Friday 6th May 2016
NEWS TICKER: NEWS TICKER: Generali Real Estate has acknowledged the resignation of Christian Delaire from his role as Chief Executive Officer and General Manager of the company. With immediate effect, the firm’s board has appointed Francesco Benvenuti as interim general manager. Benvenuti, who also holds the position of group investments chief operating officer within Group Investment Management, will retain his current role - INFRASTRUCTURE INVESTMENT - Infracapital, the infrastructure investment arm of M&G Investments, has made an agreement to acquire an 80% stake in a Private Public Partnership (PPP) portfolio from Società' Italiana Per Condotte d'Acqua SpA (Condotte), the third largest construction company in Italy. The portfolio comprises both operational and greenfield assets that will provide core public services in the health, transport and security sectors. The portfolio, with a total capital value of over €700m, has an attractive risk-return profile, providing institutional investors with predictable cash flows for over 20 years. Italy is one of the largest PPP markets in Europe and offers numerous opportunities in the social infrastructure space. Andy Matthews, greenfield director, Infracapital, says: “This transaction provides Infracapital with a high-quality platform of PPP projects in Italy, a country which has successfully embraced the PPP model and offers numerous opportunities in the social infrastructure space —TURKEY After a generally benign April, when it looked as if emerging markets had turned a corner May has come in like a lion and once again (in aggregate) the segment has fallen in six straight sessions. Turkey is on the brink of a constitutional battle, which no doubt will be won by President Tayyip Erdogan, who wants to create a lifelong executive presidency. Investors are not crazy about the idea, the upshot being that S&P will likely cut Turkey's rating at least one notch deeper into junk later on Friday. The lira is set to end the week around 4.3% weaker against the dollar. The stock market was down 0.9% today and is on course for the biggest weekly drop since June 2013, with losses of over 8%. Local 10-year bond yields remain at one-month highs while Turkish five-year credit default swaps (CDS) are at 269 basis points (bps), hovering near a two-month high according to Markit. It is also unlikely that Europe will look upon Erdogan’s insistence on dominating all parts of Turkish economic and political decision making. Certainly it has proved too much for Turkey’s moderate prime minister Ahmet Davutoglu, who says he now wants to stand down at the upcoming AK Party congress later this month; though it is likely he was pushed into the decision as the president stripped the premiership of much of its power and authority. The resignation means Erdogan has tightened his control of Turkey and is likely to install a more obedient prime minister. It will weigh heavily on European legislators who are already ambivalent about bringing the country closer into the European fold. Erdogan has timed his move to dominate Turkish polity well: the country is dealing with a number of rising problems, including a resurgent conflict with the Kurdistan Workers’ Party (PKK), bombings by extreme Islamic groups and the influx of more than two and half million migrants and refugees. Davutoglu had led talks with Europe to limit the number of refugees flowing across its border in return for accelerated EU accession talks and financial aid. That stance reportedly did not gel with the president who wants a more fluid relationship with Europe; so it will be interesting to see what happens now. —EM TRADING SESSION – Australia’s ASX All Ordinaries was up a marginal 0.26% today, the only index that did not take a hammering today. The Shanghai Composite fell 2.82%, its biggest one-day fall in more than two months as investors began to worry about the country’s growth prospects again. The Hang Seng fell 1.66%, while India’s Sensex was down 0.13%. The Japanese market fell 0.25%, not great, but not the hammering the market has taken in recent days. The Taiwan TSEC50 was also down 0.26%. Russian dollar-denominated stocks slipped 1.3% and South African stocks lost 0.7%. Russian rouble and Kazakh tenge losing 0.5% and the South African rand down 0.3%. Kazakhstan's central bank cut its main policy rate to 15% (FROM 17%) yesterday explaining the move as easing pressure on the tenge and lower inflation risks. Emerging markets FX and index losses are attributed to weak commodity markets, with copper set for its largest weekly loss since early 2015, and a plunge in steel and ore prices. The reality is though that while investors keep pushing for ever looser central bank policy on interest rates it is not actually helping growth anywhere, nor is it encouraging inflation. A change in thinking is needed, but investors haven’t locked on to that yet and it is difficult to see how much further they can reasonably expect central banks to move to accommodate investor preferences, particularly as it is clear that asset allocation strategies are undergoing systemic change, but that argument’s for another day– ENERGY - Oil prices have also lost almost 7% this week, falling 1% today as Brent took its first weekly loss for just over a month. Prices are now back below $45 a barrel as investors reported took profits against the recent rise in prices (up 20% on a month basis). Reuters reports Brent futures LCOc1 were down 24 cents at $44.77 a barrel at 0848 GMT. WTI futures CLc1 traded at $44.07, down 25 cents day on day – USA – Of course everyone is looking towards today’s non-farm payroll data. Based on yesterday’s insurance claim data, there won’t be much change, but investors will be looking for a marginal improvement. However, they might be missing the mainline story which is that 59 US oil and gas companies have now declared bankruptcy this year, the latest candidates to file being Midstates Petroleum and Ultra Petroleum as oil prices have plummeted by over 60% since the summer of 2014. These are big numbers and ratings firms look to expect the overall number to double by year end. To put this in context, 68 firms filed for bankruptcy at the height of the dot.com bust back in 2002/2003. Significantly, the bankruptcies are not set against a backdrop of consolidation in the sector with M&A activity in energy at an all-time low. Moreover, many US energy firms are debt laden, with investors exposed to high yield bonds in the segment facing the risk that they will lose money.

