October 21 2013

In the trading room today: Is it Time for the JPY to Resume its Downtrend? In light of the weaker than expected trade balance report from Japan and the statement by the Bank of Japan Governor, we examine the odds of additional monetary policy easing by the Japanese central bank and explore the potential for a continuation of the JPY downtrend in the months ahead, we analyze the range in the USD/JPY currency pair, we take a look at the pullback in the EUR/USD pair, we keep an eye on the GBP ahead of a sequence of UK economic events, we highlight the market’s reaction to the Japanese Trade Balance and the German PPI, we discuss new forecasts from Morgan Stanley and Mizuho Bank, and prepare for the trading session ahead.


USA 

Bundesbank: boom in cities could be unsustainable. Asian markets rally, although Europe stays calm. Bondholders could take control of Co-op Bank. Npower hikes UK energy prices. US employment situation report to steal the spotlight this week…

 


Powered by Guardian.co.ukThis article titled “Bundesbank warning over German house prices as world stock markets inch higher – live” was written by Graeme Wearden, for theguardian.com on Monday 21st October 2013 13.12 UTC

Markets close to five-year highs

Back in the financial markets, and world stocks remain near their highest levels in five years today, despite a somewhat lacklustre session in Europe so far.

The MSCI world equity index, measuring stocks around the globe, is up 0.7% today at its highest level since Macy 2008. It was driven by decent gains in Asia overnight, where Australia’s index hit a five-year and China’s stocks enjoyed their biggest daily rise in two weeks.

As explained in the opening post, markets are being driven higher by steady speculation that the Federal Reserve will resist cutting its $85bn/month stimulus programme this year. Many analysts suspect the Fed will not ‘taper’ the scheme until the consequences of the US shutdown are clear.

In Europe, the FTSEurofirst 300 crept a little higher — helped by decent results from Philips and Akzo Nobel.

London’s FTSE 100 is up a modest 10 points – with Royal Bank of Scotland’s shares down almost 5% as rumour swirl of a good bank/bad bank breakup

Matt Basi of CMC Markets reports that City traders are starting to ponder a festive rally: 

With high street stores seemingly intent on starting the Christmas shopping period earlier each year, equity traders too seem to be weighing an early start to festivities as we approach ‘santa rally’ season.

With many major indices making fresh highs last week and barriers to further upside apparently reduced, the potential for record-breaking gains by year end is strong – though the prospect of another round of political wrangling in the US in early 2014 may be enough to prevent a full bear capitulation…

The oil price, though, has fallen today – with a barrel of US crude sliding below the $100 mark for the first time since July 3 this year. That follows reports of production increases, and comes ahead of new (postponed) government oil inventory data later today.

Fawad Razaqzada of GFT Global Markets in London said prices could well keep falling:

The ample and rising supply of oil, combined with a weaker demand growth prospects, point toward lower prices in the months ahead.

There’ll be a rush of US data this week, with the delayed publication of various reports that were held up by the US shutdown (including the Non-Farm Payroll report on the jobs market). This means some investors are being cautious, for the moment.

Here’s Monex Capital Markets’s take, ahead of the Wall Street open, in around 15 minutes.

With the overdue non-farm payrolls and a busy week for US corporates, Wall Street is certainly set to find some fresh direction.

What’s more, with the threat of a default having weighed on US equities for most of the month so far, there’s arguably some catching up to be done. Ahead of the open we’re calling the DOW down 6 at 15394 and the S&P down 2 at 1743. In after hours trade, Nikkei futures are down 19 at 14675.

In other Italian news, police in Bologna say they yesterday arrested a former banker who is wanted in the United States over accusations of allegedly helping wealthy US clients to set up Swiss bank accounts.

AP has more details:

Police said on Monday that when Raoul Weil checked into a hotel Friday evening, authorities were alerted that he is wanted in the U.S. on an international arrest warrant.

Weil was indicted in 2008 in Florida on charges that he conspired to defraud the government when he was chief of UBS’s wealth management business.

Weil’s lawyer has said his client is innocent, and that the charges should have been dropped when UBS agreed to turn over clients’ names in 2009 to settle allegations it conspired to defraud the U.S. government of taxes.

Updated

Italian unions plan protests over 2014 budget

Political tension is rising in Italy again, with the country’s major unions agreeing to hold strikes and protests to protest against the country’s 2014 budget.

The head of the UIL union, Luigi Angeletti, told reporters in Rome that prime minister Enrico Letta had blundered by not making more radical changes in next year’s fiscal programme, arguing:

Everything stays the same, he shouldn’t have done a budget to stabilise the government, he should have done one to stabilise the country.

