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Fri, 24th February 2017

Anirudh Sethi Report

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Archives of “interest rate” Tag

Negative rates put corporate Japan in a spending mood

The introduction of negative interest rates a year ago by the Bank of Japan is prompting listed companies here to funnel the money they save on borrowing costs toward takeovers and capital investment.

The average borrowing rate of 1,387 nonfinancial companies listed on the first section of the Tokyo Stock Exchange and which released their third-quarter results by December 2016 has shrunk to an estimated 1.06%, down 0.11 percentage point from a year earlier. Interest-bearing debt has increased nearly 1 trillion yen ($8.84 billion) to about 207 trillion yen, while interest payment costs have fallen 10% to about 1.63 trillion yen. Some 30% of the companies have increased their borrowings.

 Telecommunications giant SoftBank Group is one of the companies that has benefited the most from negative interest rates. Chairman and CEO Masayoshi Son bought British chip designer ARM Holdings for about 24 billion pounds ($29.8 billion) at the current rate in 2016 and has announced other bold global plans.

SoftBank’s interest-bearing debt has jumped 16%, or about 1.9 trillion yen, to a little more than 14 trillion yen over the past year. However, its average borrowing rate — obtained by dividing interest payment costs by average interest-bearing debt — was 3.53%, down 0.18 percentage point.

Negative interest rates have also lowered borrowing costs for corporate bonds. Borrowing costs for SoftBank seven-year bonds issued in April 2016 were 1.94% per annum, 0.19 percentage point lower than the cost for the seven-year bonds it issued six months earlier.

Next Week -Watch out :Week ahead: Greece, Fed minutes, Buffett letter

Don’t be fooled by the the holiday-shortened trading week in the US. Next week promises to give investors plenty to watch, including the Greek bailout, minutes of the Federal Reserve’s last meeting, Bank of England governor Mark Carney’s testimony, retail earnings and Warren Buffett’s annual letter.

Here’s what to look for in the coming days.

Greece

The meeting has also gained additional significance, as the last major one slated before European elections begin next month, starting with the Dutch.

“With the two largest eurozone economies facing elections this year, we believe it is in
their policymakers’ interests to contain any potential risks from Greek disruption,” said economists at Nomura. “We therefore expect some transitory agreement to be reached at least at the eurozone level, with the IMF decision on programme participation likely to be delayed even further”.

Carney testimony

Following Federal Reserve chair Janet Yellen’s semi-annual testimony to Congress, investors get to hear from her UK counterpart when Mark Carney testifies before the UK parliament’s Treasury Committee on Tuesday. Mr Carney’s testimony comes after the BoE upgraded its economic forecast, while leaving its inflation forecast and interest-rate policy on hold.

“Since the inflation report was published two weeks ago, we’ve seen downside surprises to wage growth, inflation, and retail sales,” said strategists at TD Securities. “So even after the IR was more dovish than markets expected, we may see a further dovish tone with the IR testimony given the soft tone of the recent data releases.”

Fed minutes

The Federal Reserve will release the minutes of its last monetary policy meeting on Wednesday, though they may seem dated since investors have just heard from Ms Yellen. In her testimony to Congress this week, she painted an upbeat view of the US economy and warned that it would be “unwise” to wait too long before raising interest rates.

Bank of America economists say they believe the minutes will reflect “a great deal of focus on both upside and downside risks,” even as Fed officials “become increasingly constructive on the outlook for the economy.”

Moreover, any discussion on the Fed’s balance sheet is likely to garner interest. “Yellen reiterated the view that the primary tool remains rates and that the balance sheet will only be addressed once the normalization of the fed funds rate is well under way,” said the folks at Bank of America. “We expect the minutes to reinforce this view, but there might be some discussion among members on the issue.”

Overnight US Market :Dow closed up 107 points.Crosses 20600.S&P 500 -Nasdaq Hitting New High

Stocks jumped to new record highs and the Dow shot past 20,600 on Wednesday after more reports showed the U.S. economy continues to strengthen.

The Dow Jones industrial average climbed 107 points, up 0.5% to a new closing high of 20,611.86.

