Thursday 18th December 2014
NEWS TICKER: WEDNESDAY, DECEMBER 16TH 2014: GEA Group Aktiengesellschaft is one of the largest suppliers for the food processing industry, following the sale of the Heat Exchangers Segment at the end of October this year, Klaus Hunger, chairman of the General Works Council of the former GEA Heat Exchangers Segment, has announced his retirement from the GEA Group Supervisory Board. By order of the local court of Düsseldorf, Brigitte Krönchen, deputy chair of the GEA Farm Technologies Works Council, was appointed to the as the new employee representative. - On a seasonally adjusted basis, the US Consumer Price Index for All Urban Consumers declined 0.3% in November after being unchanged in October, according to the Bureau of Labor. The index for all items less food and energy increased 0.1% last month after rising 0.2%in October - Methorios Capital, an Italian based independent financial services company, has listed on the Alternext market in Paris, with the direct listing of the existing 133,436,181 shares. The admission price of Methorios Capital shares was set at €0.63 per share. Market capitalisation was €84.1mon on its debut. Fabio Palumbo, Chairman of Methorios Capital, says “This listing allows the company to increase its international visibility, the share liquidity and guarantee new capital raising opportunities to finance its growth.” - Nasdaq today announced that LifeSci Index Partners, LLC, will list two new exchange-traded funds, the BioSharesTM Biotechnology Clinical Trials Fund (Symbol: BBC) and the BioSharesTM Biotechnology Products Fund (Symbol: BBP), on The Nasdaq Stock Market. BBC and BBP will begin trading today. "The landscape of the biotechnology sector has experienced dramatic shifts since the initial public offerings of Cetus and Genentech in the early 1980s," says Paul Yook, co-founder of LifeSci Index Partners. "Our BioShares funds are designed with the current biotechnology market in mind and offer investors unique and diversified portfolios of entrepreneurial biotechnology stocks by applying our rules-based index methodology." Both funds employ an equal weighting approach that allows each security's performance to affect the ETF equally, regardless of the size of the company. In this way, a relatively small firm enjoying a major breakthrough can have a meaningful impact on the ETF. An equal weighting also serves to minimize the outsize impact that a handful of mega-cap biotech companies can have on more traditional, market-cap weighted indexes. - According to Platon Monokroussos, head of research at Eurobank, “Taking their cue from the negative tone in Asia earlier today, major European stock markets stood in a negative territory in early trade on Wednesday pressured by persisting Russia jitters and the continued downtrend in oil prices amid oversupply concerns. The FOMC holds its final meeting of the year today. The policy announcement is scheduled for 20:00 CET and market focus is on whether the FOMC will drop its commitment “to maintain the 0 to ¼% target range for the federal funds rate for a considerable time following the end of its asset purchase program” - The first round of voting for the election of the new President of the Hellenic Republic in the 300-seat Parliament is scheduled to take place this evening at 19:00 Athens time (EET). As per Article 32 of the Constitution of Greece, a 2/3rd majority of the number of seats is required for the election of the new President i.e., 200 in-favour votes. Recall that Greece’s two-party coalition government currently enjoys the support of 155 lawmakers; center-right New Democracy controls 127 seats and PASOK 28. The coalition government has nominated former EU Commissioner Stavros Dimas for the presidential post – The UK’s Water Services Regulation Authority's (Ofwat’s) final determination on price limits for UK water companies over the forthcoming five-year control period 2015-20, which was announced on December 12th, remains challenging but in line with expectations, says Moody's in a report published today. The main difference is a further 10 basis-point reduction in the allowed wholesale return, resulting in an overall allowed return for the business as a whole (including wholesale and retail activities) of 3.74%, compared with 3.85% in the draft determination and 5.1% in the current period. However, the ratings agency says negative implications of the additional 10 basis-point reduction are somewhat offset by other positive changes from the draft determination stage, including an adjustment for cost inflation on retail cost allowances from 2012-13 to 2013-14. Moody's notes