European banks

Investors believe Mario Draghi could impose deeper negative interest rates and unleash more QE tomorrow. UK construction growth hits seven-month low. Latest: eurozone inflation just 0.1%. Citi predicts big moves from Draghi tomorrow…

Powered by Guardian.co.ukThis article titled “Euro weakens as eurozone inflation boosts stimulus hopes – business live” was written by Graeme Wearden, for theguardian.com on Wednesday 2nd December 2015 17.01 UTC

After a fairly undramatic day, London’s stock market has closed higher:

In 24 hours we’ll know exactly what Mario Draghi and co have decided.

In the meantime, City analysts continue to speculate — and perhaps prepare the ground for some ‘I told you so’ action.

Capital Economics have nailed their trousers to the mast, forecasting steeper negative interest rates on banks, and a serious QE boost.

Brian Davidson says:

We have long argued that the ECB would need to add more stimulus before long, and the consensus has come round to this view following a series of dovish signals by the ECB. Accordingly, markets are now pricing in a cut of around 10bp to the deposit rate and polls show that most economists expect a €15bn increase in monthly asset purchases. We think the ECB will cut the deposit rate by 20bp, and increase its monthly asset purchases by €20bn.

Updated

Thursday’s ECB meeting could be quite combative, as some central bank governors are reluctant to provide more stimulus.

The German contingent are particularly concerned, as the Wall Street Journal explains:

Several officials have expressed skepticism that more stimulus is needed at this time, led by the ECB’s two German officials, Bundesbank President Jens Weidmann and ECB executive board member Sabine Lautenschläger. Central bankers from Baltic euro members have also signalled resistance, making it unlikely that Thursday’s decision will be a unanimous one.

More here:

Newsflash from Ontario: The Bank of Canada has left interest rates unchanged at today’s policy meeting.

Money is also flowing into eurozone government bonds today, on anticipation that the ECB will boost its QE programme.

This has driven the yield, or interest rate on German two-year bonds deeper into negative territory – which means the price is at a record high.

The pound is tumbling on the FX markets today.

It just hit a new seven and a half-month low against the US dollar at $1.4979.

Sterling is being hit by two events

Back to the eurozone.

Swiss bank UBS have produced a nifty chart showing the main options which the ECB could deploy tomorrow…..and the likely impact on the markets.

ECB policy options

Updated

US private sector job creation hits five-month high

A strong dose of US employment data has just increased the chances that the Federal Reserve raises interest rates in two weeks time.

A total of 217,000 new jobs were created by US companies last month, according to the ADP Research Institute.

That’s the biggest rise in private sector payrolls since June, and beats forecasts for a 190,000 increase. It also beats October’s reading of 196,000, which was revised up from 182,000.

It suggests that the wider Non-Farm Payroll will show a robust labour market. The NFP is due on Friday, and is the last major data point until the Fed’s December meeting.

US ADP Payroll

US ADP Payroll Photograph: ADP / fastFT

As fastFT puts it:

Although the ADP survey has not proved a consistent forecaster of the official monthly government jobs numbers, they may soothe investors nerves ahead of an important period for economic data and central bank decisions.

The euro has fallen back today, in another sign that Draghi is expected to announce new stimulus measures tomorrow.

The single currency dropped back through the $1.06 mark against the US dollar today, which is a near eight-month low.

Euro vs US dollar today

Euro vs US dollar today Photograph: Thomson Reuters

This is a handy chart, showing the three main options in the ECB’s toolbox, and the way they could be deployed:

There’s no realistic chance that eurozone inflation will hit the forecasts drawn up by the ECB’s own economists three months ago.

That’s the view of Timo del Carpio, European Economist, RBC Capital Markets, who told clients:

The most recent staff projections from the ECB (published in September) revealed an expectation for HICP [inflation] to average 0.4% y/y over Q4/15 as a whole.

Taking into account today’s outturn, this would require the headline rate to rise to at least 0.8% y/y in December in order for those forecasts to still be valid. Suffice to say, we think that is too tall an order, even taking into account the expected base effects from last year’s oil price declines (expected to come into force primarily in December and January).

In other words, this outturn should represent further downside news for the ECB.

And that’s why del Carpio predicts a further 20 basis point cut to the deposit rate, and a 6-month extension to the QE asset purchase programme .

It’s all systems go for more ECB stimulus, says Jonathan Loynes, chief European economist at Capital Economics:

“November’s weaker-than-expected eurozone consumer prices figures give a final green light for the ECB to both increase the pace of its asset purchases and cut its deposit rate at tomorrow’s policy meeting.”

Loynes is also concerned the core inflation – which excludes volatile components such as energy prices – dropped from 1.1% in October to 0.9% in November.

(FILES) A picture taken on August 7, 2014 shows the Euro logo in front of the European Central Bank, ECB in Frankfurt am Main, western Germany. Financial markets are looking to the European Central Bank to open the cash floodgates next week after consumer price data showed the 18-country eurozone is flirting with deflation, analysts said. AFP PHOTO / DANIEL ROLANDDANIEL ROLAND/AFP/Getty Images

Ruben Segura-Cayuela, a euro zone economist at Bank of America Merrill Lynch, believes the weak inflation report will have surprised the European Central Bank, in a bad way.

With inflation stuck at just 0.1%, Segura-Cayuela believes the ECB will boost its bond-buying QE programme from the current rate of €60bn per month.

I’ve taken the quotes off Reuters:

“It [the inflation report] is not consistent with the trend that the ECB was expecting.

We are expecting a one year extension on QE purchases and quantities to go up to as much as €70bn a month.”

Segura-Cayuela is also in the ‘deeper negative rates’ camp — he reckons the deposit rate on bank deposits at the ECB could fall from -0.2% to -0.3%.

European stock markets are still rallying after the inflation data reinforced hopes of more eurozone stimulus:

European stock markts

Bloomberg’s Maxime Sbaihi also expects significant action from the European Central Bank tomorrow:

Updated

Economist and ECB watcher Fred Ducrozet has found a chart showing how weak inflation will prompt extra QE from the European Central Bank.

The x-axis shows the forecast for inflation — the ECB’s target is just below 2%.

The y-axis shows how much extra bond-buying would be needed if inflation is falling short — red if the ECB is struggling to push funds into the real economy, and grey if the ‘transmission mechanism’ is working well.

And as Fred tweets, today’s poor inflation data suggests anything between €400bn and one trillion euros of extra QE could be required.

Citi predicts lots more QE.

Citigroup has predicted that Mario Draghi will make two serious announcements tomorrow.

1) They expect him to hit the banks with more severe negative interest rates, by cutting the deposit rate at the ECB to minus 0.4% (compared with minus 0.2% today).

2) In addition, they suspect Draghi will boost the ECB’s bond-buying programme from €60bn per month to €75bn per month….

…and also run the quantitative easing programme for another six months. So rather than ending in September 2016, it would continue to March 2017.

That adds up to around €585bn of extra QE, I reckon.

City traders are predicting that Mario Draghi will announce a significant increase in the ECB’s stimulus measures on Thursday:

This weak inflation report could provoke the ECB into a more dramatic stimulus boost at tomorrow’s governing council meeting, says Jasper Lawler of CMC Markets:

He believes Mario Draghi could announce plans to buy more assets with newly printed money each month, rather than just run the quantitative easing programme for longer.

The euro plunged after data showed Eurozone inflation was stuck at a meagre 0.1% year-over-year in November, missing estimates of a slight rise to 0.2%.

The inflation miss adds to the case for stronger action from the ECB tomorrow. The data could be the difference-maker for the ECB choosing to increase the size of monthly asset purchases over just extending the end-date of the QE program.

