(Reuters) LOS ANGELES (Reuters) – The burgeoning lithium industry, which produces the powerhouse metal used to make electric vehicle (EV) batteries, has entered its first major downturn, an unwelcome bruising for investors eager to help combat climate change.FILE PHOTO: An aerial view shows the brine pools of SQM lithium mine on the Atacama salt flat in the Atacama desert of northern Chile, January 10, 2013. REUTERS/Ivan Alvarado/File Photo
Albemarle Corp (ALB.N), Tianqi Lithium Corp (002466.SZ) and others have been producing more lithium than automakers need. Global supply exceeds demand by about 5 percent, according to Canaccord data.
That comes as electric vehicle sales in China – the world’s largest EV market – fell nearly a third in September amid sliding government subsidies, the third consecutive monthly decline, according to Jefferies.
A global average of prices is down more than 50 percent since the start of 2018, according to Benchmark Mineral Intelligence, a metals pricing provider that is hosting an EV supply chain conference this week in Los Angeles.
“Current market conditions are challenging,” Luke Kissam, Albemarle’s chief executive officer, said last week.
Despite the weak data, analysts and executives expect a rosy future when they look out 10 years.
Benchmark’s Simon Moores called the lithium oversupply an “air pocket that detracts from the building wall of demand,” and noted much of the excess white metal on the market is for so-called technical grade, or the kind that goes into smaller consumer electronics such as stopwatches.
Battery-grade lithium is used primarily in EV batteries, and many automakers have high purity standards. Much of the lithium industry’s capacity to produce high-quality, battery-grade lithium is locked up until 2024, Moores said.
Weather and social unrest are just two of the myriad issues that have hampered the industry, fueling worries there may not be enough of the white metal to sate automakers in the years ahead.
“The future supply of battery-quality chemicals is very much in doubt,” said Joe Lowry, an independent industry analyst, who wondered how the industry can hope to produce at least 800,000 metric tons by 2025, more than double current capacity.
The popularity of future models from Volkswagen AG (VOWG_p.DE), Tesla and others will ultimately require massive lithium investments in the billions of dollars, said Chris Berry, an independent metals analyst.
But for now, lithium companies have reacted to the price drop by scaling back spending, a response to nervous investors pushing the industry to focus more on profitability.
“This delaying of investment will likely act as a powerful precursor for a pricing cycle in the early 2020s,” said Ernie Ortiz, president of Lithium Royalty Corp, an affiliate of Waratah Capital Advisors, which buys lithium royalty rights.
(JN) O IGCP colocou 970 milhões de euros em obrigações a 10 anos e desta vez os juros não foram os mais baixos de sempre. A taxa agravou-se ligeiramente e a procura foi reduzida.
Portugal colocou hoje 970 milhões de euros em obrigações do Tesouro a 10 anos (maturidade em 15 de junho de 2019), suportando um custo de 0,333%, que está acima da taxa de juro de 0,264% da emissão anterior.
Este agravamento ligeiro está em linha com o comportamento dos juros de Portugal no mercado secundário, que têm aliviado de mínimos nas últimas semanas.
O IGCP, agência que gere a dívida pública portuguesa, pretendia emitir entre 750 milhões e mil milhões de euros, tendo colocado um montante que ficou muito próximo do limite máximo. A procura foi fraca (1,58 mil milhões de euros), superando apenas em 1,63 vezes a oferta. Um rácio inferior ao registado na última emissão de setembro (2,11 vezes).
Os juros mais elevados e a procura mais reduzida refletem um menor apetite dos investidores por dívida soberana europeia, numa altura em que é maior a procura por ativos de maior risco. Nas últimas semanas os juros da dívida portuguesa (e de outros soberanos da Europa) têm subido face aos mínimos registados em agosto.
No mercado secundário a taxa de juro dos títulos a 10 anos está esta quarta-feira em 0,342%, o que compara com o mínimo abaixo de 0,1% fixado há três meses.
Os custos de financiamento de Portugal nas emissões a 10 anos fixaram mínimos históricos em todos os leilões realizados este ano. Apesar do agravamento ligeiro da emissão de hoje, a taxa de 0,333% é a segunda mais baixa de sempre e representa menos de um terço do custo de financiamento que Portugal suportou na emissão realizada em maio (1,059%).
“Esta subida acaba por refletir um movimento que assistimos em toda a dívida soberana europeia, a título de exemplo os 10 anos alemães vieram dos -0.564% para os -0.288%. As políticas acomodatícias dos bancos centrais, bem como o abrandamento económico mundial, continuam a suportar as taxas de juro em mínimos históricos”, refere de Filipe Silva, do Banco Carregosa, estimando que a “tendência que não deve mudar muito nos próximos meses”.
“No início do ano para o mesmo prazo estávamos a pagar 1,568% e agora pagamos 0,333%. É esta poupança que tem permitido ter margem de manobra para reembolsar antecipadamente alguns dos empréstimos concedidos pelo Fundo Europeu de Estabilização Financeira”, acrescenta Filipe Silva.
No que diz respeito à procura, apesar de ter sido reduzida, não foi a mais baixa do ano. Em julho atingiu apenas 1,188 milhões de euros, o que ficou 1,58 vezes acima da oferta.
Com a emissão de 970 milhões de euros, o IGCP eleva para cerca de 13,5 mil milhões de euros o montante colocado no mercado em dívida de longo prazo, o que se situa abaixo dos 15,4 mil milhões de euros em obrigações do Tesouro para 2019.
O Brasil, infelizmente, como outros Países da América Latina, não é, na minha opinião um País onde se possa viver em segurança, nem investir. Nem vejo como possa ter volta a dar lhe, depois do estado caótico a que chegou.
(Terra) Investidores temem que radicalização de discurso atrapalhe a tramitação das reformas; dólar sobe 1,80 % e vai a R$ 4,16, Bolsa cai 1,78%
O mercado reagiu ontem à soltura do ex-presidente Luiz Inácio Lula da Silva (PT) com alta forte do dólar e queda no Ibovespa, principal indicador do Bolsa de São Paulo. A leitura foi de que, do ponto de vista jurídico, a mudança de posição do Supremo Tribunal Federal (STF) traz insegurança e assusta sobretudo o investidor estrangeiro. Pelo lado político, na visão dos agentes, significa o acirramento da polarização em Brasília e nas ruas, o que poderia afetar o andamento da pauta econômica do governo.
Há, inclusive, parlamentares ameaçando obstruir qualquer votação no Congresso até que ocorra a análise da proposta de emenda à Constituição (PEC) sobre a prisão em segunda instância. Foi nesse ambiente que o dólar subiu 1,80% nesta sexta-feira, 8, e fechou cotado a R$ 4,1666 no mercado à vista. Já a Bolsa fechou com queda de 1,78%, aos 107.628,98 pontos.
Nesta sexta, no caso do câmbio, em menos de 45 minutos, período entre a notícia de que o ex-presidente seria solto e o fechamento do mercado, houve renovação de sucessivas máximas e a incorporação de dois centavos na cotação, da casa de R$ 4,14 para a de R$ 4,16.
“Na semana, a moeda norte-americana refletiu dois eventos: de um lado, o leilão, que começou tudo, e depois a liberação do Lula. O mercado deu uma azedada, não teve nenhuma notícia que ajudasse o real (na semana)”, disse o economista da corretora Nova Futura, Pedro Paulo Silveira. O economista se referia também ao fracasso dos leilões realizados pela Agência Nacional de Petróleo (ANP).
A semana no mercado de ações encerrou com os investidores se desfazendo de suas posições, mesmo após terem absorvido a frustração com os dois leilões de petróleo e gás, com resultado negativo para o governo.
Na avaliação do economista-chefe do banco digital ModalMais, Álvaro Bandeira, o noticiário deu impulso à realização de ganhos acumulados na esticada de cinco mil pontos do índice à vista desde o final de outubro. “A soltura de Lula já estava mais ou menos no preço. O mercado já estava meio que esperando a decisão do Supremo desde que a ministra Rosa Weber mudou o voto”, disse.
