonomous community of Catalonia, Artur Mas, on Saturday signed a decree calling an independence referendum for Nov. 9, although the national government in Madrid vowed to challenge the planned vote before the Constitutional Court.
The nationalist CiU coalition, which governs Catalonia, had promised during regional elections in 2012 to formally call an independence referendum. It is supported in that push by other pro-secession parties and grassroots organizations.
Mas said Saturday in signing the decree in a solemn ceremony at the regional government’s headquarters in Barcelona that it marks a « before and after » for Catalonia, but at the same time he said he is willing to negotiate the conditions of the plebiscite with Prime Minister Mariano Rajoy’s administration.
EU’s Juncker team faces make-or-break hearings
BRUSSELS (Reuters) – The next 10 days could make or break a plan to reshape the European Union under new management in an attempt to revive the economy and regain trust among its half-billion people.
From Monday, members of a European Parliament elected on a wave of anti-Brussels protest will subject nominees for posts on executive European Commission to hearings that could wreck the line-up and a complex new structure proposed by its incoming president, Jean-Claude Juncker.
The former Luxembourg prime minister has presented his team as « political, not technocratic », featuring several former premiers and fewer career bureaucrats.
But lawmakers are uneasy about several of his appointments and the nominees from Britain, France, Spain and Hungary face a torrid interrogation.
Iran and six powers make little progress in nuclear talks
UNITED NATIONS (Reuters) – Iran and six world powers made little progress in overcoming significant disagreements in the most recent round of nuclear talks, including on uranium enrichment, Iranian and Western diplomats close to the negotiations said on Friday.
Officials from Iran and the six countries had originally said a breakthrough in New York was unlikely on a nuclear deal to end sanctions on Tehran, although they had hoped substantial progress could be made in narrowing disagreements.
That, the diplomats said, did not happen at talks this week on the sidelines of the United Nations General Assembly.
« On the core issues we remain pretty far apart, » a Western diplomat told reporters on condition of anonymity. « On enrichment, we are not there yet. On sanctions, we are not there yet. »
The diplomat said that Iran and the United States, Britain, France, Germany, Russia and China would likely meet again in the coming weeks, but no date and venue have been set. The negotiators have set a Nov. 24 deadline for an agreement.
Iran President Hassan Rouhani said at a news conference on Friday in New York that the « progress we have witnessed in recent days has been extremely slow. » Rouhani said, « We must look forward to the future and make the courageous decisions vis-a-vis this problem. »
Rouhani said any deal without lifting all sanctions against Tehran was « unacceptable. »
China News
Hong-Kong political reforms protest
Pro-democracy protests gained more traction this weekend. Mainland sticks to its view that any political reform should bind by the “basic law”. We do not see HK and Mainland China governments to accept any substantial change in the short term. However, unlike with Tian’anmen square protest, we see Chinese leadership being less “harsh” fighting the protests. In the medium term, we see China devoting more democratic say in HK. Our forecast is built on the view that the Chinese government is fearing a HK political change as a threat of its reform agenda. President Xi wants to be seen as the strong man to fight conservatism push back to the reform, specifically ahead of the IV-th Plenum, which will focus on improving governance (which creates an important shift of power from “princelings” to the reformists).
China:Manufacturing data support our view that China is soft landing while rebalancing. Labor statistics showed that the manufacturers have started to rebalance their activities away from labor intensive (an objective already stressed by the Chinese leadership). These are in line with the objective to rebalance the economy away from credit driven investment. The government seems fearing that the economic rebalancing has not taken momentum yet although 1) labor intensive manufacturers are relocating in cheaper labor countries, 2) businesses are upgrading their business models, 3) President Xi has conducted many trade – investment agreement with Neighbours (after Premier Li did the same in Africa) to secure investment projects which use Chinese manpower – engineers know-how in this domaine, 4) China is gaining more military presence and has fluxed it mussels – e.g. China “Top Gun” intercept by a US fighter jet -, 5) China has signed many RMB agreement which reinforce the currency usage and prepare its full liberalisation – after Free Trade Zones (FTZ) have proven to be a success -, 6) China has undertaken a genuine fight against bad governance and better regulation – many examples in our recent daily briefings of fight against corruption and bad governance-. We see in FinMin Lou Jiwei comment an indication that not only China wants to create a reserve currency it does want it to be strong when Chinese leaders perceive the heavy pressure place on USD by a category of investors to avoid debasing the currency through deficit financing – although we consider that this worry is misplaced -.
