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SNBDL Daily Briefing
Report prepared using big data solution Quid
Our take away from the last 24 hours news
ECB: Thursday October 2nd President Draghi is expected to reveal more detail on the private asset quantitative program. For now, markets have been dismissive of the already announced tools positive impact to lift up inflation and growth. We disagree with market consensus. ECB and market operators game of chicken aims to push the central bank to buy Sovereign bonds, and support the carry-trade, which suffers from early US monetary policy normalisation. The recent Germany announcements [J. Weidmann, Chancellor Merkel] continue to be hawkish to push France and Italy to undertake reforms, before agreeing for more private-public-partnership-investment (last weekend Allianz Chief Economist WSJ OpEd gives a blessing to these investment which enables to rebalance Germany high current account surpluses without jeopardising the fiscal balances). Germany investment would provide as well a go-ahead to President Juncker investment program. EUR and Periphery credit continue to suffer from the negative communication campaign which spread from Catalonia independence (a low risk event but over priced) to the impact of Russia sanctions on Germany manufacturing. These factors are likely to fade quickly, reversing the renewed “doom-and-gloom” scenario for Eurozone [EURCHF recent weakness and convergence to the SNB cap is an indication that the existential threat discount is getting repriced].
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).
Fed: Since September FOMC, markets have stopped hearing whatever indication that economic development does not require a quick rate normalisation : the dots hawkish message should not be over played (dots include the non-voters hawkish participants), Plosser, the Hawkish Philadelphia Fed had decided to resign (reducing forthcoming FOMC dissidence), inflation is subdued, productivity gain generated by automation – robots makes profits more sustainable… We disagree with consensus analysis. We consider that current positions are likely to be squeezed as soon as mid-October (as mid-term elections loom with increase in economic uncertainties should Senate majority goes to GOP). However, the talk about rate normalisation is crowding out carry-trade and pushing investors toward “real economy finance”. The recent heavy sanctions against banks are contributing to these shift, which many commentators consider that it cannot take place. Indications from both Department of Justice and Senate Democrats (i.e. E. Warren) hint that this time is different. Sanctions are likely to be transformed in Jail time, should reports indicating that Traders have been facilitating / participating in ISIL oil production sale. Should these reports be confirmed, the US administration will find a unique opportunity to create the shock needed to change financial institutions bad behaviour.
Emerging markets:
Brazil: as we were indicating in our recent notes and daily briefing, Brazil continue to search approaches to refrain from engaging into genuine structural reforms. We see any postponing of structural reforms as a very negative sign which would pursue Brazil stagflation economic scenario.
Russia: the World Bank joined other institutions in indicating that the cost of sanctions will be much more negative for Russia than for the global economy. We see the recent weaknesses to be short lived for the eurozone while Russia government attitude to avoid reforms (as conservatism struck a win in the public debate in the aftermath of the Ukrainian crisis). Energy prices weakening is the most worrying development for both the economic prospect as well as the stability of the Russian government (please see our Russia update note).
Turkey: Fed concern is increasingly stressing the country vulnerabilities. These will require from President Erdogan a real choice between: pursuing reforms and good governance or aligning with Russia. Nato and EU need a reformed Turkey in order to avoid pushing the risk that Turkey side with “radical islam” in the on-going war against XVI century ideas. We have reported in our previous daily briefings that Turkey have provided asylum to Muslim Brotherhood after Qatar has expelled them because Qatar wants to reduce the pressure on its involvement in financing terrorism.
Economic news: In our recent note Perception & reality: closing the gap using big data, we were indicating “The widespread idea that all governmental institutions have become rotten to the core is fuelling the political agenda of the populist parties. The elites in the UK are increasingly attracted by the UKIP’s ideas and they are saying so out loud. The UKIP’s appeal is based solely on a narrow view of protecting privilege. To learn more of our thinking on this topic, check out our report, “The tea party’s hidden agenda”. However, technology productivity improvement and energy / commodity prices decrease are likely to provide the boost needed to: 1) postpone rate normalisation, 2) reduce the eurozone existential threat, 3) enable EM central banks to avoid urgent rate hikes, while doing the reforms (we continue to worry about countries which have not undertaken genuine reforms with the hope that the carry trade will buy more time), 4) help developed world economies to undertake governance improvement reforms (OECD take avoidance initiative, G-20 initiatives) which will help reduce the mistrust which constitute in our view the most important risk going forward (such a mistrust is the most efficient “marketing tool” used by both militants and Jihadists to hire their followers).
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 been intensifying to: 1) fight disinformation (we were talking about it in our recent daily briefings), 2) provide short term medical assistance (France, US, Israel, etc.) with the help of military expertise – when numerous Western African countries are indicating the lack of medical personnel – , 3) provide financial support (wealthy donors, government funding, NGO help etc.), and 4) fast track the Ebola drug trial (the drug has had a very good result in the experimental tests).
Notwithstanding the on-going difficulties, and the short term negative economic effect, we continue to believe that the fight against Ebola will succeed and will clear the way to the increase in Africa investment and economic support (cf. our note “This time for Africa” which stressed that Africa is heading to experience the same development China had experienced when it joined the WTO in 2001 with positive consequences for both Africa and the world economy). The global coordination triggered by the response to the terrorist risk might help responding to the Ebola risk as well (due to the threat a dirty weapon using Ebola virus constitute). We disagree with the bet of Cocoa upward spiral because many analysis assumes the doom-and-gloom scenario which is unlikely to happen. We see the intensification of the worrying rhetoric as a part of the genuine action to keep the subject high in the leaders to do list.
Gaza: As Hamas and Fatah head toward 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. The social media focus against ISIL is likely to require a total rethinking of communication out the Muslim Brotherhood, as we were forecasting a couple of weeks ago. Indeed, the muslim community push back against “barbaric groups naming their fight in the name of Islam” may back-fire on Muslim Brotherhood political arm. As soon as Muslim Brotherhood will move to condemn ISIL, the end of terror will be close. But Kremlin and Commodity bugs interests groups are likely to postpone such a shift in the strategy.
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 (and specifically would constitute a Eurozone existential threat), 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, international experts are rushing to find financial solutions for the New Russia political strategy, outside the West energy deals – e.g. with Turkey – ). 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”. Meanwhile, Russia accelerates 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 “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).
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). Banks shares are suffering from the combination of the increase perception of increase in risks and additional macro prudential constants to curb housing prices frothiness.
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) and RBNZ fight against excessive carry trade effects.
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 -. The Prime Minister confirmed in his Diet address to pursue Abenomics 3rd arrow.
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
ECB: Thursday October 2nd President Draghi is expected to reveal more detail on the private asset quantitative program. For now, markets have been dismissive of the already announced tools positive impact to lift up inflation and growth. We disagree with market consensus. ECB and market operators game of chicken aims to push the central bank to buy Sovereign bonds, and support the carry-trade, which suffers from early US monetary policy normalisation. The recent Germany announcements [J. Weidmann, Chancellor Merkel] continue to be hawkish to push France and Italy to undertake reforms, before agreeing for more private-public-partnership-investment (last weekend Allianz Chief Economist WSJ OpEd gives a blessing to these investment which enables to rebalance Germany high current account surpluses without jeopardising the fiscal balances). Germany investment would provide as well a go-ahead to President Juncker investment program. EUR and Periphery credit continue to suffer from the negative communication campaign which spread from Catalonia independence (a low risk event but over priced) to the impact of Russia sanctions on Germany manufacturing. These factors are likely to fade quickly, reversing the renewed “doom-and-gloom” scenario for Eurozone [EURCHF recent weakness and convergence to the SNB cap is an indication that the existential threat discount is getting repriced].
German Inflation Beats Estimates as ECB Adds Euro-Area Stimulus
Sept. 29 (Bloomberg) — German inflation beat economists’ estimates in September as the European Central Bank prepares to implement more stimulus in the euro area.
Inflation in the currency bloc’s largest economy, calculated using a harmonized European Union method, was 0.8 percent, the Federal Statistics Office in Wiesbaden said today. That’s unchanged from the previous month and better than the 0.7 percent median forecast in a Bloomberg News survey. Prices were unchanged on the month.
Euro-Area Economic Confidence Falls in Sign ECB Plan Takes Time
Sept. 29 (Bloomberg) — Economic confidence within the euro area diminished in September in a sign that the European Central Bank’s measures to shore up the recovery have yet to bear fruit.
