Diplomatic relations between the UK and EU are fast approaching zero degrees Kelvin.
One day after Theresa May not only cemented, but allowed herself Brexit negotiating breathing room with her stunning, yet cunning decision to announce snap elections which would only boost the leverage of her party, Brussles has retaliated and as the FT reports, Brussels is starting to “systematically shut out British groups from multibillion-euro contracts” while urging companies to migrate to one of the 27 remaining EU members.
The Brussels note suggests that tensions between the UK and EU mey deteriorate to the point where even Bremainers may turn on Brussels:
In an internal memo seen by the Financial Times, top European Commission officials have told staff to avoid “unnecessary additional complications” with Britain before 2019, highlighting an administrative chill that is biting even before Britain leaves the bloc.
It explicitly calls on EU staff to begin encouraging the UK-based private sector to prepare for the “legal repercussions” of Brexit and consider the need “to have an office in the EU” to maintain their operating permits. Agencies are also told to prepare to “disconnect” the UK from sensitive databases, potentially on the day of Brexit.
The biggest names in the oil world come together this week for the largest industry gathering since the end of a two-year price war that pitted Middle East exporters against the firms that drove the shale energy revolution in the United States.
When OPEC in November joined with several non-OPEC producers to agree to a historic cut in output, the group called time on a fight for market share that drove oil prices to a 12-year low and many shale producers to the wall.
Oil prices are about 70 percent higher than they were the last time oil ministers and the chief executives of Big Oil met in Houston a year ago at CERAWeek, the largest annual industry meet in the Americas.
The ebullience as both sides enjoy higher revenues will be a welcome relief from the gloom of a year ago, near the depths of the price war.
“The oil market has been rebalancing and the powerful forces of supply and demand have been working,” said Dan Yergin, vice chairman of conference organizer IHS Markit and a Pulitzer Prize-winning oil historian.
In the shadow of Donald Trump’s spree of controversial actions, the European commission has quietly launched the next offensive in the war on cash. These unelected bureaucrats have boldly asserted their intention to crack down on paper transactions across the E.U. and solidify a trend that has been gaining momentum for years.
The financial uncertainty amplified by Brexit has incentivized governments throughout Europe to seize further control over their banking systems. France and Spain have already criminalized cash transactions above a certain limit, but now the commission has unilaterally established new regulations that will affect the entire union. The fear of physical money flowing out of the trade bloc has manifested a draconian response from the State.
The European Action Plan doesn’t mention a specific dollar amount for restrictions, but as expected, their reasoning for the move is to thwart money laundering and the financing of terrorism. Border checks between countries have already been bolstered to help implement these new standards on hard assets. Although these end goals are plausible, there are other clear motivations for governments to target paper money that aren’t as noble.
While Bank of Japan officials see no grounds for Donald Trump’s accusation of currency devaluation, they still worry that the bank’s unique measure to control long-term rates could become the next target as the president continues his rhetorical battles.
“I have no idea what he is saying,” said one baffled BOJ official after learning about the criticism Trump leveled against the central bank.
Bond investors seem similarly perturbed. Yields on 10-year Japanese government bonds temporarily rose 0.025 percentage point Thursday, hitting 0.115% — the highest since the BOJ announcement of negative interest rates Jan. 29, 2016. The climb also reflects market anxiety over whether the central bank will continue buying up JGBs at the current pace.
BOJ Gov. Haruhiko Kuroda refuted Trump’s accusation in the Diet on Wednesday, saying Japan’s monetary policy is designed to defeat persistent deflation and not to keep the yen weak. “We discuss monetary policy every time Group of 20 finance ministers and central bankers meet,” he said. “It is understood among other central banks that [Japan] is pursuing monetary easing for price stability.”
In fact, U.S. monetary policy is chiefly responsible for the yen’s depreciation against the dollar. The Federal Reserve in 2015 switched to a tightening mode after keeping interest rates near zero for years, judging quantitative easing to have worked its expansionary magic on the economy. The gap between American and Japanese rates is now the widest it has been in around seven years, encouraging heavier buying of the dollar — the higher-yielding currency — than the yen.
Bill Gross on what is in store for markets in 2017
Bill Gross takes on the big questions in his latest investment outlook. He says the election enthusiasm will flounder if it’s not followed by +3% growth.
“We shall see whether Republican/Trumpian orthodoxy can stimulate an economy that in some ways is at full capacity already. To do so would require a significant advance in investment spending which up until now has taken a backseat to corporate stock buybacks and merger/acquisition related uses of cash flow,” he wrote.