Angeletti was speaking after a meeting with other union heads. The planned protests are not a full-blown general strike.

The budget, announced last week, has been badly received across Italy. Many people had hoped for a major cuts to labour taxes, to narrow the gap between the cost of employ workers and what they actually get, along with an easing of austerity.

Instead, prime minister Enrico Letta only offered minimal changes, after struggling to get agreement for spending cuts and deciding to comply with EU debt targets (the budget cuts Italy’s deficit from 3% this year to 2.5% in 2014).

Anger over the budget hit the streets of Rome on Saturday, when thousands of people took part in an anti-austerity protests:

Writing in the FT today, Wolfgang Münchau explains how Italy’s fragile coalition made it impossible for Letta to cut labour taxes and compete better with Germany:

Mr Letta’s Democrats are one of Europe’s last unreformed socialist parties. It supports the prime minister in his determination to stay within the EU-mandated deficit target of 3 per cent of gross domestic product. But it also opposes the changes needed to free up resources for tax cuts.

Meanwhile, Silvio Berlusconi’s centre-right People of Liberty party, another member of the coalition, opposes increases in wealth, property and consumption taxes. If one coalition partner vetoes spending cuts, and the other vetoes tax increases, the margin for budgetary manoeuvre is close to zero.

More here: Italy misses the chance to reform

Royal Bank of Scotland shares remain the biggest faller in London, with 5% wiped off the value of the state-controlled company this morning.

Earlier I blamed uncertainty over its future, with the government poised to say whether it will be broken up.

There is another factor, though, as fastFT flags up. With JP Morgan close to a $13bn settlement over the mis selling of mortgage-backed securities, could RBS be facing another penalty? Berenberg analysts reckon it could be $3.7bn.

The upshot is that RBS shares have slipped to their lowest level in almost six weeks, -5.2% at 353p, as this graph shows.

Bundesbank’s house price warning – more details

The Bundesbank’s warning that German house prices could be overpriced (see also 11.21am) is online here:

Possible overvaluation of residential property in German cities

In it, the central bank cites Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf as cities where prices are up to 20% above the level that demographic and economic factors would suggest as reasonable.

The Bundesbank suggests that overseas investors are piling into the German property market, seeking higher returns than are possible from government debt.

In Germany, renting a home has traditionally been more common than in the UK. That attitude may be changing ,though, as Germans look for a safe place for their savings. As the Bundesbank put it:

The belief that the value of one’s assets can be best secured through property ownership was certainly an argument for many households to consider investing in property.

Bundesbank warning over German house prices

Germany’s economic recovery will continue through the winter, according to its central bank’s latest assessment.

The Bundesbank predicted that Europe’s largest economy kept growing between July and September, partly thanks to rising orders across the industrial and construction sectors. It said:

Economic output should have increased in the summer quarter.

and also suggested German consumers will push private consumption higher.

The monthly report also flagged up concerns over German house prices (rising by around 4% year-on-year), saying:

Price increases have so far concentrated in large cities. Measured by longer-term demographic and economic influence factors, overvaluations could be between 5 and 10 percent

In the attractive large cities, the deviations are up to 20 percent.

(quotes via Reuters)

Wonder what they make of the situation in the UK, with one survey finding London house prices leapt 10% last month alone (driven by hot demand for the priciest residences).

Updated

The latest assessment of European government finances confirms that deficit levels fell last year, but with stark differences across the region.

Eurostat reported that the total national debt of eurozone countries rose from 87.3% of GDP in 2011 to 90.6% of GDP in 2012. The region’s annual deficit dropped from 4.2% to 3.7%.

Across the wider EU, national debts rose in 2012, from 82.3% to 85.1% of GDP.

The updated data also found that Greece’s deficit in 2012 was 9%, not 10% as estimated six months ago. Ireland’s, though, was 0.6% higher at -8.2% of GDP.

Eurostat also reported that:

In 2012 the lowest government deficits in percentage of GDP were recorded in Estonia and Sweden (both -0.2%), Luxembourg (-0.6%) and Bulgaria (-0.8%), while Germany (+0.1%) registered a government surplus.

Seventeen Member States had deficits higher than 3% of GDP, with the largest registered in Spain (-10.6%), Greece (-9.0%), Ireland (-8.2%), Portugal and Cyprus (both -6.4%).

In all, fifteen Member States recorded an improvement in their government balance relative to GDP in 2012 compared with 2011, twelve a worsening and one remained stable.

End in sight for Cyprus capital controls?