An index of executive and consumer sentiment slipped to 99.9 in September from 100.6 a month earlier, the European Commission in Brussels said today. That’s the lowest since November and in line with the median of 25 forecasts in a Bloomberg News survey.
Policy makers meeting in Naples, Italy this week will discuss details of an asset-purchase plan designed to complement long-term loans and record low rates to kick-start the economy. In a blow to confidence, growth in the 18-nation region stalled in the second quarter, with unemployment stuck close to a record high, while inflation is running at a fraction of the ECB’s mandate.
ECB will buy 200 billion euros of ABS and covered bonds in a year: Reuters poll
(Reuters) – The European Central Bank will buy a total of 200 billion euros of asset-backed securities (ABS) and covered bonds in the span of a year, a Reuters poll of euro money market traders found on Monday.
That is a sharp fall from the 300 billion euros expected in a similar poll on September 8 and a Reuters survey of economists last week. [ECB/REFI][ECB/INT]
Traders said lackluster demand from banks earlier this month for the ECB’s low-interest long-term loans, known as TLTROs, and the risks of deflation and weak economic growth across the region, will push the central bank to buy government bonds.
« ABS purchases (are) unlikely to be too big or for too long, » said a trader at a large dealer. « The ECB needs to buy sovereigns at some point and we think that will be sooner than later, especially after the abysmal take up at the first TLTRO. »
Germany’s Bundesbank says need solid finances for growth
« Solid public finances are a precondition for sustainable economic growth and not a contradiction, as many suggest in the discussion over the still ongoing crisis in the euro zone, » Jens Weidmann told an audience in Berlin.
The comments from the president of the Bundesbank appear at odds with calls from ECB President Mario Draghi for governments to use their fiscal policies to bolster growth in the flagging euro zone economy.
Draghi told the Jackson Hole central bankers’ conference in late August: « It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this ».
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).
Rewriting History Seen Emboldening BOE Rate Hawks
A rewriting of U.K. economic history this week may strengthen the case for Bank of England policy makers to begin raising interest rates from a record low.
The Office for National Statistics will publish revised growth data since 2007 alongside its third estimate of second-quarter gross domestic product tomorrow. Previously published changes up to 2012 indicated Britain had a shallower recession and recovered more strongly than initially estimated.
With the economy expanding for six straight quarters and unemployment falling, the recasting could prompt BOE officials to revise up their own projections. The Monetary Policy Committee has split on borrowing costs, with some officials now challenging the majority view led by Governor Mark Carney that there is enough slack in the labor market to justify taking no action. Traders are betting the BOE will keep the benchmark interest rate at 0.5 percent until June, Sonia forwards show.
Fed: Since September FOMC, markets have stopped hearing whatever indication that economic development does not require a quick rate normalisation : the dots hawkish message should not be over played (dots include the non-voters hawkish participants), Plosser, the Hawkish Philadelphia Fed had decided to resign (reducing forthcoming FOMC dissidence), inflation is subdued, productivity gain generated by automation – robots makes profits more sustainable… We disagree with consensus analysis. We consider that current positions are likely to be squeezed as soon as mid-October (as mid-term elections loom with increase in economic uncertainties should Senate majority goes to GOP). However, the talk about rate normalisation is crowding out carry-trade and pushing investors toward “real economy finance”. The recent heavy sanctions against banks are contributing to these shift, which many commentators consider that it cannot take place. Indications from both Department of Justice and Senate Democrats (i.e. E. Warren) hint that this time is different. Sanctions are likely to be transformed in Jail time, should reports indicating that Traders have been facilitating / participating in ISIL oil production sale. Should these reports be confirmed, the US administration will find a unique opportunity to create the shock needed to change financial institutions bad behaviour.
Dollar Climbs Versus Emerging-Market Currencies
The dollar climbed to a six-month high against emerging-market currencies as signals the U.S. economy is improving bolstered the case for the Federal Reserve to raise interest rates for the first time since 2006.
Currencies of developing countries fell for a third day and volatility rose as unrest in Hong Kong damped risk appetite. Brazil’s real touched the weakest in almost six years after a poll showed President Dilma Rousseff widened her lead over opposition candidate Marina Silva. The U.S. dollar headed for its biggest monthly gain since 2012, while New Zealand’s currency reached a 13-month low.
“Developments in Hong Kong have definitely caught the market’s attention; it’s helping drive the risk-off sentiment,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, in a phone interview. “The dollar’s strength is starting to endanger some of the commodity currencies that have done quite well in the quantitative-easing environment.”
Recent remarks by U.S. Federal Reserve officials
In remarks to the National Association for Business Economics, Evans repeated his view that the Fed should be « exceptionally patient » in tightening monetary policy, even if the result is inflation temporarily breaching the Fed’s 2 percent target. He also repeated that the Fed should follow a « shallow » path when it does raise rates.
[more of last week Fed officials remarks by following the link]
Emerging markets:
Brazil: as we were indicating in our recent notes and daily briefing, Brazil continue to search approaches to refrain from engaging into genuine structural reforms. We see any postponing of structural reforms as a very negative sign which would pursue Brazil stagflation economic scenario.
Russia: the World Bank joined other institutions in indicating that the cost of sanctions will be much more negative for Russia than for the global economy. We see the recent weaknesses to be short lived for the eurozone while Russia government attitude to avoid reforms (as conservatism struck a win in the public debate in the aftermath of the Ukrainian crisis). Energy prices weakening is the most worrying development for both the economic prospect as well as the stability of the Russian government (please see our Russia update note).
Turkey: Fed concern is increasingly stressing the country vulnerabilities. These will require from President Erdogan a real choice between: pursuing reforms and good governance or aligning with Russia. Nato and EU need a reformed Turkey in order to avoid pushing the risk that Turkey side with “radical islam” in the on-going war against XVI century ideas. We have reported in our previous daily briefings that Turkey have provided asylum to Muslim Brotherhood after Qatar has expelled them because Qatar wants to reduce the pressure on its involvement in financing terrorism.
Turkish Lira Falls on Fed Concern as Central Bank Cuts Funding
Turkey’s lira slid to a seven-month low as higher central bank funding costs failed to ease concern that an increase in Federal Reserve interest rates will dent the appeal of the nation’s assets.
Yields on 10-year government bonds jumped 31 basis points to a five-month high of 10.01 percent. The currency sank for a third day, dropping 0.6 percent to 2.2756 per dollar at 6:15 p.m. in Istanbul, the weakest since Feb. 4. Turkey is among countries most vulnerable to shocks from higher U.S. rates, Fitch Ratings said this month.
The central bank has reduced the amount of liquidity it provides at one-week repurchase auctions, raising banks’ average funding costs to 8.61 percent on Sept. 26, the highest since July 17, according to data on the central bank’s website. Last week it auctioned 31 billion liras ($13.6 billion), down from 43 billion liras a week earlier. It has offered 5 billion liras so far this week. The central bank left all of its main interest rates unchanged last week.
Ruble Drops to Record as Central Bank Intervention Level Nears
The ruble weakened to a record, approaching the level at which Russia’s central bank said it would step in to support the world’s worst-performing currency this quarter.
The ruble fell 0.8 percent to 44.2450 versus the central bank’s target basket of dollars and euros at 8:10 p.m. in Moscow. That’s within 0.4 percent of the 44.40 threshold that would prompt the monetary authority to begin buying rubles according to its policy guidelines. Ten-year government bonds retreated, lifting the yield four basis points to 9.36 percent.
Policy makers last intervened in May, bringing to $40 billion the amount Russia sold this year to counter an exodus from local assets that accelerated after President Vladimir Putin annexed Ukraine’s Crimea region in March. Russian companies are set to face dollar-funding stress as $35 billion of debt matures in December, while U.S. and European Union sanctions over the Ukraine conflict propel outflows, Morgan Stanley analysts wrote in a Sept. 26 note.
Asia: Fear not the Fed, but do the homework
Some Asian economic officials worried at the last G-20 meeting of finance ministers and central bank governors (Cairns, Australia, September 20-21, 2014) that a widely expected monetary tightening in the United States would force them to follow suit and damage their own growth dynamics.
I am assuming that this was an earnest policy concern rather than the usual attempt to blame policy mistakes on the proverbial external shocks.
With that important clarification out of the way, I would like to calm these Asian fears with two arguments.
First, the Federal Reserve is nowhere close to any policy change that would force Asian countries into growth-stifling interest rate hikes. And whenever such changes begin to take place, they are likely to be gradual and largely within the range of policy-neutral real interest rates.