No entanto, para ele, apesar dos ruídos que podem haver com a intensificação da polarização, se o governo seguir tocando a agenda liberal e reformista, não deve comprometer a tendência até agora vista para a Bolsa. “Por enquanto, não dá para assustar, vamos ver os desdobramentos.”
O analista-chefe da Necton Corretora, Glauco Legat, ressalta que o tom pode ser mais negativo com Lula solto em um contexto no qual o governo quer fazer mais reformas. “De maneira geral, a soltura dele traz eventos negativos e fica mais evidente o Brasil dividido, com passeatas que já começam”, diz.
Nesse meio tempo, o senador José Serra (PSDB-SP) protocolou requerimento solicitando dados que embasaram a elaboração das três PECs do pacote Mais Brasil, em tramitação no Senado. O tucano quer saber informações detalhadas, entre elas, a economia esperada das medidas e a memória de cálculo das projeções.
O ministro da Economia, Paulo Guedes, poderá ter de abrir em até 30 dias todos os dados e, caso contrário, a tramitação das PECs ficará sobrestada, interrompendo sua tramitação.
(BBG) Palladium is now the most valuable of the four major precious metals, with an acute shortage driving prices to a record. A key component in pollution-control devices for cars and trucks, the metal’s price doubled in little more than a year, making it more expensive than gold.
1. What is palladium?
It’s a lustrous white material, one of the six platinum-group metals (along with ruthenium, rhodium, osmium, iridium and platinum itself). About 85% of palladium ends up in the exhaust systems in cars, where it helps turn toxic pollutants into less-harmful carbon dioxide and water vapor. It is also used in electronics, dentistry and jewelry. The metal is mined primarily in Russia and South Africa, and mostly extracted as a secondary product from operations that are focused on other metals, such as platinum or nickel.You’ve reached your free article limit.Try 3 months for $105 $6. Cancel anytime.View Limited Time OfferSign inBloomberg Anywhere clients get free access
If something sounds too good to be true, it probably is.
There’s a dark side to the wave of cost cutting that’s swept through the exchange-traded fund industry over the last 12 months. While every mom and pop in America can now pay nothing to buy an ETF through their favorite broker, and an extra nothing to cover its annual management fee, concern is mounting that there are catches to this bargain that could surprise investors.
Brokerages have been fairly upfront about compensating for their lost commissions with interest revenue, but managing a fund — even one that tracks an index — isn’t free either. It costs about $250,000 per year to run an ETF, with the exact amount depending on what the fund owns, which service providers it hires, and the issuer’s broader business. But one way or another, whether its legal costs, aggressive up-selling or extra risk-taking, investors could wind up paying.
“This isn’t UNICEF, there’s a cost associated with doing things,” said Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors, referring to the well-known children’s charity. “My first question is how are these costs being covered?”
The answer? It depends. A fund’s management fee typically covers the cost of licensing or creating an index, admin like record keeping and prospectus mailings, as well as the expenses associated with running a board of directors. Issuers that offer products for free still have these costs, but they have more reason to try to reduce them.
One place where efficiencies could be made is in the legal department, which could hurt investors in the event of a lawsuit. Other savings could be made by constructing indexes in-house or licensing lower-cost alternatives, hiring second-tier custodians, or limiting any sales presence or advertising budget. These economies could result in damaging oversights, or increase the likelihood of the fund closing.
“I would be concerned about the compliance and legal aspect,” said Sam Huszczo, the founder of SGH Wealth Management, a $170 million investment adviser based in Detroit that uses ETFs. “Those are the two areas where I could see corners being cut.”
Salt Financial, which pays investors to buy its fund, tracks an index of stable companies and only swaps out two or three names per quarter, which lowers transaction costs, according to co-founder Alfred Eskandar. In October, the company said it planned to move the ETF to a trust maintained by U.S. Bank to reduce administrative and operational complexity. The change will also save money, although Eskandar said investors will not be exposed to additional risks. He hopes the lack of fee will encourage investors to try the fund, and that they’ll stick around due to its performance.
An alternative strategy for issuers with more than one product is to leverage their zero-fee products to generate other business. Fidelity Investments started the first zero-fee mutual funds in August 2018, but they’re only available to investors that have a brokerage account with the firm. Meanwhile, Social Finance Inc., an online lender best known for refinancing student loans, views its no-fee products as a way to develop existing clients. Two of its ETFs cost nothing until at least June 2020, but another fund costs $5.90 for every $1,000 invested, more than the median ETF fee.
The thinking was “we’ll provide this for free so you can find out all the other things available in this community,” said Michael Venuto, chief investment officer of Toroso Investments, which helped SoFi start its funds. “It’s about engagement,” he said, adding that selling more expensive products alongside zero-fee ETFs is not nefarious.
A greater risk looms as these funds grow. ETFs habitually lend out a proportion of their holdings to hedge funds and other borrowers for a fee, part of which goes back to investors. While the amount of securities that can be out on loan at any given time is capped by the regulators, issuers of zero-fee funds could be incentivized to lend out a larger portion of their underlying portfolios, and keep a larger percentage of the profits.
While no zero-fee ETF currently engages in the practice, Fidelity’s four index funds are eligible for securities lending, according to a company spokesman. But all revenue — minus lending agent and custodial fees — goes back to investors. ETFs need about $50 million to make securities lending worthwhile, according to Toroso’s Venuto, who says it’s low risk.
Still, the race to zero shows no sign of letting up. Abolishing fees generates publicity, something that could make the difference between survival and liquidation in a marketplace with more than 2,000 options. More than 70% of U.S. ETF assets are in funds that charge $2 per $1,000 invested or less and 93% of new money has flowed into such products this year, according to data compiled by Bloomberg.
Vanguard Group cut its fees again on Oct. 23, this time announcing that it would reduce the cost of 13 London-listed ETFs. Meanwhile, in the U.S., BNY Mellon has filed for a group of broad-indexed ETFs, fueling speculation that these products could augment the growing pool of zero-, or near-zero, fee investments.
“If they’re not getting paid by the clients, how are they getting paid?” Dan Egan, managing director of behavioral finance and investing for Betterment, said of zero-fee funds. “People who are happy paying nothing for something are going to get what they pay for.”
Shares close below HK$320, which had provided a floor in 2019
Asia’s largest stock has lost about 20% since an April high
Tencent Holdings Ltd.’s sell-off may get a lot worse after the shares failed to hold above their key support level.
Asia’s biggest stock closed down 0.3% in Hong Kong on Thursday, despite an otherwise upbeat market in the city. Tencent is now trading below the key level of HK$320 that supported its shares on three occasions this year. The stock has lost about 20% since a peak in April, equivalent to some $93 billion in market value.You’ve reached your free article limit.Try 3 mon
With $3.6 trillion in assets indexed to it, the S&P 500 is one of the most important indices in the world. It’s a reflection of the US large cap stock space. But how is it actually constructed? FT data journalist Brooke Fox breaks it down.
Sterling has rocketed over the past week, shooting up from around $1.22 to $1.28.
The FT’s Katie Martin says markets think the no-deal Brexit bombshell has been safely defused but we won’t hear a collective sigh of relief from sterling traders just yet.
U.K. and Irish leaders meet in North West England.
Both commit to a statement claiming “a pathway to a possible deal” on Brexit.
Sterling rises to a session high as reporters suggest movement from the U.K. on Irish customs checks.
British Prime Minister Boris Johnson (L) speaks to the media ahead of his meeting with Irish Taoiseach Leo Varadkar at Government Buildings on September 9, 2019 in Dublin, Ireland.Charles McQuillan | Getty Images News | Getty Images
The British pound rose sharply on Thursday after positive comments on Brexit from the leaders of the Republic of Ireland and the U.K.
