Wednesday 28th January 2015
NEWS TICKER, JANUARY 28TH: BNP Paribas’ 4th Quarter 2014 Results will be available on Thursday February 5th from 6:00 am (London time) on the bank’s website. A live webcast in English with synchronised slides of the analysts presentation hosted by Jean-Laurent Bonnafé (CEO) will be available on the website starting at 1:30 pm (GMT). - Kurdish forces say they have expelled the Islamic State fighters from the Syrian town of Kobani, near the Turkish border. However, this is the now the fourth time in as many months that this news has been disseminated - - Deutsche Börse will announce its preliminary results for the 2014 operating year on February 19th - S&P has lowered the Russian credit rating to junk with negative outlook as the sliding oil prices and tensions in Ukraine now look to be a serious threat to the country’s financial and political stability, says SwissQuote. The FX analytics firm notes that the USD/RUB is testing 70 offers. “Should the sell-off gains momentum above 70, we expect the CBR to intervene to temper the ruble depreciation. The CBR meets on January 30th and is expected to keep the bank rate unchanged at 17%. Given the selling pressures on the ruble, we do not expect any cut yet. Russia’s forex reserves eases toward 2009 lows, $379.4bn as of January 16th. With the free-floating RUB, the FX reserves will certainly keep fading, therefore should bring the CBR to find alternative ways to intervene to slowdown the debasing”. - Latvia’s prime minister’s office, has issued a statement about events in the Ukraine. "We express our concern about the deteriorating security and humanitarian situation in eastern Ukraine. We condemn the killing of civilians during the indiscriminate shelling of the Ukrainian city of Mariupol on 24 January 2015. We note evidence of continued and growing support given to the separatists by Russia, which underlines Russia's responsibility. We urge Russia to condemn the separatists' actions and to implement the Minsk agreements. We recall the European Council conclusions of 18 December 2014, where we said that "the EU will stay the course" and that we are "ready to take further steps if necessary." In view of the worsening situation the office asks “the upcoming Foreign Affairs Council to assess the situation and to consider any appropriate action, in particular on further restrictive measures, aiming at a swift and comprehensive implementation of Minsk agreements,” says the statement. Latvia has assumed the presidency of the EU for the six months to June. - Data from the IMF suggests that The Netherlands has raised its gold holdings, having bought 9.61 tonnes in December last year. Russia too continues to build its gold reserves and has increased stock for the ninth consecutive month, buying 20.73 tonnes last month. The purchases by the Dutch central bank follows its move in November to repatriate more than 120 tonnes of gold from vaults in the United States - UK GDP looks to be weaker than expected but remains good news for investors. “The first estimates of the Q4 GDP numbers came in slightly below expectations at 0.5% and markedly slower than the previous three quarters of 2014. The primary driver of the reduced growth rate was the construction sector, which saw output fall by 1.8%. However, the slowdown was not enough to prevent the fastest full year growth rate of 2.7% since the financial crisis,” says Helal Miah, investment research analyst at The Share Centre. “Despite numbers being slightly weaker than expected, we believe the UK economy remains relatively robust. After a fantastic few years in the construction sector it is quite natural to see a return to normal markets conditions. The services element of the UK economy remains healthy and the full benefits of the plunge in the price of oil are still to come. Low inflation will hold back interest rate rises and we therefore believe that for investors the equity market remains the asset class of choice.” - Societe Generale Securities Services (SGSS) has launched a new website, Sharinbox, for corporations and their registered shareholders and employees who benefit from free share plans, stock options plans and other incentive schemes. Operational since December 13th last year, the website, www.sharinbox.societegenerale.com, provides users with direct, multilingual access to an online resource with information regarding their share and employee ownership plans in order to manage their personal data and transactions – According to Michael Hewson, chief market analyst at CMC Markets, “Given the headwinds being felt by major oil companies around the world, the share price performance since the beginning of last year, while uninspiring, has still out performed the oil price which given the macro economic back drop is all the more surprising … We’ve already seen the effects that the slump in the oil price is having on the oilfield service providers in the US, with both Baker Hughes and Halliburton announcing job losses as the companies see rig counts drop, and margins decline. We’ve also seen WBH Energy, a Texas based shale producer file for bankruptcy. Despite all these concerns the shares have outperformed, though that probably has more to do with the buyback program the company has been doing than anything to do with outperformance relative to its peers. The company has been buying back shares on a fairly steady basis over the past 12 months and this undoubtedly will have accounted for the relative