Also building upon their record highs set in the previous session were the S&P 500 and Nasdaq composite, up 0.5% to 2349.25 and 0.6% to 5819.44, respectively.

The encouraging data could push the Federal Reserve to raise interest rates more aggressively from the record lows marked during the Great Recession.

Wednesday’s economic reports give the Federal Reserve more encouragement to raise interest rates, and economists said the possibility is increasing that it may happen at the central bank’s next meeting in March. Retailers had stronger sales in January than economists expected, and inflation at the consumer level was the highest in years. Consumer prices rose 2.5% in January from a year earlier, the highest rate since March 2012.

Fed Chair Janet Yellen said in testimony before a Congressional committee that the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates, echoing her comments from a day earlier. The central bank raised rates in December for just the second time in a decade, after keeping rates at nearly zero to help lift the economy out of the Great Recession.

Overnight US Markets :Dow closed + 92 points -Hits New High

Stocks shook of earlier losses and ended higher Tuesday, led by a rise in bank stocks as major indexes pushed further into record territory.

The Dow Jones industrial average gained 92 points, or 0.5%, to an all-time closing high well above that landmark 20,000 level — and a little over halfway to the next 1,000-point rung, at 20,504.41.

Meanwhile the Standard & Poor’s 500 index rose 0.4% and the Nasdaq composite index gained 0.3%. Both indexes also set new all-time closing highs. All three indexes’ previous closing highs came in Monday’s session.

Bond yields rose after Federal Reserve Chair Janet Yellen said the central bank is still on track to raise interest rates gradually.

Yellen answered questions before a Senate committee, and she said that the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates.

Bond yields moved higher immediately following Yellen’s comments. The yield on the 10-year Treasury note rose to 2.47% from 2.43% late Monday.

China Just Created A Record $540 Billion In Debt In One Month

One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”

DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “ 

BOJ’s government bond holdings top 40% for 1st time

The Bank of Japan’s holdings of Japanese government bonds has topped 40% of the outstanding balance for the first time, the central bank said Wednesday.

The BOJ has been snapping up JGBs in large quantities since it implemented drastic monetary easing measures in April 2013.

  Statistics released by the bank show that its JGB holdings stood at about 358 trillion yen ($3.19 trillion) as of the end of January, or about 40% of the outstanding total of some 894 trillion yen.

Last September, the BOJ switched its policy focus from quantity to interest rates, aiming to keep long-term rates at around 0% to achieve its inflation target. Nevertheless, its JGB holdings continue to rise, with the bank sticking to its annual target of 80 trillion yen for JGB purchases.

With the amount of such bonds circulating in the market declining, “the bank will reach the limits of its bond purchase program as early as the first half of 2019,” said Takenobu Nakashima of Nomura Securities.

ECB sees seeds of next crisis in Trump deregulation plan

The European Central Bank rejected U.S. accusations of currency manipulation on Monday and warned that deregulating the banking industry, now being openly discussed in Washington, could sow the seeds of the next financial crisis.

Arguing that lax regulation had been a key cause of the global financial crisis a decade ago, ECB President Mario Draghi said the idea of easing bank rules was not just worrying but potentially dangerous, threatening the relative stability that has supported the slow but steady recovery.

 Draghi’s words are among the strongest reactions yet from Europe since U.S. President Donald Trump ordered a review of banking rules with the implicit aim of loosening them. That raises the prospect of the United States pulling out of some international cooperation efforts.

“The last thing we need at this point in time is the relaxation of regulation,” Draghi told the European Parliament’s committee on economic affairs in Brussels. “The idea of repeating the conditions that were in place before the crisis is something that is very worrisome.”

The ECB supervises the euro zone’s biggest lenders.

“Big mistake”

Andreas Dombret, a member of the board of Germany’s powerful central bank, the Bundesbank, said that reversing or weakening regulations all at once would be a “big mistake”, because it would increase the chance of another financial crisis.

“That is why I see a possible lowering of regulatory requirements in the U.S., which is under discussion, critically,” said Dombret, who is also a member of the Basel committee drafting new global banking rules.

