Thursday 2nd July 2015
NEWS TICKER: THURSDAY, JULY 2nd 2015: Deutsche Börse says a new iShares ETF from BlackRock's product offering has been launched on Xetra and Börse Frankfurt today. The iShares MSCI EMU USD Hedged UCITS ETF launched on Xetra ETF provides access to euro-zone equities with currency hedging against US dollar. The exchange organisation says the ETF enables investors to participate in the performance of stock corporations in the euro zone while also benefiting from currency hedging against the US dollar. This protects investors against an appreciation of the US dollar against the euro. - The Straits Times Index (STI) ended 3.3 points or 0.1% lower to 3327.84, taking the year-to-date performance to -1.11%. The top active stocks today were UOB, which gained 0.82%, DBS, which closed unchanged, Singtel, which declined 0.24%, CapitaLand, which declined 1.13% and Global Logistic, with a 0.78% fall. The FTSE ST Mid Cap Index declined 0.06%, while the FTSE ST Small Cap Index rose 0.02%. The outperforming sectors today were represented by the FTSE ST Basic Materials Index, which rose 0.82%. The two biggest stocks of the Index - Midas Holdings and NSL- ended 1.59% higher and 0.67% lower respectively. The underperforming sector was the FTSE ST Real Estate Investment Trusts Index, which slipped 0.67%. CapitaLand Mall Trust shares declined 2.30% and Ascendas REIT declined 2.41% - According to Flightglobal, China’s state aviation supplier has tentatively signed for up to 75 Airbus A330s in an agreement which will help bridge a production gap to the re-engined A330neo. General terms of the agreement inlcude an order for 45 jets plus a memorandum of understanding for another 30 options. The deal took place during an official visit to France by Chinese premier Li Keqiang. Airbus has long been negotiating the landmark agreement following a preliminary deal to establish an A330 completion centre in Tianjin. The pact with China Aviation Supplies Holding, which is likely to include several aircraft configured in the lower-weight regional version. Meanwhile, Airbus CEO Fabrice Bregier says the package is a “new vote of confidence” in the twinjet. “China is today the most important market for aviation in the world,” he adds - Morningstar has upgraded the Royal London UK Equity Income fund to a Morningstar Analyst Rating of Silver. The fund was previously rated Bronze. Experienced manager Martin Cholwill has, over his decade-long tenure on the fund, consistently applied his proven investment process to good effect. His strategy is sensible for delivering yield and competitive total returns for investors, with a focus on free cash flows and valuations. The fund also enjoys a cost advantage over its rivals, with ongoing charges lower than the category norm. These factors have led to a strong and consistent performance profile over a number of years - The amount of outstanding Euro commercial paper (CP) and certificates of deposit (CD) declined significantly in the week ending July 1st, according to CMDPortal data. Outstandings dropped by $11.80bn to $861.59bn during the week. Sovereign, supranational and agency CP outstandings dropped by $2.80bn to $219.44bn. Corporate CP outstandings declined the most during the week by $5.56bn to $89.83bn. Meanwhile financial CP outstandings declined by $3.04bn to $503.37bn - SWIFT says that BTG Pactual, one of Latin America’s largest financial services firms, has joined the Know Your Customer (KYC) Registry, a centralised repository that maintains a standardised set of information about correspondent banks required for KYC compliance. For the KYC Registry, banks contribute an agreed ‘baseline' set of data and documentation for validation by SWIFT, which the contributors can then share with their counterparties. Each bank retains ownership of its own information, as well as control over which other institutions can view it - Laurel Powers-Freeling is to join the board of Atom, the UK’s newest bank, as its senior independent non-executive director. The appointment comes hot on the heels of Atom’s announcement that the Prudential Regulation Authority and the Financial Conduct Authority have approved its digital business model. Powers-Freeling was recently appointed as Chairman of Sumitomo-Mitsui Banking Corporation Europe - China has guaranteed that 100% foreign-owned firms (typically known as WFOEs – Wholly Foreign-Owned Entities) will be able to manufacture and market their own products for sale to mainland clients, operating under exactly the same rules as local private funds. The announcement comes at the end of the US-China Strategic and Economic Dialogue, which appears to have resulted in unprecedented rights for foreign firms participating in China’s financial markets. Greater access to China’s Interbank Bond (IBB) market has also been granted, with the elimination of firm-level ownership quotas in addition to improved access and operating rights for foreign banks. Finally, Shanghai’s Free Trade Zone (FTZ) has been specified as the testing ground where foreign owners can establish wholly-owned futures companies with access rights to domestic exchanges. China’s opening-up to foreign asset managers is now moving faster than our most optimistic predictions. With that speed in mind, we predict that all of the above opportunities will be available to foreign owners by the end of 2015.

