Thursday 20th November 2014
NEWS TICKER: THURSDAY, NOVEMBER 20TH 2014: Harkand has secured a multi-million pound contract with a leading independent oil and gas operator to commence work across their assets in the Southern North Sea region later this month. The deal will see Harkand mobilise their dive support vessel the Harkand Atlantis to excavate and remove existing spools and install a flexible jumper at an open water, existing subsea well location. They will also commence engineering work for production tie-back scope at the site of a new subsea well at another location. Earlier this year, Harkand delivered a successful multi-well fault-finding campaign across the Operator’s subsea assets off Humberside in the Southern North Sea. Harkand Europe managing director David Kerr said: “This contract award builds on the excellent relationship we have developed together. We are committed to supporting this important client’s needs and delivering reliable and quality services in all sectors of the North Sea.”- The Securities and Exchange Commission today announced that its Advisory Committee on Small and Emerging Companies will hold its next meeting on Wednesday, Dec. 17, beginning at 9:30 a.m. ET. The committee will focus on the interests and priorities of emerging and smaller public companies. “Small and emerging companies contribute greatly to the strength of our nation’s economy,” said SEC Chair Mary Jo White. “We welcome the valuable input of the Advisory Committee members who bring a wealth of expertise from across the small business community.” The co-chairs of the committee are Stephen M. Graham, Managing Partner in Fenwick & West LLP’s Seattle office, and M. Christine Jacobs, member of the board of directors of McKesson Corporation and former Chairman, CEO, and President of Theragenics Corporation. The full agenda for the meeting will be released before the meeting date - In trading in Japan today Yen crosses rallied to fresh highs as news emerged that the Japanese trade balance deficit narrowed from JPY958.3bn to JPY710bn in October says Swissquote. USD/JPY tested 119.00 as European traders jumped in. The bullish trend continues to gain pace, with large vanilla calls from 117.50/75 to 118.00 should give support today. Key resistance is placed at 120.00. EUR/JPY trades surged to 149.14. Deep overbought conditions (RSI at 81%) should lead to profit taking into 150.00/152.00 zone. The Fed minutes published last night pushed USD higher against all G10 and EM currencies. Minutes mentioned that the weak economic outlook in the eurozone, China and Japan should have little impact on the US recovery. Some members were concerned that the inflation may remain below the target for some more time. The US October CPI is due today (13:30 GMT), the CPI is expected to decelerate by 0.1% on month. Any positive surprise should push for further USD gains. US ten-year yields remain below 2.40%, the DXY index resists pre-88.000. Else, the Brazil mid-November inflation figures surprised on the downside. USD/BRL legged down to 2.5660. A close below 2.57 will push MACD in the red zone suggesting extension of gains for the BRL. Option bids trail above 2.5180/2.5200+ for today expiry. We remain cautious as political risks should abruptly halt BRL recovery. “Brazil inflation accelerated at the softer pace of 0.38% in mid-November print, pulling the yearly inflation down to 6.42%. The good news is that the inflation managed to step in BCB’s 4.5% (+/-2%) target band mid-November, led by weaker energy prices which certainly had a negative impact on all sub-groups. The transportation costs increased 0.20% on month to mid-November down from 0.45% in September, since the slide in global oil prices accelerated; the communication costs fell 0.21% m/m. Less comforting news is that the government-conducted rise in fuel prices (on Nov 7th) is probably not fully reflected in mid-month figures and may push the inflation back above the target range by the end of the month. In addition, the FX volatilities certainly give little comfort to the BCB, expected to proceed with additional 25 basis points rise in Selic rate at December 3rd meeting. Speculations on 50 bps hike should range sideways until 3Q GDP release due next week (Nov 28th),” notes Ipek Ozkardeskaya – Swissquote Market Analyst. Elsewhere, Ozkardeskaya says “EUR/CHF keeps trading dangerously close to 1.20 floor despite the recent polls on Gold referendum showing abrupt shift toward « no » camp. We believe that the game is most probably over at this point. EUR/CHF 1-month 25-delta risk reversals dip down below 150 bps, showing interesting opportunities in topside OTM calls.” – According to the Taiwan Stock Exchange, General Interface Solution (GIS) Holding Limited (GIS, stock code: 6456) has applied for primary listing on the Taiwan Stock Exchange. GIS is the 9th foreign company filing IPO application with Taiwan Stock Exchange this year. GIS is registered at Cayman Islands, and its paid-in capital is NTD2,860m and its net worth is NTD6,664m. GIS is mainly engaged in producing and selling of touch display modules. The company has major operations sites in both Taiwan and China. Consolidated revenue reached NTD80,329m, with net income of NTD2,304m and EPS of NTD$13.57. For the first three quarters of 2014, consolidated revenue totaled NTD51,830m, with