U.K. Prime Minister Boris Johnson met with his Irish counterpart Leo Varadkar for further Brexit talks Thursday afternoon, with subsequent comments causing traders to buy the British pound.
Sterling rose to 1.2390 against the U.S. dollar by 4:55 p.m. London time after trading nearer $1.2218. It was up 1.3% versus the greenback for the session.
“The Prime Minister (Johnson) and Taoiseach (Varadkar) have had a detailed and constructive discussion,” the joint statement said.
“Both continue to believe that a deal is in everybody’s interest. They agreed that they could see a pathway to a possible deal.”
The statement was also tweeted out from the Twitter account associated with the Irish leader Leo Varadkar.
The meeting reportedly lasted more than three hours, with Johnson and Varadkar initially speaking alone.
Squaring the Brexit circle
Ireland is at the center of the Brexit debate because the United Kingdom has a land border on the Irish mainland between Northern Ireland and the Republic of Ireland to the south. The Republic is to remain in the European Union while Northern Ireland would leave as it is part of the United Kingdom.
Erecting a physical border between the two is problematic as it would contravene a peace treaty, known as the Good Friday Agreement. This treaty was put in place to help end a decades-long war that pitted Northern Irish unionist groups and the British state against different factions of the Irish Republican Army (IRA).
The backstop is an arrangement whereby Northern Ireland remains in the customs union — a common tariff area — until a solution can be found to prevent any return of physical checks on the border.
Including the Irish backstop in any U.K. withdrawal deal has drawn fire from opponents who see it as a means of trapping the U.K. within Europe.
Firm says it offers an edge with trade execution, cash yields
Move is latest in series of fee cuts by Boston-based company
Fidelity Investments is crashing the free-trading party, challenging rivals in a gambit to lure assets by ending commissions.
The firm will offer not only zero commissions for online buying and selling of U.S. stocks, exchange-traded funds and options, but also provide higher yields for cash balances and better trade execution, according to an announcement Thursday.You’ve reached your free article limit.Get unlimited access for $1.99/mo.View Offers
It started off well enough, with lots of “optimism” that a trade deal was just around the corner thanks to flashing red headlines from first Larry Kudlow and then China on Monday. However, shortly after 3am ET it all started going terribly wrong as first we got some negative Brexit news, when a Downing Street source said that unless the EU compromises and does a Brexit deal shortly, then the UK will leave the EU without a deal, which was then followed by the main event, namely China’s Ministry of Commerce saying to “stay tuned” for Beijing’s retaliation after the US placed eight Chinese technology companies on its “entity list” which now need to be licensed to access US technology exports.
That was just the start however, as China also said it will halt NBA broadcasts, further souring the mood music ahead of the trade talks scheduled this week, while shortly after the SCMP reported that this week’s trade talks were as good as dead when a “source” told the South China Morning Post that the Chinese delegation may cut short their stay in Washington, removing the possible chance of the talks extending into Friday evening as the delegation would be expected to head to the airport instead of departing at some point on Saturday.
Then, just moments later, Bloomberg doubled down on its originally refuted of soft capital controls by the US on China, when it reported that the Trump administration “is moving ahead with discussions around possible restrictions on capital flows into China, with a particular focus on investments made by U.S. government pension funds” adding that “the efforts are advancing even after American officials pushed back strongly against a Bloomberg News report late last month that a range of such limits was under review. Trump officials last week held meetings on the issue just hours after White House adviser Peter Navarro dismissed the report as “fake news,” and zeroed in on how to prevent U.S. government retirement funds from financing China’s economic rise.”
Faced with this mountain of evidence that the odds of even a watered down deal being announced this week are virtually nil, futures plunged, with the Emini sliding from session highs of 2,950 to as low as 2,910, wiping out almost all post-payrolls gains…
Citizens CEO Says China Trade Deal Could Be ‘Quite Powerful’
… while global markets had deteriorated to a sea of read despite a solid Asian session.
The news also slammed the offshore yuan, which tumbled 0.5% after earlier climbing the most in a month:
The barrage of negative news hit the European STOXX 600 index, which dropped as much as 1%, with Germany’s trade-sensitive DAX hit hard despite earlier data showing an unexpected rise in industrial output. Mixed corporate news added to the woes, with LSE shares tumbling 6% after Hong Kong pulled out of its takeover bid for the exchange, while Germany biotech Qiagen has plunged 16.5% to three-year lows after a sales warning.
Ironically, Europe’s losses followed healthy gains in Asia, where Japan’s Nikkei climbed 1.0% while MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.55%, led by gains in tech shares in South Korea and Taiwan. Hong Kong extended gains after the territory’s leader said she had no plans to introduce other laws using the emergency regulation ordnance, as it’s too early to say the anti-mask law is ineffective. On the other hand, reports, citing the Chief Executive, noted that the Chinese military could step in if the ongoing protests in the city get worse. The Hong Kong leader also noted that during Golden week, the number of visitors declined 50% Y/Y.
Also of note, China mainland stocks returned from a week-long holiday with a 0.6% rise. The National Holiday celebrations also offered a rare respite to China’s retail sector, with spending on goods and dining returning to growth this year. Yet the latest PMI survey showed China’s services sector grew at its slowest pace in seven months in September, offering little momentum to an economy that has been expanding at its weakest pace in almost three decades.
Emerging-market stocks advanced as Chinese markets re-opened after a week-long holiday, with most closing as investors still basked in the glow of the positive trade deal sentiment, as China confirmed that a high-level delegation had already left for the talks in Washington, while President Donald Trump said “we’ll see” if a deal could be reached. Of course, all that changed in subsequent hours, but it was too late to hit the majority of EM stocks.
All this happens, of course, as negotiations are getting under way ahead of a scheduled increase in U.S. tariffs on $250 billion worth of Chinese goods, to 30% from 25% on Oct. 15. Trump has said the tariff increase will take effect if no progress is made in the negotiations.
“Since tariffs have been hurting trade, people are hoping Trump may postpone some of the upcoming tariffs,” said Yukino Yamada, senior strategist at Daiwa Securities. “Nevertheless, you can’t ignore that fact that, up until now, the market has underestimated Trump’s determination on tariffs.”
The surge in trade deal uncertainty also added to pressure in fixed income markets with German bund yields nudging lower while U.S. Treasuries yields slumped as low as 1.52% despite some $78 billion in note and bond supply slated for auction this week.
Meanwhile in currencies, the dollar initially lost momentum, dipping 0.1% against a basket of its rivals after posting its biggest single-day rise in a week in the previous session, before rebounding to unchanged. The greenback traded as low as 106.80 yen, after hitting 107.44 earlier. The euro got a boost from the healthy German industrial output data, with the single currency rising 0.2% to $1.0988, not far off the more than a two-year low hit last week.
Besides the yuan, the other big mover was the pound sterling which traded at $1.2217, after Boris Johnson told German Chancellor Angela Merkel a Brexit deal is essentially impossible if the EU demands Northern Ireland should stay in the bloc’s customs union. The call between the leaders, at 8 a.m. Tuesday, came after a text message from one of the prime minister’s officials, reported by the Spectator magazine, said his government is preparing for talks to collapse.
Elsewhere, the lira was poised for its first advance in three days, clawing back some of Monday’s losses, which were fueled by concern Turkey’s planned incursion into Syria will deepen a rift between Washington and Ankara. The Turkish Defense Ministry said all preparations are complete for the military operation into Syria, while reports stated that US does not endorse any Turkish operations in northern Syria, according to a senior administration officials who added that US troops will be withdrawn from the Turkey-Syria border, not out of Syria entirely.
Looking ahead, markets will be keenly watching comments from U.S. Federal Reserve Chairman Jerome Powell later in the day, who’s speaking at the annual meeting of the National Association for Business Economics, after some weak U.S. data last week raised concerns the U.S. economy may be heading towards a protracted slowdown. Other central bank speakers include the Fed’s Evans and Kashkari. There’ll be September’s PPI reading and the NFIB small business optimism index, while from Canada there’s September housing starts and August building permits. Expected data include PPI. Helen of Troy is reporting earnings.