Currently the ECB is buying €60bn of assets each month with new money, to expand its balance sheet and push more cash into the economy.

Updated

The euro has fallen sharply, as investors calculate that the ECB is very likely to announce new stimulus measures tomorrow:

Eurozone inflation: the detail

Eurozone’s inflation rate was, once again, pegged back by cheaper oil and petrol.

Here’s the detail, explaining why inflation was just 0.1% last month.

  • Energy prices slumped by 7.3%
  • Food: up 1.5%
  • Service: up 1.1%
  • Other goods: +0.5%
Eurozone inflation

Eurozone inflation, November 2015 Photograph: Eurostat

Another blow – core inflation, which excludes energy, food and tobacco, only rose by 0.9%.

That’s down from 1.1% a month ago, suggesting that inflationary pressure in the eurozone is actually weakening….

Eurozone inflation stuck at 0.1%

Here comes the eagerly-awaited eurozone inflation data!

And it shows that consumer prices only rose by 0.1% year-on-year in November.

That’s a little weaker than the 0.2% which economists had expected.

It raises the chances of significant new stimulus moves from the European Central Bank tomorrow (as explained earlier in this blog)

More to follow….

Updated

The pound has been knocked by the news that UK construction growth has hit a seven-month low:

Pound vs dollar today

Pound vs dollar today Photograph: Thomson Reuters

Updated

Britain’s construction sector is suffering from a lack of skilled builders, warns David Noble, CEO at the Chartered Institute of Procurement & Supply.

He says this is a key factor behind the sharp drop in growth last month:

“Suppliers continued to struggle this month, citing shortages in key materials, supply chain capacity and skilled capability as the causes.

But there is a question mark over the coming months as the housing sector, normally the star performer, may drag back on recovery along with the lack of availability of skilled staff.”

Maybe George Osborne should get back to that building site….

Britain’s Chancellor of the Exchequer George Osborne lays a brick during a visit to a housing development in South Ockendon in Essex, Britain November 26, 2015. REUTERS/Carl Court/Pool

Construction recovery is ‘down but not out’

The slowdown in housebuilding growth last month means that it was overtaken by the commercial building sector, as this chart shows:

Construction PMI by sector

Tim Moore, senior economist at Markit, explains:

“The UK construction recovery is down but not out, according to November’s survey data. Aside from a pre-election growth slowdown in April, the latest expansion of construction activity was the weakest for almost two-and-a-half years amid a sharp loss of housebuilding momentum.

“Residential activity lost its position as the best performing sub-category, but a supportive policy backdrop should help prevent longer-term malaise. Strong growth of commercial construction was maintained in November as positive UK economic conditions acted as a boost to new projects, while civil engineering remained the weakest performer.

UK construction growth hits seven-month low

Breaking — growth across Britain’s construction sector has slowed to a seven month low, as builders suffer an unexpected slowdown.

Data firm Markit reports that house building activity expanded at the lowest rate since June 2013 in November.

Markit’s Construction PMI, which measures activity across the sector, fell to 55.3 last month from 58.8 in October.

That is the weakest reading since the pre-election slowdown in April, and the second-weakest since mid 2013.

The slowdown was particularly sharp in the house-building area – which is particularly worrying, given Britain’s desperate need for more homes.

Markit says:

All three broad areas of construction activity experienced a slowdown in output growth during November. Residential building activity increased at the weakest pace since June 2013, while civil engineering activity rose at the slowest rate for six months and was the worst performing sub- category.

UK construction PMI

More to follow…

Yannis Stournaras governor of Bank of Greece shows the new 20 euro note in Athens, Tuesday, Nov. 24, 2015. The new 20 euro notes will circulate in the 19 Eurozone countries on Wednesday. Greece was formally cleared Monday to get the next batch of bailout loans due from its third financial rescue after the cash-strapped country implemented a series of economic reform measures that European creditors had demanded. (AP Photo/Thanassis Stavrakis)

A new survey of Europe’s businesses has found that, for the first time since 2009, they aren’t struggling to get credit.

That suggests the ECB’s policy measures are having an effect — and also indicates that perhaps more stimulus isn’t needed after all….

The ECB surveyed more than 11,000 companies across the eurozone. And most reported that they have no concerns over their ability to borrow. Instead, the main problem is a lack of customers.

It’s six weeks since the last ECB meeting, when Mario Draghi dropped a loud hint that the central bank was ready to do more stimulus if needed.

Since then, European stock markets have climbed steadily, and are heading for a three-month high today.

Latvia’s central bank governor has apparently told a local newspaper that the ECB’s quantitative easing programme is “better than doing nothing”.

That’s via Bloomberg. The interview took place with the Neatkariga Rita Avize newspaper – but there’s only a teaser online.

There’s a bit of edginess in the markets this morning, as investors wait for November’s eurozone inflation data to arrive in 70 minutes time.

Economists expect a small uptick, from 0.1% to 0.2% — while core inflation (which strips out volatile factors like energy and food) might hover around 1.1%.

A poor reading would surely seal fresh stimulus measure at tomorrow’s ECB meeting. But a stronger inflation report might cause jitters, as Conner Campbell of Spreadex puts it:

Given that the region’s failure to reach its inflation targets is one of the main reasons the Eurozone’s central bank is considering another injection of QE, this Wednesday’s figures perhaps carry slightly more weight than they have of late.

European stock markets

European stock markets in early trading Photograph: Thomson Reuters

This chart shows how investors expect the ECB to impose deeper negative interest rates on commercial banks.

That would discourage them from leaving money in its vaults rather than lending it to consumers and businesses:

Ramin Nakisa of UBS

Ramin Nakisa of UBS Photograph: Bloomberg TV

It’s possible that the European Central Bank disappoints the markets tomorrow.

Ramin Nakisa, global asset allocation manager at UBS, believes the ECB will not boost its quantitative easing programme tomorrow, despite a general belief that more QE is coming.

He also reckons the deposit rate paid by banks who leave cash at the ECB will only be cut by 10 basis points, from minus 0.2% to minus 0.3%.

Nakisa tells Bloomberg TV:

If that happens, there could be some disappointment in the markets.

But in the long-term, Nakisa adds, the eurozone economy is recovering. More stimulus isn’t really needed.

Ding ding – European markets are open for trading, and shares are rising.

The German DAX, French CAC, Italian FTSE MIB and Spanish IBEX are all up around 0.4%, ahead of tomorrow’s ECB meeting.

The FTSE 100 is lagging, though – up just 0.1%. It’s being dragged down by Saga, the travel and insurance group, which has shed 5% after its biggest shareholder sold a 13% stake.

The Bank of England printing works, now De La Rue, in Debden Newly printed sheets of 5 notes are checked for printing mistakes<br />B81HM8 The Bank of England printing works, now De La Rue, in Debden Newly printed sheets of 5 notes are checked for printing mistakes

You’d think that printing banknotes would be a safely lucrative business (losing money? Just make some more!).

But De La Rue, the UK-based printer, has just announced that it’s cutting around 300 staff and halving its production lines from eight to four.

The axe is falling sharply on its Malta plant, which is to close.

De La Rue prints more than 150 national currencies, and has suffered from falling demand for paper notes. There had been chatter that it might pick up the contract to produce new drachma for Greece, but that particular opportunity appears to have gone…..

Updated

VW shareholders to face workers

There could be ructions in Wolfsberg his morning, as the billionaire owners of Volkswagen face workers for the first time since the emissions cheating scandal broke.

The Porsche-Piech have been criticised for keeping a low profile since the VW crisis erupted. But today, several members of the group will make the trip to the carmakers headquarters to show solidarity with workers – who are being forced to down tools over Christmas because sales have weakened.

