September 16 2013

After years of the Fed pumping $85bn a month into financial markets, the strength of the American recovery will be tested. The Federal Reserve chairman is expected to make the symbolic gesture this week of announcing the beginning of the end of QE…

 


Powered by Guardian.co.ukThis article titled “Bernanke set to begin Fed’s tapering of QE – but is the US economy ready?” was written by Heather Stewart and Katie Allen, for The Guardian on Sunday 15th September 2013 20.25 UTC

As Barack Obama gears up to announce Ben Bernanke’s successor, the Federal Reserve chairman is expected to make the deeply symbolic gesture this week of announcing the beginning of the end of quantitative easing – the drastic depression-busting policy that has led the Fed to pump an extraordinary $85bn (£54bn) a month into financial markets.

It will signal the Fed’s belief that the US economy is on the mend, but it could also frighten the markets and hit interest rates. So what exactly is Bernanke doing, why now – and how might it affect the UK and other countries?

What will the Federal Reserve do?

After on Tuesday and Wednesday’s regular policy meeting, the Fed is widely expected to announce that it will start to “taper” its $85bn-a-month quantitative easing (QE) programme, perhaps cutting its monthly purchases of assets such as government bonds by $10bn or $15bn.

Is that good news?

It should be: it means the governors of the Fed, led by the chairman, Bernanke, believe the US economy is strong enough to stand on its own, without support from a constant flow of cheap, electronically created money – though they still have no plans to raise base interest rates from the record low of 0.25%, and they expect to stop adding to QE over a period of up to a year. “We really want to see a situation where central banks should not be pumping money into markets. It’s not a healthy thing to be doing,” says Chris Williamson, chief economist at data provider Markit.

Why are they doing it now?

Economic data is pointing to a modest but steady recovery. House prices have turned, rising by 12% in the year to June. Unemployment has fallen to 7.3%, its lowest level since the end of 2008, albeit partly because many women and retirees have left the workforce.

Since QE on such a huge scale carries its own risks – it can distort financial markets, for example – the Fed is keen to withdraw it once it thinks an upturn is well underway. However, some recent data, including worse-than-expected retail sales figures on Friday, have raised doubts about the health of the upturn.

There’s another reason too: Bernanke’s term as governor ends in January next year, and he may feel that at least making a start on the process of tapering – marking the beginning of the end of the policy emergency that started more than five years ago – would be a fitting end to his tenure.

How will the markets react?

With a shrug, the Fed hopes, since it has carefully communicated its intentions. Scotiabank’s Alan Clarke said: “I think it’s pretty much priced in … Speculation began months ago, the market has already moved and we are still seeing some very robust data. The foot is on the accelerator pedal just a bit more lightly.”

However, a larger-than-expected move could still cause ripples – and a decision not to taper at all would be a shock, though some analysts believe it remains a possibility. Paul Ashworth, US economist at Capital Economics, said: “I don’t think they’ve actually decided on this ahead of time.”

What will investors be looking for?

First, the scale of the reduction in asset purchases. No taper at all might suggest Bernanke and his colleagues have lingering concerns about the health of the economy; a reduction of $20bn a month or more would come as a shock. The tone of the statement, and the chairman’s subsequent press conference, will also be scrutinised, with markets hoping for reassurance that even once tapering is underway, there is no immediate plan to raise interest rates: Bernanke has previously said he doesn’t expect this to take place until unemployment has fallen to 6.5% or below. Williamson said: “I think they will accompany the announcement with a very dovish statement designed not to scare people that the economy is too weak but to reassure stimulus won’t be taken away too quickly.”

What does it mean for the UK?

Long-term interest rates in UK markets have risen sharply since the early summer, at least in part because of the Fed’s announcement on tapering, and that shift, which has a knock-on effect on some mortgage and other loan rates, is likely to continue as the stimulus is progressively withdrawn.

If tapering occurs without setting off a market crash or choking off recovery, it may help to reassure policymakers in the UK that they can tighten policy once the recovery gets firmly under way, without sparking a renewed crisis. David Kern, economic adviser to the British Chamber of Commerce, said: “it will strengthen for me the argument against doing more QE in the UK.”

How will the eurozone be affected?