that United Utilities Water Limited (A3 stable) and Thames Water Utilities Ltd (Baa1 negative) benefitted from significant changes to their overall total expenditure allowances between draft and final determination, and, in the case of Thames Water, a company-specific uncertainty mechanism related to the Thames Tideway Tunnel project. Similarly, Moody’s says Southern Water Services Limited (Baa2 negative) achieved a significant improvement in the legacy adjustment related to its performance in the current regulatory period. Conversely, Bristol Water plc (Baa1 stable) remains the relative loser of the final determination, as it faces the largest relative reduction in wholesale total expenditure allowance compared with the company's plan. The gap between Bristol Water's proposed wholesale total expenditure versus Ofwat's final determination allowances is 32%, making a referral to the Competition and Markets Authority likely – Bloomberg reports that Jefferies Group is moving to shed the commodities and financial-derivatives business that it bought from Prudential Bache in 2011. Jefferies says it's getting out of the business because of high costs and dwindling fees – California’s SunEdison, Inc says it has closed its second fund for distributed solar photovoltaic (PV) generation projects in the United States with Barclays and Citi. The lease pass-through fund is valued at $117m, and follows on the Barclays and Citi fund closed earlier this year. This brings the aggregate value of funds closed this year with Barclays and Citi for SunEdison and TerraForm Power's distributed generation projects to $290m. The fund will provide financing for a portfolio of distributed generation PV projects in 12 states across the West Coast, mid-Atlantic, New England, Hawaii and Puerto Rico. The projects are expected to be operational in the fourth quarter of 2014 through the first half of 2015. Upon mechanical completion, the projects will be sold to TerraForm Power – Emolument.com, the salary benchmarking site has examined bonus data from 322 VPs working in front office in Asset Management in Europe. It finds London’s salaries are the highest –with a strong culture of incentivising staff, “bonuses in London are the chunkiest in Europe” says the firm. However, salaries are higher in Geneva (at a 23% premium to London). VPs in Amsterdam earn as much as those in Paris says the firm - According Sino news service Red Pulse, Baidu will invest $600m in the taxi start-up, marking the tech giant’s official entry into the taxi app space, a year after Tencent and Alibaba announced their investments in taxi apps DidiTaxi and Kuaidi Taxi respectively. This recent acquisition marks yet another push from Baidu to compete in the mobile payment and O2O market sectors. Baidu launched its third-party payment platform, Baidu Wallet, in April 2014, competing with Alibaba’s Alipay and Tencent’s Tenpay platforms. Baidu also has an investment in the travel website Qunar, which in addition to Baidu Wallet, also offers the option for payment through other platforms. Some industry sources believe that this new investment will be no different and that Uber will likely remain open to other payment channels. Even if this is not the case, Baidu Wallet will continue to face considerable hurdles. While the company has grown a strong client base through its mapping app, it has yet to prove that it can transform passive consumers to active ones, willing to make a purchase through its platform - Russia continues to take a beating in the FX trading markets. The depreciation of the Ruble this year is unprecedented and while it has also put pressure on other emerging market currencies, Russia is the fall guy in today’s markets, while the USD and JPY are both benefactors of safe haven investment flows. The euro found its footing as it attempted to rally back above 1.2500 following better than expected PMI readings and a huge jump in the German ZEW economic sentiment survey, though it is looking toppy and selling is now expected - UK economic news flow has tended to be better than analysts expect over the last couple of months and aside from a very downbeat inflation report and inflation expectations, the rest of the economy is maintaining a firm pace of growth. The issue however is the role inflation plays in the BOE’s policy outlook, currently inflation at 1% is well below the BOE’s target of 2%, and concerns are inflation will decline further before recovering, this is likely to impact the BOE’s progression to raising interest rates and as such will have ongoing implication on the value of GBP. For now GBP is marginally firmer on the morning.