Bloomberg has a good take:

Wolfgang Porsche, chairman of family-owned majority shareholder Porsche Automobil Holding SE, will address thousands of workers in hall 11 of Volkswagen’s huge factory in Wolfsburg, Germany. He’ll be flanked at the 9:30 a.m. staff meeting by the other three supervisory board members who represent the reclusive clan: Louise Kiesling, Hans-Michel Piech and Ferdinand Oliver Porsche.

The Porsche-Piech family has been asked by labor leaders to signal their commitment to workers, now facing two weeks of forced leave during the Christmas holidays as the crisis begins to affect sales.

Labor chief Bernd Osterloh, who has pushed to shield workers by focusing cutbacks on Volkswagen’s model portfolio, will host the assembly. It comes amid mixed news for Volkswagen: though the company has made progress toward a simpler-than-expected recall of 8.5 million rigged diesel cars in Europe, plummeting U.S. sales show the impact of the crisis on the showroom floor.

Updated

The Agenda: Eurozone inflation could seal stimulus move

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

There’s a ‘calm before the storm’ feeling in the markets today. Investors are bracing for Thursday’s European Central Bank meeting, where it is widely expected to boost its stimulus programme.

European stock markets are tipped to rally at the open, on anticipation that Mario Draghi will step up to the plate again and announce something significant.

It could be a new cut to borrowing costs, hitting banks with harsher negative interest rates to force them to lend money. Or it could be an extension to the ECB’s QE programme – a commitment to pump even more new electronic money into the economy.

Or both.

Or something else entirely. With ‘Super Mario’, you never know for sure.

The ECB is under pressure to act, because inflation in the eurozone is so weak.

At 10am GMT, the latest eurozone prices data is released — it’s expected to show that prices rose by just 0.2% annually in November. That would be an improvement on October’s 0.1%, but still far short of the target (just below 2%).

Also coming up today….

  • Market releases its UK construction PMI report at 9.30am GMT. That will show how the building industry fared last month -
  • The latest measure of US private sector employment is released at 1.30pm GMT. That will give a clue to how many jobs were created across America last month, ahead of Friday’s non-farm payroll report.
  • Federal Reserve chair Janet Yellen is speaking at the Economics Club of Washington on Wednesday at 5:25pm GMT.
  • And Canada’s central bank sets interest rates at 3pm GMT – we’re expecting no change.

We’ll be tracking all the main events through the day….

Updated

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USA 

Dovish Fed chair Janet Yellen sends markets surging. U.S. dollar comes under pressure following the Fed announcement with the pound rallying to near five-year highs. The Confederation of British Industry fears exports could suffer from strong pound…

 


Powered by Guardian.co.ukThis article titled “Stock markets rally and pound hits near five-year high after Federal Reserve meeting – business live” was written by Graeme Wearden, for theguardian.com on Thursday 19th June 2014 13.40 UTC

In parliament the Treasury Committee has given its stamp of approval to Kristin Forbes, MIT professor, joining the Bank of England’s monetary policy committee.

After a hearing yesterday, Andrew Tyrie MP, said:

 

“The Committee is satisfied that Professor Forbes has the professional competence and personal independence to be appointed to the Monetary Policy Committee and wishes her every success in her new role.

“The Committee also welcomes the fresh perspective Professor Forbes should bring to the MPC from her economics and public policy experience in the US.”

During the hearing, the Committee appeared concerned that Forbes – an expert on financial contagion – has not worked specifically on monetary policy before. She explained that her work on macro-economic themes such as how crises spread, and on global capital flows, were crucial to modern monetary policy.

Updated

European lunchtime summary: Fed cheers the markets

Last night’s dovish tone from the US central bank has lifted European stock markets, pushed the pound higher, and sent the VIX volatility index down to its lowest level in around eight years.

The Fed sparked the rally last night, by giving no clear indication of when interest rates might rise, and by refusing to panic about the recent pick-up in inflation.

As Kit Juckes of SocGen put it:

In the end, Janet Yellen’s dovish bias ruled. The Fed is more worried about anchoring long-term rate expectations than preparing the market for rate hikes.

Other economists pointed out that the Fed is not willing to risk knocking the US economy back by raising rates too soon:

European stock markets are close to their highest level in six years. Here’s a snapshot, after Japan’s Nikkei hit a four-and-a-half month high:

  • FTSE 100: up 0.7% at 6827, +48 points
  • German Dax: up 0.85% at 10015, +84 points
  • French CAC: up 1% at 4575, + 45 points
  • Italian FTSE MIB: up 1% at 22251, +222 points
  • Spanish IBEX: up 1.1% at 11234, +122 points

Global investors were also cheered by the Fed’s declaration that “[US] economic activity has rebounded in recent months”.

It’s the financial markets favourite cocktail — the promise of more loose monetary policy today, and the prospect of growth tomorrow.

David Thebault, head of quantitative sales trading at Global Equities, commented:

“The overall tone was pretty dovish and the forecast for economic growth seems lower than expected, which is good for equities. Central banks continue to drive markets big time.”

The Euro STOXX 50 Volatility index, Europe’s main “fear gauge”, tumbled 9 percent to 12.6 – a level not seen since 2006.

The pound is trading steadily at its highest level since August 2009, at $1.7035 to the US dollar – prompting the CBI to warn it could hurt exports.

And the dollar remains lower today against most currencies — as traders adjust to the fact that Janet Yellen did not, as some predicted, give hints about when interest rates might rise.

Ioan Smith, director at KCG, said (via Reuters)

“There was a fear that the Fed would pick up more of a hawkish rhetoric, which they didn’t do.

It was probably patience on their part, even after the uptick in inflation in May.”

Updated

The oil price has reached a new nine-month high today.

Brent crude hit $114.80 per barrel for the first time since September 2013. That’s partly due to the dollar having weakened, but also caused by fears that the insurgency in Iraq could hit supplies.

Over to Reuters for details:

Government forces battled Sunni militants for control of Iraq’s biggest refinery as Prime Minister Nuri al-Maliki waited for a U.S. response to an appeal for air strikes to beat back the threat to Baghdad.

The Baiji refinery, 200 km (130 miles) north of the Iraqi capital near Tikrit, was a battlefield as troops loyal to the Shi’ite-led government held off insurgents from the Islamic State of Iraq and the Levant and its allies who had stormed the perimeter, threatening national energy supplies. (Full Story)

If the 300,000 barrels per day (bpd) refinery stays closed for long, Baghdad will need to import oil products to meet its own domestic consumption, further tightening oil markets.

“This would stress an already reasonably tight global balance further, depending on its duration,” oil analysts at Vienna-based consultancy JBC Energy said in a note to clients.

Updated

Encouraging jobs data from America just hit the wires – the number of people filing new claims for unemployment fell last week, from 318,000 to 312,000.

And the ‘continued claims’ total dropped to 2.561m, from 2.615m — Reuters says that’s the lowest level since October 2007.

Updated

Paddy Power have issued new odds on where the pound will end the year – and they suggest sterling will continue to rally from today’s $1.702:

In good news for holidaymakers the 5/6 favourite is between $1.76 to 2.00, while there’s 8/1 should it head north from there.

It’s 9/2 for $1.50 or less and 11/8 to finish the year between $1.51 and $1.75.

One of the Bank of England’s interest rate setters, Ian McCafferty, has confirmed that the Monetary Policy Committee is inching closer to raising borrowing costs.

In a speech just released, McCafferty also said the decision will “critically” depend on data (inflation and wage growth, me thinks).