outperformance”.The FSCS has started paying compensation in respect of 13 firms, including seven investment advice firms and three life and pension advice firms that have gone into default. The financial advice firms which have entered default, according to the scheme are: Barry Norris & Associates, Premier Financial Advice, The Financial Consultancy (UK), True Financial Management (formerly HNL Financial Services), Unleash Advice Partnership, and AJ Buckley Financial Management formerly AJ Buckley Overseas, City Insurance Consultants. Last week, the FSCS published its plan and budget for the coming year, which revealed investment advisers would be paying £125m towards the FSCS annual levy for 2015/16. Life and pension intermediaries are paying a £57m levy, an increase of £24m compared to the £33m the FSCS levied against the funding sub-class for 2014/15. Since it was set up in 2001, the FSCS has paid out more than£975 million in compensation to customers of defaulted advice firms. In November 2014, the FSCS said it had dealt with the default of 2,391 independent advice firms since it was set up. - Retail Sales in the United Kingdom unexpectedly increased in December, as the drop in oil prices boosted the country’s spending power. The increase came from a 5.2% gain in computers, telecoms, toys, and sporting goods sales, while food sales alone contributed 1.3%. There was a decline in sales of some items, such as clothing and household goods, reflecting a boost from Black Friday discounts the previous month - The Source Goldman Sachs Equity Factor Index Europe UCITS ETF has been launched, the second Source ETF to be launched that provides access to Goldman Sachs’ multi-factor indices. “Smart beta funds have proven successful in certain markets, providing investors with the potential to generate better returns than the more common market-cap weighted benchmarks, particularly on a risk-adjusted basis,” says Michael John Lytle, chief development officer at Source. “The Goldman Sachs series of factor-based indices offer exposure to multiple factors, rather than just the one or two that are applied to many other funds on the market.” – Mixed news from the US over the weekend. Housing starts in the US surged, as builders broke ground in December on the most houses in almost seven years. Work began on 728,000 houses at an annual rate, a 7.2% increase from November and the most since March 2008. On the other hand, building permits, a representation for future construction declined 1.9% in December to a 1.03m pace, however more Americans filed applications for unemployment benefits last week, signaling that the holiday employment turnover is taking its toll on the jobs market. Jobless claims dropped by 10,000 to 307,000 in the week ending January 17th down from a revised rate of 317,000 in the prior week, a Labor department report shows. Applications for jobless benefits were expected to decline to 300,000, according to market surveys by economists - German ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, climbed for a third consecutive month in January to 48.4 from 34.9 in December. Economists forecast an increase to 40, according to the median of 37 estimates in a Bloomberg News survey. The sentiment index jumped to the highest level in 11 months - Singapore Exchange is partnering Clearbridge Accelerator to address financing gaps small and medium-sized enterprises (SMEs) and entrepreneurs face by providing the investing community with greater transparency. SGX said on Monday (Jan 26) it signed a Memorandum of Understanding (MoU) with CBA, a Singapore venture capital and incubation firm specialising in early-stage investments. Under the agreement, both parties will form a joint-venture (JV) company to develop the fund-raising platform, which aims to address financing gaps SMEs and entrepreneurs face by providing the investing community with greater transparency. The JV will identify and form a strategic equity partnership with an experienced platform operator and industry stakeholders such as financial institutions to operate the new capital-raising platform. It will also identify other partners and collaborators to create demand among investors for the offerings on the platform, according to the press release. The move to help smaller firms raise funding marks the entry of SGX into a new business area. Besides operating the stock market, which caters to the equity needs of more to established firms, SGX also offers a platform for bonds as well as derivatives and commodities. Enterprise development agency SPRING Singapore will play a supporting role in the formation of the JV, as part of its ongoing efforts to make the financing environment more conducive to SMEs and entrepreneurs, the statement added. - Hedge funds swung to betting on price falls in cotton, soybeans and wheat, amid ideas of easier supplies, as they cut bullish positioning in agricultural commodities to the weakest in three months Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities, from coffee to cattle, by more than 43,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator - Richard Bruton TD, Minister for Jobs, Enterprise and Innovation, today announced that the Viagogo Group, which operates www.viagogo.com, the ticket marketplace, intends to double its workforce in Ireland over the next three years, taking it from 100 to over 200 employees. The jobs are supported by the Department of Jobs, Enterprise and Innovation through IDA Ireland -