It could cut both ways: a strengthening US economy is a welcome market for Europe’s exporters, and if the value of the dollar increases against the euro on the prospect of higher interest rates, that will make eurozone goods cheaper.

However, the prospect of an end to QE in the US has also caused bond yields in all major markets to rise, pushing up borrowing costs – including for many governments. That could make life harder for countries such as Spain and Italy that are already in a fiscal tight spot.

What about emerging markets?

Back in May, Bernanke merely had to moot the idea of ending QE to send emerging markets reeling. A side-effect of the unprecedented flood of cheap money under QE has been that banks and other investors have used the cash to make riskier investments in emerging markets. The prospect of that tap being turned off has already seen capital pouring out of emerging markets and currencies, potentially exposing underlying weaknesses in economies that have been flourishing on a ready supply of cheap credit.

“It has triggered all sorts of significant movements around the world out of emerging markets. It’s had big ramifications for India and other parts of Asia,” said Clarke.

Central banks in Brazil and India have been forced to take action to shore up their currencies; Turkey and Indonesia also look vulnerable. Many of these markets have looked calmer in recent weeks, but the concrete fact of tapering could set off a fresh panic.

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USA 

Investors cheer prospect of dovish replacement for Bernanke. Would Janet Yellen really be a dramatically different prospect to Summers? Noon market update: Euro shares at highest since 2008. Greek riot police use teargas as strikes begin…

 


Powered by Guardian.co.ukThis article titled “Larry Summers’ withdrawal from Fed race pushes markets to five-year high – live” was written by Graeme Wearden, for theguardian.com on Monday 16th September 2013 11.53 UTC

The Bank of England is touring the UK, holding roadshows to promote its plan to replace Britain’s paper banknotes with plastic alternatives.

They’re in Gateshead today, having kicked off in the refined environs of Oxford on Friday – where my colleague Katie Allen watched events unfold.

She writes:

Stephen Barratt, an accountant from Oxford, is unimpressed. He rubs the polymer dummy between his fingers with a look of disgust.

“It’s the feel. I can see the practical advantages but paper is much nicer. I don’t like them personally … The fact paper notes age is actually quite nice,” he says.

More than 650 people handle the notes before the day is out. Questions range from the environmental impact to washability.

Justin Gunson, a 29-year-old magician, is keen to see how the notes handle as well as other possible professional challenges. “As a magician you want to know if you can mark them, if you can use fake ones.”

The Bank has more than a dozen roadshows planned (unless local conjurers relieve them of the prototypes first).

More here: British shoppers get to grips with Bank of England’s polymer notes

Updated

Back to Greece, and Greek unions say that more than 40,000 civil servants took part in the central Athens demonstration today.

Participation in strike action is reckoned to be 95% - a very high figure given that strikers lose their salaries when they walk off the job.

Angeliki Fatourou of the OLME union (which represents workers in education) told our correspondent Helena Smith that:

It’s been a huge success.

And indicative of what the government and troika can expect in the coming weeks and months ahead.

As flagged up earlier, Greece’s Troika of international lenders return to Athens next week…..

Market update: European share at five-year high

A quick markets update. European stock markets remain buoyant following Larry Summers’ decision to withdraw from the race to succeed Ben Bernanke as head of the Federal Reserve.

• FTSEurofirst 300: up 9.5 points at 1259, a new five-year high 

• FTSE 100: up 59 points at 6643, a five-week high

• German DAX: up 103 points at 8613, an all-time high

• French CAC: up 32 points at 4146, highest since February 2011

Some financial analysts reckon that the market reaction is overblown. After all, Ben Bernanke has already outlined the conditions under which the Fed would slow its stimulus programme. Would Janet Yellen really be a dramatically different prospect to Summers?

Stephen Lewis of Monument Securities thinks not.

Here’s his reasoning:

The markets should not assume that other candidates to lead the Fed will deviate far from the timetable for ‘tapering’ QE3 that Mr Bernanke has outlined. Ms Yellen, whose chances of taking the Chairmanship will appear to have improved with Prof Summers’ withdrawal, may be of a generally ‘dovish’ disposition.

But she has not dissented from the Bernanke schedule nor has she released any public comment recently about economic growth or unemployment that suggests she might look with favour on a more accommodative policy-course than the FOMC consensus currently approves.