S&P 500 futures down 0.5% to 2,916.50
STOXX Europe 600 down 0.2% to 382.04
MXAP up 0.6% to 156.40
MXAPJ up 0.6% to 500.32
Nikkei up 1% to 21,587.78
Topix up 0.9% to 1,586.50
Hang Seng Index up 0.3% to 25,893.40
Shanghai Composite up 0.3% to 2,913.57
Sensex down 0.4% to 37,531.98
Australia S&P/ASX 200 up 0.5% to 6,593.43
Kospi up 1.2% to 2,046.25
German 10Y yield fell 0.4 bps to -0.579%
Euro up 0.2% to $1.0987
Italian 10Y yield rose 1.9 bps to 0.512%
Spanish 10Y yield fell 0.5 bps to 0.132%
Brent futures little changed at $58.36/bbl
Gold spot up 0.3% to $1,498.34
U.S. Dollar Index down 0.1% to 98.90
Top Headline News from Bloomberg
China signaled it would hit back after the Trump administration placed eight of the country’s technology giants on a blacklist over alleged human rights violations. Asked on Tuesday if China would retaliate over the blacklist, foreign ministry spokesman Geng Shuang told reporters “stay tuned.”
Boris Johnson told German Chancellor Angela Merkel a Brexit deal is “essentially impossible” if the EU demands Northern Ireland should stay in the bloc’s customs union. The call between the leaders, at 8 a.m. Tuesday, came after a text message from one of the prime minister’s officials, reported by the Spectator magazine, said his government is preparing for talks to collapse.
China’s state TV network CCTV said Tuesday that it would halt broadcasts of the National Basketball Association’s games as a backlash intensified against the U.S. league over a tweet that expressed support for Hong Kong’s pro-democracy protesters.
The U.K. government revamped the tariffs it will levy after a no-deal Brexit following warnings from industry that its earlier plans risked making domestic producers uncompetitive.
German industrial production unexpectedly improved in August after two months of decline, a development that will do little to alleviate concerns about intensifying trade tensions and waning business confidence.
Japanese investors sold a record amount of Spanish bonds in August, seeking to lock in profits from five months of purchases while pivoting more toward U.S. debt.
Asian equities traded higher across the board despite a lacklustre handover from Wall Street where stocks were choppy but ultimately closed in the red amid trade war jitters after the US blacklisted Chinese governmental and commercial organisations over treatment of the Muslim minority community. ASX 200 (+0.4%) was kept afloat by miners amid favourable price action in base metals, whilst Nikkei 225 (+1.0%) was bolstered on the back of a weaker Yen and after US and Japan signed a limited trade deal on agricultural and digital trade. Hang Seng (+0.2%) and Shanghai Comp (+0.3%) returned from a long weekend and played catchup to the NFP-induced upside in the prior session. The former was buoyed by heavyweights Geely Auto after dealers noted a pickup in sales during Golden Week, whilst HKEX shares rose in excess of 2% after it dropped its GBP 32bln bid for LSE, as the boards of the two companies were “unable to engage”. Meanwhile, Mainland China saw upside despite the Caixin Services metric falling short of forecasts, as an improvement in the Composite metric signalled the strongest rate of growth since April. Furthermore, South Korea’s KOSPI (+0.8%) showed a strong performance as the index was supported by tech giant Samsung Electronics, who’s shares spiked higher by 1% after its Q3 guidance topped analyst expectations, albeit it still noted that its profits will likely plunge 56% Y/Y. Finally, core fixed-income futures drifted lower and tracked the risk sentiment around the market with UST and Bund futures poised to close Asia trade near session lows.
Top Asian News
Hillhouse-Backed Genor Said to Seek Up to $1 Billion Valuation
Samsung Billionaire Heir to Cede Board Seat Before Legal Probe
Major European Bourses (Euro Stoxx 50 -0.9%) are lower, with the region shrugging off a positive AsiaPac hand over, as trade jitters return to the forefront following the flurry of headlines yesterday evening. This morning, China’s Ministry of Commerce said to stay tuned for a blacklist retaliation to the recent US decision to list 28 Chinese governmental and commercial organisations, including Hikvision, to the entity list over treatment of the Muslim Uighur community. Further contributing to the downbeat tone, SCMP reported that China is toning down expectations head of US/China trade talks, and even though the round of talks will take place this week, a source says that the Chinese delegation is already planning to cut short its stay in Washington by one night. Moreover, Chinese negotiator Liu He will not carry the title of “special envoy” for President Xi Jinping at the meeting, which the article speculated is an early indication that the vice-premier has not been given any particular instructions from China’s leader. Separately, but also contributing some downside to global equities, was a return of no deal Brexit fears, with UK/EU talks seemingly approaching collapse and the UK government vowed to pursue a no deal exit unless the EU compromises. The confluence of negatives saw DAX Dec’ 19 futures lose the 12000 handle. Moving forward, further impetus likely to come in the form of Fed speak (including Powell at 19.30 BST) and Minutes tomorrow and US/China trade talks, US CPI and ECB Minutes on Thursday. Sectors are lower apart from Telecoms (unch.). In terms of individual movers; Airbus (+0.7%) shares were supported by a strong delivery update. Wirecard (-2.8%) initially moved higher after the Co. announced an increase to its Vision 2025 targets, before paring gains alongside the market. EasyJet (-6.3%) shares fell after a trading update; on the face of it the update appeared strong, however investors noted that they had been expecting firmer guidance, while also suggesting that the co.’s decision to not to have a conference call was a mistake. London Stock Exchange (-4.8%) sunk on news that the Hong Kong Exchange and Clearing will no longer proceed with their offer for the Co. Uniper (-8.2%) shares fell and Fortum (-0.2%) initially rose after the former announced it had agreed to acquire a majority stake in the latter, before falling with the market.
Top European News
Fortum Gets Uniper Control in $2.5 Billion Deal With Funds
U.K. Tweaks No-Deal Brexit Tariffs for Trucks, Fuel and Clothing
Johnson Warned Against Big Tax Cuts as U.K. Faces No- Deal Shock
German Factories Feed Unexpected Rebound in Industrial Output
In FX, NZD/AUD/SEK/TRY – Not quite all change, but certainly some solace for the Kiwi, Aussie, Swedish Crown and Turkish Lira following a bad start to the week. Nzd/Usd has regained 0.6300+ status on the back of supportive fiscal impulses as the NZ Finance Minister flagged a 4 bn budget surplus overshoot against target overnight, while Aud/Usd is hovering above 0.6750 in wake of mixed Chinese Caixin PMIs and an uptick in NAB business conditions. Elsewhere, Eur/Sek has eased back from 10.8900+ peaks towards 10.8500 with the aid of some encouraging Swedish data (private/services production and Usd/Try retreated from around 5.8450 to sub-5.8000 at one stage after US President Trump threatened to decimate the Turkish economy if it crosses the line in Northern Syria.
GBP – In stark contrast to all the above, no deal Brexit risk has put the Pound back on the rack amidst reports that German Chancellor Merkel deems that a breakthrough on the Irish backstop is now highly unlikely, while other headlines contend that an agreement may be dead in the water full stop. In response, Cable lost grip of the 1.2300 handle and filled bids at 1.2275 before ploughing through more between 1.2260-50 on the way through 1.2230, while Eur/Gbp spiked to just over 0.8980 and beyond 500 mn option expiries at 0.8965.
CHF/EUR/JPY – All firmer against the Dollar even though the DXY nudged back over 99.000 ahead of US PPI and Fed Chair Powell, with an element of underlying safe-haven demand underpinning the Franc, Yen and Euro awaiting US-China trade talks alongside the aforementioned Brexit negotiations on the cusp of collapsing. Usd/Chf is closer to 0.9900, Eur/Usd near the top end of a 1.0965-95 band and Usd/Jpy eyeing 107.00 again from circa 107.45 earlier. Note, latest SCMP reports confirms earlier talk that Beijing is not looking for any major deal and propose to cut their stay short, with Liu He not attending in the guise of special envoy that would imply no remit or agenda to sign off on a full trade agreement.