Latest Video

Why the ECB will need to purchase bonds again

Friday, 27 July 2012 Written by 
Why the ECB will need to purchase bonds again Even if the European Central Bank (ECB) does not particularly like the idea, it will soon have to return to buying government bonds from several eurozone countries. The reasoning behind this prediction lies in a chain of events already taking place. http://www.ftseglobalmarkets.com/

Even if the European Central Bank (ECB) does not particularly like the idea, it will soon have to return to buying government bonds from several eurozone countries. The reasoning behind this prediction lies in a chain of events already taking place.

Earlier this year the ECB froze its securities market programme (SMP), which, since its inception in 2010, has bought over €210bn worth of sovereign bonds. The responsibility of buying sovereign bonds from various eurozone countries, it said, would now shift to the European Financial Stability Fund (EFSF) and European Stability Mechanism (ESM).

Despite the high level of interest rates in Spain and Italy, the ECB has not resumed its purchases of government bonds, and shows no enthusiasm for doing so. As mentioned, its official stance is that government bond purchases should be carried out by the EFSF/ESM.



However, many analysts (us included) believe the EFSF/ESM will not be able to react sufficiently – mainly due to its size but also the fact it lacks access to monetary creation, which the lender of last resort for governments must have.

To see the chain of events taking place, we only need look at the economic position of Spain, Italy, France and Portugal – which are all deteriorating. This reinforces the risk that investors will refuse to finance these countries, which will push interest rates to the point where there is a threat of default.

In these countries (obviously to different extents):

  • the private sector continues to deleverage;
  • the fiscal policy is and will be restrictive;
  • there is a decline in real wages since labour's bargaining power is weakening;
  • household demand is deteriorating, which leads to companies reducing their investment rate;
  • sluggish activity is leading to job losses and preventing these countries from improving their public finances; and
  • despite the decline in domestic demand in Italy, Spain and Portugal, there remains a substantial external deficit; in France, on the other hand, domestic demand has not started to fall yet, but the external deficit is rising.

The improvement in competitiveness due to the fall in wages (in Spain, Italy and Portugal, but not yet in France) is unable to improve foreign trade, either because the industrial sector is too small as a proportion of the whole economy (Spain, Portugal, France), or because this improvement is insufficient (Italy).

So there is clearly a downward spiralling risk. The crisis spreads from one country to the next via foreign trade and, since the external deficits are only partially being reduced, the crisis may be exacerbated by the rise in interest rates.

Therefore, we can see a continuous weakening of the economy. If the countries’ economic situation deteriorates, it will be increasingly difficult to finance their debts. Investors will be concerned about the countries’ situation and their solvency – in fiscal and external terms. Interest rates will rise further, and this means that countries and governments will be threatened with default.

Realistically, if this occurs the ECB will have to intervene because the officially planned solution (bond purchases by the EFSF/ESM) will not be sufficient. Given the size of the countries’ debts, the need to buy bonds will exceed the capacity of a bond issuer such as the EFSF/ESM – especially in the event of a bond market crisis affecting several eurozone countries.

Given that the lender of last resort for governments must have access to monetary creation, the only institution capable of buying bonds at the volumes required will be the ECB.

We believe that at the end of this process the ECB will have to intervene via massive government bond purchases (similar to the action taken by Bank of England). This is legal, provided that it relates to purchases in the secondary market, irrespective of some countries’ reservations.

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

Related News

Related Articles

Related Blogs

Related Videos

Current Issue

TWITTER FEED