There remains the mystery of why President Obama has appeared reluctant to nominate Yellen already. Lewis adds:

Dark rumours of personal frictions during the Clinton Administration abound but, politically, a Yellen appointment would probably be the easiest course for the President to pursue. He could at least count on most of the Democrats in the Senate being on his side.

Updated

Helena Smith: Anger on the streets of Athens

Over in Greece our correspondent Helena Smith reports that passions are on the rise as striking workers, starting with teachers, kick off a week of industrial action in the debt-stricken country.

She also confirms that several people were taken to hospital after riot police used tear gas this morning.

 After a slow-motion summer, Greek unions are back in action organising protests and walk-outs with a vengeance.

Outrage over government plans to pare back the bloated public sector boiled over at 7 AM this morning when a week of strikes got off the ground with police firing tear gas at demonstrating school guards amassed outside the administrative reform ministry.

Three protestors were subsequently rushed to hospital suffering respiratory problems. The decision of authorities to resort to using toxic chemicals so early in the day appears only to have reinforced the resolve of unions in both the public and private sector to step up action against the reforms now being asked of Greece by the EU and IMF.

“It’s just made us more mad,” said Angeliki Fatourou, a leading member of the secondary school teachers union OLME which kicked off five-day rolling strikes today. “Please note that we will not rest easily. This will be the mother of strikes and teachers will lead the way.”

As Helena writes, thousands of teachers, from both secondary and primary sectors, are marching towards the parliament building in Syntagma square in a massive display of opposition over reforms that will see some 12,500 civil servants being transferred to a mobility scheme, widely seen as shorthand for dismissal, by the end of the year.

“The cuts really are the last straw,” said Fatourou insisting that most public schools no longer had enough money to pay heating, electricity or water bills.

ADEDY, the umbrella group representing civil servants nationwide, has also called on its 42 federations to go on strike later this week.

The 48-hour walkout, Wednesday and Thursday, comes ahead of crucial meetings Friday and Saturday that will decide whether industrial action will continue across the public sector. “At the moment different sectors are backing the idea of strike action with varying degrees of intensity,” ADEDY’s Tania Karayiannis told me this morning. “But that is expected to change. Greeks in both the public and private sector have been pushed to the absolute brink. This will be a very hot week that should be seen as a prelude to a very hot winter,” she said.

Visiting inspectors representing Greece’s international creditors will almost certainly be given a baptism of fire when they arrived in Athens to begin what will be the most crucial review, yet, of the Greek economy next Monday.

This video clip appears to show those reported clashes outside Greece’s Ministry of Administrative Reforms between school guards and riot police this morning (see 10.56am onwards):

That’s via the Keep Talking Greece website, which reports that demonstrators held a sit-down protest in the middle of the road outside the ministry, prompting riot police to move them.

And here’s a photo of teachers on strike in Crete:

Updated

Greek schoolteachers have gathered in force in the city of Thessaloniki for today’s walkout, as these tweets from local resident Antonis Gazakis show:

That’s via university lecturer Spyros Gkelis. He also flags up that there is reportedly a high turnout across the country from Greece’s school teachers for today’s strike.

Updated

Greek strikers ‘clash with riot police’ as week of industrial action begins

Over in Greece, a week of industrial action has begun with schoolteachers downing tools, and reports of clashes between school guards and riot police in Athens.

Greek secondary school teachers launched a five-day strike this morning, in protest at the government’s plans to cut thousands of jobs, and transfer staff to its unpopular ‘mobility scheme’ [from where employees can be forced to take a new job or be laid off].

It’s likely to be the first in a series of ‘rolling’ strikes.

According to local reports, Greek police fired teargas to disperse school guards who tried to enter the Administrative Reforms ministry in central Athens this morning, as the walkout got underway.

One police official told Reuters:

About 60 to 70 school guards tried to enter the building to occupy it and were pushed back by police.

School guards are responsible for patroling educational premises, and also operate road crossings for pupils.

Here’s Associated Press’s early take:

Riot police have scuffled with striking school guards outside a ministry in central Athens, as labor unions gear up for a series of public sector strikes over job cuts.

Local media report Monday at least two demonstrators were transported to hospitals suffering from breathing problems after police used small amounts of pepper spray in an attempt to move protesters away from the Administrative Reform Ministry.