He notes the headwinds from high debt, automation and an aging workforce but concedes that Trump could stimulate short-term growth.
He believes that yields will continue to move higher in the year ahead and bases it as much on on technicals not fundamentals. He highlights the decades-long downtrend in yields that is suddenly under threat and that 2.60% is the key level.
The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.
“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.
During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.
“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.
The head of the International Atomic Energy Agency (IAEA) said Iran has shown commitment to its end of the nuclear deal struck last year while visiting Tehran December 18.
Iran has complained about the US extending a sanctions package for another decade. The US says these sanctions are unrelated to the deal; Iran disagrees.
“We are satisfied with the implementation of the [nuclear agreement] and hope that this process will continue,” IAEA Director General Yukiya Amano told the press in the Iranian capital, Reuters reports, citing the IRNA news agency.
“Iran has been committed to its engagement so far and this is important,” he said. Amano was in Tehran to meet head of Iran’s Atomic Energy Organization Ali Akbar Salehi. After the White House said earlier this week that the sanctions bill would become law even without President Barack Obama’s signature, Iran requested a meeting of the Joint Comprehensive Plan of Action (JCPOA) commission to discuss the situation and ordered its scientists to start developing nuclear systems to power ships. Salehi presented the maritime nuclear propulsion project to Amano and said the country would provide more details on it in three months, according to the Islamic Republic News Agency (IRNA). The initial outline did include what is so far the most controversial issue of the project: the level of uranium-enrichment powering the ships will require.
China will raise the sales tax on small cars to 7.5% in 2017.
New methodology used by Turkstat to measure Turkish GDP has led to significant upward revisions.
Turkish authorities are growing more concerned about the weak lira.
Fitch moved the outlook on Chile.
Chile’s central bank shifted to an expansionary policy bias.
Colombia selected Juan Jose Echavarria to be the new central bank governor.
Fitch revised the outlook on Mexico’s BBB+ rating from stable to negative.
Banco de Mexico hiked rates by a larger than expected 50 bp.
In the EM equity space as measured by MSCI, Hungary (+4.3%), Russia (+3.2%), and Turkey (+2.3%) have outperformed this week, while Brazil (-3.8%), China (-3.6%), and Chile (-3.5%) have underperformed. To put this in better context, MSCI EM fell -2.3% this week while MSCI DM fell -0.1%.
In the EM local currency bond space, Poland (10-year yield -15 bp), Korea (-4 bp), and Czech Republic (-4 bp) have outperformed this week, while the Philippines (10-year yield +41 bp), Indonesia (+32 bp), and Hong Kong (+32 bp) have underperformed. To put this in better context, the 10-year UST yield rose 12 bp this week to 2.59%.
In the EM FX space, RUB (+1.4% vs. USD), HUF (+0.9% vs. EUR), and PLN (+0.7% vs. EUR) have outperformed this week, while CLP (-2.7% vs. USD), EGP (-2.7% vs. USD), and ZAR (-1.7% vs. USD) have underperformed.
China will raise the sales tax on small cars to 7.5% in 2017. The tax will be increased further to 10%, according to the Finance Ministry. The government cut this tax rate from 15% in October 2015 after lobbying from China’s auto association. Automakers had asked for the tax cut to be made permanent.
It is probably a coincidence that one day after we commented on what is emerging as “the market’s next headache”, namely China’s (not so) stealth tightening, which in the last few weeks has led to a creep higher across the curve, the yield on China’s sovereign 10Y bond jumped 6.5bps to 2.94% on what Bloomberg dubbed were “liquidity fears.” This was the biggest one day spike for the benchmark bond since Jan. 25, according to ChinaBond data.
As a result of the selloff, the most actively traded 10-year govt bond futures were down 0.72%, while five-year futures dropped 0.74%.
The tightening was broad-based, with 1-year rate swaps rising 13bps to 19-month high at 3.17%; additionally the overnight repo rate also rose to 2.31%, the highest level this month.
Quoted by Bloomberg, Wu Sijie, bond trader at China Merchants Bank said “tightening interbank liquidity and the expectation of even higher short-term borrowing costs are driving up swap costs and affecting sentiment on the cash bond market.”
Meanwhile, signalling no change at all in its posture, overnight the PBOC drained funds in open-market operations for the fourth consecutive day, bringing the total withdrawal to 130 billion yuan.