Thursday 18th December 2014
NEWS TICKER: THURSDAY DECEMBER 18TH 2014: Scotiabank’s Commodity Price Index dropped -4.8% m/m in November (-6.1% yr/yr) and will end 2014 in a ‘deflationary’ mode, says economist Patricia Mohr. "Significant capacity expansion and the defence of market share by major oil and iron ore producers— against a backdrop of lacklustre world economic growth — account for the softness at the end of the year," she says. Mohr adds that the decision by Saudi Arabia not to reduce output to shore up international oil prices, but instead to allow prices to drop to levels curbing US shale development appears to be having a negative impact on confidence in a wide variety of other commodity as well as equity markets. She predicts prices will fall further this month, but will start to rebound in mid 201 - Jonathan Hill, the EU's financial-services commissioner, says he plans to pursue rules that separate a bank's proprietary trading from retail operations. "The sensible thing to do is to seek to make progress quickly" on the issue, Hill said. "There are still areas of risk in some of the biggest and most complicated banks,” reports Bloomberg- CME Group, said yesterday that it will change daily price limits in its CME Feeder Cattle futures effective today, pursuant to its emergency action authority. The current daily price limit for CME Feeder Cattle futures is $3.00 per hundredweight and will change to $4.50 per hundredweight effective on trade date December 18th Additionally, effective December 19th (tomorrow) these limits will have the ability to expand by 150% to $6.75 per hundredweight on any business day in the event that one of the first two contract months settles at limit on the previous trading day. CME Feeder Cattle futures have been locked limit for five consecutive days as a result of various factors. The change to daily price limits is necessary to ensure continued price discovery and risk transfer, says the CME. Daily price limits for CME Live Cattle futures will remain unchanged at $3.00 per hundredweight. Effective Friday, December 19th, these limits will have the ability to expand by 150 percent to $4.50 per hundredweight in the event that one of the first two contract months settles at limit on the previous trading day - The Straits Times Index (STI) ended +16.42 points higher or +0.51% to 3243.65, taking the year-to-date performance to +2.49%. The FTSE ST Mid Cap Index gained +0.29% while the FTSE ST Small Cap Index gained +0.71%. The top active stocks were Keppel Corp (+2.68%), SingTel (-1.02%), DBS (+2.36%), Global Logistic (-3.21%) and UOB (+0.30%). The outperforming sectors today were represented by the FTSE ST Basic Materials Index (+3.13%). The two biggest stocks of the FTSE ST Basic Materials Index are Midas Holdings (+6.38%) and Geo Energy Resources (unchanged). The underperforming sector was the FTSE ST Telecommunications Index, which declined -0.98% with SingTel’s share price declining -1.02% and StarHub’s share price declining-0.73%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (+2.56%), DBXT CSI300 ETF (+0.42%), STI ETF (+0.61%). The three most active Real Estate Investment Trusts (REITs) by value were Ascendas REIT (-0.42%), Keppel DC REIT (unchanged), Suntec REIT (+0.26%). The most active index warrants by value today were HSI23400MBeCW150129 (+7.32%), HSI22600MBePW150129 (unchanged), HSI24000MBeCW150129 (+12.50%). The most active stock warrants by value today were KepCorp MBeCW150602 (+21.95%), DBS MB eCW150420 (+29.29%), DBS MB ePW150402 (-18.03%) - Spain’s Director of Public Prosecutions, Eduardo Torres Dulce, has resigned from the post for “personal reasons”, Spanish daily El Mundo reported this morning. A spokesman for the Public Prosecutor’s office confirmed the news by telephone to The Spain Report, saying that Mr. Torres Dulce had informed Justice Minister Rafael Catalá of his decision: “but that it perhaps would not come into effect until they find a replacement”. That decision is taken at cabinet level. The next cabinet meeting for Rajoy’s government is tomorrow morning - Hedge funds including Marshall Wace, Odey Asset Management and Lansdowne Partners are shorting OTP Bank Plc, a Hungarian lender with a Russian subsidiary whose shares have fallen almost 6% this month reports Albourne Village. All three London-based funds took or increased their position this month in OTP, Hungary’s largest lender, according to data compiled by Bloomberg. The ruble rose today in Moscow after plunging as much as 19%against the dollar yesterday, when Russia’s central bank increased interest rates to 17% percent from 10.5 percent in an attempt to stem the decline. The ruble is down 52% this year and has taken a disproportionate beating in the wake of sanctions and falling oil prices. The country still has the third largest currency reserves in the world and so is unlikely to default. According to Eric Chaney, Manolis Davradakis and Greg Venizelos from AXA IM’s Research and Investment Strategy team Russia will likely resort to fiscal stimulus to contain the risk of social and political unrest. Capital controls, political unrest and even default on private hard currency debts are possible outcomes they say. They credit default swaps market is pricing a one-third probability of sovereign default within five years - Indonesia is ramping up financing for its $439bn development program, planning an almost fivefold increase in sales of project sukuk. The government is seeking to raise IDR7.14trn rupiah (around $568m) from notes that will fund particular construction ventures next year, compared with IDR1.5trn this year, which say local press reports, will help finance its estimated spending of about IDR5,519trn from 2015 to 2019 to build roads, railways and power plants.