Greece’s government has pledged to ax thousands of public sector jobs in an effort to meet conditions of its international bailout. The country has been depending on rescue loans from the International Monetary Fund and other European countries that use the euro currency since May 2010.

Today’s walkout is the prelude to a major 48-hour walkout, starting on Wednesday, called by Greece’s main unions.

Updated

Janet Yellen is the odds-on favourite to succeed Ben Bernanke this morning. A shoe-in, really, at just 1-8 with Paddy Power (so you’d get £9 back for every £8 you risked.)

Tim Geithner, outgoing Treasury secretary, is an 8-1 shout, as is former Fed vice-chairman Donald Kohn.

Stanley Fischer, who just stepped down from running Israel’s central bank, is a 40-1 outsider.

More details here.

Larry Summers decision not to run for the Federal Reserve chair (see opening post onwards), is going to trigger a rally on Wall Street later today.

Traders are calling the Dow Jones industrial average up by over 1%, as US investors give the thumbs up to the prospect of a more dovish Fed chair (although we still don’t know who is going to actually replace Bernanke, of course)

European stocks remain at five-year highs, and the US dollar is still down around 0.5% on the currency markets.

Summers’ decision could give the US economy a small boost , tweets economic policy analyst Alan Tonelson:

Eurozone inflation fell to just 1.3% (annual basis) last month, data just released from Eurostat confirmed.

That’s a drop from July’s reading of 1.6% (for the consumer prices index), further away from the European Central Bank’s target of just below 2%. That shows there’s no pressure on the ECB to raise rates, or change its commitment to leave them at present levels, or lower, for an extended period.

The data confirmed that Greece remains in deflationary territory, with prices falling by 1.0% year-on year. Bulgaria (-0.7%) and Latvia (-0.1%) also showed the lowest rates.

The highest eurozone inflation figures were seen in Estonia (3.6%), the Netherlands (2.8%) and Romania (2.6%), with the UK also reporting inflation of 2.8% last month.

Updated

This may please Mario Draghi — as the ECB chief began his speech, Italy reported that its trade surplus has widened

Imports fell 0.3% year-on-year in July, while exports jumped by 3.0% compared with July 2012 – the first rise in exports in three months. This pushed the Italian trade surplus up to €5.948bn, up from €4.733bn a year ago.

In another welcome sign of rebalancing, exports to non-EU countries were up by 3.5% (full details here)

Draghi is also warning that eurozone governments must not slacken off the pace of reform – a familiar refrain for the ECB chief:

 Thanks to their consolidation efforts so far, the primary fiscal deficit for the euro area has fallen from 3.5% of GDP in 2009 to around 0.5% in 2012. This is projected to turn into a primary surplus from 2014 onwards.

This improvement in public finances has helped send a signal to investors that government debt levels will stabilise and then fall in the future. This has been crucial in reassuring markets about debt sustainability. But the average public debt level in the euro area is still very high, at around 95% of GDP. This means that consolidation efforts need to be maintained in the years to come.

Draghi: Europe’s ‘fragile’ recovery needs more help

Mario Draghi’s Berlin speech is now online at the ECB’s web site: click here

It’s called “Europe and the Euro – A Family Affair”*, and the key theme is that Europe needs growth to underpin its delicate recovery.

As Draghi puts it:

The recovery is only in its infancy. The economy remains fragile. And unemployment is still far too high.

Draghi is reminding his audience of German small business owners that the eurozone faced” difficult circumstances” a year ago, with “severe tensions in financial markets” as investors feared the break-up of the euro.

That threat has receded, he said, but Europe remains too weak:

My main message is that we have made significant progress on the first step, stabilising the euro area. But there is still work to do to transform this achievement into higher growth and employment. Strengthening the euro area through sustainable policies, higher competitiveness and stronger common institutions is therefore our priority for today.

The speech contained some familiar themes — unemployment remains too high, and banking union remains incomplete.

On competitiveness, Draghi actually hails the drop in wages in some eurozone countries:

One way to regain competitiveness quickly is to address the numerator in unit labour costs – nominal wages. Another, longer-term approach is to increase the denominator – to achieve higher productivity. In my view, in the euro area today we need both.