Greece : Nine out of 10 firms are not creditworthy

Almost two in every three Greek companies (63 percent) are deemed to have a high credit risk, compared to just 6 percent in 2009, according to data compiled by ICAP, as the Greek production base is collapsing rapidly.

Most Greek firms now have serious or very serious problems in covering their obligations, along with weak financial results and particularly low competitiveness. This is a combination which generates major doubts about their sustainability.

Another 27 percent of enterprises are on the verge of entering the above category too, with an increased risk, as they show vulnerability to adverse financial conditions, low economic performance and low competitiveness.

In other words, 90 percent of enterprises in Greece find themselves in the zone of high or increased credit risk and according to bank rules should not be entitled to bank financing. Therefore the credit system is up against a huge problem, as in order to help the revitalization of the economy it will have to increase credit levels, but the companies that are actually creditworthy and fulfill the banks’ criteria are very few indeed.

Deutsche Bank posts €1.9bn loss in Q4

Image result for deutsche bankDeutsche Bank posted a €1.9bn net loss for the fourth quarter, as its performance was weighed down by the cost of its $7.2bn mortgage mis-selling settlement with the US Department of Justice.

Germany’s biggest bank took €1.6bn of litigation charges in the final three months of the year, the bulk of which related to the DoJ settlement, which chief executive John Cryan had made one of his priorities.

The fourth quarter loss, which was slightly better than the €2.1bn net loss that Deutsche posted in the same period a year earlier took Deutsche to a €1.4bn net loss for the year, down from a loss of €6.8bn a year earlier.

However, he said that the bank had “proved our resilience in a particularly tough year,” pointing out that Deutsche’s capital and liquidity ratios had improved.

Deutsche’s common equity tier one ratio, a closely-watched measure of financial strength, finished the year at 11.9 per cent, up from 11.1 per cent at the end of the third quarter, as Deutsche cut back risk-weighted assets.

Bank of England decision day – ‘Super Thursday’ preview

Bank of England announces
  1. Its interest rate decision
  2. The minutes from the policy meeting
  3. And the Quarterly Inflation Report
A three-in-one, that’s why its called Super Thursday.
  • All three come at 1200GMT
  • Governor Carney’s press conference follows at 1230GMT
1. On interest rates – the Bank is pretty much unanimously expected to keep rates unchanged (0.25%) and the asset purchase target at £435bn (I have seen just one analyst expect the target to lower).
It is worth noting the UK economy is showing better than expected signs:
  • Growth is stronger than it was expected to be after the yes vote on Brexit. There are plenty of expectations around for slower growth ahead as the impacts of Brexit become clear, but these have not been evident in the official data. I’ll admit to being in ‘you are all doomed, just you wait’ camp, but the evidence so far has been opposite this (i.e. don’t listen to me!). Yesterday I posted the view of the UK’s National Institute of Economic and Social Research – they are pretty much of the same view as me, & they’ve been eating humble pie too: NIESR has progressively revised up its short-term estimates for British economic growth since the referendum, thanks in large part to consumers who kept on spending
  • Unemployment is falling (at an 11-year low if I recall correctly)
  • Inflation is ticking higher, and will perhaps overshoot the topside target (2% is the target). BoE Governor Carney is on record as saying the bank will not be overly tolerant of an inflation overshoot.
Despite these better signs the Bank is expected to be remain in ‘wait and see’ mode, watching more data, especially on business activity and consumer spending. In November Governor Carney said the Bank had a neutral policy bias, so I’d expect a clear indication of a shift in the bias before any policy move on rates or QE. This (a shift in policy bias) is something to watch for from the Bank today.
 
2. The minutes will be scoured for hints of how the Monetary Policy Committee members voted and reasoned, looking for signs for the future direction on rates and QE
3. The Quarterly Inflation Report will be a big key focus. It will include the BoE’s latest forecasts for growth & inflation. The most recent Bank update to these forecasts was way back in  November;
  • the GDP forecast was 2.2% for 2016
  • 1.4% 2017
  • 1.5% 2018
  • 1.6% 2019