net income of NTD785m and EPS of NTD2.84 - The Straits Times Index (STI) ended -18.96 points lower or -0.57% to 3315.6, taking the year-to-date performance to +4.76%. The FTSE ST Mid Cap Index declined -0.35% while the FTSE ST Small Cap Index declined -0.53%. The top active stocks were SingTel (-0.76%), UOB (+0.04%), DBS (-0.81%), OCBC Bank (-1.43%) and Keppel Corp (-1.29%). Outperforming sectors today were represented by the FTSE ST Consumer Services Index (-0.10%). The two biggest stocks of the FTSE ST Consumer Services Index are Jardine Cycle & Carriage (-1.51%) and Genting Singapore (+1.38%). The underperforming sector was the FTSE ST Basic Materials Index, which declined -3.64% with Midas Holdings’ share price declining -1.70% and Geo Energy Resources’ share price declining -9.55%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (-0.65%), SPDR Gold Shares (-1.07%), STI ETF (-0.30%). The three most active Real Estate Investment Trusts (REITs) by value were Suntec Reit (+0.26%), CapitaCom Trust (-0.89%), CapitaMall Trust (-0.51%) - Russian lender VTB Group reported a 90% fall in third-quarter profit, hurt by the country's economic slowdown and geopolitical tensions. The state-controlled bank said today that net profit for the quarter fell to RUB1.8bn ($38.6m), compared with RUB17.9bn in the same quarter last year. The figure is below the RUB2.8bn expected by analysts. VTB is the first big Russian bank to report earnings for the quarter, in which sanctions were ramped up and the ruble continued to tumble against the dollar. "Headwinds we continue to face have driven up provision charges and cost of risk, which remain the key factor adversely impacting VTB Group's profitability in 2014," says Andrey Kostin, VTB president and chairman of its management board in an official release. Although interest income rose 9.8% over the period, the bank applied provisions of some RUB65bn to cover potential loan losses. - Gulf-based airlines have closed financing agreements for a total of 16 Boeing and Airbus aircraft, according to local press reports. Boeing expects the Gulf region to generate orders for over 2,600 aircraft between now and 2033, with potential sales in the pipeline worth as much as $550bn for both Boeing and Europe’s Airbus. Emirates airline recently signed an AED1.1bn ($299.5m) financing deal for the purchase of two Boeing planes. First Gulf Bank, the third-largest lender by assets in the Emirates, led the club finance lease package on behalf of the airline - Equity markets are rallying into the year end and many indices trade at multi-year or all-time highs, but the dollar's strength warns against complacency in 2015, suggests investment platform provider AJ Bell. “So long as wage growth, inflation and corporate spending remain subdued central banks may be tempted to keep interest rates lower for longer than current market expectations, a scenario that will leave many investors once more searching for dependable sources of income,” posits Russ Mould, Aj Bell investment director, speaking at the 2014 AJ Bell Investival event. “Meanwhile the surge in the dollar, traditionally a haven asset, suggests markets have yet to fully recover their appetite for risk following October's stumble, when it took Japan's stunning increase in its quantitative easing (QE) programme to fend off fears of a deflationary downturn.” - Hedge funds and other creditors with claims against Iceland’s failed banks face an exit tax as the island looks for ways to unwind capital controls without hurting the economy, according to Reuters. The government hopes to having a plan in place by year-end that will scale back currency controls currently blocking about $6.6bn from exiting the island. The framework will build on analysis conducted by the central bank and external advisers, including JPMorgan Chase. Hedge funds Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP are among the hedge funds reportedly making claims. The winding-up committees that represent investors have urged the government to let them sidestep the currency controls to end the payment dispute – Hong Kong’s auction of three year RMB4bn sovereign bonds held earlier today was more than four times over-subscribed. The average accepted coupon was 2.66%, within a range of 2.20% to 2.74%. The sovereign issue applied an allocation ratio of approximately 78%. The central bank’s issue of RMB3bn of five year bonds received offers worth over RMB8.9bn. The average accepted coupon was 2.91% in a range from 2.40% to 3.00%. The allocation ratio was approximately 46.77%. It’s 10 year RMB2bn bonds received offers wroth RMB7.7bn, with an average accepted coupon of 3.28%, within a range of 3.00% to 3.38%; the allocation ratio was approximately 7.69% - Sovereign data releases expected to announce today: Swiss October Trade Balance, Exports & Imports m/m, German October PPI m/m & y/y, French, German and Euro-zone November (prelim) Manufacturing, Services and Composite PMI, Euro-zone November (Advance) Consumer Confidence, Italian September Industrial Sales & Orders m/m & y/y, UK October Retail Sales m/m & y/y, US October CPI m/m & y/y, US November 15th Initial Jobless Claims & November 8th Continuing Claims, US November (Prelim) Manufacturing PMI, Philadelphia Fed November Business Outlook, US October Existing Home Sales m/m and Leading Index.