On the first count, there are already some encouraging signs of rebalancing in the euro area in terms of cost competitiveness. Thanks in part to the structural reforms introduced in several countries, relative costs are adjusting where they had become misaligned in the past.

• – presumably the title is a reference Sly and the Family Stone, following Mark Carney’s decision to name-check young UK singer-songwriter Jake Bugg last month.

Over in Berlin, European central bank president Mario Draghi has begun giving a speech – here’s the wire snaps off the Reuters terminal….

16-Sep-2013 09:00 – ECB’S DRAGHI – EURO ZONE ECONOMY REMAINS FRAGILE, UNEMPLOYMENT FAR TOO HIGH

16-Sep-2013 09:00 – ECB’S DRAGHI – GIVEN SUBDUED INFLATION OUTLOOK, EXPECT KEY INTEREST RATES TO REMAIN AT CURRENT OR LOWER LEVELS FOR EXTENDED PERIOD OF TIME

16-Sep-2013 09:00 – ECB’S DRAGHI – BANKING UNION SHOULD HELP SPEED UP THE REPAIR OF BANKS – THAT IS IF, AS I HOPE, WE END UP WITH A STRONG SINGLE RESOLUTION MECHANISM 

Updated

Kit Juckes of Société Générale dubs today’s market action the “Larry Rally”, and puts his finger firmly on the causes of the buoyant financial markets — easy money.

From his morning note to clients:

Five (long) years on from Lehman’s collapse, and while the global economy is still struggling to find its feet, financial markets are riding high. This morning’s catalyst may be Larry Summers’ decision to withdraw from consideration for the Fed Chairmanship, but the real driver is easy monetary policy. Of course.

June saw a huge market blood-letting as ‘tapering’ was priced in, and the period since then has seen outflows from emerging markets and bond funds slow, markets calm down.

The issue is how long the risk party can last as talk of tapering becomes reality and before the focus switches firmly to when and how fast the Federal Reserve actually tightens policy.

The Fed’s monetary policy committee meets on Wednesday night, so we might not have long to wait…..

Britain’s borrowing costs have dropped this morning, following Larry Summers’ decision.

The yield on 10-year gilts has dropped to 2.86% , from 2.91% on Friday night, as traders rush to buy UK debt (pushing up the price, and thus lowering the interest rate on the bond).

US Treasuries have also strengthened, driving down yields on America’s 10-year bonds by a chunky 8 basis points to 2.812%, from 2.9% on Friday.

The message from the markets is clear — they expect a less hawkish Fed chair than Summers….

Germany’s DAX index hit a new record high this morning — nudging 8,601 points in the opening minutes of trading.

Updated

European markets hit five-year high

The FTSeurofirst 300 index of Europe’s biggest companies has just hit a new five year high, driven by the prospect of the dovish Janet Yellen becoming the next Fed chair.

It has jumped 0.58% to 1,260.35, a level not seen since June 2008 — three months before the collapse of Lehman Brothers.

Here’s the details of the European markets this morning, following Asia’s rally (see 7.51am)

Mike van Dulken, head of research at Accendo Markets, explains that recent progress in Syria is also boosting the markets – along with the first election results from Germany (of which more shortly…..)

Investors are reacting positively to news that the more hawkish Larry Summers has withdrawn from the race to be the next Fed chair in Jan (not enough support from Obama’s Democrats), paving the way for the more accommodative vice-chair Janet Yellen.

Markets are not worried about tapering per se, rather the speed of it, seeing Yellen reduce bond buying more slowly and leave rates lower for longer.

Sentiment is also helped by news of deal between US & Russia over Syria’s chemical weapons surrender.

German Chancellor Merkel’s sister party won the Bavarian election which bodes well for her to keep her position in next week’s general election.

Updated

Summers end drives European markets higher

Europe’s stock markets are open, and the news that Larry Summers won’t be the next Fed chair is pushing shares higher.

The prospect of an “ even more dovish chairman at the helm of the world’s most pivotal central bank” than Ben Bernanke, as Chris Weston of IG puts it, is giving markets a lift.

The FTSE 100 jumped 1% at the start,and is now up 50 points at 6633.

Italy’s FTSE MIB has also gained 1%, with other indexes jumping at least 0.8%.