Pro-democracy protests expand in Hong Kong after police use tear gas on demonstrators
HONG KONG (AP) — Pro-democracy protesters wearing surgical masks and holding up umbrellas to protect against tear gas expanded their rallies throughout Hong Kong on Monday, defying calls to disperse in a major pushback against Beijing’s decision to limit democratic reforms in the Asian financial hub.
13 arrested as Hong Kong’s students take to streets for democracy
Hong Kong (CNN) — Thirteen student activists, including 17-year-old leader Joshua Wong, were arrested by Hong Kong police Friday, as pro-democracy demonstrations took a heated turn.
Police said that after issuing warnings, they used pepper spray on a group of protesters who stormed a fenced area outside the government headquarters, at the climax of a day which saw high school students join a weeklong boycott of classes by university students.
Authorities said the arrested ranged in age from 16 to 35.
Yvonne Leung, spokesperson for Hong Kong Federation of Students, said that Wong, the student movement’s most prominent leader, was among those detained.
Taiwan rebuffs Chinese leader’s new pitch for unification
Taiwan has sharply rejected Chinese President Xi Jinping’s suggestion that the two sides end more than six decades of hostile separation by adopting a “one country, two systems” model like the one employed to achieve the return of the former British territory Hong Kong to Chinese sovereignty.
Dashing hopes in Beijing for reunification in the immediate future, the Taiwan government’s Mainland Affairs Council said in a statement that more than 70% of Taiwanese people consider the Chinese Communist Party leader’s idea “unfit” for their democratic, self-ruled island. Mainland China and Taiwan split amid civil war in 1949.
“Regarding mainland China’s comments related to ‘one country, two systems,’ our government has no way of accepting them,” the council said late Friday.
Ground report: Half of Chinese troops leave, rest to follow
Within hours of External Affairs Minister Sushma Swaraj stating that the standoff between India and China along the Line of Actual Control (LAC) had ended, Chinese troops started pulling out of Chumar, the centre of a 16-day standoff between troops of the two countries. By Friday afternoon, almost “half” the Chinese troops along the LAC had withdrawn, officials said.
While Swaraj said the withdrawal “would begin today (Friday) and end by September 30″, sources said that going by the current rate of disengagement, the process may finish sooner. Both sides have agreed to return to “pre-September 10 positions”, officials said.
“The withdrawal has started and troops will return to pre-September 10 positions. The plan of disengagement was agreed upon in a flag meeting on Thursday evening,” an official from the Ministry of Defence said. However, despite four flag meetings — including three inconclusive ones last week — the issue was largely solved by diplomatic intervention. Things moved forward after Chinese ambassador Le Yucheng met senior officials of the External Affairs Ministry on Wednesday, followed by Swaraj’s meeting with Chinese Foreign Affairs Minister Wang Yi in New York on Thursday. “I am happy to tell you that both nations have sat down and resolved the issue.
Some progress reported as Kishida meets Chinese, S. Korean foreign ministers
Japan and South Korea agreed Thursday to work toward a bilateral summit and to discuss the issue of women forced to work in wartime Japanese military brothels, Japanese officials said.
Foreign Minister Fumio Kishida told reporters that he and South Korean Foreign Minister Yun Byung-se “reaffirmed the importance of continuing and enhancing communication at a high political level.”
But Kishida stopped short of saying how far apart Prime Minister Shinzo Abe and South Korean President Park Geun-hye remain on scheduling a one-on-one meeting on the sidelines of international events they will attend in November, such as the summit of the Asia-Pacific Economic Cooperation forum.
China pledges ‘harshest penalties’ for food-safety violations
Reuters) – China has vowed to hand out the « harshest penalties » to food safety violators and to further reform the food and drug safety administration, Xinhua news agency said on Saturday.
Vice-Premier Wang Yang made the comment during an inspection tour of Beijing’s food safety monitoring center on Friday, the news agency said.
