•  
Sat, 27th May 2017

Anirudh Sethi Report

  •  

Archives of “Euro” Tag

A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017… It’s Not Enough

Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.” 

 

Draghi says risks of deflation have largely disappeared

Draghi statement to IMFC

  • Growth in the Eurozone is firming and broadening
  • There are sign of a somewhat brighter global recovery and increasing global trade
  • Cannot yet have confidence that a sustained rise in inflation will materialize in a sustainable manner
  • Underlying inflation has not shown a convincing upward trend

You could say he’s cautiously optimistic.

Earlier in the year, the market read the optimism as a sign of potential action to tighten but officials have fought back against that idea, and that’s what helped to cap the euro at 1.09.

“As underlying inflation remains subdued and the path of inflation crucially dependent on the prevailing very favourable financing conditions, we cannot yet have sufficient confidence that a sustained adjustment in inflation will materialize in a durable manner,” he wrote.

It’s a similar line to what he said after the March 9 ECB meeting. The next ECB meeting is April 27.

Forex reserves increase by $889.4 mn to $369.887 bn

India’s foreign exchange reserves rose by USD 889.4 million to USD 369.887 billion during the week ended April 14, helped by increase in foreign currency assets, the Reserve Bank said.

They had declined by USD 956.4 million to USD 368.998 billion in the previous reporting week.

The reserves had touched a life-time high of USD 371.99 billion in the week to September 30, 2016.

Foreign currency assets (FCAs), a major component of the overall reserves, surged by USD 881 million to USD 346.248 billion in the reporting week, RBI said.

Expressed in US dollar terms, FCAs include the effects of appreciation/depreciation of non-US currencies, such as the euro, pound and the yen, held in the reserves.

Gold reserves remained unchanged at USD 19.869 billion, the apex bank said.

The special drawing rights with the International Monetary Fund was up by USD 3.1 million to USD 1.446 billion.

India’s reserve position with the Fund, too, rose by USD 5.3 million to USD 2.323 billion, RBI said.

Le Pen to Hold Referendum on French EU Exit in First Half of 2018 if Elected

Image result for Le PenThe first round of the French presidential elections is scheduled for this Sunday, while the run-off is set for May 7.

“Marine Le Pen said that she wanted an exit of the European Union organized with our European partners and that this departure would be sanctioned by a referendum. [Which will be held] undoubtedly in the first half of 2018,” David Rachline said.

According to Le Pen’s campaign manager, she also wants to “drastically change economic policy, while putting an end to increasing financialization and globalization of the economy.”

“We were warned of a catastrophe with the Brexit vote, the facts, however, disagree with those merchants of fear who in reality do not want us to touch this system, which grants them numerous advantages!” Rachline pointed out.

The United Kingdom’s decision to leave the European Union and the victory of Donald Trump in the US presidential election in 2016 were seen as big victories for the anti-establishment and anti-globalist movement. Le Pen’s approach seems in sync with the growing anti-globalism trend.

Emerging Markets :An Update

  • Malaysia’s central bank said it will allow investors to fully hedge their currency exposure.
  • Egypt declared a 3-month state of emergency after two deadly church attacks.
  • South Africa’s parliamentary no confidence vote has been delayed
  • Argentina central bank surprised markets with a 150 bp hike to 26.25%.
  • Brazil central bank accelerated the easing cycle with a 100 bp cut in the Selic rate.
In the EM equity space as measured by MSCI, South Africa (+3.1%), Turkey (+2.5%), and the Philippines (+0.9%) have outperformed this week, while Russia (-3.9%), Peru (-3.4%), and Brazil (-2.6%) have underperformed.  To put this in better context, MSCI EM fell -0.3% this week while MSCI DM fell -0.7%.
 
In the EM local currency bond space, South Africa (10-year yield -18 bp), Poland (-8 bp), and Indonesia (-8 bp) have outperformed this week, while Brazil (10-year yield +11 bp), Peru (+9 bp), and Colombia (+9 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 15 bp to 2.24%.
 
In the EM FX space, ZAR (+2.5% vs. USD), RUB (+1.9% vs. USD), and ARS (+1.2% vs. USD) have outperformed this week, while HUF (-0.9% vs. EUR), KRW (-0.5% vs. USD), and PLN (-0.5% vs. EUR) have underperformed.

In First Week Of ECB “Taper”, Draghi Ramps Up Purchases Of Corporate Bonds

In previewing today’s newsflows, Deutsche Bank’s Jim Reid this morning said that “perhaps the most interesting stat today will be the ECB CSPP number which will include 3 days worth (out of 5) of settled secondary purchases under the new tapering regime. A big debate has been as to whether they taper CSPP in line with the PSPP or leave it running at a similar pace. Obviously the latter would be very good for credit technicals.”