  • BANK OF ENGLAND’S MCCAFFERTY – DECISION ON WHEN TO RAISE RATES IS BECOMING “MORE BALANCED”
  • BOE’S MCCAFFERTY – SHOULD NOT HOLD BACK TOO LONG ON RAISING RATES TO ENSURE INCREASES ARE GRADUAL
  • BOE’S MCCAFFERTY – MUCH UK PRODUCTIVITY WEAKNESS MAY BE PERSISTENT
  • BOE’S MCCAFFERTY – DECISION ON WHEN TO RAISE RATES DEPENDS “CRITICALLY” ON COMING MONTHS’ DATA

No end to the protests in Greece

Our Greek correspondent Helena Smith reports that the protests outside the Athens finance ministry are growing, with sacked cleaning workers becoming increasingly organised in their push to be reinstated.

Helena says:

Just passed the finance ministry on Servias Karaegorgis street off Syntagma Square, and despite the rowdy demonstrations earlier today there is an air of festivity about the cleaners’ burgeoning protest.

The entrance to the ministry now resembles a tent city with laid off school guards and school teachers also pitching tents, tables and chairs outside the building. A blackboard proclaimed that this was the 44th day the cleaners have been there.

“And we are going to stay for as long as it takes,” said Despoina Kostopoulou, aged 53, and the cleaners’ de facto spokeswoman. “Our aim is to get our jobs back and if that means us being here all through the summer so be it,” she said adding that around 15 cleaners slept outside the building every night.

“Every day we will plan a protest. This weekend I am going to Yannina to give a speech. We are becoming much more organised and as you can see solidarity for our position is growing. The school guards and teachers came around 15 days ago. They have helped boost our morale.”

Updated

CBI warns strong pound could hit exports

The strong pound risks denting Britain’s recovery, by making it harder for manufacturers to export, the CBI has warned this morning.

Katja Hall, CBI deputy director-general, is concerned that the strength of sterling – to a near five-year high of $1.702 today – will hurt overseas orders.

Hall said:

“Demand for British made goods remains buoyant and that’s helped drive this quarter’s further rise in output.

“Growth is broad-based, with the recovery spreading its roots, and firms have high hopes for the coming quarter.

“However, the recent rise in Sterling could impact on the resilient export orders we’ve seen lately.

On the other hand — factory owners should be reassured that the US Fed thinks America’s economy will recover pretty strongly through the rest of this year.

Hall was speaking after the CBI’s monthly survey of manufacturers showed that factories are raking in new business. Order books have swelled to a six-month high – close to the 18-year high achieved last December.

The CBI reports:

Demand for UK-made goods rose strongly in June…

This strength was broad-based, with above average results in 14 out of the 17 sectors. The food and drink sector was particularly robust, reporting its fullest order books in just under four years.

Ukraine has a new central bank governor — former investment banker Valeria Hontareva (also written as Gontareva).

Hontareva’s appointment was “overwhelmingly” approved by the Ukraine parliament this morning, having been nominated by new president Petro Poroshenko.

Hontareva has previously held senior roles at ING and Société Générale, and ran headed local investment bank Investment Capital Ukraine.

In her new role, she’ll be negotiating with the IMF over the financial assistance Ukraine needs since the Crimea crisis began.

She told MPs that:

“My appointment can be seen as a positive signal for bankers and a positive signal for international investors.”

The Ukrainian Hrynvia has strengthened a little today against the (generally weakening) dollar, up 0.75% to 11.86 to $1.

Updated

In the City, the hottest ticket of the day appears to be a place at the annual general meeting of Quindell, the technology outsourcing and consultancy company.

Perhaps sensing trouble ahead, Quindell took the precaution of banning her Majesty’s press pack from the event. But Twitter user Private-Investor is there, and reports that hordes of shareholders have descended

So why the rush? Well, back in April, Quindell’s shares tumbled after US research firm (and short seller) Gotham Research launched a remarkable attack on the company, questioning its profitability – which Quindell swiftly rebutted.

Its share price remains bruised, though:

Will Hedden of IG says the London stock market is “holding on to the coat tails of US markets and a dovish Federal Reserve meeting,” with the FTSE 100 now up 58 points, or 0.86%.

Less than half a dozen blue chips are trading in the red, with no notable fallers. On the upside Rolls-Royce (+6%) has powered to the top spot, having promised shareholders a billion pounds in buybacks, after it sold its gas turbine unit to Siemens earlier in the year.

Janet Yellen’s relaxed approach to last month’s rise in US inflation has helped drive shares up. Hedden points out that the VIX index, which tracks volatility, has hit a seven year low:

The Fed’s reaction to recent inflation data as ‘noise’ created a nice echo for equity bulls, with US indices pushing back towards their early June all-time highs and the VIX printing a low close not seen since February 2007.

Updated

As the US dollar keeps weakening, the pound has touched a new near-five year high of $1.7028.

As flagged up earlier, travellers on Britain’s West Coast line can look forward to four more years of Virgin Trains, after the company paid £430m to keep running the service.

The deal comes two years after the government handed the line to rival First Group, only to slam on the brakes after flaws in the process were exposed.

Virgin has promised to spend £20m brushing up the stations, convert some 1st class carriages into standard class for the rest of us to cram into, and install super-fast WiFi:

Virgin Trains to run west coast mainline until 2018

UK retail sales fall by 0.5% in May

UK retail sales fell back in May, but sales of football replica shirts stopped the decline being worse, according to data just released.

The amount spent in the retail industry increased by 3.2% last month, compared with May 2013, but was 0.5% lower than the previous month.

That’s the first monthly fall of the year, but largely as expected after retailers benefitted from the late Easter in April.

And there was a 28.9% surge in spending at sporting goods and toy stores, compared to a year ago.

A new fitness frenzy? Not exactly…The Office for National Statistics explains that events in Brazil are probably responsible:

Feedback from retailers in these stores has suggested that the increase in sales in May 2014 is due to the build-up of the FIFA World Cup. A better picture of the impact of the World Cup on retail sales statistics will be available when June data are released on 24 July 2014.

The data also gives little sign of inflationary pressures, with average prices paid at the till falling. The ONS says:

Average prices of goods sold in May 2014 showed continued deflation of 0.7%, fuel once again providing the largest contribution, falling by 2.2%. Food stores were the only sector to show an increase (0.4%) however, this series continues to fall and is now at its lowest level since March 2006 (0.3%).

And here are the key charts:

Updated

European stock markets are close to their highest level in over six years, reports Reuters, after this morning’s rally (see 8.19am):

The rise left the FTSEurofirst 300 just 0.1 percent off of its 2014 high set earlier this month, which was the index’s highest level since January 2008.

In Greece, cleaning workers who lost their jobs last summer in the austerity cutbacks are protesting outside the office of New Democracy, the governing party.

Via Twitter, here are a couple of photos from the scene from crisis-watcher @inflammatory_

These cleaning staff have been calling for their jobs back for many months. In May a judge ruled they should be reinstated, only for another court to suspend that ruling. And still they fight on.

Updated

The strength of the pound should reduce inflationary pressures in the UK, points out economist Shaun Richards:

The weakness of the dollar has also pushed the euro higher – which will not be welcome, as eurozone inflation is running at just 0.5% per year (compared to 1.5% in the UK).

Pound hits highest level against US dollar since August 2009

Sterling has hit its highest level in almost five years against the US dollar this morning, as currency traders reacted to last night’s events.

The pound pushed back over the $1.70 mark to hit $1.7017, a level not seen since August 2009.

Janet Yellen’s dovish words on inflation and unemployment have pushed down the dollar, as has the news that Federal Reserve policymakers believe interest rates will eventually peak at a low level (3.75%, down from 4%).

Updated

European stock markets rally after Fed meeting

Europe’s stock markets are open, and they’re rallying in early trading as traders take their cue from last night’s Federal Reserve meeting.

