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

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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