Blog

The European Review

By Patrick Artus, chief economist at Natixis

Are there available instruments to stimulate euro zone growth, and are they likely to be used?

Friday, 15 June 2012 Written by 
Are there available instruments to stimulate euro zone growth, and are they likely to be used? A consensus is emerging that euro zone growth must be boosted to prevent several countries from slipping into a depressive cycle where production declines and unemployment increases without the fiscal deficit or the external debt correcting. We have drawn up a list of available instruments to boost euro zone growth (wage increases, fiscal deficits, European investments, a range of actions by the ECB, weakening of the euro) and seek to determine which measures are most likely to be implemented. The risk is that agreement between European countries is only reached on policies that do not provide a substantial boost to growth in the euro zone – faster (spontaneous) wage increases in Germany, increase in investments by the EIB and structural funds, a third VLTRO, a cut in the euro repo rate – and not on policies that would have a much greater impact, such as fiscal stimulus in Germany, purchases of government bonds by the ECB, massive currency purchases (dollars) by the ECB. http://www.ftseglobalmarkets.com/

A consensus is emerging that euro zone growth must be boosted to prevent several countries from slipping into a depressive cycle where production declines and unemployment increases without the fiscal deficit or the external debt correcting.

We have drawn up a list of available instruments to boost euro zone growth (wage increases, fiscal deficits, European investments, a range of actions by the ECB, weakening of the euro) and seek to determine which measures are most likely to be implemented.

The risk is that agreement between European countries is only reached on policies that do not provide a substantial boost to growth in the euro zone – faster (spontaneous) wage increases in Germany, increase in investments by the EIB and structural funds, a third VLTRO, a cut in the euro repo rate – and not on policies that would have a much greater impact, such as fiscal stimulus in Germany, purchases of government bonds by the ECB, massive currency purchases (dollars) by the ECB.

There is a consensus over growth stimulus in the euro zone

There is a growing consensus that growth in the euro zone needs to be boosted. The recession is leading to a situation in an increasing number of countries where the fiscal deficit is no longer being reduced (Spain, Italy, Portugal, and Greece).



Meanwhile, despite the slowdown in domestic demand, the external deficit remains substantial in Portugal and is no longer being reduced in Spain, Greece and France due to the weakening of activity and exports in the euro zone. Indeed, rising unemployment is pushing down real wages in Italy, Spain, Greece and Portugal while companies everywhere remain cautious and are investing little.

So a depressive dynamic is emerging: declining activity and falling wages without any improvement in fiscal or external deficits. This has given rise to a growing view that action needs to be taken to boost growth in the euro zone. We will therefore draw up a list of policies that could stimulate growth in this region and gauge the likelihood of these being introduced.

The (possible/likely) policies to stimulate euro-zone growth

1. Faster wage growth in Germany

Rather than an explicit economic policy, this is more the effect that full employment and high corporate profitability have on wage growth in Germany. Indeed, wage agreements reached in Germany mean an annual four per cent rise in nominal wages in 2012, or around two per cent in real terms, is conceivable. Our research suggests that every percentage point annual increase in wages in Germany results in a EUR 14 bn income injection.