The core reason for asymmetry between the German and French economies: corporate profitability

Friday, 25 May 2012 Written by 
The core reason for asymmetry between the German and French economies: corporate profitability The main explanation for asymmetry between the French and German economies is that in France, companies’ production capacity is unable to keep up with domestic demand, whereas in Germany it is growing faster than domestic demand. This difference is related to corporate profitability: high and rising in Germany, but low and falling in France, which is limiting French companies’ investment capacity. There are two plausible causes for the profitability gap between German and French companies: the higher level of product sophistication and diversification that gives more pricing power to German companies; and the nature of labour market negotiations, where the link between the labour market and the economy is much stronger in Germany than in France. Yet – if no new economic policies are introduced to improve the profitability of French companies – it is more than likely that the country’s economic situation will not improve. http://www.ftseglobalmarkets.com/

The main explanation for asymmetry between the French and German economies is that in France, companies’ production capacity is unable to keep up with domestic demand, whereas in Germany it is growing faster than domestic demand. This difference is related to corporate profitability: high and rising in Germany, but low and falling in France, which is limiting French companies’ investment capacity. There are two plausible causes for the profitability gap between German and French companies: the higher level of product sophistication and diversification that gives more pricing power to German companies; and the nature of labour market negotiations, where the link between the labour market and the economy is much stronger in Germany than in France. Yet – if no new economic policies are introduced to improve the profitability of French companies – it is more than likely that the country’s economic situation will not improve.

The economic asymmetry between France and Germany

The main reason for economic asymmetry between France and Germany, which also explains the differences between their current account balance situations, is the ability of companies to build up production capacity to meet domestic demand.



Indeed, domestic demand in France has increased much faster than GDP meaning that its inability to meet excess demand through domestic production has cost them potential economic growth. And its production capacity for industrial products in particular has been unable to keep up with domestic demand. This is in stark contrast to Germany, however, where domestic demand is actually weak relative to supply.

The role of corporate profitability

A key explanation for the differences between German and French companies’ investment capacity is corporate profitability, particularly in the manufacturing industry. Indeed, corporate profitability has been growing in Germany but declining in France since 2000. This is because, unlike in Germany, French companies are faced with cost increases that exceed price increases, particularly in the industrial sector. Furthermore, French companies have been unable to pass on increases in production costs to consumers, explaining the long-run decline in profitability since 2001.

Indeed, the low profitability of French companies is an obstacle to investment that German companies are not lumbered with. Furthermore, German firms’ self-financing rate (the ratio of savings to fixed capital) essentially exceeds 100%, explaining why there is a faster rate of productive investment in Germany. Meanwhile, the greater capacity for investment in Germany will be amplified if it becomes more difficult to obtain credit, which is likely to be the case in France due to the impact of new prudential rules for banks.

Causes of low corporate profitability in France

There are two major causes for French companies’ poorer profitability:

1. Less sophisticated industrial products

The fact that French industrial companies are unable to pass increases in production costs on to consumers shows their weak pricing power and the low level of product sophistication. Demand for French products is therefore price sensitive, which is not the case for German products, and explains why France’s export market share fell when the euro appreciated between 2002 and 2008 yet Germany’s did not. Meanwhile, it could also be said that France is stuck in a vicious circle: the low product sophistication of French companies reduces their profitability, which reduces their ability to invest and enhance the quality of their products.

2. The nature of labour market negotiations

The rise in unemployment and the weakness of activity has caused a significant slowdown in wage growth in Germany. However, this has not occurred in France, where wages have been less sensitive to the performance of the economy. Since wage costs remain high, it is more difficult for French companies to enhance corporate profitability after periods of weak growth.

Indeed, profitability remained low in France from 2003 to 2007 and from 2010 to 2012, yet improved in Germany. So labour market negotiations in France seem to favour "insiders" (employees who have kept their jobs) instead of encouraging firms to hire new staff. But in Germany it is easier to negotiate the wages of existing employees and therefore to recruit new staff.

Which economic policy approaches should be used in France in order to address these issues?

Government policy should seek to boost corporate profitability by:

  • Lowering labour costs to restore profit margins for French companies and to boost investment. This can be achieved through tax reforms that reduce the weight of welfare contributions;
  • Helping French companies to invest more despite their low self-financing rate. This could include government intervention such as public-sector funding or loans via state-owned banks, as well as through the development of a large corporate bond market;
  • Helping companies to improve product sophistication through government research grants, government contracts for technological products, and offering support for new industries: digital, energy, etc.;
  • And finally, by changing the nature of negotiations between unions and employers in France to ensure the employment component is taken into account in negotiations.
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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