Friday 28th November 2014
NEWS TICKER: FRIDAY NOVEMBER 27TH 2014: BofA Merrill Lynch Global Research’s latest report shows that investment flows this week starkly highlight the impact of negative interest rates in Europe. Money is moving up the value chain in search of substitute asset classes with suitable yield. Investment grade credit looks to be the greatest beneficiary of this at present, with inflows reaching $2-$3bn a week over the last month, a historic high. With around €450bn European govies trading at negative yields, investors have started shifting their attention to high-grade bond funds. The bank’s research team expects the recent strong trend of inflows to continue next year, with inflows to increase to $100bn into the asset class. So far this year high-grade credit has seen $63bn of inflows, while government bond funds have seen only $17bn. The low or negative yielding asset classes are all seeing outflows, reports Bank of America Merrill Lynch in the report. Government bond funds saw their fifth week of outflows, while money market funds saw their largest outflow ($19.5bn) since May this year. Flows into equities managed to bounce back to the positive territory, after three weeks of outflows - According to SwissQuote, in Switzerland, traders will be watching Swiss Kof leading indicator, which is expected to rise from 99.8 to 100.0 in November. However, the real focus will be referenda results this Sunday. The outcome should be released around 4pm CET on Sunday. The latest polls suggest that the “no” votes have the majority indicating that spillover into EURCHF and Gold should be limited. Elsewhere, Euro area flash HICP inflation is expected to drop from 0.4% y/y in October to 0.3% y/y in November. Swedish GDP growth is anticipated to weaken from 0.7% q/q in Q2 to 0.2% q/q in Q3. While OPEC decision not to cut will clearly be disappointing to Canadian policy makers, today GDP is expected to ease from 3.6% y/y to 2.1% y/y in Q3 - New research conducted by independent financial researcher Defaqto on behalf of NOW:Pensions reveals that advisers are gearing themselves up for the business opportunity that auto enrolment presents. Nine out of ten (88%) advisers who are currently advising small and medium sized companies on auto enrolment plan to continue doing so in 2015 when micro businesses will begin staging. Over half of the advisers surveyed (51%) think that auto enrolment represents a good opportunity for them to grow their business over the long term, with three quarters (76%) seeing it as a chance to both advise existing clients as well as grow a new client base. Over two in three (68%) advisers expect to be providing employers with advice on selecting a pension provider, while 72% expect to be advising them for the staging date, and 78% expect their services to be required on an ongoing basis after the staging date has passed. Seven out of ten (73%) believe they will need to advise on other corporate issues such as business protection insurance. Neil Liversidge, managing director, West Riding Personal Finance Solutions explains: "The need for help and advice around auto enrolment naturally brings together business owners, their employees, and advisers. As such it probably represents the single greatest opportunity most firms will have to generate new clients this decade." Not all advisers are in agreement, as nearly one in five (17%) of the 244 advisers questioned, do not intend to advise small and micro businesses on auto enrolment next year. Of these advisers, over half (55%) say they don’t think it will offer profitable business, while 28% believe there is too much admin involved, and 25% are deterred by how much time it will take. One in ten (10%) don’t believe they have the right knowledge to advise on it. Additionally, two in three (66%) advisers say that from their experience so far, employers are either not that engaged or not engaged at all with auto enrolment, while the same can be said for 83% of employees - Germany’s KfW IPEX-Bank and Africa Finance Corporation (AFC) have signed a Framework Financing Agreement (Basic Agreement) amounting to $300m. The facility will be accessible to infrastructure projects in Africa, developed by AFC, by providing long-term financing of European equipment and services imported for such projects. The basic agreement helps to address Africa’s infrastructure development needs while also supporting German and European exporters. Projects that will be financed under the agreement will be covered by guarantees from European Export Credit Agencies (ECAs) - A new active ETF issued by PIMCO Fixed Income Source ETFS plc has begun trading in the XTF segment on Xetra today. The ETF is the PIMCO Low Duration Euro Corporate Bond Source UCITS ETF Asset class, an active bond index ETF (ISIN: IE00BP9F2J32), with a total expense ratio of 0.3%. According to PIMCO, at least 90% of the investment portfolio underlying the active ETF consists of investment grade corporate bonds issued in euro. Up to 20% of the fund assets can be invested in the emerging markets region. The currency risk may amount to up to 10% due to corporate bonds not denominated in euro. The average duration ranges from zero to four years - Legal & General (L&G) has announced a restructure across its L&G Assurance Society (LGAS) division following the announcement of the impending departure of chief executive John Pollock next year. L&G’s savings business will be split into two businesses; mature and digital. Jackie Noakes, chief operating officer for LGAS and group IT director will become the managing director of the mature savings division (including insured savings and with-profit businesses). Mike Bury, managing director of retail savings at L&G will manage the digital savings arm, Cofunds, IPS, Suffolk Life and L&G’s upcoming direct-to-consumer platform –Orangefield Group has purchased Guernsey-based Legis Fund Services, expanding its fund services division and increasing its total assets under administration to more than $50bn. Legis will change its name to Orangefield Fund Services but will continue to be led by managing director Patricia White. The acquisition is part of a trend in mergers and acquisitions in the offshore fund administration sector, and was advised by Carey Olson. Carey Olson also recently advised Anson Group on the sale of its fund administration business to JTC Group and First Names Group on its acquisition of fund management business Mercator - The Straits Times Index (STI) ended +9.54 points higher or +0.29% to 3350.50, taking the year-to-date performance to +5.86%. The FTSE ST Mid Cap Index gained +0.14% while the FTSE ST Small Cap Index declined -0.52%. The top active stocks were Keppel Corp (-2.17%), DBS (+0.66%), OCBC Bank (-0.10%), UOB (+0.71%) and SingTel (unchanged). Outperforming sectors today were represented by the FTSE ST Technology Index (+1.03%). The two biggest stocks of the FTSE ST Technology Index are Silverlake Axis (+1.97%) and STATS ChipPAC (unchanged). The underperforming sector was the FTSE ST Oil & Gas Index, which declined -2.84% with Keppel Corp’s share price declining -2.17% and Sembcorp Industries’ share price declining-1.08%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (+0.38%), SPDR Gold Shares (-0.70%), STI ETF (unchanged). The three most active Real Estate Investment Trusts (REITs) by value were CapitaCom Trust (+0.30%), Suntec REIT (+1.29%), Ascendas REIT (+1.30%). The most active index warrants by value today were HSI24400MBeCW141230 (-6.67%), HSI23800MBeCW141230 (-5.13%), HSI23600MBePW141230 (+2.50%). The most active stock warrants by value today were DBS MB eCW150602 (+2.42%), KepCorp MBePW150330 (+13.85%), UOB MB eCW150415 (+1.24%).