Second, most of Asia’s largest economies (China, Japan, India, South Korea and Indonesia) could cope with the normalization process of U.S. monetary policies with some adjustments to their macroeconomic conditions.
Ringgit Falls to Five-Month Low as U.S. GDP Bolsters Rate Bets
Malaysia’s ringgit dropped to the lowest level in more than five months after an acceleration in U.S. economic growth strengthened the case for the Federal Reserve to raise interest rates next year.
U.S. gross domestic product increased at the fastest pace since 2011 last quarter, data showed on Sept. 26. A payrolls report due Oct. 3 is forecast to show companies in the world’s largest economy hired more than 200,000 workers this month. The Asian Development Bank on Sept. 25 lowered its 2014 growth estimate for Southeast Asia to 4.6 percent from 5 percent amid moderating demand in some of the region’s biggest economies.
“Stronger U.S. GDP revisions driven by demand ups the ante for the Fed to tighten,” said Vishnu Varathan, an economist at Mizuho Bank Ltd. in Singapore. “The jobs report will feed into expectations U.S. rates will rise sooner rather than later.”
Economic News
Economic news: In our recent note Perception & reality: closing the gap using big data, we were indicating “The widespread idea that all governmental institutions have become rotten to the core is fuelling the political agenda of the populist parties. The elites in the UK are increasingly attracted by the UKIP’s ideas and they are saying so out loud. The UKIP’s appeal is based solely on a narrow view of protecting privilege. To learn more of our thinking on this topic, check out our report, “The tea party’s hidden agenda”. However, technology productivity improvement and energy / commodity prices decrease are likely to provide the boost needed to: 1) postpone rate normalisation, 2) reduce the eurozone existential threat, 3) enable EM central banks to avoid urgent rate hikes, while doing the reforms (we continue to worry about countries which have not undertaken genuine reforms with the hope that the carry trade will buy more time), 4) help developed world economies to undertake governance improvement reforms (OECD take avoidance initiative, G-20 initiatives) which will help reduce the mistrust which constitute in our view the most important risk going forward (such a mistrust is the most efficient “marketing tool” used by both militants and Jihadists to hire their followers).
Jordan Says SNB’s Arsenal Includes Negative Interest Rates
Sept. 29 (Bloomberg) — The Swiss National Bank won’t rule out negative interest rates or any measure to ensure stable prices, its President Thomas Jordan said today.
A “negative interest rate is in our arsenal of instruments,” Jordan told reporters at the Geneva Press Club. “We don’t exclude any measure to meet our mandate of price stability.”
The SNB set a cap of 1.20 per euro on the franc three years ago to shield the economy from the euro area’s debt crisis. At its policy review this month, the central bank cut its inflation forecasts for 2015 and 2016 citing a deteriorating global environment. It sees consumer prices rising just 0.1 percent this year, with economic growth of 1.5 percent.
“In case of need, we can take supplementary actions immediately,” Jordan said, adding the institution hadn’t intervened to defend the cap since September 2012. “The risk of deflation has increased.”
With the franc trading within one centime of its 1.20 per euro cap and European Central Bank stimulus intensifying pressure, the SNB will probably need to resume purchases to defend the level, according to 15 of 24 respondents in Bloomberg’s monthly survey of economists, published prior to the SNB’s policy announcement on Sept. 18. Ten economists said the central bank may even have to resort to charging banks for excess reserves they keep with it to stave off currency inflows.
State data points to German inflation holding steady in September
(Reuters) – Annual inflation in Europe’s largest economy will probably remain at 0.8 percent for a third month in September, data from some German states suggested on Monday, maintaining pressure on the European Central Bank to revive the euro zone economy.
Data from four federal states showed yearly inflation holding steady, while consumer price pressures picked up by 0.1 percentage points in two states.
BOK Rate-Cut Bets Risk Outflow as Premium Shrinks: Korea Markets
Sept. 30 (Bloomberg) — Bets that the Bank of Korea will cut interest rates for a second time this year have slashed the yield premium on the nation’s bonds to a seven-year low, risking an outflow from won debt.
The extra yield that 10-year sovereign notes offer over U.S. Treasuries fell to 39 basis points on Sept. 26, the least since 2007, data compiled by Bloomberg show. Global funds pulled 82 billion won ($78 million) from local debt in August, the first outflow in six months, according to the Financial Supervisory Service.
Nomura Holdings Inc. and Deutsche Bank AG are among lenders predicting BOK Governor Lee Ju Yeol will lower borrowing costs even as the won weakens amid signs the Federal Reserve will raise its key rate next year. The nation has “sufficient policy room” to support growth, Finance Minister Choi Kyung Hwan said on Sept. 16, four days after Lee said excessive easing increases the risk of capital outflows.
“The narrowing spread against U.S. Treasuries will erode the attractiveness of Korean bonds over time,” Ng Kheng Siang, Singapore-based Asia Pacific head of fixed income at State Street Global Advisors, which oversees more than $2.4 trillion globally, said in a Sept. 24 e-mail interview. “There will be concern in most emerging bond markets as the U.S. raises rates. Portfolio adjustments by investors may trim some exposures in these markets, including Korea.”
UPDATE 7-U.S. crude rises on economic data, strong products market
* Chinese Aug industrial profits fall
* Strike trims Libyan oil output
* Stronger gasoline futures underpin U.S. oil
NEW YORK, Sept 29 (Reuters) – U.S. crude oil rose on Monday, hovering around $94 a barrel on support from strong U.S. economic data last week, while Brent edged up after nearing a two-year low last week.
With U.S. refinery maintenance season around the corner, analysts said prices for U.S. crude, or West Texas Intermediate (WTI), may come under pressure. Gasoline prices have jumped around 6 percent in the last two weeks due to refinery maintenance shutdowns, and strength in gasoline has supported crude prices.
How Hong Kong unrest may shake world economy
The protests in Hong Kong are not yet sparking fears that the region will become the next trouble spot for the global economy, but such concerns will grow if the conflict intensifies and ensnares China, economists say.
Hong Kong is small, producing 0.4% of the world’s gross domestic product. IHS Global Insight estimates its economy will grow 2.5% this year and 3.2% in 2015.
The region is a small U.S. trading partner, accounting for 0.3% of U.S. imports and 2.7% of exports, according to the Office of the U.S. Trade representative and PNC Financial Group. Pro-democracy protests that don’t turn more violent likely would have minimal effects on the global and U.S. economy, says Bill Adams, PNC’s senior international economist.
Consumer Spending Accelerates in August
American consumers spent more in August, a positive sign for the U.S. economy which appears to have shifted into a higher gear.
The Commerce Department said on Monday consumer spending rose 0.5 percent last month after being unchanged in July. The growth in August was just above the median forecast in a Reuters poll of a 0.4 percent gain.
RPT-Six years after AIG bailout, trial asks: was it legal?
Reuters) – One of the more unusual trials to come out of the 2008 financial crisis is set to begin on Monday, when a federal judge will consider whether the U.S. government’s rescue of American International Group Inc was, in fact, legal.
In a case that explores the limits on U.S. government power in responding to major financial crises, the trial is expected to revisit in detail the New York Federal Reserve’s September 2008 decision to extend a bailout package to AIG as the insurance giant was minutes from bankruptcy.
The AIG bailout, on the heels of the Lehman Brothers collapse in 2008, preceded the « too big to fail » auto and bank bailouts the federal government undertook during a U.S. financial crisis underpinned by faulty mortgage lending.
The major players in that drama will be back on the Washington stage during the six-week trial: Former Federal Reserve Chairman Ben Bernanke, and former Treasury Secretaries Timothy Geithner and Henry « Hank » Paulson.
Indonesia revises 2015 GDP growth forecast slightly up
JAKARTA, Sept. 29 (Xinhua) — The Indonesian government and parliament on Monday agreed to rise the forecast of economic growth next year to 5.8 percent from the initial target of 5.6 percent with lower state budget deficit, lawmaker said here.
They also scaled down the forecast of the deficit to 2.21 percent of GDP in 2015 from the initial forecast of 2.32 percent, according to Ahmadi N. Supit, chairman of the House of Representative’s Budget Committee. Both government and parliament agreed to cut inflation forecast to 4.4 percent from 4.6 percent, he said at the parliament.
