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These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
Post-FOMC
Dovish Fed unnerves global equity markets
Taken from the FT Saturday, 19 September 2015
Janet Yellen had to hold fire this week, but risks an even
nastier crunch later if inflation forces the Fed has to slam on
the brakes suddenly
The US Federal Reserve would have been mad to raise interest
rates in the middle of a panic over China and an emerging
market storm, and doubly so to do it against express warnings
from the International Monetary Fund and the World Bank.
The Fed is the worlds superpower central bank. Having
flooded the international system with cheap dollar liquidity
during the era of quantitative easing, it cannot lightly walk
away from its global responsibilities - both as a duty to all
those countries that were destabilized by dollar credit, and in
its own enlightened self-interest.
Dollar debt outside the jurisdiction of the US has reached $9.6
trillion, on the latest data from the Bank for International
Settlements. Dollar loans to emerging markets have doubled
since the Lehman crisis to $3 trillion.
The world has never been so leveraged, and therefore so
acutely sensitive any shift in monetary signals. Nor has the
global financial system ever been so tightly inter-linked, and
therefore so sensitive to the Fed.
The BIS says total debt in the rich countries has jumped by 36
percentage points to 265pc of GDP since the peak of the last
cycle, and by 50 points to 167pc in developing Asia, Latin
America, the Middle East, Eastern Europe, and Africa.
It is wishful thinking to suppose that the world can brush off a
Fed rate rise on the grounds that most of the debt is in local
currencies. BIS research shows that they will face a rate shock
regardless. On average, a 100 point move in US rates leads to
a 43 point move in local currency borrowing costs in EM and
open developed economies.
Given that the Fed was forced to reverse course dramatically
in 1998 when the East Asia crisis blew up for fear it would
take down the US financial system it can hardly go ahead
nonchalantly with rate rises into the teeth of the storm today
when emerging markets are an order of magnitude larger and
account for 50pc of global GDP.
Even if you reject these arguments, Goldman Sachs says the
strong dollar and the market rout in August already amount to
75 basis points of monetary tightening for the US economy
itself.
Headline CPI inflation in the US is just 0.2pc. Prices fell in
August. East Asian is transmitting a deflationary shock to the
West, and it is not yet clear whether the trade depression in
the Far East is safely over.
The argument that zero rates are unhealthy and impure is to
let Calvinist psychology intrude on the hard science of
monetary management. The chorus of demands and just
from internet-Austrians that rates should be raised in order
to build up reserve ammunition in case they need to be cut
later, is a line of reasoning that borders on insanity.
If acted on, it would risk tipping us all into the very
deflationary trap that we are supposed to be protecting
ourselves against, the Irving Fisher moment when a sailing
boat rolls beyond the point of natural recovery, and capsizes
altogether. So hats off to Janet Yellen for refusing to
listen to such dangerous counsel.
However, the Fed is damned if it does, and damned if it does
not, for by recoiling yet again it may well be storing up a
different kind of crisis next year.
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
Not for the first time, the worlds two largest economies are in
a symbiotic embrace.
Following months of speculation, the US Federal Reserve
opted this week not to raise rates, from the effective zero level
at which they have been locked for almost seven years. It
palpably wanted to raise rates. US unemployment named a
determining factor ahead of the decision continues to
improve.
The decision not to raise rates was just what many in the
worlds stock markets had been screaming for. Stocks like
cheap money. But the reaction has been negative. Europes
FTSE-Eurofirst 300 index dropped 1.92 per cent yesterday,
following a similar fall for Japans Nikkei 225. In the US, the
S&P 500 had dropped 1.15 per at mid-session.
This reaction was down to the way Janet Yellen and her
colleagues chose to explain their decision. The Fed remains
reluctantly on hold primarily because of a blast of deflationary
pressure from China. As Chinas future is uncertain, the Fed
has to remain uncertain over when it can start to raise rates.
And there is nothing the markets like less, as the old clich
states, than uncertainty.
The market was particularly spooked by the addition of this
sentence to the Feds communique: Recent global economic
and financial developments may restrain economic activity
somewhat and are likely to put further downward pressure on
inflation in the near term.