Without lax monetary and FX policies, fiscal consolidation in the euro zone is impossible

Friday, 01 June 2012 Written by 
Without lax monetary and FX policies, fiscal consolidation in the euro zone is impossible In the past, successful fiscal consolidations occurred through a combination of restrictive fiscal policy, expansionary monetary policy and sharp depreciation of the currency. In many euro-zone countries, as the policy mix is restrictive, fiscal consolidation is failing due to falling real economic activity. All possible ways to make monetary policy in the euro zone more expansionary must therefore be explored. Although there remains little leeway to lower short-term interest rates, it is possible to reduce long-term interest rates in the euro-zone countries where they are abnormally high, both by restoring fiscal credibility and through bond purchases by the ECB. Above all, the euro must be weakened, requiring interventions in the FX market. And if the current trend of restrictive fiscal policies without drastic monetary measures persists, euro-zone countries will end up in recession and with higher, not lower fiscal deficits. http://www.ftseglobalmarkets.com/

In the past, successful fiscal consolidations occurred through a combination of restrictive fiscal policy, expansionary monetary policy and sharp depreciation of the currency. In many euro-zone countries, as the policy mix is restrictive, fiscal consolidation is failing due to falling real economic activity. All possible ways to make monetary policy in the euro zone more expansionary must therefore be explored.