NOK/CAD – The Norwegian Krona and Loonie are both holding relatively steady around 10.0400 vs the single currency and 1.3300 vs the Greenback respectively, with the former largely taking comments from Norges Bank Governor Olsen in stride as he underlined guidance for rates to remain on hold after September’s hike, barring the option to reverse the tightening move if economic developments deteriorated significantly. Meanwhile, Canadian housing starts and building permits are due and may provide the Cad with some independent direction or at least a distraction.
In commodities, the crude complex is lower on Tuesday, after negative news flow on the US/China trade and Brexit front spurring risk off. WTI Nov’19 futures broke below yesterday’s USD 52.60/bbl lows and technicians will now be eyeing support just ahead of the USD 52.00/bbl handle. Meanwhile, Brent Nov’ 19 futures are probing support at USD 58.00/bbl. In terms of geopolitical developments, news flow still appears focussed on the US’ recent decision to pull troops out of Northern Syria, which opens the door for a Turkish offensive against Kurdish forces in the area (reports allege the offensive had already begun), rather than on the US/Iran/Saudi picture; given Syria’s lack of oil it remains unlikely that these developments will have much of a baring on crude prices. In supply news, the North Sea’s Buzzard Oilfield remains closed, according to its operator, and there is still no timeline for its return to normal operations. Gold prices have reclaimed the USD 1500/oz mark assisted by the aforementioned trade and Brexit jitters, after reports that China is ready to do a deal on the parts of the negotiations both sides agree upon (and is prepared to set out a timetable for the harder issues to be worked out next year) triggered a lurch lower during US hours on Monday. Copper prices saw upside overnight on decent Chinese Caixin PMI data helped to moderate concerns about an economic slowdown in the country, but has since given up the majority of its overnight gains.
US Event Calendar
Oct. 8-Oct. 11: Monthly Budget Statement, est. $96.5b, prior $119.1b
8:30am: PPI Final Demand MoM, est. 0.1%, prior 0.1%;
PPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%
PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.4%
8:30am: PPI Final Demand YoY, est. 1.8%, prior 1.8%
PPI Ex Food and Energy YoY, est. 2.3%, prior 2.3%
PPI Ex Food, Energy, Trade YoY, prior 1.9%
DB’s Jim Reid concludes the overnight wrap
I’m in need of motivational words from readers this morning. 5 months ago I set off on a journey of betterment and fulfilment but over the last few days I’ve had a wobble, become disillusioned and now need reassurance that I’ve picked the right path. Yes at 45, with three young kids, a full time (demanding) job and numerous other claims on my time I decided to completely remodel my 35 year old golf swing. After starting this process as a 5-handicapper back in early May, yet another poor round this past weekend has seen me move up to 7. Every time I tee the ball up at the moment I’ve got no idea how wild it’s going to be. Most evenings I stand in front of a mirror and do 30-40 minutes of practise swings before videoing it at the end to see the progress. My wife thinks I’m crazy. On camera it’s looking pretty good but on the course I’ve been struggling for months and have given myself tennis elbow for good measure with all the swinging. Oh and I’ve even moved to live opposite my golf course to try to find time to get better. So if you’ve made a big effort to try to get better at something and have experienced big lows before eventually seeing a euphoric payoff then I’ll be delighted to hear from you as I need it to motivate myself through the upcoming winter months.
US markets flipped between gains and losses yesterday with a level of direction normally reserved for my driver. We eventually closed in the light rough. In more detail the S&P 500 had initially opened -0.55% lower as investors first reacted to the Sunday night Bloomberg story that Chinese officials have become more reluctant to agree a broad trade deal. It then bounced back into the green to trade as high as +0.25% on comments from US official Larry Kudlow that we’ll discuss below. Ultimately the index fell back during afternoon trading to end -0.45% lower, though trading volumes were their thinnest in over a month. The NASDAQ (-0.33%) and the Dow Jones (-0.36%) performed similarly. While most of what Kudlow said was non-committal, saying that he didn’t want to predict the outcome of the trade talks, he did say that delisting Chinese companies “is not on the table”. We also got a White House statement yesterday that the US would be welcoming a Chinese delegation led by Vice Premier Liu He for further trade talks beginning on Thursday. The statement said that the topics of discussion include “forced technology transfer, intellectual property rights, services, non-tariff barriers, agriculture, and enforcement.” After markets had closed, news broke that the US is sanctioning eight additional technology companies over their involvement with China’s treatment and surveillance of the Uighur minority group. Coming just before the trade talks are set to begin, the announcement might lead to more tensions.
This morning in Asia markets have risen in spite of the above blacklisting news. The advances are across the board, with the Nikkei (+1.03%), the Hang Seng (+1.08%), and the Kospi (+0.97%) all trading higher, while the Shanghai Comp (+0.84%) also saw similar moves in spite of opening again after a seven-day public holiday. In corporate news overnight, Samsung’s results beat analysts’ estimates, even as operating profit fell 53% last quarter, and the company’s shares are up +1.36% this morning. We’ve also heard that Hong Kong Exchanges & Clearing are not going to go ahead with its attempt to take over the London Stock Exchange. Elsewhere 10yr JGBS are up +2.0bps this morning and S&P 500 futures are up +0.37%.
Back to trade, and in a special report yesterday (link here ), Peter Hooper and Michael Spencer looked at the current trade war with a historical perspective, as well as prospects for the future. They write that we’ve come to the end of a six-decade surge in global trade as a share of GDP, and that this growth led to a protectionist backlash because the benefits of trade were skewed increasingly away from lower and middle income households. Looking forward, they don’t expect the scope for trade conflict to change greatly after next year’s elections, regardless of the outcome, and either a Trump win or a progressive Democratic win could increase the intensity of the trade conflict in 2021.
Outside of trade, fiscal is another topical issue at the moment and there were interesting headlines on this yesterday from a European Commission document. It suggested that the “Euro-zone need pre-emptive fiscal stimulus to avoid protracted period of low growth” and that “more monetary easing now would be less effective than fiscal stimulus”. The Reuters article suggests that the document will be presented to the Eurogroup meeting of finance ministers next week. It’ll be interesting to see whether it gets traction but it’s important as it shows that the commission is starting to give Governments the green light to open the fiscal vaults. On page 44 of our long term study ( link ) we showed that monetary (QE especially) and fiscal policy have mostly gone in opposite directions since 2010. When central banks have been expanding their balance sheet, governments have been reducing their deficits and visa-versa. So the two moving in the same direction would be more powerful.
Back to markets yesterday and the other big move came from oil, which took a similar roundtrip move as stocks did. WTI and Brent had traded as much as +2.37% and +2.24%, which would’ve been the biggest move since the Saudi drone attack 3 weeks ago, but they retraced to end closer to flat as the risk-off mood reasserted during the afternoon. Nevertheless, energy stocks had led equity gains in Europe, with the STOXX Oil & Gas index up +0.99%, since they closed before the afternoon selloff. In the US, energy stocks lagged and the only group which advanced on the day was the safe-haven communications sector.
Unlike the US, European equities pared back losses to close higher yesterday, with the STOXX 600 up +0.71%, along with the DAX (+0.70%) and the CAC 40 (+0.61%). This was in spite of more negative data, once again from German manufacturing. Factory orders fell by -0.6% mom in August, (vs. -0.3% expected), bringing the yoy rate down to -6.7% (vs. -6.4% expected). This means that the yoy rate has been negative for 15 consecutive months, and comes at a tense time for the German economy, which stands on the brink of a technical recession after contracting by -0.1% in Q2. In the US, 10yr Treasuries ended the session +3.1bps, although the curve flattened with the 2s10s -2.7bps at 9.3bps.