Reid said that “for choice I think they do taper CSPP” and added that “we won’t know for sure today but we’ll perhaps get some clues in the size of the purchases. The last two weeks have seen daily numbers of EU335m and 308m respectively down from the average of 365m since the program started so there’s a little clue here that they have been scaling back a touch. We also have to adjust for the slightly below 20% of primary in the number which due to longer settlement periods won’t be under the new regime in today’s number. So an interesting release to follow this afternoon.”

Moments ago the ECB disclosed its “anticipated” first stub week of bond purchases under the tapered regime, when it disclosed that it as of April 7 it held €77.87BN in corporate bonds.

IMF First China Foreign Currency Report Puts Reserves at $10.8Trln

Yuan banknotes and US dollars are seen on a table in Yichang, central China's Hubei province on August 14, 2015Prior to Friday’s report, IMF currency data was limited to the US dollar, euro, Japanese yen, UK pound sterling, Australian dollar, Canadian dollar and Swiss franc, and an indistinguishable category of “other currencies.”

“With the separate identification of reserves in RMB [Renminbi], eight currencies are now distinguished,” the IMF publication stated.

Chinese holdings of US dollars were $5.1 trillion at the end of 2016, compared with $10.8 trillion in total foreign currency reserves, the report explained.

The remainder was divided among other currencies, with euro holdings the largest at $1.6 trillion, according to the IMF.

Gold forecast from BNP, lower due to Fed hikes ($ 1220 for 2017 ,$ 1120 for 2018 )

A piece from BNP says analysts there are bearish on gold due to a stronger USD expected as the Federal Reserve hikes rates

BNPs gold forecast
  • An average price of USD1,245 for Q2 of 2017
  • $1220 for 2017 as a whole on average
  • $1120 for 2018 as a whole on average
  • BNP hedge that demand may increase on European political uncertainty though
  • Longer term trend remains down though
On the Fed:
  • Expect a total of 3 Federal Reserve hikes this year
  • And more over the coming year, says market is too complacent on the potential 2018 hikes also

Greenback Consolidates Losses as Yields Stabilize

The US dollar remained under pressure in Asia following the disappointment that the FOMC did not signal a more aggressive stance, even though its delivered the nearly universally expected 25 bp rate hike.  News that the populist-nationalist Freedom Party did worse than expected in the Dutch elections also helped underpin the euro, which rose to nearly $1.0750 from a low close to $1.06 yesterday.  European activity has seen the dollar recover a little, but the tone still seems fragile, even though US interest rates have stabilized and the 10-year Treasury yield is back above the 2.50% level. 
The US premium over Germany on two-year money peaked a week ago near 2.23.  After the US yield fell in response to the Fed’s move, the spread finished near 2.12%, from which it has not moved far.  Initial euro support has been found a little above $1.07.  The first retracement target of the run-up is a little below there at $1.0690.  The other retracement targets are seen near $1.0675 and $1.0655. 
Few expected the Wilders in the Netherlands to have a say in the next Dutch government.  He drew about 13% of the vote and will hold about 20 seats, which is five more than currently.  Prime Minister Rutte’s party appears to have received the most votes and 33 seats, down from 41.  The other coalition partners did worse.  In particular, the disastrous showing of Labor means that Dijsselbloem, the current finance minister and head of the Eurogroup of finance ministers is unlikely to hold his post.  Labor may have less than 10 seats in the new parliament, down from 38.  The other coalition partner, Liberals, lost eight seats.  

Greece : Prospects for deal in bailout talks get more distant

After yet another round of inconclusive bailout talks in Athens, Prime Minister Alexis Tsipras said he believed a comprehensive deal with creditors could be reached by April while taking a dig at the International Monetary Fund over its tough stance on labor rights.

In comments to reporters at the end of a summit of European Union leaders in Brussels, Tsipras said he believed a technical-level agreement could still be reached in time for a March 20 Eurogroup, with a broader accord, including the specification of medium-term debt relief measures, coming in April.

Tsipras indicated, however, that tough talks on collective wage bargaining would be harder to conclude. “That issue can’t be solved at the technical level. There’s a disagreement,” he said, adding that the IMF must understand that Greece is a European country and that non-European labor models cannot be imposed on it.

In a related development, IMF chief Christine Lagarde said Tsipras asked the Fund “to stand by Greece” in its third bailout program.

“To commit to Greece, as the Greek prime minister has requested, in addition to reforms, the debt should be sustainable,” Lagarde told French newspaper Le Parisien in an interview.