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 been intensifying to: 1) fight disinformation (we were talking about it in our recent daily briefings), 2) provide short term medical assistance (France, US, Israel, etc.) with the help of military expertise – when numerous Western African countries are indicating the lack of medical personnel – , 3) provide financial support (wealthy donors, government funding, NGO help etc.), and 4) fast track the Ebola drug trial (the drug has had a very good result in the experimental tests).
Notwithstanding the on-going difficulties, and the short term negative economic effect, we continue to believe that the fight against Ebola will succeed and will clear the way to the increase in Africa investment and economic support (cf. our note “This time for Africa” which stressed that Africa is heading to experience the same development China had experienced when it joined the WTO in 2001 with positive consequences for both Africa and the world economy). The global coordination triggered by the response to the terrorist risk might help responding to the Ebola risk as well (due to the threat a dirty weapon using Ebola virus constitute). We disagree with the bet of Cocoa upward spiral because many analysis assumes the doom-and-gloom scenario which is unlikely to happen. We see the intensification of the worrying rhetoric as a part of the genuine action to keep the subject high in the leaders to do list.
Experts expect Ebola in West Africa will affect cocoa prices
Hedge funds are betting that the price of cocoa will rise on concern that the deadly Ebola disease will disrupt supplies from West Africa, which produces 70% of the global supply.
Money managers raised their cocoa investments by the highest amount in 16 weeks. As governments and international organisations struggle to contain Ebola, concerns are mounting that the outbreak could spread from nations including Liberia and Guinea to neighbouring Ivory Coast, the top cocoa producer.
UN mission to combat Ebola opens HQ in Ghana
DAKAR, Senegal: The UN mission to combat Ebola opened its headquarters on Monday in Ghana, where it will coordinate international aid to assist West Africa to combat the accelerating crisis.
This outbreak has spiraled into the worst ever for Ebola, and the World Health Organization says it is has linked more than 3,000 deaths to the disease. Even that frightening figure is likely an underestimate of the true toll, said WHO. Liberia, Sierra Leone and Guinea have been hit hardest. Senegal and Nigeria have also been touched, but have not reported a new case in weeks.
Ebola’s spread brings host of other diseases in its wake
Almost 3,000 West Africans have died from the current outbreak of Ebola virus, and on Tuesday, the U.S. Centers for Disease Control and Prevention warned that by January between 550,000 and 1.4 million people could be infected if nothing is done.
But the outbreak, which began in Guinea in March before spreading to Liberia, Sierra Leone, Nigeria and Senegal, is only part of the terrifying picture. Last week, fear of Ebola caused locals to kill eight members of an Ebola education team, sick people are avoiding clinics, and the World Health Organization says that 208 of the 373 infected healthcare workers in the region have died from the virus.
As a result, ”the health services of West Africa have to a very large degree broken down,” according to Jeremy Farrar, director of the Wellcome Trust international health charity.
Fauci says ‘inadequate’ world response won’t control Ebola
BETHESDA, Md. — The nation’s top expert on infectious diseases warns that without a bigger response the world risks seeing « close to the worst-case scenario » in the Ebola crisis in west Africa, amid projections that a million people could die.
« The community of nations — European nations, other developed countries that have resources to do it, the UN, the African Union — if they get involved in a very aggressive way to do infection control, we can put an end to this, I’m confident, » says Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, part of the National Institutes of Health. « But if we have a lot of motion but no action, a lot of signing of resolutions with no resources, it’s not going to happen. We’re not going to control it. »
Ebola Outbreak: Thailand’s Siriraj Hospital Creates ‘Antibody Treatment’ for Deadly Virus
A Thai hospital has claimed to have successfully developed an « antibody treatment » against the Ebola virus that has killed over 3,000 people in West Africa this year.
Siriraj Hospital at Mahidol University doctors state they have developed a formula that will trigger antibodies to fight the disease.
However it is unclear exactly what the treatment is, with some having reported the breakthrough is a vaccine and other saying it is a cure.
The National News Bureau of Thailand reported that the medical breakthrough will be announced in a press conference scheduled for 2 October.
The development could lead to a treatment applied after infection, as opposed to a pre-infection vaccine, to stimulate the body’s natural immune system to fight off infection.
Doctors at the hospital told the Indian news website NDTV that researchers did not import the Ebola virus into Thailand to develop the treatment, but instead used less-virulent viruses that produce similar haemorrhagic fevers.
What America’s Richest Man Thinks We Should Do About Ebola
America’s richest man has a plan to fight Ebola, and he isn’t shy about trumpeting its greatest benefactor: the United States.
In his first interview since donating $50 million to counter the quickly-expanding threat of Ebola in West Africa, Bill Gates outlined the obligations America has in shaping the institutions that will curb the crisis.
He told an intimate audience at the Bank of America building in Washington, D.C., today that the Ebola outbreak is « a great example of where the world needs to come together. »
Gaza
Gaza: As Hamas and Fatah head toward 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. The social media focus against ISIL is likely to require a total rethinking of communication out the Muslim Brotherhood, as we were forecasting a couple of weeks ago. Indeed, the muslim community push back against “barbaric groups naming their fight in the name of Islam” may back-fire on Muslim Brotherhood political arm. As soon as Muslim Brotherhood will move to condemn ISIL, the end of terror will be close. But Kremlin and Commodity bugs interests groups are likely to postpone such a shift in the strategy.
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).
Netanyahu Tells World Leaders ‘Hamas is ISIS and ISIS is Hamas’
Prime Minister also refutes Palestinian leader’s accusations of « genocide » in Gaza Strip
Israeli Prime Minister Benjamin Netanyahu pushed back Monday against Palestinian leader Mahmoud Abbas’ claims that Israel was waging a “genocide” against Palestinians, and called on world leaders to treat Palestinian militant group Hamas as indistinct from the Islamic State of Iraq and Greater Syria (ISIS).
“Israel dropped fliers, made phone calls, sent text messages, broadcast warnings in Arabic, all to allow civilians to evacuate targeted areas,” Netanyahu said, arguing that Israel took all available precautions to protect civilian lives, while Hamas deliberately fired rockets from areas where children live and play. “Israel was using its missiles to protect its children, Hamas was using children to protect its missiles,” he added.
Abbas, Netanyahu trade accusations at the UN
UNITED NATIONS (AP) — Palestinian President Mahmoud Abbas and Israeli Prime Minister Benjamin Netanyahu attacked each other in speeches before world leaders at the U.N. General Assembly. Here is look at some of their remarks: GENOCIDE: In his speech on Friday, Abbas accused Israel of conducting a « war of genocide » during this summer’s 50-day war in Gaza, saying the Israeli military targeted civilians and committed war crimes.
PM tells UN: Israel’s fight is the world’s fight
Netanyahu also cautioned against focusing world efforts on battling Islamic State at the expense of ignoring Iran’s nuclear aspirations, saying that “to defeat ISIS [Islamic State] and leave Iran as a threshold nuclear power is to win the battle and lose the war.”
Indian, Israeli PMs meet in New York on defense cooperation
NEW DELHI, Sept. 29 (Xinhua) — Indian Prime Minister Narendra Modi met with his Israeli counterpart Benjamin Netanyahu Sunday in New York on defense cooperation in what is seen as a shift of India’s policy towards the Jewish state, said local media Monday. The Indo-Asian News Agency quoted the prime minister’s office as saying Monday that Netanyahu also invited Modi to Israel, which the latter accepted. A statement from the Indian prime minister’s office said « The two leaders reviewed the robust relationship, and rapidly growing trade. They also discussed how ties could be further expanded. »
Sunday’s meeting was the first high-level meeting between India and Israel since Prime Minister Ariel Sharon’s 2003 visit to India. As chief minister of Gujarat, Modi had visited Israel in 2006.
At UN, Netanyahu asks Arab states for new peace plan
Prime minister says peace possible with ‘fresh’ approach from Israel’s neighbors; ties Abbas to Hamas ‘war crimes.’
NEW YORK – Prime Minister Benjamin Netanyahu on Monday called on moderate Arab states to update the 2002 Arab League peace initiative to match current Middle East reality, particularly in view of the civil war in Syria and the wave of Islamic terror being spearheaded by Islamic State.
Addressing the UN General Assembly in New York, Netanyahu argued that improved relations between Israel and the Arab states would contribute to advancing peace with the Palestinians, rather than vice versa. The prime minister, however, did not present a practical plan for achieving this.
“With a fresh approach from our neighbors, we can advance peace despite the difficulties,” he told a half-empty hall. “In Israel, we have a record of making the impossible possible. We’ve made a desolate land flourish. … Peace, of course, would enable Israel to realize its full potential. … But the old template for peace must be updated. It must take into account new realities and new roles and responsibilities for our Arab neighbors.”