Food safety is a highly emotive issue in China where there have been numerous scandals from photos of food oil being scooped from drains to tales of phony eggs and melamine-tainted milk powder.
More recent scandals have embroiled the likes of McDonald’s and KFC-parent Yum Brands Inc.
« The strictest supervision should be carried out to create a fair market environment, the harshest penalties should be used to deter violations, and the most serious accountability system should be established to punish those who fail to perform their duties, » Xinhua quoted Wang as saying.
Intel to invest up to $1.5 billion in two Chinese mobile chipmakers
BEIJING/SAN FRANCISCO: Intel Corp said it will pay as much as $1.5 billion for a 20 per cent stake in two mobile chipmakers with ties to the Chinese government, in the hopes of catching up in a smartphone chip industry dominated by rival Qualcomm Inc.
Intel will acquire the stake in Spreadtrum Communications and RDA Microelectronics through a deal with Tsinghua Unigroup, a government-affiliated private equity firm which owns the two mobile chipmakers.
Australia News
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 current 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 – ).
UPDATE 3-Australian court blocks bid to oust CITIC from iron ore mine
Australian court grants interim injunction against Mineralogy
* Second hearing scheduled for Dec. 18
* Companies have been locked in court battles over royalties (Recasts with court injunction against Mineralogy)
SYDNEY, Sept 26 (Reuters) – An Australian court has blocked Mineralogy, the resources company of mining magnate and Australian politician Clive Palmer, from terminating the mining rights of China’s CITIC at the Sino Iron Project, ramping up a bitter dispute between the two companies.
The $9.6 billion project in Western Australia, China’s biggest overseas mining investment, has been a huge headache for Beijing after starting exports more than three years behind schedule and nearly four times over budget.
CITIC paid $415 million to Mineralogy to acquire the rights to the project and agreed to pay royalties once production started, but the two companies have been locked in a series of court battles over hundreds of millions of dollars in royalties.
Clive Palmer tries to terminate iron ore partnership with Chinese company Citic Pacific
Clive Palmer’s company Mineralogy has moved to terminate its partnership with the Chinese operator of its $10 billion iron ore mine in Western Australia.
Mineralogy has given Chinese state-owned Citic Pacific notice that its right to mine iron ore at the Sino Iron Project in Western Australia will be terminated in 21 days.
Mineralogy director Clive Mensink, Mr Palmer’s nephew, said the company had served a default notice on Citic Pacific over billions of dollars in losses more than two years ago, but the issues raised had not been addressed.
« Not only has Citic Pacific Limited failed to rectify the defaults in the notice, the directors of Citic Pacific failed to declare the default notice to the market in Hong Kong and may have breached the law, » Mr Mensink said.
He said Mineralogy was considering making a complaint to Hong Kong authorities about the alleged failure of Citic Pacific directors to inform the Hong Kong stock exchange of the 2012 default notice.
MH370: Deep sea volcanoes, ridges discovered in search for missing Malaysia Airlines airliner
Remnants of volcanoes, towering ridges and deep trenches have been discovered by experts mapping the southern Indian Ocean as part of the search for missing Malaysia Airlines flight MH370.
Australian authorities released the three-dimensional images, revealing for the first time details about the seafloor where efforts are being concentrated to find the jet, which is presumed to have crashed into the sea on March 8.
The area in which the plane is thought to have gone down is remote and largely unexplored, and officials are conducting an intensive survey of the seabed before the underwater probe for the plane can begin.
« The recently acquired high-resolution bathymetry (underwater survey) data has revealed many of these seabed features for the first time, » the ATSB said in a statement.
Labor’s Jones plans run against Premier
Labor’s Kate Jones has thrown her hat into the ring to stand against Queensland Premier Campbell Newman at the state election.
The former environment minister will seek preselection in her former seat and the premier’s current seat of Ashgrove, in Brisbane.
Ms Jones made the announcement to a backyard Labor gathering on Saturday.
A YouTube video showing her speech to the small crowd was posted by an account called Come Back Kate.
« Campbell Newman is always spoiling for a fight, but it just seems to me that it is never fighting for us, » she said.
« This is not the kind of Queensland I want to live in, this is not the kind of Queensland I want my children to grow up in and I don’t believe this is the kind of Queensland the people of Ashgrove want.