So why the rally? It’s all about Janet Yellen, the new favourite to replace Bernanke. As Weston explains, Yellen could potentially have quit the Fed altogether if Summers got the top job, depriving the Fed of one of its most dovish members:

Life with Larry Summers at the helm would have potentially been very different from life under Ben Bernanke; it’s these uncertainties that keep markets held back.

In theory if Larry Summers had got the job, we could easily have seen Janet Yellen step down from the Fed and return to academia, which would have had negative ramifications on the composition of the Fed in Q2 2014, with the board not just losing a key note dove, but also its last voting female. This has now changed, and while we know Donald Kohn has been interviewed, if Janet Yellen doesn’t get the job there could be an outcry given a large number of democrats and certainly market participants have been campaigning for her appointment.

Updated

Larry Summers’ withdrawal may be good news for investors who don’t want America’s stimulus programme to end, but it’s a blow to President Obama.

As our Washington bureau chief, Dan Roberts, explained last night:

Barack Obama’s hopes of a smooth transition of power at the US Federal Reserve were dealt a significant blow on Sunday night when Larry Summers unexpectedly pulled out of the running to replace Ben Bernanke when he stands down in January.

Summers, a former Treasury secretary under President Clinton, had been frontrunner to take charge of US monetary policy during a crucial phase in the economic recovery but is understood to have been deterred by the prospect of bumpy Senate confirmation hearings.

Despite an impeccable track record as an economist and policymaker, Summers remains widely associated with the period of laissez-faire economic policy-making that led up to the banking crash and his decision to step aside on the eve of the fifth anniversary of the crisis shows how raw the politics remain in Washington.

More here: Larry Summers withdraws name for Federal chairmanship

Updated

…while fastFT have swiftly rounded up the currency movements:

  • Malaysian ringgit: +1.42%
  • Indian rupee: +1.41%
  • Indonesian rupiah: +1.09%
  • Aussie dollar: +0.88%
  • Kiwi dollar: +0.71%
  • Thai Baht: +0.50%
  • Japanese yen +0.47%

Updated

Here’s a snapshot of the rally in Asia today: led by emerging markets (which have been buffeted in recent weeks by the prospect of the Fed ‘tapering’ its quantitative easing programme):

The agenda

It’s going to be a busy day, quite apart from the excitement over the Fed race.

Here’s an agenda:

• Mario Draghi gives speech in Berlin – from 10am CET (9am BST). Details

• Eurozone inflation data for August: 11am CET (10am BST)

• Troika begin review of Portugal’s bailout programme – all day

• Greek teachers strike over austerity cutbacks – all day

• Italian trade data – 10am CET (9am BST)

Markets to surge on Summers withdrawal

Good morning, and welcome to our rolling coverage of the financial markets, the world economy, the eurozone and the business world. 

European stock markets are set to rally this morning following the surprise news last night that Larry Summers, former US Treasury secretary, has withdrawn from the race to become the next chairman of the US Federal Reserve.

The former US Treasury secretary threw in the towel yesterday, seemingly daunted by the prospect of a bruising fight with Congress.

The move throws the race to succeed Ben Bernanke wide open, with the Fed on the very brink of deciding whether to begin slowing its huge monetary stimulus programme. The new front-runner appears to be Janet Yellen, Fed vice-chair since 2010 – a popular choice with Democrats and many in the financial markets and the media.

As well as having helped guided Fed policy through the crisis, Yellen is credited with a rare knack of reading economic trends — including predicting in 2009 that the recovery would be “frustratingly slow”.

Economists and analysts believe Yellen is more likely than Summers to maintain a robust stimulus programme, meaning more easy money for Wall Street and the City.

Summers’ withdrawal has already hit the dollar, driving sterling to its highest level since January. The pound is up by 0.8 cents this morning, to $1.59.5.

Emerging markets have rallied overnight, with Thailand’s stock market up almost 3% and India up 1%.

European stocks are expected to surge too, while bond yields should probably slide — on the prospect of the Fed buying even more US debt than under Larry Summers.

IG is calling the FTSE 100 up 72 points at 6655, the DAX up 131 points at 8640, and the CAC up 57 points at 4171.

I’ll be tracking all the news through the day, as usual….

Updated

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