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Interesting reading (24th - 30th April 2017)

27.04.2017 14:11 (London time)
Selection of interesting opinions and articles from various sources.

Interesting reading (24th - 30th April 2017)

Global economy 

Draghi Says Recovery Is Broad While Inflation Fails to Convince

Bloomberg, 2017-04-27

Mario Draghi showed growing enthusiasm about the state of the euro-area economy, while cautioning that inflation pressures remain too weak to contemplate paring back stimulus.

“It’s true that growth is improving, things are going better,” the European Central Bank president told reporters in Frankfurt on Thursday after the Governing Council agreed to keep stimulus settings unchanged. “In 2016 we were speaking of a fragile and uneven recovery. Now it’s solid and broad.”

Euro-area economic data have demonstrated increasing resilience, prompting ECB officials to publicly debate when they might start to wind down asset purchases and raise interest rates. Economists predict the first hints of an exit from extraordinary stimulus may come by June 8, when the Governing Council next announces policy and publishes projections on the economic outlook.

“The risks surrounding the euro area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside,” Draghi said. “Underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend.”

 

Trump Rules Out Swift Nafta Exit in Favor of Renegotiation

Bloomberg, 2017-04-27

President Donald Trump won’t immediately terminate U.S. participation in the North American Free Trade Agreement, the White House said, after he spoke with the leaders of Mexico and Canada about ways to renegotiate the accord.

“Both conversations were pleasant and productive. President Trump agreed not to terminate Nafta at this time and the leaders agreed to proceed swiftly, according to their required internal procedures, to enable the renegotiation of the Nafta deal to the benefit of all three countries,” the White House said in a statement late Wednesday. Mexico’s peso and Canada’s dollar jumped after the White House’s announcement.

“It is my privilege to bring Nafta up to date through renegotiation,” Trump said in the White House statement. “I believe that the end result will make all three countries stronger and better.”

Commerce Secretary Wilbur Ross told CNBC on Thursday that Mexico and Canada appear to be ready to start renegotiations of the trade pact. One of the issues he said the U.S. wants to target is the rules regarding country of origin of products sold under the deal. He said that Mexico’s trade deficit with China is approximately equal with their trade surplus with the U.S., indicating that products made in China are being sold under Nafta.

Trump must give Congress 90 days notice that he seeks to renegotiate the accord. Ross said on Tuesday that the administration is busy working with lawmakers to kick start renegotiation of the deal, and that the U.S. was embarking on a more muscular strategy for trade-enforcement.

Trump has blamed Nafta for hollowing out America’s manufacturing sector by relocating jobs to lower-cost Mexico -- which his administration initially said was the main target of changes he was seeking to the accord.

Where Trump stands on Nafta has been hard to discern. After harsh rhetoric during the campaign, he has in recent weeks toned down his criticism, suggesting the relationship with Canada only needs tweaking. This week, he fueled trade tensions by imposing new duties on softwood lumber imports from Canada and vowing to defend U.S. dairy farmers against quotas imposed in Canada.

A number of Republicans are strong backers of free trade and have cautioned the administration against walking away from the free-trade deal.

“Scrapping Nafta would be a disastrously bad idea,” Republican Senator Ben Sasse of Nebraska, who was a Trump critic during the campaign, said Wednesday in a statement. “It would hurt American families at the check-out, and it would cripple American producers in the field and the office.”

Without Nafta -- which reduced or eliminated tariffs on most trade products after taking force in 1994 -- commerce ties between the nations would need to be reset, raising the specter of more frequent trade disputes and higher tariffs.

U.S. trade with its Nafta partners has more than tripled since the agreement took effect, rising to $1.1 trillion last year. Canada followed by Mexico ranked as the two biggest markets for U.S. exports, taking in a combined 34 percent of the total in 2016, according to a February paper published by the Congressional Research Service.

Broken Politics and a Fragile World Economy

Bloomberg, 2017-04-24

Persistent tepid growth is especially difficult for central banks, because it implies correspondingly low interest rates. In the U.S., the normal interest rate -- the one expected to prevail at full employment -- used to be roughly 4 percent. Today it might be 2 percent or less. This means the Federal Reserve will have less room to cut interest rates when the next recession hits. It makes macroeconomic stability harder to achieve. The same logic applies in most other advanced economies.

