Monday 27th April 2015
NEWS TICKER: MONDAY, APRIL 27th 2015:Luc Luyet, CIIA – Senior Market Analyst AT Swissquote says that yesterday, “the SNB surprised the market by announcing that the number of sight deposit account holders that are exempt from negative interest has been reduced. This decision doesn’t change much the domestic banks’ situation as the “20 times the minimum reserve requirement” rule is still running. On the other side, the institutions associated with the Confederation, such as the pension fund of the Confederation or the pension fund of the SNB, are no longer exempt of negative interest. Consequently, only the account holders of the national social security system are still fully exempt.” - High yield debt issuance remains buoyant. Issuance volume for the week ending April 17, 2015, slowed down a bit from the previous week, but remained strong. Junk bond, or high-yield debt, issuers continued to issue bonds as yields remained favourable. High-yield debt is tracked by the SPDR Barclays Capital High Yield Bond ETF and the iShares iBoxx $ High Yield Corporate Bond Fund. According to data from S&P Capital IQ/LCD, dollar-denominated bonds amounting to $10.75bn were issued across 16 transactions in the week ending April 17th. The issuance volume fell by 3.2% from the week ending April 10. Pricing was evenly spread across the week. The number of transactions fell from 18 to 16 week-over-week. Last week brought the total US dollar issuance of high-yield debt to $115.8bn in 2015 YTD, up some 15% from the same period in 2014, the bulk of which is refinancing of older debt - Moody's says EMEA auto ABS performance remained stable during the three-month period ending February 2015. The sector's average performance trend was positive in terms of delinquency ratios and cumulative losses. The 60+ day delinquencies decreased to 0.66% in February 2015 from 0.77% in February 2014, while cumulative defaults decreased to 1.06% from 1.20% over the same period. This decrease was due mainly to the good performance of the German and Dutch markets. The prepayment rate increased slightly to 13.49% in February 2015 from 13.30% a year earlier. As of February 2015, the pool balance of all outstanding rated auto ABS transactions was €27.55bn - According to Sino specialists Red Pulse, China’s State Council is considering allowing daily repatriation for QFII. Currently, RQFII enjoys T+1 repatriation while QFII is restricted to T+5. QFII is the largest channel for foreign investment into China with quota of USD150bn, however, only half of the quota is in use, like at least partly due to the five-day repatriation stipulation - Malaysia’s state pension fund will offer a Shari’a-compliant investment option for its members by 2017, Prime Minister Datuk Seri Najib Razak said today. Najib says it will create the largest Shari’a fund of its kind in the world. Malaysia has one of the world’s largest Islamic finance sectors and the authorities are keen to develop it further. They envision the industry accounting for 40% of the country’s total banking assets by 2020 compared with latest figures of around 23% released last year. The $160bn (MYR577.4bn) Employees Provident Fund (EPF) already invests about a third of its portfolio in stocks and bonds that comply with Islamic principles, which ban interest payments and pure monetary speculation. The fund reportedly hired consultants last year to study the feasibility of a state-backed pension fund focusing entirely on Shari’a-compliant investments. Additionally, local press reports says that Malaysia’s sovereign wealth fund Khazanah Nasional has received regulatory approval to issue a MYR1billion (around $275m) socially responsible Islamic bond - The NASDAQ OMX Group, Inc has declared a regular quarterly dividend of $0.25 per share on the company's outstanding common stock, an increase of 67% from the prior $0.15 per share quarterly dividend. The dividend is payable on June 26TH 2015, to shareowners of record at the close of business on June 12TH 2015 - Lazard Ltd today reported operating revenue1 of $581m for the quarter ended March 31st. Adjusted net income was $103m, or $0.77 (diluted) per share for the quarter. These results exclude a pre-tax charge of $63m relating to a debt refinancing2. Q1 2015 net income on a U.S. GAAP basis, including the pre-tax charge, was $56m, or $0.42 (diluted) per share. "Our Financial Advisory and Asset Management businesses continue their strong performance," says Kenneth M. Jacobs, Chairman and Chief Executive Officer of Lazard. "In the first quarter, we refinanced and repaid a portion of Lazard's long-term debt, significantly reducing our interest costs," adds Matthieu Bucaille, chief financial officer of Lazard. "Consistent with our capital management objectives, we have increased the quarterly dividend by 17%, the fifth increase in as many years." -

Blog

The European Review

By Patrick Artus, chief economist at Natixis

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

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