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).
Obama says US ‘underestimated’ rise of ISIS, admits ‘contradictory’ Syria policy
President Obama acknowledged Sunday that U.S. intelligence officials « underestimated » the threat posed by the Islamic State and overestimated the Iraqi army’s capacity to defeat the militant group.
The president said in a wide-ranging interview on CBS’ “60 Minutes” that the Islamic State militants went « underground » after being squashed in Iraq and regrouped under the cover of the Syrian civil war.
« During the chaos of the Syrian civil war, where essentially you have huge swaths of the country that are completely ungoverned, they were able to reconstitute themselves and take advantage of that chaos, » Obama said.
Obama concedes US underestimated Islamic State threat, acknowledges Syria policy helps Assad
WASHINGTON (AP) — President Barack Obama is acknowledging that U.S. intelligence agencies underestimated the threat from Islamic State militants in the Middle East and overestimated the ability and will of Iraq’s army to fight such extremists.
Obama described the U.S. intelligence assessments in response to a question during a CBS « 60 Minutes » interview that aired Sunday, in which he also conceded that the U.S. led military campaign against that group and an al-Qaida affiliate in Syria was helping Syrian dictator Bashar Assad, a man the U.N. has accused of war crimes.
Tracing the Rise of ISIS Into a Menace of Terror
WTI Crude Set for Biggest Loss in a Week With Brent
West Texas Intermediate crude headed for its biggest loss in a week as U.S. economic data bolstered the outlook for higher interest rates. Brent declined in London amid concern Chinese demand is slowing.
Futures dropped as much as 0.9 percent in New York and 0.8 percent in London. Both grades were heading for their biggest quarterly loss in more than two years. The dollar traded near its highest closing level against the euro in more than two years, curbing the appeal of commodities, amid speculation the Federal Reserve will increase interest rates. Gauges of Chinese manufacturing are due tomorrow and on Oct. 1, and U.S. payrolls data will be released on Oct. 3.
U.S. Congress vote on campaign against Islamic State could lag to 2015
(Reuters) – The U.S. Congress might not vote until next year on an authorization for President Barack Obama’s air strikes against Islamic State militants in Iraq and Syria, congressional aides said on Monday, despite some lawmakers’ insistence that approval is already overdue.
The U.S. military began a campaign in Iraq weeks ago to halt advances by the Sunni group known as Islamic State, which has killed thousands of people while seizing swaths of territory in Iraq and Syria. The United States and five Arab nations began air strikes against targets in Syria last week.
U.S., Kurds strike at Islamic State in Syria
(Reuters) – U.S. warplanes attacked Islamic State targets in Syria overnight, in raids that a group monitoring the war said killed civilians as well as jihadist fighters.
The Britain-based Syrian Observatory for Human Rights said the strikes hit mills and grain storage areas in the northern Syrian town of Manbij, in an area controlled by Islamic State, killing at least two civilian workers.
Strikes on a building on a road leading out of the town also killed a number of Islamic State fighters, said Rami Abdulrahman, who runs the Observatory which gathers information from sources in Syria.
Germany Unable to Meet NATO Readiness Target
Germany’s military is unable to meet its medium-term readiness target should NATO call on its members to mobilize against an attack, officials said Monday.
The revelation follows days of embarrassing reports about equipment failures that included German army instructors being stranded in Bulgaria en route to Iraq when their plane broke down, and delays in sending weapons to arm Kurdish fighters because of another transport problem.
In the latest incident, the military said one of two aging C-160 aircraft flying German aid to Ebola-affected West Africa has also been grounded on the island of Gran Canaria since the weekend, awaiting repairs.
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 (and specifically would constitute a Eurozone existential threat), 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, international experts are rushing to find financial solutions for the New Russia political strategy, outside the West energy deals – e.g. with Turkey – ). 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”. Meanwhile, Russia accelerates 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).
Turkey-Russia energy deal intact, says minister
Russia will continue its $22 billion nuclear energy investments in Turkey, and both countries will strengthen their economic cooperation despite differences in outlook on regional political issues, Energy Minister Taner Yıldız has said.
Speaking in Istanbul at a special meeting of World Economic Forum’s titled “Unlocking Resources for Regional Development,” Yıldız said he will visit Moscow tomorrow to discuss Russia’s economic investments in Turkey.
In reference to Russia’s energy investments in Turkey worth $22 billion, including nuclear power plants, he said despite Turkey and Russia’s differing opinions on the political crises in the Middle East, such as in Syria, their “mutual interdependency takes priority.”
The Akkuyu Nuclear Power Plant project is estimated to cost around $20 billion, and a total of $3.5 billion worth of equipment is expected to be used in its construction process. $1.8 billion of this will be spent this year alone.
Funds received from Russia are expected to be used specifically for the infrastructure of the plant, constructing roads, power lines, water pipelines, temporary housing and cranes.
If the project license is approved, the reactor construction is estimated to begin in 2016 and become operational by 2020, with the entire plant fully operational by 2023.
Ukrainians say Russian troops captured them in east Ukraine
Reuters) – Two Ukrainian soldiers have offered new evidence of direct Russian military involvement in eastern Ukraine, saying they were captured by Russian troops in a battle that became a turning point in the conflict.
Their testimony, given after being freed from a month’s captivity, casts further doubt on Moscow’s denials of Western accusations that it helped pro-Russian rebels stave off defeat last month by sending in soldiers and weapons from Russia.
The Russian Defense Ministry, contacted by phone on Monday, declined to comment on their remarks.
Stepping out of a bus on at dusk on Sunday during a prisoner exchange, Alexei Koshelenko said he was captured during heavy fighting on Aug. 24-25 near the town of Ilovaysk, east of the separatist stronghold of Donetsk.
Russia Wheat Export Price Falls for 1st Time Since July
Spot prices for Russian milling wheat at the main export hub declined last week for the first time since July amid ample global supply, according to Andrey Sizov, managing director at market researcher SovEcon.
The average price for wheat with protein content of 12.5 percent fell to $237 a metric ton at Novorossiysk Commercial Sea Port PJSC by Aug. 26, from $245 the week before, he said. Global wheat production will rise to a record 719.95 million tons in the 2014-15 season, the U.S. Department of Agriculture said Sept. 11.
“Russia has ignored all this,” Sizov said today by phone from Moscow. “Now things are coming apart.”
Why Iran Is Wrong In Its Talk Of A New World Order
Change has come, or so the Obama administration has been preaching since the election of President Hassan Rouhani, arguing that a deal with Iran has now become possible. Rouhani and his foreign minister, Javad Zarif, also jumped on the word « change » and the possibility of a « historic » deal.
Yet in Zarif’s version, it is America and the world – not Iran – that have changed. Globalization and other factors, Zarif believes, have made the old world order anachronistic: old rules should be replaced with new ones that give non-Western countries a bigger role in international affairs. And thus, the faster America and the West realize this new reality, the faster « change » can result in a deal, and the faster some pressing Middle Eastern problems can be solved.
The Iranians have not been the only ones to think that the « decline of the West » requires new rules. Russia’s Vladimir Putin has similar ideas. Turkey’s Recep Erdogan thought he could revive the Ottoman Empire. Brazil gave the West a hard time during its two-year membership in the UN Security Council. Even Egypt’s Mohamed Morsi believed that his miserable government and its devastated economy could join the anti-Western bloc led by BRICS (Brazil, Russia, India, China and South Africa).
Russian FM Lavrov criticizes West at UN
Russia opens criminal case on Kiev for ‘genocide’ in east
Russia opened a criminal case on Monday into what it called Kiev’s genocide of Russian-speaking residents in eastern Ukraine in a move that could increase tensions during a strained ceasefire in the region.
An official statement said Russian-speaking citizens were targeted by Kiev forces using heavy weapons to kill over 2,500 people in the « Luhansk and Donetsk people’s republics », the breakaway regions in the east.
The investigation could ratchet up tensions between the post-Soviet neighbours weeks after Kiev and pro-Russian rebels agreed on a ceasefire earlier this month that has been marred by daily skirmishes and artillery shelling.
« The Investigative Committee opened has opened a criminal case into the genocide of the Russian-speaking population of Ukraine’s southeast, » said the statement by the Investigative Committee of the Russian Federation, a law enforcement body that answers only to President Vladimir Putin.