It was the reverse picture in sovereign bond markets, which pared back gains to end the session lower, with ten-year bunds (+1.3bps), OATs (+1.0bps) and BTPs (+1.9bps) all seeing higher yields. The outperformance came from Portugal yesterday, where government bonds outperformed following the country’s election results, with ten-year yields down -0.4bps as investors looked for continuity as Prime Minister Costa increased his Socialist Party’s representation in parliament. Costa is still short of an overall majority however, so needs to work out an alliance with other parties, and has said he wanted to continue working with the Left Bloc and the Communists as he has for the last four years. Costa’s target is to bring public debt down from 122% at present to below 100% of GDP by the end of this four-year term in 2023. Portuguese 10yr yields fell below their Spanish equivalents for the first time since December 2009 with yields falling to 0.137% – impressive given that they were at 4.297% as recently as 2017, and as high as 17.393% in the sovereign crisis in 2012.
Elsewhere in the world of Sovereign risk, the Turkish lira fell -2.47% against the dollar yesterday, its worst session in over six months, extending losses after President Trump tweeted that “if Turkey does anything that I, in my great and unmatched wisdom, consider to be off limits, I will totally destroy and obliterate the Economy of Turkey”.
In terms of the latest on Brexit, Prime Minister Johnson won a Scottish legal challenge yesterday, where anti-Brexit campaigners had sought to force Johnson into sending the extension required under the Benn Act. The judge said that the “unequivocal assurances” that he would obey the law were sufficient. After today’s proceedings in Westminster, Parliament will be prorogued again later on today. However unlike the last prorogation, which ended up being ruled unlawful by the Supreme Court, this one is only until a Queen’s Speech on Monday, which is where the UK government outlines its legislative programme for the coming parliamentary session. Meanwhile, there seemed to be little progress towards a deal ahead of the crucial EU Council meeting on 17 October, and last night the Spectator magazine published what they claim was a message from someone in Prime Minister Johnson’s office that the government were preparing for the talks to collapse and that as a result they would be forced into fighting the next election explicitly on a no-deal platform to ensure they carried the leave vote with them.
Turning to the day ahead, we have a number of highlights, including remarks from Fed Chair Powell, who’s speaking at the annual meeting of the National Association for Business Economics. In terms of other central bank speakers we’ll hear from the BoE’s Haldane and Tenreyro, the ECB’s Lane and Hernandez de Cos, along with the Fed’s Evans and Kashkari. The data picks up a little as well this morning, with August releases for German industrial production, Italian retail sales and the French trade balance. From the US, there’ll be September’s PPI reading and the NFIB small business optimism index, while from Canada there’s September housing starts and August building permits.
NEW YORK (Reuters) – The Securities and Exchange Commission on Thursday said it would adopt a new rule to modernize how exchange-traded funds (ETFs) are brought to the market and their regulation.
The long-awaited Rule 6c-11 – or the ETF rule as it is more commonly called – is aimed at simplifying rules governing ETFs and seeks to speed up the process of launching new ETFs while reducing associated costs.
Notably, the new rule does away with the exemptive-relief requirement in which would-be ETF issuers had to file with the regulator to get special permission to go around rules outlined in the Investment Company Act of 1940, which did not allow for ETFs.
“As the ETF industry continues to grow in size and importance, particularly to Main Street investors, it is important to have a consistent, transparent and efficient regulatory framework that eliminates regulatory hurdles while maintaining appropriate investor protections,” SEC Chairman Jay Clayton said in a statement.
Since 1992, the SEC has issued over 300 exemptive orders that allowed more than 2,000 ETFs to exist with more than $3.3 trillion in total net assets, according to data from the commission.
The new ETF rule will replace hundreds of those individual exemptive orders with a single rule.
“The ETF rule will level the playing field for ETF providers, allowing new participants to enter via a streamlined process,” said Elisabeth Kashner, FactSet’s director of ETF research.
BlackRock Inc, Vanguard, and State Street Corp currently dominate the ETF space.
“BlackRock has long supported ETF regulation that enhances transparency, market quality and choice for investors,” BlackRock Inc, the world’s largest issuer of ETFs, said in a statement.
“We look forward to reviewing the final rule in detail and sharing our thoughts in due course,” BlackRock said.
The new rule will allow all ETFs to use custom baskets, containing securities that do not match their ETF’s index, in the creation and redemption process instead of a basket that exactly replicates the index or cash in lieu of certain basket of securities.
The use of custom baskets, commonly allowed in the early days of ETFs, but not in recent years, has allowed older ETF firms like BlackRock and State Street to adjust their portfolio’s holdings efficiently and minimize capital gains from higher-turnover, active strategies.
“The custom basket provision, now extended to virtually all players, will increase access to the “heartbeat” trade, allowing newer entrants to re-balance portfolios without passing along capital gains,” said Kashner.
“Heartbeat trades” refer to transactions in which an investor puts money into an ETF only to make a quick withdrawal that is paid out in shares of the stocks held by the ETF, thereby avoiding significant capital gains for the fund.
The FT’s capital markets editor Katie Martin sees fading no-deal Brexit fears driving the pound’s recovery this week. On Friday the currency climbed back above $1.24 as markets breathed a sigh of relief.
The London Stock Exchange Group (LSE.L) has unanimously rejected a takeover bid from Hong Kong Exchanges and Clearing (HKEX) (0388.HK).
LSE said in a statement on Friday lunchtime that the board had “considered the unsolicited, preliminary, and highly conditional proposal” and concluded it has “fundamental flaws.”
“The Board has fundamental concerns about the key aspects of the Conditional Proposal: strategy, deliverability, form of consideration, and value,” the company said in a statement.
LSE said it would not engage further with HKEX and would instead focus on its acquisition of data business Refinitiv.
HKEX surprised the market on Wednesday with a £32bn bid for LSE. It said a merger of the two businesses would “connect East and West” and “offer customers greater innovation, risk management, and trading opportunities.”
Analysts said the deal looked unlikely from the start.
“There are only few instances of cross-continental exchange mergers that have been completed successfully, as nationalistic concerns often arise,” UBS analysts Michael Werner and Federico Braga said in a note to clients on Friday.
“Given the recent business disruptions in Hong Kong, we would argue that this adds to the potential perceived risk of a proposed LSE/HKEX merger.”
Analyst Benjamin Goy at Deutsche Bank said the deal would be “strategically and politically challenging.”
Shares in HKEX fell sharply on Thursday in Hong Kong as investors guessed the deal would be rejected. The stock price fall wiped about $1bn off the company’s value.
The company that owns Hong Kong’s main stock exchange has made a £32bn bid to buy its rival in London.
Shares in the London Stock Exchange Group jumped by more than 15% on news of the offer, but fell back later.
Hong Kong Exchanges and Clearing said in a statement that combining the two exchanges would bring together “the largest and most significant financial centres in Asia and Europe”.
But it wants the LSE to scrap its plans to buy data firm, Refinitiv.
The deal would “redefine global capital markets for decades to come”, said Charles Li, chief executive of the Hong Kong company.
“Together, we will connect East and West, be more diversified and we will be able to offer customers greater innovation, risk management and trading opportunities,” he added.
The LSE confirmed it had received an “unsolicited, preliminary and highly conditional” offer from its Hong Kong rival and said it would make an announcement in “due course”.
But analyst Neil Wilson, from Markets.com, described the proposed deal as a “non-starter”. He pointed to the LSE’s share price after the announcement – just more than £71 and well below the £83.61 offer price – a sign that investors don’t expect the deal to get over the line.
He said political considerations would be “front and centre”.
“The UK government may not wish to see such a vital symbol of UK financial services strength, and indeed a strategic asset, to be owned by foreigners,” he said. “Effectively it would hand it over to the Chinese through the Hong Kong back door.”
