Tuesday 27th January 2015
NEWS TICKER: TUESDAY JANUARY 27TH 2015: According to Luc Luyet, CIIA – senior market analyst at Swissquote: “The 4Q Australian inflation release on 28 January will likely be critical in the decision of the RBA to cut rates or not. Indeed, given the weakening commodity outlook and the relative attractiveness of Australian yields, a lower inflation reading would favour a rate cut from the RAB during its next monetary policy meeting on 3 February to support the recovery. Given the strong disinflationary forces at play due to lower oil prices, the short-term path of AUD/USD is likely on the downside.” Today traders are watching: Spanish December PPI m/m & y/y, IFO Business Climate, Current Assessment and Expectations in Germany in January, UK December BBA Loans for House Purchase and Dallas Fed’s January Manufacturing Activity Index. - Markitt in its review of how short sellers are positioning themselves in companies due to announce results in the coming week.points out Carbo Ceramics’ stock price falls 28% while short interest jumps by 78%. Short sellers have also covered 17% of positions as Kone’s stock continues to rise while Casio and Wacom face competition despite weakening yen’s improving prospects - The Financial Services Compensation Scheme (FSCS) has declared 10 financial advice firms in default. The FSCS has started paying compensation in respect of 13 firms, including seven investment advice firms and three life and pension advice firms that have gone into default. The financial advice firms which have entered default, according to the scheme are: Barry Norris & Associates, Premier Financial Advice, The Financial Consultancy (UK), True Financial Management (formerly HNL Financial Services), Unleash Advice Partnership, and AJ Buckley Financial Management formerly AJ Buckley Overseas, City Insurance Consultants. Last week, the FSCS published its plan and budget for the coming year, which revealed investment advisers would be paying £125m towards the FSCS annual levy for 2015/16. Life and pension intermediaries are paying a £57m levy, an increase of £24m compared to the £33m the FSCS levied against the funding sub-class for 2014/15. Since it was set up in 2001, the FSCS has paid out more than£975 million in compensation to customers of defaulted advice firms. In November 2014, the FSCS said it had dealt with the default of 2,391 independent advice firms since it was set up. - Retail Sales in the United Kingdom unexpectedly increased in December, as the drop in oil prices boosted the country’s spending power. The increase came from a 5.2% gain in computers, telecoms, toys, and sporting goods sales, while food sales alone contributed 1.3%. There was a decline in sales of some items, such as clothing and household goods, reflecting a boost from Black Friday discounts the previous month - The Source Goldman Sachs Equity Factor Index Europe UCITS ETF has been launched, the second Source ETF to be launched that provides access to Goldman Sachs’ multi-factor indices. “Smart beta funds have proven successful in certain markets, providing investors with the potential to generate better returns than the more common market-cap weighted benchmarks, particularly on a risk-adjusted basis,” says Michael John Lytle, chief development officer at Source. “The Goldman Sachs series of factor-based indices offer exposure to multiple factors, rather than just the one or two that are applied to many other funds on the market.” – Mixed news from the US over the weekend. Housing starts in the US surged, as builders broke ground in December on the most houses in almost seven years. Work began on 728,000 houses at an annual rate, a 7.2% increase from November and the most since March 2008. On the other hand, building permits, a representation for future construction declined 1.9% in December to a 1.03m pace, however more Americans filed applications for unemployment benefits last week, signaling that the holiday employment turnover is taking its toll on the jobs market. Jobless claims dropped by 10,000 to 307,000 in the week ending January 17th down from a revised rate of 317,000 in the prior week, a Labor department report shows. Applications for jobless benefits were expected to decline to 300,000, according to market surveys by economists - German ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, climbed for a third consecutive month in January to 48.4 from 34.9 in December. Economists forecast an increase to 40, according to the median of 37 estimates in a Bloomberg News survey. The sentiment index jumped to the highest level in 11 months - Singapore Exchange is partnering Clearbridge Accelerator to address financing gaps small and medium-sized enterprises (SMEs) and entrepreneurs face by providing the investing community with greater transparency. SGX said on Monday (Jan 26) it signed a Memorandum of Understanding (MoU) with CBA, a Singapore venture capital and incubation firm specialising in early-stage investments. Under the agreement, both parties will form a joint-venture (JV) company to develop the fund-raising platform, which aims to address financing gaps SMEs and entrepreneurs face by providing the investing community with greater transparency. The JV will identify and form a strategic equity partnership with an experienced platform operator and industry stakeholders such as financial institutions to operate the new capital-raising platform. It will also identify other partners and collaborators to create demand among investors for the offerings on the platform, according to the press release. The move to help smaller firms raise funding marks the entry of SGX into a new business area. Besides operating the stock market, which caters to the equity needs of more to established firms, SGX also offers a platform for bonds as well as derivatives and commodities. Enterprise development agency SPRING Singapore will play a supporting role in the formation of the JV, as part of its ongoing efforts to make the financing environment more conducive to SMEs and entrepreneurs, the statement added. - Hedge funds swung to betting on price falls in cotton, soybeans and wheat, amid ideas of easier supplies, as they cut bullish positioning in agricultural commodities to the weakest in three months Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities, from coffee to cattle, by more than 43,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator - Richard Bruton TD, Minister for Jobs, Enterprise and Innovation, today announced that the Viagogo Group, which operates www.viagogo.com, the ticket marketplace, intends to double its workforce in Ireland over the next three years, taking it from 100 to over 200 employees. The jobs are supported by the Department of Jobs, Enterprise and Innovation through IDA Ireland -

Blog

The European Review

By Patrick Artus, chief economist at Natixis

What kind of economy would the euro zone be without Germany?