RPT-ANALYSIS-Ukraine leader clings to European goal despite Putin
* Poroshenko says ceasefire shows his peace plan working
* But many question his plans for limited self-rule in the east
* Leader expects election to give him mandate for pro-EU reforms
* Russia’s Putin still battling Kiev’s pro-Europe moves
KIEV, Sept 28 (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.
And, a month away from a parliamentary election which he hopes will bring a strong coalition of support for sweeping reforms, Poroshenko’s peace plan is coming under greater criticism at home – even from some of his erstwhile allies.
A U.S. refusal to provide Kiev with high-precision weaponry required to beat Russian-backed separatists on the battlefield, and the European Union’s move to defer implementation of part of a key pact with Ukraine to appease Moscow have spelled the clear message that Western support for Kiev has its limits.
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).
PM’s US Visit: Modi’s 10-trillion-dollar breakfast with US CEOs, asks investors to shed fears
NEW YORK: Prime Minister Narendra Modi had a $10-trillion Monday morning as he pitched India to some of the largest global investors and financiers, asking them to look afresh at the country and urging them to shed any fears that they might have developed about investing in the country in recent years.
After storming Madison Square Garden on Sunday, Modi kicked off one of the most extensive interactions between the American business community and the Indian government ahead of his mee ..
Supreme Court rules 5-4 for Republican plan to limit early voting in Ohio
The Supreme Court’s conservatives cleared the way Monday for Ohio to restrict early voting in the state, on the eve of the day it was to start.
The court granted the state’s request to stay decisions of lower courts that threw out the state’s new plan, passed by the Republican-led legislature. But the court’s four liberal justices said they would have stayed out of the case and left those decisions in place.
Ohio argued that the new plan–reducing from 35 to 28 the number of days voters could cast an early ballot–could not be seen as violating the rights of minority voters.
“Ohio offers more early-voting options than 41 other states and the District of Columbia,” its petition to the court said.
White House fence-jumper made it far deeper into building than previously known
The man who jumped the White House fence this month and sprinted through the front door made it much farther into the building than previously known, overpowering one Secret Service officer and running through much of the main floor, according to three people familiar with the incident.
An alarm box near the front entrance of the White House designed to alert guards to an intruder had been muted at what officers believed was a request of the usher’s office, said a Secret Service official who spoke on the condition of anonymity.
Senator to seek probe of Chicago air center sabotage
CHICAGO – A U.S. senator said Sunday that he will seek an investigation into how a contract employee was able to sabotage a regional control center and bring Chicago’s two international airports to a halt.
Bill Gross Departure Not Seen as ‘Imminent Risk’ to Pimco Total Return Fund
NEW YORK (TheStreet) — Research firm Morningstar doesn’t believe Bill Gross’s surprise departure from Pimco will pose an immediate risk to the firm’s flagship Pimco Total Return Fund (PTTAX) mutual fund.
PRECIOUS-Gold poised for worst month in 15 months on dollar strength
SINGAPORE, Sept 30 (Reuters) – Gold held steady above a nine-month low on Tuesday, but was poised to post its sharpest monthly loss in 15 months as a rapid climb in the dollar dimmed the metal’s appeal.
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.
A recent survey have indicated that 85% of UK manufacturers support UK remaining a member of EU. UKIP however is fighting for its ideological existence while helping, through weakening EU, Russian Eurasia and the push back against G-20 actions to improve governance.
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). China has joined the group calling for innovative solutions to increase a civil nuclear deal.
EU trade nominee open to dropping investor rights in U.S. pact
* Issue of investor protection dominates new trade chief’s hearing
* Europeans fear clause will make U.S. companies too powerful
* Malmstrom says Russia can’t amend EU-Ukraine trade accord
* EU-U.S. talks in 7th round, could create biggest trade deal
BRUSSELS, Sept 29 (Reuters) – The woman likely to become the EU’s new trade chief sought to reassure lawmakers on Monday that U.S. companies will not be able to challenge Europe’s safety and environmental rules if Brussels and Washington agree the world’s biggest trade deal.
Sweden’s Cecilia Malmstrom told the European Parliament she did not rule out removing contentious investment protection provisions from the pact if Europeans believed they would allow U.S. firms to circumvent EU rules and standards.
CORRECTED-UPDATE 1-France’s Total wins Egypt gas exploration licence-source
CAIRO, Sept 29 (Reuters) – French oil company Total has been awarded a licence to explore for natural gas in the Nile Delta, a source in the state-run Egyptian Natural Gas Holding company (EGAS) said on Monday.
« France’s Total won the bid to explore in Sector 2 in the Delta region, » the source told Reuters on condition of anonymity.
In December, Egypt’s General Petroleum Corporation (EGPC) and Natural Gas Holding Company (EGAS) announced an international auction for oil and gas exploration concessions in accordance with production sharing agreements.
Report: E.U. to accuse Apple of illegal tax deals with Ireland
The European Union will accuse Apple of benefiting from illegal tax deals with the Irish government, the Financial Times reported Monday.
Apple’s tax rate in Ireland is less than 2 percent. According a E.U. probe, that low rate was the product of backroom deals with Irish authorities and the iPhone maker, the Financial Times reported, citing unnamed “people involved in the case.”
Apple denied there was a quid pro quo to bring jobs to Ireland in exchange for preferential tax treatment. That could violate the European Union’s rules against “state aid,” illegal use of taxpayer-funded resources to give a company a competitive advantage over other E.U. markets.
Spanish Bonds Drop Amid Catalan Tension as Italian Debt Slides
David GoodmanSep 29, 2014 11:26 am ET
Sept. 29 (Bloomberg) — Spanish government bonds fell as Prime Minister Mariano Rajoy and Catalonia’s President Artur Mas clashed over whether Spain’s largest economic region can keep planning a referendum on separation.
Ten-year securities declined for a third day amid concern secession by Catalonia, which has a 193 billion-euro ($245 billion) economy, would reduce the capacity of the Spanish government to service and repay its debt. Italy’s bonds slid as the nation held its largest sale of bonds in a single day since June. Spain, Germany and France are also scheduled to sell debt this week.
“There seems to be an escalating political conflict in Spain,” said Daniel Lenz, lead market strategist for the euro area at DZ Bank AG in Frankfurt. “This uncertainty is not good news and is having a negative effect on Spain and other periphery countries. This week we have a bunch of auctions, so this may have an impact.”
UK housing market cools further as mortgage approvals slip
(Reuters) – British mortgage approvals slipped a three-month low in August, according to official data, falling slightly more than expected and adding to signs the housing market has cooled in recent months.
The Bank of England said mortgage approvals numbered 64,212 last month, the weakest reading since May and down from 66,100 in July. Analysts had forecast a fall to 65,000.
Economists said the decline was a consequence of tougher checks on mortgage borrowing introduced in April.
UK firms’ risk appetite picks up even as election looms – Deloitte
LONDON, Sept 29 (Reuters) – British companies are feeling their most confident about taking on business risk in seven years despite worries about an election in 2015 and a possible referendum on Britain’s membership of the European Union, a survey showed on Monday.
In a change of mood likely to be welcomed by the Bank of England, 72 percent of chief financial officers said now was a good time to take risk onto their balance sheets, according to the quarterly survey by accountants Deloitte.
That was up from 65 percent in the previous survey conducted in the second quarter.
Brexit’ will benefit British business: UKIP
British business will not be harmed by a U.K. exit from the European Union, the leader of Britain’s eurosceptic U.K. Independence Party (UKIP) told CNBC — despite the latest survey showing the vast majority of manufacturers in favor of remaining in Europe.
« The fact is this country trades at a massive deficit with Europe. They sell us far more Mercedes and bottles of champagne than we sell them bottled beers and cars made here, » Farage told CNBC, adding, « They need us more than we need them. »
In a survey published Monday, U.K. manufacturing trade body EEF found that 85 percent of its members would vote to stay in the EU, with only 7 percent of companies voting to leave. The remaining 8 percent responded « don’t know. »
China calls for creativity in Iranian nuclear talks
BEIJING, Sept. 29 — China’s Foreign Ministry says Iranian nuclear talks have reached a final crucial stage and China hopes all parties can creatively seek a solution to difficult issues.
All parties demonstrated the political will to reach a comprehensive agreement at an earlier date during the seventh round of nuclear talks, Chinese Foreign Ministry spokeswoman Hua Chunying said at a daily news briefing.