One of the conditions of the offer from Hong Kong is that the LSE scraps its proposed £22bn deal to buy data firm Refinitiv from its current owners, which include Thomson Reuters and private equity house Blackstone.
But in its statement, the LSE said it “remains committed to and continues to make good progress” with the deal.
(ZH) Blackrock’s Chief Investment Officer, Rick Rieder, best known perhaps for recently suggesting that the ECB should monetize stocks, writes in the Blackrock blog today and highlights the economic policy state-of-play today, and where it may lead to should economic growth falter, productivity not materialize, and populism continue to thrive.
* * *
The major global central banks continue to draw bigger guns in their battle against deflation, yet in some places, it appears to be of no avail. The fact is that the share of sovereign yields that are in negative territory keeps increasing and the average level of these interest rates becomes ever more negative. Further, quantitative easing (QE) purchases of sovereign debt have transitioned to purchases of corporate debt, and in some places equities; with inflation still elusive and improved growth prospects in question. That all leads one to wonder where (and how) these policies end? What is today’s monetary policy endgame?
Turn to economic history for perspective
Central Banks Must Get Inflation Right, AllianzGI’s Utermann Says
In order to envision the monetary policy endgame several years (or a decade) from now, let’s start by stepping back and examining two of the foundational tenets that have driven the global economy and financial markets since the 1970s. The first principle is that the major central banks embraced a roughly 2% inflation target (implicit for the Federal Reserve since, at least, 1995 and explicitly stated since 2012), and the second factor is the end of the Bretton Woods monetary system; marking the shift away from the gold standard and into a world of fiat currency fluctuation. The commitment to the 2% inflation target is extremely important for understanding our current monetary policy challenges, because that target was premised around structural forces that no longer exist (given this era of demographic aging and rapid technological development, which both hold down broad-based inflation). Still, the switch to fiat currency about two decades before the 2% inflation target was set, ironically paves the way for the inflation target to be met – eventually. The question that remains, then, is just “how” this will be the case?
However, before we answer that we must examine why inflation peaked in 1979 and why it has been in a downtrend since then? In other words, what are the structural forces creating disinflation? There are four major forces that created inflation prior to 1979 and resulted in disinflation afterward. First, the population growth rate following the post war Baby Boom peaked around 1979/1980 and subsequently slowed. Second, the growth rate of female participants in the labor force also peaked around 1979/1980 and subsequently slowed. Third, the U.S. and China opened diplomatic and trade relations in 1979, as a result of Deng Xiaoping’s reforms, arguably marking the beginning of the latest stage of globalization. Finally, the oil shocks of the 1970s, ending with the 1979 Iranian Revolution and a surge in oil-driven inflation were a critical factor in the price rises of that time.
This latter event was followed by the subsequent commitment from a then relatively newly formed OPEC that it would act as an oil supplier of last resort, helping to keep oil prices from becoming too volatile (a role it has largely maintained until today). Fascinatingly, in recent years technological innovations have taken hold that form an important new disinflationary force. Specifically, we’ve seen price transparency and information symmetry, which are driven by the proliferation of smartphones, the Internet and the Information Age, more broadly. These forces are flattening supply curves across a huge variety of products, making traditional aggregate demand stimulus less effective in creating inflation. Demand expands, but prices don’t rise as they did in the past, because everyone is aware of exactly what the marginal good should cost and will not pay a cent more than can be (instantly) found at the cheapest online supplier.
Thus, some huge inflationary forces pre-1979 have since abated, and some tremendous disinflationary forces have entered the picture post-1979, but at the end of the day these are all significant, secular, factors that are not likely to be reversible (with the possible exception of globalization, but even then, only to a modest degree). The fact is that central banks’ actions, so far, have simply been too modest to matter against the backdrop of these tectonic changes. Moreover, we would argue that central banks have already achieved meaningful price stability (for instance, the volatility of CPI is near its lowest levels in history), but the natural rate of inflation is simply not 2%, but rather is something lower. So, despite the seemingly large size of monetary policy stimulus by historic standards, central banks have still only brought “a knife to a gun fight,” to paraphrase a film from the late-1980s, at least as far as creating sustained 2% inflation is concerned.
What ammunition central banks have yet to deploy
While the point is debatable, we do not think the arsenal of central bank tools is near exhausted, which brings us to the endgame and the concept of fiat currency. There are two ways inflation is created: one is to actually raise the prices of goods and services organically, but the other is to debase the currency in which those goods and services are sold (think helicopter money). Because the former method relies on traditional aggregate demand stimulus (lower interest rates), which has not been working, since the natural rate of aggregate demand growth is now so low (and in some places is contracting) and the supply curve is so flat; the endgame may well be monetary debasement. Under the gold standard this would not have been possible, as every new dollar would have to be backed by physical gold mined from the earth (a very slow and expensive process, and likely without the requisite volumes), but today money is created by printing presses, or even a few computer keystrokes.
In order to debase a currency, money needs to be created at a faster pace than goods and services are (essentially, liquidity growth needs to exceed world GDP growth). What does this mean for investors? Real rates will definitionally need to be negative – and in fact more negative than the real rates of competitors (think competitive devaluation). The U.S. is not quite there yet, but we will see as soon as next month how much closer the ECB gets to monetary debasement (we think they’re still some ways away, as they haven’t fully exhausted their negative interest rate path, it seems). Ironically, the beggar-thy-neighbor implications of competitive devaluations will almost certainly incite a response from countries who may not originally even have needed to resort to currency debasement in the first place, raising the potential for full blown currency war.
How should one position for such an endgame? As is probably evident, any nominal instrument will be devalued in real terms, so the solution is to hold an asset that maintains its real value – an asset that cannot be printed. We would include stocks (dividend yields are set on payout ratios, companies have some degree of pricing power, and shares outstanding are limited in number), real estate (it is difficult and expensive to expand the stock of real estate), and even commodity currencies, like gold (again, limited supply and expensive to extract). By definition, the worst asset to hold would be a sovereign bond with a negative yield, closely followed by paper money at zero yield, both with a theoretically infinite supply.
Unfortunately, such extreme devaluations in currencies could not only inflate the prices of real assets but could also push Gini coefficients to historically wide levels (a measure of the rich/poor divide) and may well fuel a continued rise in populist politics. Ultimately, this could have a real influence on central banking as we know it today, and/or the value of fiat currency. All of this is very difficult to anticipate in terms of the breadth and influence of these types of actions and ultimate reactions in terms of how prices, markets, investors, and central banks consequently adjust.
Coming back from these extreme policies is very difficult, particularly as the aging demographic and concurrent potential growth trends embedded in the system provide a ceiling on above-trend growth, which otherwise could aid the economy in soft-landing from these policies. And, potentially more importantly, extremely low rates can and will encourage fiscal actors to add more, and potentially dramatically more, debt to an already historically-levered set of economies (e.g. the increased discussion of MMT). Hence, all of this leads one today to consider assets that can participate in an inherent devaluation of the local currency, which is to say: equities, real estate, and even hard assets that have historic value-relevance, such as gold.
(ZH) The global growth outlook is the lowest since the last financial crisis, and central banks, especially ones in emerging markets, have already started to cut interest rates to make sure growth doesn’t collapse.
Manufacturing across large parts of South America, Europe, Asia, and the Middle East are reeling from a global structural slowdown, amplified by the US and China trade war, have triggered emerging central banks to cut rates by the most in a decade, reported Reuters.
Emerging central banks took notice when major central banks including the US Federal Reserve and the European Central Bank started to cut interest rates this summer, all in an attempt to lessen the impact of a global synchronized slowdown.
Sri Lanka Central Bank Governor on Interest Rate Cut, Inflation, Tourism
Central banks across 37 emerging market economies recorded a net fourteen rate cuts in August, the most since policymakers dropped rates to zero after the global financial crash in 2008/09.
August marked the seventh straight month of net rate cuts followed by a tightening cycle that ended in early 2019. July recorded a net eight rate cuts. Cuts by Mexico and Thailand in August took markets by surprise.