In the future, either central banks will have to resort to unconventional measures more often or fiscal policy will have to shoulder more of the burden of managing aggregate demand. In either case, economies will have greater need of competent policy makers, trusted by voters and insulated from the turbulence of daily politics. Again, populism pushes the other way.

It's good that the global economy is gathering momentum. But with politics this broken, don't expect miracles.

 

Global Stock Rally Lives On Amid Earnings Optimism: Markets Wrap

Bloomberg, 2017-04-26

Here are some key upcoming events that investors are watching:

Alphabet Inc., Microsoft Corp., Amazon.com Inc., Twitter Inc., Intel Corp., Barclays Plc, Bayer AG and Total SA are among major companies releasing results this week.

The Bank of Japan is widely expected to keep the settings on its monetary easing program unchanged at the end of a two-day policy meeting on Thursday. Though inflation remains well below the central bank’s 2 percent target, it’s ticking up.

The European Central Bank sets monetary policy later that same day. With officials indicating little chance of a policy change, the focus will be on any signals from President Mario Draghi that the ECB is starting to discuss an exit from its extraordinary stimulus.

U.S. GDP is due at the end of the week. It’s projected to show the economy expanded at a 1.0 percent annualized rate in the first quarter, the weakest pace in a year. 

 

Retailers Are Going Bankrupt at a Record Pace

Bloomberg, 2017-04-24

Retailers are filing for bankruptcy at a record rate as they try to cope with the rapid acceleration of online shopping.

In a little over three months, 14 chains have announced they will seek court protection, according to an analysis by S&P Global Market Intelligence, almost surpassing all of 2016. Few retail segments have proven immune as discount shoe-sellers, outdoor goods shops, and consumer electronics retailers have all found themselves headed for reorganization.

“This created a bubble, and like housing, that bubble has now burst,” said Hayne. “We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”

Jim Elder, S&P Global Market Intelligence’s director of risk services, wrote that first quarter results suggest there’s no quick recovery in sight. Sears Holdings Corp., Bon-Ton Stores Inc., and Perfumania Holdings Inc. are among the most vulnerable in the coming year, according to an S&P analysis of public retail companies. Sears acknowledged in a March filing that there is “substantial doubt” about its future. Fitch named retail chains including Nine West Holdings, Claire’s Stores, and children’s clothing outlet Gymboree Corp. in a study late last year. A spokesman for Nine West declined to comment. (Representatives from Bon-Ton, Perfumania, and Claire’s didn’t immediately respond to requests for comment.)

Department stores, electronics retail, and apparel shops are at highest risk, according to S&P. The food and home improvement segments are safest.

Risky Retail

 

Trumponomics

Trump's Tax Plan Said to Seek 10% Levy on Offshore Earnings

Bloomberg, 2017-04-26

President Donald Trump plans to propose a 10 percent tax on more than $2.6 trillion in earnings that U.S. companies have stockpiled offshore, said a White House official familiar with the president’s tax plans.

Proceeds from the so-called “repatriation tax” would represent a one-time source of sorely needed revenue, which could offset some of the deep tax cuts Trump has proposed for businesses -- or could be devoted toward popular, bipartisan initiatives, like infrastructure spending.

As with other portions of his tax plan that have leaked, Trump’s plan to call for a 10 percent tax on companies’ repatriated earnings is one that he first floated during his campaign. The tax represents an attempt to reconcile a quirk of the U.S. tax system. Unlike most developed nations, the U.S. applies its 35 percent corporate income tax to companies on their global earnings, not just their U.S. income. But companies can defer taxes on their overseas profits until they decide to return those earnings to the U.S., or “repatriate” them.

Read full article (link above)

 

Brexit

Banks Get Serious About Moving Jobs to Frankfurt as Brexit Looms

Bloomberg, 2017-04-26

The Brexit Banker Exodus Gains Momentum

Bloomberg, 2017-04-26 

Post-Brexit Bank Moves Destinations

Brexit Bulletin: Downing Street Talks

Bloomberg, 2017-04-26

Brexit Bullets

Bankers including Douglas Flint of HSBC and Barclays’ Jes Staley, as well as government officials, will on Wednesday discuss Brexit at a London conference organized by hedge fund manager Paul Marshall
Gina Miller will outline a new tactical voting campaign
Royal Bank of Scotland Chairman Howard Davies asks “will London survive Brexit?”
Turkish President Recep Tayyip Erdogan says Brexit has given the U.K. “peace of mind” and that Turkey could reconsider its position on joining the bloc, the Telegraph reports
International banks are getting serious about moving staff to Frankfurt from London, according to property brokers in Germany’s financial capital
Tory lawmakers resigned from Open Britain after it began targeting Conservatives who voted for Brexit
European Central Bank Governing Council member Ewald Nowotny says he’s “really concerned that the problems of Brexit have been underestimated so far”
European Commission Vice President Valdis Dombrovskis says so-called equivalence for banks is “not a right for all third countries, and it is not a blank check”
There’s a chance that renegotiation of nuclear fuel supply rules will limit output at U.K. plants after Brexit, according to Macquarie Group