The FTSE 100 has jumped by 46 points, or nearly 0.7%, to 6825. The German, Spanish, Italian and French markets all rose by 0.8%.

The biggest riser in London is Rolls-Royce, which announced a bit share buyback this morning. But share are gaining across the board – here’s the risers and fallers:

Traders are pushing shares higher after Fed chair Janet Yellen gave no indication that recent increases in inflation, and drops in unemployment, required a rise in borrowing costs.

As Jasper Lawler of City firm CMC Markets explains:

Yellen didn’t seem too concerned about the recent rise in consumer price inflation and chose to emphasise the risks that low inflation could pose to economic performance.

For unemployment, the Chair referenced the decreasing participation rate saying some of the improvements to the headline rate were as a result of “shadow unemployment or discouragement”; both of which impy a continued need for stimulus.

Australia’s stock market has enjoyed its best day’s trading of the year, sharing in the wider Asian rally.

The Federal Reserve’s upbeat view of the US economy drove investors into buying mining stocks, scenting profits if the world’s biggest economy picked up pace.

And the lack of any hints of an early US interest rate rise also drove shares up.

From Melbourne, Stan Shamu of IG explains:

The boards have lit up in Asia today after the Fed delivered a dovish tone, while the market seemed to have been positioned for a slightly more hawkish tone.

This saw US equities extend gains to fresh record levels and this has also resonated through to Asian markets.

Updated

There’s nothing like a dovish central bank to get the stock markets moving upwards, and Janet Yellen appears to have done the trick last night – sending most Asian markets rallying.

The Federal Reserve was upbeat about US economic prospects (as we wrote last night), despite actually cutting its growth forecast for 2014 following the bad winter.

And while the Fed “tapered” its bond-buying package by another $10bn per month, to $35bn, Yellen gave no indication of exactly when interest rates might start to rise.

And Fed members’ own forecast of where interest rates might reach in the long term fell from 4% to 3.75%.

That sent the S&P 500 to a fresh record high last night, and Japan’s Nikkei has followed the trend – hitting a four-month high.

As Nobuhiko Kuramochi, a strategist at Mizuho Securities in Tokyo, explained:

“The Fed sees the U.S. economy as on track, while it hinted of low interest rates in the long term.”

Coming up today: Federal Reserve reaction; Argentina’s battle against default…

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

Today I’ll be watching the reaction to yesterday’s Federal Reserve meeting, where it cut its stimulus programme by another $10bn….

…we’ll also keep an eye on Argentina’s battle to avoid default over the row with holdout creditors.

In Europe, the International Monetary Fund will be presenting its assessment of the eurozone economy to finance ministers — and arguing that the European Central Bank should consider buying government bonds.

As one source put it to Reuters:

“The draft from the euro zone mission restates more strongly the request previously made to the ECB to do more to fight the risks of deflation.

“It doesn’t mention ‘quantitative easing’ but it does talk about bond purchasing programmes.”

While in the UK, the latest retail sales figures will show if consumers kept spending in May.

In the corporate world, Virgin Rail Group has announced it has secured a new deal to keep running the West Coast Main Line.

More to follow on all those issues, along with other news through the day….

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Data for April shows contraction in Germany’s business activity, with prospects for service sector ‘increasingly gloomy’. The services purchasing managers index fell to 49.6 last month from 50.9 in March– the first contraction since November…

 


Powered by Guardian.co.ukThis article titled “Eurozone recession set to deepen as private sector shrinks for 15th month” was written by Rupert Neate, for The Guardian on Monday 6th May 2013 13.53 UTC

The eurozone's private sector shrank for the 15th consecutive month in April – suggesting the single currency area will fall deeper into recession.

Germany, the powerhouse of the eurozone, also suffered a contraction in business activity during the month, which could send a worrying signal for the rest of the bloc.

An official indication of eurozone GDP is due next week and on Monday the president of the European Central Bank, Mario Draghi, stressed that the policymakers would be ready to cut rates again after taking a quarter of a percentage point off the benchmark rate to a record low of 0.5% last week.

"We stand ready to act again," Draghi said in remarks that knocked the euro lower. Wall Street, meanwhile, remained close to last week's record highs.

Tim Moore, a senior economist at Markit, said prospects for Germany's service sector were increasingly gloomy. "A renewed slide in services output during April, alongside falling manufacturing production, raises the risk that the German economy will fail to expand over the second quarter," he said.

Data gauging the level of activity across thousands of companies and regarded as a good indicator of general economic conditions came in below the crucial level of 50, which separates contraction from expansion. At 46.9 in April, Markit's eurozone composite purchasing manager's index (PMI) was an improvement on initial readings of 46.5 and March's output of 46.5 but it has been below 50 for more than a year.

Germany's PMI, which measures growth in manufacturing and services and accounts for more than two-third's of Germany's GDP, fell to 49.2.

Germany's economy performed well during the first two years of the eurozone crisis, but growth slowed last year as it was knocked by the slowdown in China. The services sector fell to 49.6 last month from 50.9 in March – the first contraction since November. Germany's wobble is likely to drag the whole of the eurozone deeper into recession, Markit warned. "The eurozone's economic downturn is likely to have gathered momentum again in the second quarter," Chris Williamson, its chief economist, said. "The PMI is broadly consistent with GDP falling at a quarterly rate of 0.4%-0.5% in April."

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The latest data and survey evidence fuel concern that the eurozone is headed for further GDP contraction in the second quarter after highly likely suffering a sixth successive quarter of contraction in the first quarter of 2013."

The European commission last week warned that it expects the eurozone's GDP to shrink by 0.4% in 2013, an increase on the 0.3% it had previously forecast. The recovery pencilled in for 2014 will also be slower than expected and the unemployment crisis in the eurozone will persist, the commission said in its spring forecasts.

ECB executive board member Benoît Cœuré had also indicated that the central bank would be ready to cut interest rates further if the economic outlook in the euro area worsens. "It's a historic low and we'll cut again if indicators confirm the situation is deteriorating," Cœuré said in an interview with France Inter radio station on Monday.

Williamson said it was difficult to believe that a mere 25 basis point cut from an already low level will have "a material impact on an economy that is contracting so sharply".

In further gloomy news, a separate EU report published on Monday showed retail sales across the eurozone dropped 0.1% in March following a 0.2% fall in February.

There were also fears that the service sector is slashing prices to drum up business. Official figures released last week showed prices across the region rose 1.2% in April – well below the central bank's 2% target – while unemployment hit a new high of 12.1%.

An index that measures sentiment in the eurozone improved, but illustrated concerns about Germany. "While investors' assessments of the economy for the eurozone are stabilising, those for Germany are clouding a little, albeit at a significantly higher level," research group Sentix said.

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It is time for the European Central Bank to show its independence and act in the interests of all eurozone citizens– not just Angela Merkel’s, writes The Guardian’s economics editor Larry Elliott.  A different approach is needed to save the eurozone…

 


Powered by Guardian.co.ukThis article titled “European Central Bank must heed eurozone warning signs” was written by Larry Elliott, economics editor, for The Guardian on Tuesday 30th April 2013 12.57 UTC

The warning signs are flashing red for the eurozone. Inflation is plunging, unemployment is rising and activity is weakening across the board. Unless Europe wants to become the next Japan, mired in permanent deflation and depression, action is needed now.

Stage one of the process should be a cut in interest rates from the European Central Bank (ECB) when it meets in Bratislava on Thursday. The latest inflation figures show the annual increase in the cost of living across the 17-nation single-currency area fell from 1.7% to 1.2%, its lowest in three years and well below the ECB's 2% ceiling. Even Jens Weidmann, the ultra-hawkish president of Germany's Bundesbank, would be hard pressed to say there is a threat to price stability.