After nine straight months of rate hikes in 2018, emerging central banks battled the fallout from a firm dollar, increasing inflation, and weaker local currencies.
Here’s a complete list of the recent emerging market central bank policy decessions:
PARAGUAY – The central bank cut its policy rate by 25 basis points to 4.25% on Aug. 21.
INDONESIA – The central bank, hoping it can spur faster growth at home despite a global slowdown, surprisingly cut its key interest rate for a second time in two months on Aug. 22.
MEXICO – Policymakers cut on Aug. 15 the key lending rate by 25 basis points to 8.00%- the first reduction since June 2014, citing slowing inflation and increasing slack in the economy, and fuelling expectations that further monetary policy easing could be on the way.
EGYPT – Egypt’s central bank cut the overnight deposit rate by 150 basis points to 14.25% on Aug. 22, its first cut since February, after July inflation figures came in significantly below expectations
MOZAMBIQUE – The central bank cut its benchmark interest rate by 50 basis points on Aug. 14 to 12.75%.
JAMAICA – Jamaica’s central bank cut its interest rate by 25 basis points to 0.50% on Aug. 28.
NAMIBIA – Policymakers reduced the lending rate by 25 basis points to 6.5% on Aug. 14.
MAURITIUS – The central bank on Aug. 9 cut the repo rate by 0.15 basis points to 3.35%.
PERU – The central bank cut the benchmark interest rate to 2.5% on Aug. 9 amid growing expectations for an economic slowdown in the world’s No.2 copper producer, but stressed its decision did not necessarily mean the start of an easing cycle.
SERBIA – The Serbian central bank surprised markets by cutting its benchmark interest rate another 25 basis points to 2.5% on Aug. 8, the second cut in as many months, to further bolster lending and growth.
THE PHILIPPINES – The central bank cut its benchmark interest rate on Aug. 8 and kept the door open for further easing to buttress the economy after growth slipped to its weakest in 17 quarters, hurt by tepid government spending and private sector investment.
BOTSWANA – The central bank cut the lending rate by 25 basis points to 4.75% on Aug. 29.
INDIA – The Reserve Bank of India (RBI) lowered its benchmark interest rates for a fourth straight meeting on Aug. 7 with a slightly bigger than expected cut, underscoring its worries about India’s near-five year low pace of economic growth.
BELARUS – The central bank said on Aug. 7 it was cutting its main interest rate to 9.5% from 10% with effect from Aug. 14 and that the intensity of inflationary processes had slowed in the second quarter.
THAILAND – Policymakers unexpectedly cut the benchmark rate on Aug. 7, expressing worry about strength of the baht and aiming to help support faltering growth.
JORDAN – The central bank of Jordan reduced its main rate in early August by 25 basis points to 4.5%.
HONG KONG – The Hong Kong Monetary Authority (HKMA) cut its base rate charged through the overnight discount window by 25 basis points to 2.5% on Aug. 1, its first cut since late 2008, in line with the U.S. Federal Reserve’s move. Hong Kong’s monetary policy moves in lock-step with the Fed as its dollar is pegged at a tight range of 7.75-7.85 per dollar.
MOLDOVA – The central bank raised its main interest rate to 7.5% from 7% on July 31 to fight rising inflation caused by wage increases and higher food prices.
SAUDI ARABIA / BAHRAIN / UNITED ARAB EMIRATES – Central banks of Saudi Arabia, Bahrain and the United Arab Emirates – whose currencies are all pegged to the U.S. dollar – cut key interest rates to preserve monetary stability on July 31 after the Federal Reserve lowered U.S. interest rates for the first time in over a decade.
BRAZIL – In its first rate cut since March 2018, the central bank cut its benchmark interest rate to a new low of 6.00% on July 31, an aggressive first move in a widely anticipated easing cycle to inject life into a moribund economy and prevent inflation from slipping too far below target.
AZERBAIJAN – The central bank said on July 26 it had cut its refinancing rate to 8.25% from 8.50%.
RUSSIA – Policymakers cut the key interest rate on July 26 and flagged that one or two more cuts were possible later this year as Russia faces sluggish economic growth and slowing inflation.
TURKEY – The central bank slashed its key interest rate by a bigger-than-expected 425 basis points to 19.75% on July 25 to spur a recession-hit economy, its first step away from the emergency stance adopted during last year’s currency crisis.
SOUTH AFRICA – The central bank cut its main lending rate as expected on July 18, but struck a cautious tone that suggested future cuts in borrowing costs were not a foregone conclusion despite benign inflation.
UKRAINE – Policymakers cut the main interest rate by half a percentage point to 17% on July 18, citing a downward inflation trend which is expected to continue in coming months and could pave the way for further monetary easing.
SOUTH KOREA – The central bank delivered a surprise interest rate cut on July 18, and shaved this year’s growth forecast to the lowest in a decade, as a brewing dispute with Japan piled more pressure on the trade-dependent economy.
PAKISTAN – Policymakers hiked the main interest rate by 100 basis points on July 16 to 13.25%, citing increased inflationary pressures and a likely near-term rise in prices from higher utility costs.
DOMINICAN REPUBLIC – Policymakers cut interest rates by 50 basis points to 5% on June 30.
COSTA RICA – The central bank cut the key policy rate to 4.50% from 4.75% from June 20.
CHILE – Chile’s central bank unexpectedly cut the benchmark interest rate by 50 basis points to 2.5% on June 7 as it braced for a sharper economic slowdown because of the U.S.-China trade dispute.
SRI LANKA – The central bank cut its key interest rates by 50 basis points on May 31, as widely expected, to support its faltering economy as overall business and consumer confidence slumped following deadly bomb attacks.
TAJIKISTAN – The central bank reduced the refinancing rate to 13.25% from 14.75% on May 31.
KYRGYZSTAN – Policymakers in the Central Asian nation cut the benchmark rate to 4.25% from 4.50% on May 28, citing slowing inflation.
ANGOLA – Angola’s central bank cut its benchmark lending rate by 25 basis points to 15.5% on May 24.
ZAMBIA – The central bank in Lusaka raised the benchmark lending rate to 10.25% from 9.75% on May 22 to counter inflationary pressure and support macroeconomic stability.
MALAYSIA – The central bank on May 7 became the first in Southeast Asia to cut its key interest rate this year, by 25 basis points to 3.0%, moving to support its economy at a time of concern about global growth.
RWANDA – Rwanda’s central bank cut its key repo rate by 50 basis points on May 6 to 5.0%.
MALAWI – Malawi’s central bank cut its benchmark lending rate by 100 basis points on May 3 to 3.5%.
CZECH REPUBLIC – The Czech National Bank raised interest rates on May 2, using a window of opportunity created by easing economic risks abroad to stem rising domestic inflation by fine-tuning a tightening cycle it had paused at the end of 2018.
KAZAKHSTAN – Policymakers cut the policy rate by 25 basis points to 9.00% on April 15 in an expected move taken after President Kassym-Jomart Tokayev ordered them to make credit more affordable.
NIGERIA – In a surprise move, the central bank cut its benchmark interest rate to 13.5% from 14% on March 26 as part of an attempt to stimulate growth in Africa’s biggest economy and signal a “new direction”.
GEORGIA – The central bank cut its refinancing rate to 6.5% from 6.75% on March 13, citing forecasts suggesting that annual inflation would stay close to its 3% target this year.
TUNISIA – Policymakers in Tunisia raised the key interest rate to 7.75% from 6.75% on Feb. 19 to combat high inflation – the third such hike in the past 12 months.
The reason emerging market central banks were delivering the most cuts in a decade last month is that the world is likely in a trade recession that could significantly worsen into 1H20.
Many emerging market countries have export-driven economies to the developed world, and when demand slows down, their economies suffer the most.
Rate cuts from August will take at least one year to filter into emerging markets, which means economic data from the 37 regions will likely stay depressed for some time.