2. Fiscal stimulus in Germany

Whereas other euro zone countries are having difficulty reducing their fiscal deficits, Germany has virtually eliminated its deficit. A coordinated fiscal policy in the euro zone, therefore, could involve a more expansionary fiscal policy in Germany. Indeed, a one percentage point of GDP rise in Germany’s fiscal deficit would amount to an income injection of around EUR 30 bn – a bigger boost to euro zone growth.

3. European investments

It is often suggested that, since euro zone countries have no more leeway to boost their economy, stimulus needs to be carried out at the European level, either in the form of additional investments by the EIB or in the form of additional investments by European structural funds. A 10 per cent increase in investments both by the EIB and European structural funds (excluding agricultural policy) would mean an additional EUR 14 bn of investment per year.

4. Driving down long-term interest rates through ECB government bond purchases

Spain and Italy are faced with considerably higher long-term interest rates than their growth rates, which is crippling their economies. Direct purchases of Spanish and Italian government bonds by the ECB would help to drive down their interest rates, so the Securities Markets Programme (SMP) should be reactivated for substantial amounts. Indeed, this has proved successful in the United Kingdom where massive purchases of Gilts by the Bank of England have kept long-term interest rates very low despite the magnitude of the country’s fiscal deficit. Central banks can control long-term interest rates if they are willing to buy the necessary quantity of government bonds.

5. A third VLTRO

The three-year repos in December 2011 and February 2012 enabled Spanish and Italian banks to obtain cheap funding at one per cent and finance massive purchases of domestic government bonds, which resulted in a temporary fall in interest rates on these bonds.

A fresh long-term repo would have two positive effects. It would help to finance the external deficits of Spain and Italy (and also those of other countries) as well as contribute to the financing of the fiscal deficits in Spain and Italy.

6. A cut in the euro repo rate

There is still some room for manoeuvre for a cut in the euro repo rate while maintaining a big enough margin between the repo rate and the deposit rate at the ECB. A 25 or 50 basis point cut in the repo rate would be justified in light of the euro zone’s growth outlook and the muted rise in unit wage costs. The cut would likely lead to a depreciation of the euro and bolster growth. We have projected that a 100 basis point cut in the repo rate would increase euro zone growth by 0.2 percentage point per year for two years with a 50 basis point cut by 0.1 percentage point per year.

7. Sharp depreciation of the euro

Even after its recent fall, the euro is still overvalued by around 10 per cent.

Despite the lack of buyers, the euro is depreciating only slightly because the euro zone has no external borrowing requirement. In order to obtain a sharp depreciation of the euro, the ECB would have to accumulate substantial foreign exchange reserves (mainly in dollars) without sterilising these reserves, i.e. adopting the same policy as emerging countries, Japan and Switzerland.

While a depreciation of the euro would increase activity in the euro zone as a whole, it would do little to benefit the least industrialised euro zone countries (Greece, Spain, and even France).

So which measures are likely to be implemented?

Faster wage growth in Germany is already taking place and an increase in European investments is very likely. Moreover, considering the growth outlook and the rise in long-term interest rates, a third very-long-term repo (VLTRO 3) and a cut (25 to 50 bp) in the refi rate are also likely.

However, we do not believe Germany will introduce a fiscal stimulus package (due to the refusal by the Germans to “pay for the others”), nor will there be a reactivation of the SMP (the monetisation of public debts jars with the ECB and Germany), nor foreign-exchange interventions to drive down the euro (due to the resulting monetary creation, since it would not be sterilised).

Meanwhile, the effectiveness of a VLTRO 3 is questionable: do the banks want to buy more government bonds at a time when interest-rate risk is still high and there will be other stress tests on government bond portfolios in the future?

We are therefore  left with a stimulus consisting in EUR 14 bn in wages in Germany, EUR 14 bn in European investments and a 25 to 50 bp cut in the repo rate, which could add 0.2 percentage points per year to euro zone growth at best.

Patrick Artus

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.

Website: cib.natixis.com/research/economic.aspx

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