Although there remains little leeway to lower short-term interest rates, it is possible to reduce long-term interest rates in the euro-zone countries where they are abnormally high, both by restoring fiscal credibility and through bond purchases by the ECB. Above all, the euro must be weakened, requiring interventions in the FX market. And if the current trend of restrictive fiscal policies without drastic monetary measures persists, euro-zone countries will end up in recession and with higher, not lower fiscal deficits.

Monetary measures during fiscal consolidations in the past

In the nineties, Sweden, Canada, Finland and Italy all successfully consolidated their fiscal position through rapid reductions in fiscal deficits, without negative effects on economic growth and unemployment. This was because fiscal consolidation was systematically combined with a very expansionary monetary policy that included lower interest rates and, above all, a sharp depreciation in the exchange rate to kick things off.



In these countries, the fall in government expenditure was offset by an increase in exports linked to the devaluation of the currency as well as an increase in domestic demand linked to the fall in interest rates.

In the absence of sufficient monetary measures, the fiscal consolidations in several euro-zone countries are failing

The ECB’s policy rate is actually low, but long-term interest rates in the troubled countries have risen markedly, which results in long-term interest rates for the euro zone as a whole that are far too high.

Moreover, although it has depreciated since 2008, the euro is still overvalued against the dollar. And, since euro-zone countries want to reduce their fiscal deficits as quickly as possible, the euro zone’s policy mix is on the whole too restrictive. So it is unsurprising that activity is declining in countries with restrictive fiscal policies: Greece, Portugal, Italy, Spain, Ireland and even the Netherlands.

Indeed, the decline in growth is so substantial that fiscal deficits stopped narrowing in early 2012 in several countries (Spain, Greece, France, Italy and Portugal), requiring additional fiscal austerity measures to be adopted. But these measures will further weaken growth, especially because they are being adopted simultaneously by most of Europe (the euro zone and the United Kingdom). This could lead to an absurd situation later in the year whereby unemployment soars while the fiscal deficits fail to fall. European countries are moving increasingly to the right of the Laffer curve, where a more restrictive fiscal policy subsequently leads to a higher fiscal deficit due to a fall in economic activity.

The only solution: Expansionary monetary and exchange-rate policy

Euro-zone countries are at an impasse if the current policy mix is too restrictive, and the resulting fall in economic activity prevents them from reducing their fiscal deficits. The only solution is then to emulate the successful fiscal consolidations in the nineties by changing over to an expansionary monetary and exchange-rate policy. So – while there is no longer much to be gained from short-term interest rates in the euro zone – it is possible to reduce long-term interest rates in the countries where they are abnormally high.

In order to achieve this, these countries need to regain medium-term fiscal credibility, i.e. financial markets need to be convinced of their determination to stabilise their public debt ratios. This would enable the ECB to resume its government bond purchase programme (SMP) – aimed at accelerating the decline in interest rates – without fear of encouraging these countries to not reduce their deficits.

Furthermore, the euro must be weakened. Indeed, exchange-rate depreciation played an important role in the fiscal consolidation programmes of the nineties. And like Switzerland, China, or once again Japan, the ECB could accumulate foreign exchange reserves (in dollars in the ECB’s case) to push down the euro’s exchange rate against the dollar.

A depreciation of the euro would directly benefit the countries with large-scale industry (Germany, Italy, Ireland, Finland, Austria and Belgium) as well as countries with large-scale exports outside the euro zone (Belgium, Ireland, the Netherlands and Germany), while Spain, France, Portugal and Greece would indirectly benefit from the positive effects of the euro depreciation on these other euro-zone countries.

Averting disaster

Although resuming its government bond purchase programme and accumulating foreign exchange reserves runs counter to the ECB’s culture, if it does not do this, several euro-zone countries will soon reach the absurd situation of the simultaneous increase in both unemployment and fiscal deficits at the same time that fiscal deficit reduction policies are being carried out. Indeed, the examples from the past clearly show that successful fiscal consolidations have always been combined with expansionary monetary and exchange-rate policy.

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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