The Fed should always have an eye on international
developments. But its choice to make this clear was taken as a
message that the Fed was not in control of events, and that it
was more worried by China than others are.
So, what is the matter with China, how does China affect US
monetary policy, and how does the dance between the two
Great Powers affect everyone else?
Chinas economy, by any measure, continues to grow.
However, evidence from official data, and particularly from
private research groups analysis of public data on economic
activity, such as on electricity generation, suggest that its rate
of growth has slowed rapidly.
Further evidence for this comes from Chinas leaders, who
have appeared desperate to prop up their stock market and
allowed their currency to devalue slightly last month with no
prior warning, sparking weeks of volatility.
This does not much affect the US through trade. The US does
not export that much to China although Asian nations, big
commodity exporters like Australia and Brazil, and western
European manufacturing powers led by Germany, are all
prone to be more affected. (The latest German export data
suggest little damage so far from China.)
And it affects commodity prices, which are falling. Demand
for metals (down 2 per cent since the announcement
according to Bloombergs index) rests on China. A slowing
China also slows demand for oil (Brent crude is down 2.3 per
cent since the Fed spoke).
This affects everyone by pushing down prices, which is good
for consumers and for commodity importers, such as India. It
is bad for countries where business investment has been
driven by high oil prices (as in the US shale boom), and it
pushes down inflation, which the easy US monetary policy has
been designed to push up. Inflation forecasts derived from the
bond market suggest that US inflation will run at less than 1.6
per cent over the next decade below the Feds 2 per cent
target.
The implication is that after months of watching US labour
data, we all need to watch China like hawks (or doves). If signs
of a slowdown intensify, then the zero interest rate regime in
the US could last much longer. If the situation calms down,
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
then US rate rises might rise before the end of the year a
possibility that futures markets now put at 46 per cent (having
rated it a virtual certainty). But it is hard to see such a clear
resolution to Chinas issues in the next three months, so the
odds now appear to me to be strongly against a 2015 rise.
In the longer term, the symbiosis between the US and China
runs deeper. China and many central banks has built up
huge reserves of dollar-denominated assets, which now total
more than $10tn. That Great Accumulation as Deutsche
Bank dubs it appears to be over, and reserves are declining.
When China pays down its reserves, it no longer diversifies its
holdings or in other words, sells dollars to move into other
currencies. That practice weakens the dollar. So in recent
years the euro has strengthened when China is piling up
dollars, and fallen when it is not. Sales of dollars would
weaken the euro, and also the already stretched emerging
market currencies. And they would means higher yields on
short-term US bonds, in which reserves are held. That,
Deutsche says, could mean quantitative tightening. US
yields would rise, doing a job otherwise done by the Fed.
The Fed is right to watch China even if it perhaps scared the
markets by saying it so clearly.
(Full article click - FT)
---
The monetary doves have won the battle, but not the war. Not
yet.
In deciding to stand pat on interest rates, the Federal Reserve
cited many of the reasons that some vocal opponents of
tighter creditthe doveshave advanced for keeping rates
near zero.
The Fed acknowledged a troubled global economy and market
turmoil have cast a shadow on both U.S. economic growth and
inflation, still well below the Feds 2% target.
But these were tactical considerations. Janet Yellen, the Fed
chairwoman, and her colleagues still think theyll be ready to
boost rates by the end of this year after the fog lifts from the
global economy and markets.
In other words, this wasnt a concession to the gloomy world
view of extreme doves, such as Harvard Universitys Larry
Summers, who believe a rate increase any time soon could be
catastrophic.
Some of Ms. Yellens own colleagues say the Fed should wait
until inflation, now 1.2% excluding food and energy, is at 2%,
or nearly there, before tightening.
Not Ms. Yellen. Waiting that long would allow unemployment
to fall well below its natural rate, at which point workers
become scarce, and we would likely overshoot substantially
the 2% target, Ms. Yellen said in remarks to reporters
Thursday.
Some doves cite the experience of other central bankssuch
as Japans, the eurozones and Swedens, all of whom raised
interest rates to ward off inflation and then had to reverse
course when growth stumbled and inflation went too low.
The International Monetary Fund this year urged the Fed to
defer rate increases until next year as insurance against the
risks from disinflation, policy reversal, and ending back at a
zero funds rate.