« And that is why I ask humbly today for your support to contest the seat of Ashgrove in 2015. »
ASX 200 company tax avoidance bleeds Commonwealth coffers of billions a year, report finds
Almost a third of Australia’s largest companies are paying less than 10¢ in the dollar in corporate tax, according to a report that exposes a gaping hole in government revenues over the past decade.
As Australia prepares to host world leaders at the G20 summit in Brisbane in November, where a global assault on tax avoidance will be a key topic of discussion, the report found 84 per cent of Australia’s top 200 stockmarket-listed companies pay less than the 30 per cent company tax rate.
Some companies, including household names like James Hardie, do not contribute a dollar to Australian coffers, it found.
Tax minimisation by large companies far outweighs that of small and medium-sized businesses and has a disproportionately large effect on eroding the tax base.
« Tackling corporate tax avoidance is an urgent priority; Australia does not have a spending problem, it has a revenue problem and it must be fixed, » write the authors of the report, Who Pays For Our Common Wealth?
New Zealand News
New Zealand: Fontera payout cuts fuel concerns over NZ economic prospects. This increases the pressure on new PM Key Cabinet to accelerate rebalancing the economy 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.. This constructive scenario narrative is currently overshadowed by the “search for yield” (or interest rates differential).
New Zealand Bond Sales Booming as Kiwi Strength Rattles RBNZ
Sept. 26 (Bloomberg) — Sales in New Zealand’s syndicated bond market are running at the fastest pace on record as top- rated borrowers help sate investor demand for the higher yields that have buoyed the nation’s currency.
Issuers led by the South Pacific nation’s government and the International Bank for Reconstruction & Development have raised NZ$12.2 billion ($9.7 billion) since Dec. 31, a 19 percent increase on the same period last year, according to data compiled by Bloomberg.
Bond offerings have boomed as a strengthened economy pushed the Reserve Bank of New Zealand to raise its benchmark borrowing cost, helping support a kiwi dollar Governor Graeme Wheeler said yesterday was at an unjustified and unsustainable level. Prime Minister John Key was elected for a third term last week following a Sept. 18 report showing the economy grew at the fastest pace in a decade.
“Certainly the interest rate differentials have been attractive,” Dean Spicer, the head of domestic capital markets for Australia & New Zealand Banking Group Ltd.’s unit in Wellington, said by phone yesterday. “Issuance has benefited from a growing offshore interest for kiwi dollars and that’s helped with the deal sizes.”
Japan News
Japan: inflation softening along with economic downgrade was widely expected as a result of the 1st VAT hike (cf our strategic note Dec 26th 2013). We see BoJ to keep the bazooka of QQE-2 un-tested until the JPY excessive depreciation and JGB solvency risk came down * investors are still short JGB expecting a Japan crisis *. 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 -.
However, BoJ might do some adjustment to its monetary program but nothing excessive. The news flow out of this weekend G20 meeting shows that the global community is gently pressing the government and the BoJ to pursue structural reforms, economic rebalancing, solvency improvement (through VAT 2nd hike commitment) and adequate monetary policy (not too hot – to avoid a crisis – not too cool – to avoid derailing the on-going portfolio rebalancing approach -). Japan continues to face heavy public pressure to rebalance its energy reliance to nuclear. While we believe that Japan will continue to press for reopening nuclear plants (when Nuclear Watchdog gives his green light), the medium to long term trend is that Japan will use Trade negotiation with neighbours to secure new energy sources while using this pressure to deregulate and move forward with Abenomics 3rd arrow (please see our Japan update for more on our views).
More than 31 feared dead after Japanese volcano erupts
Tokyo: More than 31 people are feared dead near the peak of the Japanese volcano that erupted a day earlier, sending a huge cloud of ash and rock tumbling down its slopes, while packed with hikers.
Police said they were found in a state of « cardiopulmonary » arrest, but declined to confirm their deaths pending a formal examination, as per Japanese custom.
More than 500 Japanese troops and police had set out on Sunday to search the peak of Mount Ontake, a day after its sudden eruption trapped hundreds on the mountain for hours, amid conflicting reports about missing and injured climbers.
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