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The European Review

By Patrick Artus, chief economist at Natixis

Target 2 accounts: The equivalent of currency interventions, and a very good indicator of the risk that the euro may break up

Wednesday, 20 June 2012 Written by 
Target 2 accounts: The equivalent of currency interventions, and a very good indicator of the risk that the euro may break up When the Bundesbank’s (Germany's) Target 2 account (which is positive) increases while another euro-zone country’s Target 2 account becomes more negative, this is equivalent to a German currency intervention aimed at stabilising the exchange rate between Germany and this other country, and therefore at preventing a break-up of the euro. In a completely similar manner, when China accumulates foreign exchange reserves in dollars to prevent an appreciation of the RMB, the People's Bank of China accumulates an asset and the United States a liability, and there is monetary creation (in RMB). So the size of the Target 2 accounts of the national central banks in the euro zone corresponds to the size of the foreign exchange reserves that the euro-zone countries with a strong currency have to accumulate to prevent a break-up of the euro; it is therefore a very good indicator of the risk of a break-up. http://www.ftseglobalmarkets.com/

When the Bundesbank’s (Germany's) Target 2 account (which is positive) increases while another euro-zone country’s Target 2 account becomes more negative, this is equivalent to a German currency intervention aimed at stabilising the exchange rate between Germany and this other country, and therefore at preventing a break-up of the euro. In a completely similar manner, when China accumulates foreign exchange reserves in dollars to prevent an appreciation of the RMB, the People's Bank of China accumulates an asset and the United States a liability, and there is monetary creation (in RMB). So the size of the Target 2 accounts of the national central banks in the euro zone corresponds to the size of the foreign exchange reserves that the euro-zone countries with a "strong currency" have to accumulate to prevent a break-up of the euro; it is therefore a very good indicator of the risk of a break-up.

The size of the Target 2 accounts held by national central banks in the euro zone

Germany and the Netherlands hold substantial Target 2 assets (respectively EUR 650bn and EUR 140bn), while Greece, Spain, Italy and Ireland have substantial Target 2 debts (respectively EUR 98bn, EUR 285bn, EUR 280bn and EUR 117bn).



Fundamentally, these are currency interventions

Let us take, for example, the Germany/Spain pair. If the Bundesbank lends to the Bank of Spain, there is an increase in Germany's positive Target 2 account and in Spain’s negative Target 2 account. This corresponds to a loan from Germany to Spain, or to a purchase of Spanish assets by the German central bank.

If this purchase had not taken place, Spain would be unable to finance its external deficit, and would be forced to pull out of the euro and let its currency depreciate to the point where capital inflows covered its external borrowing requirement.

Therefore, this is the exact equivalent of a currency intervention aimed at ensuring the stability of the exchange rate between Germany and Spain: the country with a "strong currency" buys assets of the country with a "weak currency" to stabilise the exchange rate.

Similarity with the China/United States pair

When China accumulates foreign exchange reserves in dollars to prevent an excessive appreciation of the RMB against the dollar, the People's Bank of China holds US assets and the United States, conversely, has a debt to China.

This operation increases the size of the balance sheet of the People's Bank of China, and therefore leads to monetary creation.

Likewise, when the Bundesbank lends to central banks in the Southern euro-zone countries, and these central banks subsequently lend these funds to the banks in their own countries, there is a creation of monetary base in euros.

Target 2 accounts measure the risk of a break-up of the euro

The size (positive or negative according to the country) of the Target 2 accounts held by the central banks in the euro zone therefore represents the size of the foreign exchange reserves that the euro zone countries with a "strong currency" have to accumulate to ensure the euro’s sustainability ("exchange-rate stability" between euro zone countries). The more the size of these accounts increases, the higher the risk that the euro may break-up.

Positive Target 2 accounts surged from the summer of 2011, and this went hand in hand with a period of pressure on the interest rates on peripheral government bonds and on risk premia on banks.

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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