It's not hard to see why inflationary pressure is abating: the eurozone economy has been flat on its back for the past 18 months. Unemployment rose by 62,000 in March, taking the eurozone jobless rate to yet another record high of 12.1%. Spain and Greece remain the weak spots, but even in Germany labour market conditions are becoming more difficult. Across the eurozone, almost one in four young people are out of work.

Why is unemployment rising? Again, you don't have to be John Maynard Keynes to figure it out. Europe's banking system is bust, there is a shortage of credit, real incomes are under pressure and the deficiency of demand is being exacerbated by austerity overkill. Retail sales figures from Greece show that in February spending was more than 14% lower than a year earlier.

The malaise is spreading from the eurozone's periphery to its core. It will be mid-May before the official growth data for the first quarter of 2013 is published, but the early evidence from Spain, where GDP fell by 0.5%, is not encouraging. Judging by the grim forward-looking surveys of business and consumer confidence, the second quarter will suffer more of the same.

Monetary policy works only with a lag, so whatever the ECB does on Thursday will be too late to prevent the recession deepening. Angela Merkel has made it clear that she does not want to see a cut in the cost of borrowing, but it is time for the ECB to show its independence and act in the interests of all eurozone citizens, not just the one seeking re-election in the German polls this autumn.

In itself, a quarter-point cut in interest rates to 0.5% would do little to revive demand, ease the credit crunch or create jobs. Instead, it should be part of a three-pronged approach to boost growth. The cut in rates should be accompanied by an ECB announcement that it is willing to embrace the unconventional methods deployed by the Federal Reserve, the Bank of England and Japan to underpin activity. It should also be the catalyst for a less aggressive approach to cutting budget deficits, with countries given more time to bring their deficits below the eurozone ceiling of 3% of GDP.

For the past three years, macroeconomic policy in the eurozone has been run on sadomasochistic principles: that only regular doses of pain will ensure countries stick to strict reform programmes.

The upshot of this policy is clear for all to see. Businesses that are starved of credit are mothballing investment and cutting their workforce. Weaker growth means higher-than-expected budget deficits. Permanent austerity has bred social dislocation and political extremism. A different approach is needed to save the eurozone from catastrophe – starting on Thursday.

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Frankfurt professor’s concerns echo recent alarms being sounded across Europe over Berlin’s stance on EU fiscal policy. A leaked policy paper from France was redolent with fear of and hostility to Merkel and her prescriptions in the euro crisis…

 


Powered by Guardian.co.ukThis article titled “German role in steering euro crisis could lead to disaster, warns expert” was written by Ian Traynor in Leuven, for theguardian.com on Sunday 28th April 2013 14.37 UTC

One of Germany's most influential political thinkers has delivered a stark warning that its post-second world war liberal democracy cannot be taken for granted and its dominant role in managing Europe's debt crisis could lead to disaster.

Jürgen Habermas, the Frankfurt professor whose political thinking has helped shape Germany over the past 50 years, called for the EU to be turned into a supranational democracy and the eurozone to become a fully fledged political union, while lambasting the "technocratic" handling of the crisis by Brussels and European leaders.

In his first big speech on the euro crisis, delivered at Leuven University, east of Brussels, Habermas called for a revival of Europe's doomed constitutional ambitions, arguing that the disconnect between what needed to be done in economic policy and what was deemed to be politically feasible for voters was one of the biggest perils facing the continent. "Postponing democracy is rather a dangerous move," he said.

At 83, Habermas has long been revered as a guru and mentor to the post-1968 generation of centre-left German politicians. He is a champion of a democratically underpinned European federation, and has reserved some of his most trenchant criticism for Berlin's role in the three-year crisis.

"The German government holds the key to the fate of the European Union in its hands. The main question is whether Germany is not only in a position to take the initiative, but also whether it could have an interest in doing so," he said.

"The leadership role that falls to Germany today is not only awakening historical ghosts all around us, but also tempts us to choose a unilateral national course or even to succumb to power fantasies of a 'German Europe'.

Euro coins and banknotes
Habermas says the EU elite’s response to the currency crisis has been to construct a technocracy without democratic roots. Photograph: Reuters

"We Germans should have learned from the catastrophes of the first half of the 20th century that it is in our national interest to avoid permanently the dilemma of a semi-hegemonic status that can hardly hold up without sliding into conflicts."

Habermas's wakeup call came at the end of a week of similar alarms being sounded on both sides of the country's borders. The Polish prime minister, Donald Tusk, in the presence of the German chancellor, Angela Merkel, in Berlin last week, said there were worries about German domination of the EU "everywhere, without exception".

A leaked draft policy paper from France's governing socialist party on Friday was redolent with fear of and hostility to Merkel and her policy prescriptions in the euro crisis.

Habermas demanded a sea change in German policy, away from insisting on "stabilising" the budgets of vulnerable eurozone countries by slashing social security systems and public services, to a policy of "solidarity" entailing common eurozone liability, mutualised debt, and euro bonds.

He located Germany's traditional EU enthusiasm in the post-Nazi quest for international rehabilitation through reconciliation with France and driving European unification processes, all occurring under the protection and promotion of the US in cold-war western Europe until the Soviet collapse in 1989.

Habermas said: "The German population at large could develop a liberal self-understanding for the first time. This arduous transformation of a political mentality cannot be taken for granted … Germany not only has an interest in a policy of solidarity, it has even a corresponding normative obligation … What is required is a co-operative effort from a shared political perspective to promote growth and competitiveness in the eurozone as a whole."

Such an effort would require Germany and several other countries to accept short- and medium-term redistribution in its long-term interest, he added, "a classic example of solidarity".

The structural imbalances between the economies of greatly divergent eurozone countries at the root of the crisis were certain to worsen under the policies being pursued, Habermas argued, because governments were making decisions "exclusively from [their] own national perspective. Until now, the German government has clung steadfastly to this dogma".

He said the EU elite's response to the crisis had been to construct a "technocracy without democratic roots", trapping Europe in a dilemma of legitimacy and accountability, between "the economic policies required to preserve the euro and, on the other, the political steps to closer integration. The steps that are necessary are unpopular and meet with spontaneous popular resistance".

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Europe could have dealt with Cyprus cheaply and painlessly with a pan-European body able to recapitalize the country’s banks. Next could be Malta and Slovenia where the government is already making contingency plans for coping with bank losses…

 


Powered by Guardian.co.ukThis article titled “Eurozone crisis demands one banking policy, one fiscal policy – and one voice” was written by Larry Elliott, economics editor, for The Guardian on Monday 1st April 2013 13.24 UTC

It had all started to look quite promising. The US was picking up, China had avoided a hard landing and in Japan the early signs from the new government's anti-deflation approach were encouraging. Even in Britain, the first couple of months of 2013 provided some tentative hope – from the housing market and consumer spending, mainly – that the economy might escape another year of stagnation.

Then Cyprus came along. The last two weeks of March brought the crisis in the eurozone back into the spotlight, and by the end of the month the story was no longer rising share prices on Wall Street on the back of strong corporate profitability or the better prospects for Japanese growth. It was, simply, which country in the eurozone would be the next to require a bailout.

The past few days has seen what Nick Parsons, head of strategy at National Australia Bank, has called the "reverse Spartacus" effect after the scene at the end of Stanley Kubrick's epic in which captured slaves are offered clemency if they identify the rebel leader. All refuse.