This round of negotiation between Iran and the six world powers – the United States, Russia, China, Britain, France, Germany started on Sept. 19 and concluded last Friday. Among the attendees were EU foreign policy chief Catherine Ashton and Iranian Foreign Minister Mohammad-Javad Zarif, plus delegates from the six major powers.
Europe schism haunts Cameron as pre-election battle drums begin
(Reuters) – The British Conservative party’s schism over Europe marred Prime Minister David Cameron’s last major party conference before a 2015 election, overshadowing his party’s attempt to pitch a growing economy and lower welfare spending to voters.
The defection of a second Conservative lawmaker to the anti-EU United Kingdom Independence Party on the eve of the conference ratcheted up the pressure on Cameron to take a tougher line on Europe, immigration and welfare less than eight months before a national election in May.
After a tumultuous month in which Cameron has taken Britain into battle with Islamist militants in Iraq and even pondered his own demise if Scotland had voted to break apart the United Kingdom, Cameron conceded it was a poor start to the conference.
Chancellor Osborn Tweet “We want low taxes but taxes that are paid. Some tech multinationals divert profits offshore to avoid tax.We’ll stop that at Autumn Statement »
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
Pro-democracy protesters, some 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.
Police officers tried to negotiate with protesters camped out on a normally busy highway near the Hong Kong government headquarters that was the scene of tear gas-fueled clashes that erupted the evening before.
An officer with a bullhorn tried to get them to clear the way for the commuters. A protester, using the group’s own speaker system, responded by saying that they wanted Hong Kong’s Chief Executive Leung Chun-ying to demand a genuine choice for the territory’s voters.
« Do something good for Hong Kong. We want real democracy! » he shouted.
Hong Kong protests: What you need to know
Hong Kong (CNN) — Hong Kong is in the midst of its longest series of political protests since the 1997 handover.
Pro-democracy activists say they are making good on a long-threatened vow to try and paralyze the city’s financial district — a key business hub for the region and beyond — through sit-ins and civil disobedience.
Clashes between students and police this weekend have been the most heated in a long summer of anti-Beijing protests. Dozens have been reported injured by authorities.
Their goal is to pressure China into giving the former British colony full universal suffrage.
Beijing has so far refused to cede ground on its stance, setting the scene for growing, and more intense, clashes.
Hong Kong won’t accept Beijing’s candidates says Democratic Party’s Martin Lee
Xinjiang locals fight « People’s war » as terrorist threats still linger
URUMQI, Sept. 29 (Xinhua) — Since China’s far western Xinjiang region launched a « People’s war » against terrorism last spring, people from all ethnic groups have joined forces with the government and police in the fight.
With the increasing frequency of deadly terrorist attacks in Xinjiang, the regional government launched a year-long campaign, and Xinjiang Party chief Zhang Chunxian declared « a people’s war » against terrorism in late May.
The official asked people in Xinjiang to become clear-minded, firmly fend off infiltration by ethnic separatism and religious extremism, and safeguard national unity and social stability.
Police in the region have offered rewards for citizens who turn over guns and explosives or provide tips in the year-long special anti-terrorism campaign.
In mid-June, three assailants with axes entered a games room in Hotan City and attacked civilians playing chess and cards. Many people fought back before the police came. Shopkeepers rushed to defend their neighbors with sticks and fire extinguishers upon hearing the alarm. Two of the attackers were killed in the melee. The third, lucky to escape with his life, was seized by armed law enforcement.
« Anyone with a conscience should stand out and fight them, » said a truck driver who helped fight the mob. « We cannot tolerate any terrorist acts. »
Another group of suspected terrorists in Hotan was identified by police on July 27. Local civilians volunteered to help the police in tracking down the suspects.
Juneyao Group, Alibaba finance arm to pilot new lending platforms
The China Banking Regulatory Commission announced on Monday that it has approved the launch of two new private banks in an effort to promote innovation models for the country’s financial reform.
Back in July, the regulator gave consent to three such banks, which was considered a landmark effort for the government to open up the State-controlled financial market to private investors.
One of the two newly approved private lenders, MYbank, boasts the recently listed Alibaba Group Holding Ltd as a major founder.
Based in Hangzhou, Zhejiang province, MYbank has registered capital of 4 billion yuan ($651 million), with Zhejiang Ant Small and Micro Financial Services Group of Alibaba holding 30 percent of its shares. Other leading private companies such as Shanghai Fosun Industrial Technology Development Co Ltd under the conglomerate Fosun Group will hold 25 percent of its shares.
In a written statement sent to China Daily, MYbank said it will use the Internet as its major means of operation and will provide financial services and products with relatively simple structures to micro and small enterprises as well as individual customers on e-commerce platforms.
Microsoft offers gaming console in China at long last
SHANGHAI – Microsoft Corp. on Monday launched its Xbox One in China, the first foreign company to enter the potentially massive market after the Chinese government lifted a 14-year ban on video game consoles.
‘Corrupt Queen’ to be extradited as another fox is hunted down
The heroine of a corruption case that shocked the nation at the turn of the century will be extradited as the related procedures with the cooperative country are underway, the Bejing News reported on Monday.
Yang Xiuzhu, the former deputy Mayor of Wenzhou, East China’s Zhejiang Province, oversaw construction projects in the booming city in the 1990s. During that time, she made a fortune large enough to purchase in 1996 a five-story building worth $5 million in midtown Manhattan.
She escaped to America when her brother was under probe for corruption in 2003, and was eventually detained in the Netherlands in 2005 after Interpol issued a Red Corner Notice, an international arrest warrant requested by China, against her.
The eye-catching case was deemed as serious corruption and bribery, with the sum involved exceeding 253.20 million yuan ($41.26 million). That prompted the media to nickname her the « Corrupt Queen ». More than 100 people were investigated for evidence and 12 economic cases were involved, including the bribery case against the former Wenzhou Mayor Chen Wenxian, according to a report by the local municipal commission for discipline inspection in 2004.
BMW launches automated driving project in China with Baidu
FRANKFURT (Reuters) – German luxury carmaker BMW is teaming up with Chinese internet giant Baidu to start highly automated driving trials in Beijing and Shanghai.
BMW research vehicles capable of highly automated driving have already undergone thousands of kilometers of trials on German autobahns. The project will now be expanded to include other large cities in China, BMW said on Monday.
« BMW is embarking on a further research project which will pave the way for highly automated driving in China as well, » the Munich-based automaker said in a statement.
« China’s fast-expanding urban centers present the engineers with challenges such as multi-level highways. »
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). Banks shares are suffering from the combination of the increase perception of increase in risks and additional macro prudential constants to curb housing prices frothiness.
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 – ).
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.
Big bank sell-off drives ASX lower
The big banks all were lower with Commonwealth Bank of Australia, the biggest company on the ASX, tumbling 1.1 per cent to $74.43. Australia and New Zealand Banking Group and Westpac Banking Corp were down 1.5 per cent and 0.8 per cent to $30.53 and $31.65 respectively.
National Australia Bank meanwhile lost 1.9 per cent to $32.07, becoming the last of the big four banks to fall into a technical correction, down more than 10 per cent from its 2014 high in late April.
Most of the losses in the shares of the big banks occurred this month, in the wake of a 7 per cent slide in the Australian dollar. Westpac is down nearly 10 per cent since in September, NAB has fallen nearly 9 per cent, while ANZ and CBA have both lost about 8.5 per cent since the beginning of the month.
Australia to Charge Man With Financing Terrorist Group in Syria
A 23-year-old man arrested during counter-terrorism raids in Melbourne today will be charged with funneling money to a U.S. citizen fighting with militants in Syria, Australian police said.
The man, who will appear in court later today, will be charged with making funds available to a terrorist organization, police said. Prosecutors will allege the man recruited the American and sent him at least A$12,000 ($10,500), according to the Australian Federal Police and state force in Victoria.
About 100 officers took part in the early morning raids on seven properties and seized a large amount of electronic evidence, authorities said. The operation wasn’t related to the death of an 18-year-old terrorism suspect last week, who was shot dead by police in Melbourne after stabbing two officers.
Cabinet nears final call on Iraq mission
RAAF aircraft have conducted their first training missions ahead of a likely deployment to Iraq, as federal cabinet prepares to make the final decision on joining a US-led assault against Islamic State.
Australia’s task group includes six F/A-18F Super Hornets, an E-7A Wedgetail airborne early warning and control aircraft and KC-30A airborne refueller.