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The European Review

By Patrick Artus, chief economist at Natixis

France’s industrial crisis: predictable and set to last

Friday, 03 August 2012 Written by 
France’s industrial crisis: predictable and set to last France’s industrial sector is in the midst of a steadily worsening crisis. There has been a decline in production, employment and productive investment, the external deficit remains significant, and export market shares are declining rapidly. We would argue that this situation was foreseeable, particularly if we add up issues with supply, domestic and external demand, and the impact of the eurozone crisis. Unfortunately, not a lot can be done about the weakness of demand, and the remedies to the supply problem are difficult to implement rapidly. http://www.ftseglobalmarkets.com/

France’s industrial sector is in the midst of a steadily worsening crisis. There has been a decline in production, employment and productive investment, the external deficit remains significant, and export market shares are declining rapidly.

We would argue that this situation was foreseeable, particularly if we add up issues with supply, domestic and external demand, and the impact of the eurozone crisis. Unfortunately, not a lot can be done about the weakness of demand, and the remedies to the supply problem are difficult to implement rapidly.

Let’s go through these issues, their causes and their implications.

Cause no. 1: The supply problem



Supply conditions for goods and services continue to deteriorate in France. The low profitability of companies discourages investment hence the production capacity of French industry is on the decline.

Since 2001, French industry sales prices have been falling relative to unit wage costs. Such falls reflect the excessive level of unit wage costs compared to the sophistication of industrial production in France. The downmarket nature of French industrial production prevents an increase in its selling prices, because of the high level of the price elasticity of demand for industrial products made in France: 0.9 versus 0.3 in Germany.

However, the rise in the unit wage cost – relative to selling prices – does not come as a result of the trend in productivity, but what has been happening to wages. This is because the level of costs is pushed up by the level of employers’ welfare contributions.

The subsequent fall in French industry’s profitability is substantial, reducing its capacity to invest and create jobs. This leads to the off-shoring of production capacity to countries where industrial profitability is higher, thereby weakening industry financially and threatening it with a serious crisis in the event of a recession and falling demand.

Cause no. 2: The demand problem

Between 2011 and 2012, French industry suffered from the weakness of both domestic and external demand. This resulted in a lower capacity utilisation rate than normal, which makes the problem of low profitability even more detrimental. And the decline in demand may deteriorate further if there is a fall in real wage incomes and government expenditure.

Cause no. 3: The euro-zone crisis

The eurozone crisis has two negative effects on French industry:

  1. it weakens demand and therefore imports in the eurozone countries that usually would have been France’s customers. This is significant because the eurozone accounts for 46% of French exports – the United Kingdom, which is also mired in a recession, accounts for 6%;
  2. it reduces domestic demand and capacity utilisation rates in Spain and Portugal and persuades industrial companies in these countries to turn to exports. As wage costs are lower in these countries, there is an increase in the competition that has a direct impact on French industry. France’s export market share tends to decline, whereas those of PortugalSpain and Ireland have recovered.

Remedies are very difficult to implement

Of the three issues mentioned, weakness of demand and the effects of the eurozone crisis cannot be controlled, particularly in a situation where there is private-sector deleveraging and a reduction in fiscal deficits. The question for French industry is therefore which remedies can be implemented on the supply side? We have put together the following list of possible measures:

 

  • an improvement in the sophistication of industrial production and in the differentiation of products, which will require innovation, investments, and marketing;
  • increased geographical diversification in companies' sales to increase the weight of emerging countries, which is currently quite low in France;
  • a major reform of the financing of social welfare in France to reduce the weight of welfare contributions paid by companies;
  • a fall in the hourly labour cost, either through a fall in the per capita wage, or through an increase in the number of hours worked (which is obviously a source of conflict).

 

However, these measures are all very difficult to implement rapidly.

It is also important to understand the major fragility of companies that are not very profitable (i.e. they have a shortfall in supply) when they are faced with a significant and lasting decline in demand.

Unfortunately, it looks as though this French industry crisis is not going to go away any time soon.

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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