In the aftermath of Cyprus, it has been a case of "I'm not Spartacus". Four members of the eurozone felt the need to issue statements explaining why they were different from the troubled island in the eastern Med. We now know that Portugal is not Spartacus, Greece is not Spartacus, Malta is not Spartacus and Luxembourg, which has the highest ratio of bank deposits to GDP in the eurozone, is not Spartacus. As Parsons noted wryly, Italy was unable to say it was not Spartacus because it still doesn't have a government to speak on its behalf. Otherwise it would probably have done so.

Few of the independent voices in the financial markets take such attempts at reassurance seriously. Another crisis in the eurozone could be avoided, but only if those in charge (sic) act more speedily and effectively than they have in the past. As things stand, another outbreak of trouble looks inevitable.

Cyprus has enough money to get by for a couple of months, but by then will be feeling the impact of a slow-motion bank run as depositors remove their money at the rate of €300 (£250) a day. The economy has been crippled by the terms of the bailout, a Carthaginian peace if ever there was one, and the country's debt ratio is bound to explode.

Investors are already casting a wary eye over Malta, which appears to have been the short-term beneficiary of capital flight from Cyprus, but the bookies favourite for the next country to need a bailout is Slovenia, where the government is already making contingency plans for coping with bank losses.

By focusing on the eurozone's minnows, the markets are in danger of overlooking a much bigger potential problem. If attempts to put together a new government in Rome fail, Italy will be facing a second general election and in such a scenario opinion polls currently put Silvio Berlusconi ahead.

It is not hard to sketch out a sequence of events in which Berlusconi completes a political comeback, the markets take fright, Italian bond yields go through the roof, the European Central Bank (ECB) under Mario Draghi says it will only buy Italian debt if Berlusconi agrees to a package of austerity and structural reforms, the new government refuses and then calls a referendum on Italy's membership of the single currency. Italy has already had six consecutive quarters of falling GDP and is on course for a seventh, making the recession the longest since modern records began in 1960. So when Berlusconi says he cannot let the country fall into a "recessive spiral without end", he strikes a chord.

If policymakers are alive to the threat posed by one of the six founder members of the European Economic Community back in 1957, they have yet to show it. The assumptions seem to be that Cyprus is exceptional, that the ECB will ride to the rescue if it proves not to be, and that Europe will be dragged out of the danger zone by the pick-up in the rest of the global economy.

This is the height of foolishness. The factors causing the crisis in Cyprus are replicated in many other member states. The ECB's "big bazooka" – buying the bonds of struggling governments without limit – has yet to be tested, and because Europe is the world's biggest market, the likelihood is that the re-emergence of the sovereign debt crisis will seriously impair growth prospects in North America and Asia.

Economists at Fathom Consulting draw a comparison between the eurozone today and the UK at the very start of the financial crisis. Mistakes were made with the handling of Northern Rock because of fears that a bailout would create problems of moral hazard – in other words helping a bank that had got itself into trouble through its own stupidity would encourage bad behaviour by others. The systemic risks were not recognised, with disastrous consequences.

Similarly, the eurozone has not understood the systemic potential of the current crisis, Fathom argues, not least the "doom loop" between fragile banks and indebted governments. Austerity is making matters worse because cuts to public spending and higher taxes hit economic activity by more than they reduce government deficits. Public debt as a share of national incomes goes up, not down.

Austerity can work, but conditions have to be right for it. It helps if a country's trading partners are growing robustly, because then the squeeze on domestic demand can be offset by rising exports. It helps if the central bank can compensate for tighter fiscal policy by easing monetary policy, either through lower interest rates or through unconventional measures such as quantitative easing (QE). And it helps if the exchange rate can fall. Not one of these conditions applies in the eurozone, which is why the fiscal multipliers – the impact of tax and spending policies on growth – are so high. Put bluntly, removing one euro of demand through austerity leads to the loss of more than one euro in GDP.

So what should be done? Clearly, the self-defeating nature of current policy needs to be recognised. Countries need to be given more time to put their public finances in order. The emphasis should be shifted from headline budget deficits to structural deficits so that some account is taken of the state of the economic cycle, and the ECB needs to be ready with its own version of QE.

Simultaneously, work needs to speed up on creating a banking and fiscal union. Europe could have dealt with Cyprus cheaply and painlessly had there been a pan-European body capable of recapitalising the country's banks. Delay in setting up such a body threatens to be costly.

Finally, the eurozone needs to start talking with one voice. A bit of "I'm Spartacus" would not go amiss.

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Capital controls in Cyprus will intensify the slump while severely damaging the credibility of the euro. The idea that the single currency would rival the US dollar as a secure store of wealth has taken a pasting as a result of the disastrous handling of Cyprus…



Powered by Guardian.co.ukThis article titled “Demolishing some myths about the single currency” was written by Larry Elliott, for guardian.co.uk on Wednesday 27th March 2013 22.29 UTC

The introduction of capital controls in Cyprus is a textbook example of shutting the stable door after the horse has bolted. Rich Russians and wealthy Cypriots knew the crisis was coming and have had the best part of a fortnight to spirit their money out of the country since it broke, even assuming they did not do so beforehand. The restrictions will intensify the slump Cyprus faces while not removing the risk of bank runs when branches finally open for businesson Thursday. What’s more, the controls severely damage the credibility of the euro.

That’s not to say the controls are unnecessary. Even with the severe restrictions announced in place, there is a possibility of bank runs. Without them, bank runs would be a certainty. Modern banking is essentially based on a sleight of hand under which banks have readily available funds that are only a fraction of their total deposits. If all the customers demand their money at once, as would be the case in Cyprus without controls, the banks go under.

The government in Nicosia insists capital controls will be removed within a week, but that looks as heroic an assumption as the idea that the economy will shrink by just 3.5% this year, the current EU forecast. Iceland introduced capital controls in 2008 and still has them in place. There will no doubt be pressure from Brussels on Cyprus to lift the controls as quickly as possible, but most analysts expect them to be in place for a minimum of six months.

As far as the real economy is concerned, Latvia – which had pegged its currency to the euro – suffered an 18% contraction of its economy following a banking collapse. And bank deposits were just 100% of GDP in Latvia; in Cyprus they were 800% of GDP before the crisis. To sum up, Cyprus is going to have a collapsing economy buttressed by capital controls, but unlike Iceland will not have the option of devaluation to make itself more competitive. Speculation that it will become the first country to leave the euro will not go away. Indeed, it will intensify the longer the capital controls are in place.

There are, of course, wider implications for Europe despite attempts over the last week to say that Cyprus is a special case. When the euro was created just over a decade ago it was supposed to embody certain principles. One of those principles was that a euro would be a euro anywhere inside the single currency zone. That has now been violated; a euro in Nicosia is not worth the same as a euro in Berlin.

A second trait of the single currency was that it was supposed to be a secure store of wealth. International investors would have confidence in it and it would rival the dollar as a global reserve currency. That idea has also taken a pasting as a result of the disastrous handling of Cyprus; the decision to make deposit holders pay a share of the bailout has been accompanied by a fall in the value of the euro against the dollar. That’s hardly surprising; savings in US banks are perceived as rock solid whereas those in eurozone banks are not.

A third core belief was that the euro would lead to economic convergence, with the weaker and poorer countries raising their performance to the level of the rich nations at the monetary union’s core. This has looked increasingly absurd against a backdrop of bailouts for Greece, Ireland and Portugal, and the chronic lack of competitiveness displayed by Italy, Spain and – more recently – France.

So Cyprus has put two myths to bed. One is the myth of convergence; the other is that the debt crisis is over. A new chapter has opened, that’s all.