Cyprus finance minister has reportedly told the country’s parliament this morning that most of its capital controls could be raised “before the spring” next year.

Harris Georgiades made the comments as he briefed MPs on next year’s budget. He cautioned that people could still be restricted on sending money overseas even if other controls are lifted.

Since March, Cypriots have faced stringent restrictions on how much money they could take out of their bank accounts, to prevent a bank run following its bailout.

Cyprus’s central bank governor also testified, telling MPs that Cyprus’s banks face a rise in bad debts as its recession hits firms

Reuters has the details:

Cyprus’s banking sector is expected to show further losses in 2014 as the economy worsens and banks book rising non-performing loans, but the sector is adequately capitalised, the head of its central bank said on Monday.

Panicos Demetriades also told lawmakers the island state would see an economic contraction of less than the 8.7 percent forecast by international lenders this year, but that risks were on the downside for 2014.

The big news in the energy sector today is that France’s EDF and the China General Nuclear Power Group, have agreed a £14bn deal to build a new UK nuclear power station at Hinkley, in Somerset.

Prime minister David Cameron has declared it was a “very big day” for Britain, and suggested Hinkley Point C will be followed by other new reactors. He said:

This is about guaranteeing secure and safe long-term supply of electricity for this country,…and creating thousands of jobs.

Here’s our latest news story on the deal: UK to build new nuclear power station

Our Politics liveblogger, Andrew Sparrow, is tracking all the action here: Hinkley Point nuclear power station deal announced: Politics live blog

The deal involved a hefty incentive — the government is agreeing to pay roughly twice today’s rate for electricity. Energy editor Terry Macalister writes that Britain is guaranteeing “decades of guaranteed financial returns” in exchange for the £14bn of investment.

City AM’s Allister Heath isn’t impressed by the deal:

Updated

Another day, another energy price hike. This time it’s NPower, hitting UK consumers with a 10.4% hike in dual-fuel tariffs.

This makes an unpopular hat-trick for the industry, after SSE announced an 8.2% rise and British Gas raised prices by 9.2% (the increases are getting steadily higher).

These steep hikes, just as the weather turns colder, has intensified concern over Britain’s living standards squeeze (wages continue to lag well behind inflation).

The opposition Labour Party continues to pledge to freeze bills for 18 months if it wins the next election, while the government encourages consumers to consider changing tariffs. Tricky if everyone raises their prices….

Over in Greece, local authority workers have announced a three-hour walkout tomorrow to protest against the Athens’s government’s cuts to the public sector workforce.

The strike will coincide with the arrival of a group of school guards in the capital. They began walking from Thessaloniki, 300 miles away, in 28 September to object to being dismissed from their jobs.

The protests come as Greece’s finance minister, Yannis Stournaras, insists that the government will not swallow any further austerity measures. Stournaras told the Kathimerini newspaper that:

We are negotiating hard, as we always do….

However, realism and calm has to prevail on all sides. At a time when markets are starting to trust Greece again, illogical demands can only cause damage.

But Athens does appear to be running out of options to fix its financing gap of around €4bn in 2014. Here’s the full story.

Jill Treanor: Co-op Bank could lose control of Bank

Our banking expert, Jill Treanor, writes that Co-operative Group could lose control of Co-op Bank to its bondholders.

She explains what the statement released this morning about the £1.5bn rescue plan really means:

After a month of intense talks with two US hedge funds, Co-op Group has conceded that its original plan, which allowed it to keep a majority stake in the bank, needs rethinking.

The US hedge funds which own debt in the Co-op Bank have been warning they have enough support to block the original plan, under which the overall group kept a 75% stake in the bank, which was to be listed on the stock market. The Co-op was asking bondholders to take £500bn of losses while the group injected £1bn into the bank.

But Aurelius Capital Management, best known for forcing Argentina to pay out on its debts, and Silver Point Capital, linked to distressed groups such as Lehman, had argued that Co-op Group should give them more shares in return for the losses on their bonds. They do not want the Co-op to own as much as 50% of the bank after it floats on the stock market.

Co-op: Bank recapitalisation plan will change

The Co-operative Group’s plan to recapitalise its troubled banking operation appears to have hit problems.

In the last few minutes, the Group released a statement on the process, revealing that negotiations with its bondholders over how to inject £1.5bn in fresh capital are continuing.

It insisted that the talks remain “constructive”, but admitted that its original plan — to float the Bank on the stock market with £1bn of capital from the Group and £500m from bondholders – will change substantially.