Thursday, 28 June 2012 Written by 
What kind of economy would the euro zone be without Germany? There is increasing talk about establishing federalist mechanisms (eurobonds, eurobills) and pooling certain risks and investments between euro-zone countries (European bank guarantees, recapitalisation of banks by the EFSF-ESM, increased investments by the EIB, EFSF-ESM access to ECB funding, purchases of government bonds by the ECB). Germany's criticism of these proposals is that they ultimately place all the costs and all the risks on Germany, due to its economic, fiscal and financial situation and its credibility in financial markets. It is claimed that eventually all the bills will be sent to Germany, since the other euro area countries have no fiscal or financial leeway or any credibility to guarantee deposits and loans. We shall therefore examine the economy of the euro zone excluding Germany and ask the question: Is it in such a bad situation that federalism or the pooling of risks and investments between euro-zone countries would in fact amount to potentially placing the entire burden on Germany? We think that Germany’s fears are justified. http://www.ftseglobalmarkets.com/

There is increasing talk about establishing federalist mechanisms (eurobonds, eurobills) and pooling certain risks and investments between euro-zone countries (European bank guarantees, recapitalisation of banks by the EFSF-ESM, increased investments by the EIB, EFSF-ESM access to ECB funding, purchases of government bonds by the ECB). Germany's criticism of these proposals is that they ultimately place all the costs and all the risks on Germany, due to its economic, fiscal and financial situation and its credibility in financial markets. It is claimed that eventually all the bills will be sent to Germany, since the other euro area countries have no fiscal or financial leeway or any credibility to guarantee deposits and loans.

We shall therefore examine the economy of the euro zone excluding Germany and ask the question: Is it in such a bad situation that federalism or the pooling of risks and investments between euro-zone countries would in fact amount to potentially placing the entire burden on Germany?

We think that Germany’s fears are justified.

Federalism: pooling between euro-zone countries

The resolution of the euro-zone crisis will inevitably involve establishing certain forms of federalism (eurobonds, eurobills) and the pooling of certain investments and risks (a European bank guarantee system, the recapitalisation of the banks (e.g. Spanish banks) by the EFSF-ESM, an increase in structural funds or investments by the EIB, ESM access to ECB funding).



The pooling of risks between euro-zone countries already exists: the Target 2 accounts are a pooling of bank risks among euro-zone central banks, and purchases of government bonds by the ECB pool sovereign risk.

This trend to federalism and pooling is inevitable: in a monetary union without federalism, countries with external surpluses and countries with external deficits cannot coexist permanently due to the resulting accumulation of external debt.

A number of financing needs are too substantial to be borne by a single country, e.g. for Spain the need for recapitalisation of its banks. And a number of risks (e.g. the risk of a bank run) are also too great not to be pooled.

Is this move towards federalism and pooling a trap for Germany?

The view in Germany is clearly that this move towards federalism and pooling is a trap for Germany. It is claimed that Germany will have to cover most of the costs because it has public finances in good health, growth that is now stronger, higher living standards than the countries in distress, and excess savings.

Germany also has strong credibility in financial markets, as shown by its interest rate level, and it is the only country to be able to credibly insure risks and guarantee loans.

The Germans' concern is therefore understandable: if there is federalism and a pooling of investments and risks, will Germany "receive all the bills"?

To determine whether this is a real risk, let’s examine the situation of the euro zone without Germany: is it such a worrying region, will it have to be propped up permanently by Germany?

The economic and financial situation of the euro zone without Germany: Is it serious?

Without going into greater detail for each country, we shall examine:

·                   its competitiveness, the foreign trade situation; the weight of industry;

·                   its situation regarding its technological level, skills, productivity and investment; its potential growth;

·                   the situation of its businesses and households;

·                   its public finances.

1. Foreign trade, competitiveness, weight of industry

The euro zone without Germany has:

·                   a structural external deficit;

·                   a shortfall in competitiveness;

·                   a small industrial base;

·                   a large external debt.

2. Technological level, skills, investment, productivity and potential growth, capacity for job creation

The technological level of the euro zone without Germany is fairly low, as is the population's level of education; this zone invests little, has low productivity gains, and since 2008 it has destroyed jobs massively.

3. Situation of businesses and households

Corporate profitability in the euro zone excluding Germany is low, but private (corporate and household) debt is lower than in Germany; however, household solvency has deteriorated (in Germany, household defaults are low and stable; in France, Spain and Italy, they are high and rising).

4. Public finance situation

The public finances of the euro zone excluding Germany are in a very poor state compared with Germany. Indeed Germany’s debt to GDP ratio is expected to fall, while in the euro zone excluding Germany it should rise rapidly toward 100%; Germany has a 1% primary surplus, while the euro zone excluding Germany has a 2% primary deficit.

Conclusion: Are the German fears justified?

If the euro zone were to become a federal monetary union, with solidarity between countries and pooling of certain investments (recapitalisation of banks, for example) and risks, surely the rest of the euro zone excluding Germany could only be:

·                   benefiting from transfers from Germany;

·                   benefiting from Germany's credibility in the markets;

·                   benefiting from Germany's guarantee;

Or could it share this burden with Germany? We suspect that the burden on Germany would be very heavy.

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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