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ECB Mario Draghi announced the details of the central bank’s bond-buying program. ‘Almost unanimous’ vote overrides German fear of inflation. Countries benefiting must enter bailout programs. Eurozone growth forecast downgraded…



Powered by Guardian.co.ukThis article titled “Eurozone crisis: ECB introduces unlimited bond-buying programme” was written by Josephine Moulds, for guardian.co.uk on Thursday 6th September 2012 13.48 UTC

Mario Draghi, the president of the European Central Bank, has pushed through a controversial scheme to save the euro, trampling over German opposition.

At the same time, the ECB said that the economic outlook for the eurozone had deteriorated. It now expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, while inflation rises to 2.6%.

Draghi said the vote to start buying the bonds of crisis-hit states in unlimited amounts, in an attempt to bring governments’ borrowing costs down, was “almost unanimous”, with one exception.

The scheme has faced furious opposition from German central bank chief Jens Weidmann, who argues that it is tantamount to printing money in order to pay off a country’s debt, which is expressly forbidden by the ECB’s mandate. He also fears the measures will fuel inflation, ease the pressure on overspending governments to get their finances in order and erode the ECB’s independence.

Ranvir Singh, chief executive of market analysts RANsquawk, said: “Even by the inscrutable standards of Mario Draghi, the ECB president’s speech revealed little of huge tectonic pressure that has built up under the eurozone’s surface. To fly in the face of Germany’s wishes will not have been easy. For the Bundesbank, keeping inflation in check is an article of faith. Its president has made no secret of the fact that he regards the ECB plan to buy the debt of the eurozone’s weaker members as the road to perdition.”

Draghi said the buying-up of bonds, which will be known as outright monetary transactions (OMTs), would be unlimited and that countries benefiting from the scheme would need to submit to certain conditions. The ECB would seek the involvement of the IMF to design and monitor such programmes. Governments to benefit from the OMT would also have to be attached to a programme with one of the eurozone bailout funds. Draghi said the ECB would stop buying a country’s bonds if it failed to comply with the bailout programme.

The ECB said it would buy bonds with a residual maturity of one to three years. That means it can buy bonds with a longer maturity, as long as they only have three years remaining until they are paid back.

As expected, the ECB said the bond-buying programme would be “sterilised”. This means the central bank will not increase the money supply as a result of the bond purchases; instead it will take the equivalent amount of money out from other parts of the system.

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Mario Draghi seeks to reassure over future of euro, but financial markets are left disappointed with the lack of action today, Bank of England maintains the benchmark rate and the size of its Asset Purchases Program unchanged, Risk-off trading session ahead of the U.S. Non-Farm Payrolls tomorrow…



Powered by Guardian.co.ukThis article titled “ECB ‘willing to buy bonds of weaker EU nations’ says Draghi” was written by Larry Elliott, Economics editor, for guardian.co.uk on Thursday 2nd August 2012 13.58 UTC

Mario Draghi pledged that the European Central Bank would buy up the bonds of the weaker members of the 17-nation single currency, as he sought to make good on his pledge to do “whatever it takes” to safeguard the future of monetary union.

The ECB’s president said the governing council of the central bank would also consider other exceptional – but non-specified – steps to ease pressures that have led to speculation about a break-up of the euro.

In a press conference following an ECB council meeting, billed as one of the most crucial since the creation of monetary union in 1999, Draghi provided more details on how to bring down bond yields, as promised in a speech in London last week.

He said: “The governing council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective.”

This was seen by markets as a sign that Draghi will reactivate the ECB’s Securities Market Programme, under which the bank buys up government bonds from financial institutions.

Private bond holders have voiced fears that a big bond-buying spree by the ECB would potentially leave them suffering bigger losses in the event of any sovereign default, because the Frankfurt-based central bank has insisted in the past that it will not take a “haircut” on its bond holdings. Draghi said these concerns would be addressed.

In addition, he said: “The governing council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission.”

The ECB will also think about providing fresh cheap funds for European banks, following two injections of liquidity through long-term refinancing operations in December 2011 and February 2012. Relaxation of collateral rules for banks will be discussed next month.

Financial markets were left confused by Draghi’s comments. An initial rally in the euro against the US dollar quickly petered out, while in the bond markets yields of Spanish and Italian bonds moved higher after falling initially. Shares also moved erratically – having been about 45 points higher as the ECB president started speaking, the FTSE 100 later reversed that to show a 50-point loss on the day, a fall of almost 1%, as analysts were at odds about whether the ECB president would be able convert his tough talk into action.

Jason Gaywood, director at currency specialist HiFX, said: “Markets were disappointed today as the ECB fell short of taking action to rescue Spain. Instead, Mario Draghi merely stated that the euro is irreversible.”

Jeremy Cook, chief economist at foreign exchange company, World First, said: “The most important thing about the ECB press conference is the statement about the fact that they may undertake outright open market operations, ie buying of peripheral debt to reduce yield pressures, which were described as unacceptable.

“This is almost what the markets wanted, but the emphasis is on the fact that things ‘might happen’. The fact that they will have to discuss ‘modalities’ and ‘seniority’ suggests that they know what they want to do, but they’re really not sure how to do it.”

But Nick Parsons, head of strategy at National Australia Bank, said: “I think he means it. He has said he will intervene in unlimited size.

“The bazooka has yet to be fired, but Draghi hinted at its design this afternoon.”

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ECB will do ‘whatever it takes’ to preserve the currency said the European Central Bank President Mario Draghi easing market concerns about the escalating EU debt crisis after Draghi appeared to signal that the central bank is prepared to act to calm the bond markets…



Powered by Guardian.co.ukThis article titled “Euro is irreversible, declares European Central Bank president Mario Draghi” was written by Josephine Moulds, for guardian.co.uk on Thursday 26th July 2012 13.48 UTC

Mario Draghi, president of the European Central Bank, said on Thursday the euro was “irreversible” and promised to do everything within his power to save it.

Speaking at the UK government’s Global Investment Conference in London, Draghi said: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

The news sent the euro up 1% against the dollar, to $1.2315, and it also gained against other major currencies. Spanish and Italian borrowing costs eased, after Draghi appeared to signal that the ECB was prepared to act to calm the bond markets.

“If government borrowing premia hurt monetary policy transmission, they are in our mandate,” he said.

The yield on Spanish 10-year debt dipped to a whisker above 7%, at 7.009%, while Italian 10-year yields fell to 6.1%.

Draghi said the eurozone was much stronger than people acknowledged and progress over the last six months had been remarkable. “The last summit was a real success as it was the first time that all the leaders of 27 countries, including the UK, said the only way out of this crisis is to have more Europe. This means that much more of what is national sovereignty is going to be exercised at supranational level.”

Draghi was sharing the stage with Sir Mervyn King, governor of the Bank of England, who took the opportunity to deflect blame for the financial crisis from the banking sector. “Of course there was bad behaviour,” he said. “But this was a crisis which emanated from major mistakes in macroeconomic policy around the world, and fundamentally the inability to successfully co-ordinate macroeconomic policy so that globally you wouldn’t get the imbalances, the capital flows, that created the difficulties in the banking system.”

The day kicks off two weeks of investment summits aimed at attracting more foreign investment into the UK and promoting British business. Based in Lancaster House, the summit is taking place within earshot of the beach volleyball at Horse Guards Parade and aims to take advantage of the influx of foreign dignitaries for the Games.

The event offers some respite for trade minister Lord Green, who is under pressure because of his role as chief executive and then chairman at HSBC when the bank laundered money for Mexican drug barons and possibly even terrorists.

Green welcomed delegates to the conference and exchanged a warm handshake with King, among others. Green was promoting the UK as a great place to do business, alongside Lord Sassoon, commercial secretary to the Treasury, in a change to the schedule. He had been due to share the podium with Stuart Gulliver, current chief executive of HSBC, but Gulliver withdrew from the conference after the money laundering revelations.

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