Brexit should cause London Stock Exchange Group to lose business to Ireland and other European markets, a senior executive at the Irish Stock Exchange said.

 

China

World’s Biggest Stock Markets Haven’t Been This Split Since 2008

Bloomberg, 2017-04-25

The Chinese and U.S. stock markets are going in opposite directions.

An intensifying crackdown against leverage in Asia’s biggest economy has rocked the hither-to unflappable Shanghai Composite Index over the past week, sending it to a three-month low last session. In the U.S., the largest equity market is embracing a risk rally spurred by the French election, with the S&P 500 Index continuing to build on reflation-trade gains ignited by Donald Trump’s November victory.

The divergence means the two markets are the least in tune since August 2008 -- just before the collapse of Lehman Brothers Holdings Inc. unleashed chaos on the global financial system.

As Beijing’s focus on reducing risk in the financial system shifted from money-market tightening and reducing leverage to containing speculation and irregular trading, the two markets starting moving in opposite directions in the past month.

As long as growth remains stable, though, the regulatory moves may continue. That would be good for the economy over the longer term, said Alex Wolf, a Hong Kong-based senior emerging markets economist at Standard Life Investments Ltd. "Successful efforts at deleveraging and reducing credit to nonbank financial institutions can reduce overall systemic risk."

For Adrian Zuercher, head of Asia Pacific asset allocation at UBS’s private banking arm in Hong Kong, the weaker relationship between Chinese shares and other markets is a good thing, and is likely to become more marked.

“All these regulations that are taking place are done in a way that should make China less risky,” he said. “The economy is on a solid footing and that’s why they can do some of the measures. We will probably see more international investors coming into China on the fixed income and equity side.”

 

Electric Vehicles

The Electric-Car Boom Is So Real Even Oil Companies Say It's Coming 

Bloomberg, 2017-04-25

Electric cars are coming fast -- and that’s not just the opinion of carmakers anymore. Total SA, one of the world’s biggest oil producers, is now saying EVs may constitute almost a third of new-car sales by the end of the next decade.

The surge in battery powered vehicles will cause demand for oil-based fuels to peak in the 2030s, Total Chief Energy Economist Joel Couse said at Bloomberg New Energy Finance’s conference in New York on Tuesday. EVs will make up 15 percent to 30 percent of new vehicles by 2030, after which fuel “demand will flatten out,” Couse said. “Maybe even decline.”

 Electric cars are beginning to compete with gasoline models on both price and performance. The most expensive part of an electric car is the battery, which can make up half the total cost, according to BNEF. The first electric cars to be competitive on price have been in the luxury class, led by Tesla Inc.’s Model S, which is now the best-selling large luxury car in the U.S.

But battery prices are dropping by about 20 percent a year, and automakers have been spending billions to electrify their fleets. Volkswagen AG is targeting 25 percent of its sales to be electric by 2025. Toyota Motor Corp. plans to phase out fossil fuels altogether by 2050.

Electric cars currently make up about 1 percent of global vehicle sales, but traditional carmakers are preparing for transformation.

PEVONI: We can only add that capacity of batteries are growing too. It looks like batteries double their capacity every 5th year. This will make EVs more efficient. They will reach interesting distances in one charge and also the cost would be more atractive comparing to current fosil fuel vehicles.

Author: Peter Vostinar

This message is only educational in nature and should not be considered as an invitation or recommendation to buy, sell or hold any investment instrument. The results of the previous period does not represent a guarantee for future development. Trading or investing in financial markets is risky. The possibility of loss is evident, cannot be excluded and every trade is associated with some risk. Before deciding to invest, please read Risk Disclosure and Legal Notice and most of all get ready through education.

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Adam S., February 2012
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Ivan D., June 2012
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Luba P., October 2012
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