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The European Review

By Patrick Artus, chief economist at Natixis

ECB bond purchases: the case for Spain and Italy

Monday, 13 August 2012 Written by 
ECB bond purchases: the case for Spain and Italy The European Central Bank (ECB) is feeling the pressure to add to its balance sheet massive amounts of sovereign debt from eurozone countries that are in distress. Assuming that the bank was to do so, with the clear objective of sharply reducing those countries' long-term interest rates, it begs the question, would the eurozone crisis then be solved? If we were to consider this in the context of Spain and Italy, we would argue that it could only happen if the bank’s intervention not only restored the fiscal and external solvency of the countries in distress, but also revived growth. While these objectives would be fairly easily achieved in Italy, they would not rescue Spain. In fact, even a massive intervention by the ECB in government bond markets would not pull Spain out of its crisis. http://www.ftseglobalmarkets.com/

The European Central Bank (ECB) is feeling the pressure to add to its balance sheet massive amounts of sovereign debt from eurozone countries that are in distress. Assuming that the bank was to do so, with the clear objective of sharply reducing those countries' long-term interest rates, it begs the question, would the eurozone crisis then be solved?

If we were to consider this in the context of Spain and Italy, we would argue that it could only happen if the bank’s intervention not only restored the fiscal and external solvency of the countries in distress, but also revived growth. While these objectives would be fairly easily achieved in Italy, they would not rescue Spain. In fact, even a massive intervention by the ECB in government bond markets would not pull Spain out of its crisis.

Strong pressure on the ECB

The high level of long-term interest rates in Spain and Italy is stifling their economies. Strong pressure is therefore being put on the ECB to buy large quantities of government bonds issued by these countries, in the hope it will sharply reduce their long-term interest rates. This could be done directly or indirectly, perhaps by transforming the European Stability Mechanism (ESM) into a bank with funding provided by the ECB.



Massive purchases of government bonds by the ECB: Would the eurozone crisis be ended?

If massive purchases of government bonds by the ECB were to resolve the debt situation in Spain and Italy, the consequential fall in interest rates would need to restore fiscal solvency, restore external solvency and bring back acceptable growth.

Let’s look at these three points now:

1. Fiscal solvency

Fiscal solvency is ensured if the primary budget surplus is greater than the public debt multiplied by the differential between the long-term interest rate and nominal long-run growth.

If long-term interest rates were lowered by ECB interventions to close to the eurozone average, a primary surplus of 4.2 percentage points of GDP would be needed in Italy and 2.8 percentage points of GDP in Spain to ensure fiscal solvency. Italy’s primary surplus is forecast to meet 4% of GDP next year, while Spain’s primary deficit is due to exceed 3%.With lower interest rates Italy would be fiscally solvent in 2013, but by no means would Spain be.

2. External solvency

External solvency is ensured if the primary surplus (excluding interest on external debt) of the current-account balance is greater than the external debt multiplied by the differential between the long-term interest rate and nominal growth.

If the ECB moved long-term interest rates closer to the eurozone average, a primary current-account surplus of 0.8 percentage point of GDP would be needed in Italy, and 3.1 percentage points of GDP in Spain. At present, Italy has a deficit of 1.8 percentage points of GDP, and Spain has a deficit of 2.5 percentage points. As such, with lower interest rates, external solvency would not be guaranteed in Italy, while in Spain, again, the situation is far worse – external solvency would be very far from guaranteed.

3. Growth

The growth prospects are dramatic for Spain and Italy. A fall in long-term interest rates would significantly impact growth in a positive way, but only if the contraction in activity was predominately due to the high level of long-term interest rates. This would be the case if the contraction itself occurred because there was a decline in investment, rather than anything else such as job losses or deleveraging.

While consumption is declining in both countries, the decline in investment is far more dramatic in Spain than in Italy. The sharp decline in investment in Spain can be attributed to the collapse of the construction sector and the need for deleveraging, a problem which is far more acute in Spain than in Italy. As a result, a fall in interest rates would not be sufficient to revive growth in Spain, but would help in Italy.

Conclusion: Would massive purchases of Spanish and Italian government bonds by the ECB stop the eurozone crisis?

In conclusion, if the ECB were to purchase massive amounts of government bonds issued by struggling eurozone countries, a sharp fall in long-term interest rates in Spain and Italy would:

  • restore fiscal solvency in Italy but not in Spain;
  • restore external solvency in neither of the two countries, though the problem is far more serious in Spain than in Italy;
  • revive growth in Italy, but not in Spain where the decline in activity does not stem mostly from high interest rates.

Massive intervention by the ECB in government bond markets would therefore be decisive for Italy, but much less so for Spain.

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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