Here’s the key point:

The Board of the Group remains committed to delivering a solution that provides both the necessary capital for the Bank, while preserving its ethical focus, and an acceptable outcome for bondholders, including private investors.

To this end, we have been engaging with different bondholder constituencies and seeking to balance the requirements and expectations of these parties.

We currently expect that many elements of any recapitalisation plan will be materially different to the outline provided on 17 June 2013, whilst still meeting the additional £1.5bn Common Equity Tier 1 capital requirement.

The news comes as Co-op also admitted that its bill for PPI provisions will be £100m higher than expected.

More to follow… 

Updated

Market hit five-year high, despite a lacklustre Europe

World stock markets have nudged a new five-year high this morning.

The FTSE All-World equity index crept up to its highest level since January 2008, on the back of Asia’s overnight rally where China was the stand-out performer.

In Europe, the FTSEurofirst 300 hit a new five-year high too, although the main markets are somewhat mixed. While the FTSE 100 is slightly higher, the German DAX and French CAC are both down 0.2%.

The star performer is Philips – up 6% after posting strong profit number.

However, the FTSE 100 is being dragged down by the banking sector, with Royal Bank of Scotland tumbling 6% on speculation that the government is about to split it into a good and bad bank.

China’s stock market just posted its biggest one-day gain since early September, following reports that the Beijing government is urging officials to keep reforming its economy to hit growth targets.

Reuters has the story:

China’s CSI300 share index posted its strongest daily gain in six weeks on Monday, outshining Asian markets after Chinese Premier Li Keqiang said there should be “no slackening” in implementation of policies that ensure growth targets are met.

The CSI300 of the leading Shanghai and Shenzhen A-share listings finished up 1.9% at 2,471.3 points, its biggest gain since September 9. The Shanghai Composite Index climbed 1.6%.

Reports in official Chinese media said that Li, at a State Council meeting on Friday, urged officials to keep up the pace of making reforms and reiterated that the policy focus will not change.

The market also responded positively to local media reports on Monday that China’s securities regulator, over the weekend, said that more steps have been added to the approval process for new initial public listings.

Investors took that to suggest that the freeze on IPO approvals since late 2012 will not be lifted by the end of this year .

Stock markets are traditionally roller-coaster rides. Now the owner of the Alton Towers Theme park wants to join the fun.

Merlin Entertainments has announced plansto float 20% of its business on the stock market, three years after an early IPO was scuppered by the financial crisis.

Merlin is Europe’s largest operator of visitor attractions, including Madame Tussauds, LEGOLAND, and Chessington World of Adventures. It’s owned by a group of private equity firms, who hope to raise £220m to pay down existing debt.

The float suggests its advisors see calm times ahead on the markets (always tricky to get an IPO off the ground when shares are dropping faster than the Nemesis)

If you’re interested, you need to buy at least £1000 of shares. Succeed, and you get money off Merlin annual passes. More fun than just getting a dividend cheque. Official statement here.

The Bank of Japan struck a positive tone this morning, raising its rating on all nine of the country’s regional economies in a sign that its huge stimulus package was having an effect.

The BoJ used the terms “recovering” or “picking up” for each area, with most now ‘recovering moderately’, adding;

Many regions said employment and salaries are showing signs of improvement amid firm domestic demand and a gradual improvement in factory output.

Summary

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

Stock markets are starting the new week on the front foot, with Australia’s main index hitting a new five-year high as Asian markets romp upwards.

Having hit their highest levels since 2008 on Friday, equities seem set to climb even higher today. Three factors seem to be driving the rally:

optimism over global economic prospects (after encouraging Chinese GDP data on Friday)

• ongoing relief that America’s government shutdown is over.

• predictions that the disruption it caused means the Federal Reserve will keep its stimulus programme unchecked a while longer, continuing to pump $85bn of new money into the economy each month through bond purchases.

As Alpari analyst Craig Erlam put it:

A U.S. default has been averted and the disruption caused by these events has almost certainly ensured that the Fed won’t taper until at least December, but probably towards the end of the first quarter of 2014.

This pushed Japan’s Nikkei up 0.9%, while China’s CSI 300 is up 1.7%. Australia’s S&P/ASX 200 closed up 0.5% at a five-year high, while New Zealand’s benchmarkNZ50 hit a record high.

Mind you, America’s political problems (let alone the fiscal ones) aren’t over, as Robin Bew of the Economist Intelligence Unit points out:

Away from the markets, there’s plenty afoot today, including the Germany Bundesbank’s monthly report (at 11am BST). We’ll also be digesting the latest news from Greece, where the government continues to insist that it will not swallow any more austerity…

Updated

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