All conducted preliminary flights from Australia’s Middle East base, Camp Baird, on Sunday, Defence told AAP in the United Arab Emirates.
If the government go-ahead is given this week, it will be the first combat mission for all of the aircraft in the task group and will come 11 years after Australia committed troops to the war against Iraqi dictator Saddam Hussein.
A 200-strong ground force, including special forces, will advise and assist Iraqi and Kurdish military.
Cabinet will meet in Canberra on Tuesday following a national security committee meeting. The opposition will then be briefed on any decisions.
Telstra payphones to become Wi-Fi hotspots
Australia’s ageing payphone network has been brought back from the brink of redundancy to become Wi-Fi hotspots.
Payphones have been suffering a slow death thanks to the rise of smartphones and mobile internet services. Where almost 40,000 boxes were in operation in 2009, less than 30,000 were still in use in 2013. But in a generous twist of fate for the orange-topped boxes most Australians grew up with, the very technology that accelerated its demise could be its saviour in the future.
Telstra today launched a trial of 1000 new Wi-Fi hotspots that will be switched on in November for the Christmas crush in Australia’s tourist hubs. Part of the trial involves converting some of Telstra’s payphones into WiFi hotspots that will temporarily allow all users to access the internet using smartphones and tablets free of charge.
The sites launched today include Sydney’s Bondi Beach, Melbourne’s Bourke Street Mall, Brisbane’s Queen Street Mall and Perth’s central business district. Telstra said the maximum range of the hotspots will be between 30 and 50 metres, so customers will need to stay relatively close to get the Wi-Fi signal.
Wesfarmers boss hits out at tax-dodging rivals
Wesfarmers managing director Richard Goyder has hit out at companies that don’t pay sufficient tax in Australia, and called on multinational corporations « to pay tax in the communities in which they operate ».
Mr Goyder, chairman of the B20 summit of the world’s biggest corporations, says companies that avoid paying taxes will end up damaging their reputations, as community sentiment turns against the use of tax havens and profit shifting to avoid taxes.
« I think the conversation will head from whether [tax avoidance] is legal to whether it is ethical, and I think that change in debate is right » said Mr Goyder.
Read more: http://www.smh.com.au/federal-politics/political-news/wesfarmers-boss-hits-out-at-taxdodging-rivals-20140928-10n64r.html#ixzz3EmBVM3yi
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) and RBNZ fight against excessive carry trade effects.
New Zealand dollar sinks after central bank sells
WELLINGTON, New Zealand (AP) — The New Zealand dollar sank Monday after the central bank disclosed it conducted its biggest sell-off of the currency in seven years to lower an exchange rate that is squeezing exporters.
Data released by the Reserve Bank showed it sold 521 million New Zealand dollars ($410 million) during August. That came after the central bank governor, Graeme Wheeler, said the currency was too strong.
The disclosure pushed the currency known as the Kiwi down nearly 2 percent against the U.S. dollar to its lowest level in over a year before it recovered slightly to trade at $0.78. The currency has dropped 12 percent since July, when the central bank announced it was suspending its program of interest rate hikes.
New Zealand vineyards harvest record profits from warm weather
WELLINGTON, Sept. 29 (Xinhua) — Warmer than usual weather in two of New Zealand’s premium wine-making regions has sent profits soaring to record levels at some vineyards, the Ministry for Primary Industries (MPI) announced Monday.
The 2014 Viticulture Monitoring Report, released by MPI and the New Zealand Winegrowers Association, found that Marlborough vineyards were seeing profits before tax for the 2013-2014 year rise by around 25 percent and in Hawke’s Bay by 139 percent.
« The wine industry is a significant contributor to New Zealand’ s economy and it’s pleasing to see vineyards reporting increases in price paid per tonne and profits before tax, » MPI director of sector policy Jarred Mair said in a statement.
Climate Change Blamed for Raising Risk of Heat Waves
Climate change can make heat waves more likely and more severe, according to a study in the Bulletin of the American Meteorological Society that found fewer clear links to extreme weather such as drought and storms.
Twenty independent teams looked at 16 events around the world in 2013, including in the U.S., Australia and Europe. They found there is evidence that the burning of fossil fuels has increased the risk for extreme heat waves.
“How human influence affected other types of events such as droughts, heavy rain events and storms was less clear, indicating that natural variability likely played a much larger role in these extremes,” they wrote.
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 -. The Prime Minister confirmed in his Diet address to pursue Abenomics 3rd arrow.
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).
Abe eyes local economics, ‘womenomics’ as extra Diet session begins
TOKYO (Kyodo) — Prime Minister Shinzo Abe pledged Monday at the outset of Japan’s two-month extraordinary Diet session to rejuvenate local economies and increase women’s participation in society, seeing them as key to the country’s future growth.
In his address to parliament, Abe said his first priority is to revive the deflation-mired economy, stressing that Japan needs to change its « mindset » and pursue reform as he set forth his two policy pillars of promoting local economies and women.
« Japan’s future depends on what we do now, » Abe told the Diet.
« We need to make use of characteristics unique to local economies and create a stage for every woman to play an active role. By using untapped potential in a wide array of areas in Japan, we can grow even more, » Abe said.
The premier, however, was short on specifics and did not make direct mention of the controversial issues of whether Japan will go ahead with another consumption tax hike in 2015 and how it will legalize the use of the right to collective self-defense.
At least 36 feared dead on Japanese volcano, search called off
(Reuters) – At least 36 people are feared to have died after a Japanese volcano erupted without warning at the weekend, raining ash and stones on hikers, but the search for victims was abandoned on Monday because of fears of toxic gases.
Rescuers at the peak of Mount Ontake, now an eerie moonscape under a thick layer of grey ash, on Monday found five more victims of Saturday’s eruption at Japan’s second-highest active volcano but authorities did not immediately confirm them as dead.
The eruption of the 3,067-metre (10,062-foot) peak, 200 km (125 miles) west of Tokyo, took place as the hiking site was packed with climbers, including children, admiring autumn foliage under a brilliant blue sky.
DreamWorks Animation Weighs Sale to SoftBank
Jeffrey Katzenberg is again weighing a sale of DreamWorks Animation (DWA) SKG Inc., after an attempt to build the film studio into a mini-Walt Disney Co. was rocked by uneven box-office results.
SoftBank Corp. (9984), the Japanese telecommunications company headed by Masayoshi Son, is in talks to buy Glendale, California-based DreamWorks Animation, people with knowledge of the discussions said on Sept. 27. An acquisition hasn’t been formally discussed by senior executives at SoftBank, and the chances of reaching a final agreement are low, said another person familiar with matters at Tokyo-based SoftBank.
The decision to weigh a sale highlights the challenges faced by Katzenberg as he seeks to diversify beyond film. DreamWorks Animation, which previously looked for a buyer, has expanded its TV business and acquired Awesomeness TV, an online video network, while forming a partnership in China that includes live entertainment. Those efforts haven’t grown large enough to offset film write-offs that hurt the stock.
Fire risk prompts Toyota to recall 690,000 pickups in U.S.
WASHINGTON – Toyota on Monday said it was recalling about 690,000 Tacoma pickup trucks in the United States to fix a suspension system flaw that could result in vehicle fires.
The safety recall covers model years 2005-2011 Tacoma 4×4 and Tacoma PreRunner pickup trucks, the U.S. unit of Toyota Motor Corp. said.
The trucks’ rear suspension system contains springs that could fracture due to stress and corrosion, it warned.
If the broken spring moves out of position and contacts the fuel tank repeatedly, it could puncture the tank, causing a fuel leak that increases the risk of a vehicle fire.
Japan, North Korea Hold Meeting on Pyongyang’s Investigation Into Japanese Abductees
MOSCOW, September 29 (RIA Novosti) – Japan and North Korea have held a meeting to discuss the issues surrounding Pyongyang’s investigation into the abduction of Japanese nationals decades ago, Kyodo News reported Monday.
The meeting took place in Shenyang located in the northeast of China and was prompted by Japan’s dissatisfaction with the ongoing investigation into the abduction of at least 17 Japanese nationals between 1970s and 1980s. According to media records, the actual number of the abductees might reach hundreds.
Japanese nationals were abducted from Japan by the North Korean government over six years between 1977 and 1983. So far, North Korea has officially acknowledged the abduction of 13 citizens of Japan.
Pyongyang was to present to Japan the preliminary results of the investigation by fall but failed to do so, reasoning that it had not yet finished the initial scrutiny of all the Japanese people currently living in North Korea.
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