Ms. Yellen was having none of it. She called the possibility of
being stuck at zero interest rates indefinitely an extreme
downside risk that in no way is near the center of my outlook.
Many doves have questioned the usefulness of the Phillips
curve, which holds that inflation should rise as unemployment
falls. Its a theory that forms the backbone of the
macroeconomic models used by Ms. Yellen, her staff, and her
academically accomplished vice chairman Stanley Fischer.
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
Fed for leaving rates too low in 2003, 2004 and 2005,
something that has been widely blamed for the US subprime
mortgage crisis.
While historically such mistakes normally resulted in a surge
of "standard" goods and services inflation rates - in turn
requiring policy makers to "crunch the economy to get it
down" the more likely risk in the current environment was
that low rates would lead to too much risk-taking in the hunt
for yield.
This then could result in people running into trouble when
rates eventually go up, he said.
"That risk clearly exists, given that we have not only the Fed
but the Bank of Japan having zero rates more or less for 13
years. The ECB has a zero, even negative, rate, and it will do so
for some time.
"Clearly, that set of issues is on the minds of some people.
That is a risk that attends these very unorthodox policies
very unusual policies. It is a risk that the relevant central
banks think that they have to take."
(Full article click - AFR)
---
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
Andrew Sentance
The US Federal Reserve has got it wrong
Taken from the FT Sunday, 20 September 2015
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
Irwin Stelzer
American Account: Dammit, Janet: the last
thing we need is more uncertainty
Taken from the Sunday Times 20 September 2015
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
its ability to influence a host of rates that set the tone for the
U.S. economy and markets overseas.
When the Fed moves, it would be the first time the central
bank has raised interest rates in nine years.
Fed officials decided to hold off at their most recent policy
meeting this week, in part to gain more insight into the
strength of the U.S. recovery and also because of a slowdown
in Chinese growth, and turbulence in financial markets both
domestic and abroad.
It was a close call in my mind, in part reflecting the
conflicting signals were getting, said Mr. Williams in his
prepared remarks.
Were balancing a number of considerations, some of which
argue for greater patience in raising rates and others that
argue for acting sooner rather than later.
In the past, I have found the arguments for greater patience
to clearly outweigh those for raising rates, he added. Looking
ahead, he said he expects the labor market to get to full
strength and inflation to move above the Feds long-term
objective. In that context, it will make sense to gradually
move away from the extraordinary stimulus that got us here.
Mr. Williams for most of 2015 had a rosy outlook on the U.S.
economy, but has sounded on the fence more recently.
Factors building the case for the Fed to shift rates higher
include improving U.S. domestic growth and unemployment
falling to 5.1%, nearer its longer-term norm. Mr. Williams said
he thinks the U.S. should reach full employment on a broad
set of measures by the end of this year of early next.
Headwinds include inflation that is running persistently below
the Feds 2% long-term objective, and the turmoil abroad. Mr.
Williams said he sees factors like low oil prices and the
appreciation of the U.S. dollar, which have been dragging
down inflation, as transitory and he sees inflation moving
back up to the 2% goal over the next two years.
He said he was in support of not waiting too long for a rate
rise, because doing so could put policy makers behind the
curve and could risk an economy that runs too hot. It would
force us into the position of a steep and abrupt hike, which
doesnt leave much room for maneuver. Not to mention, it
could roil financial markets and slow the economy.
In a question-and-answer session after the speech, Mr.
Williams said there was some evidence that slower global
growth and longer-term trends could mean U.S. interest rates
hit the zero lower bound more frequently than in the past.
In particular, he said he would be watching the August
employment report for any revisions.
He also said the U.S. central bank has to consider its domestic
economic goals alongside the risks that raising rates may
destabilize foreign economies. A selloff in the bond market in
2013, when the Fed first hinted it would taper its large-scale
bond buying programs, was a very loud reminder of
interconnectedness, and the risk that U.S. policy moves affect
markets abroad and could negatively feed back on the U.S.
recovery.
The Feds goals have to include an effort to minimize undue
negative repercussions on foreign economies, he said, to
make sure the U.S. isn't exacerbating problems overseas that
could boomerang back. But he said he was less worried that a
gradual increase in interest rates in the U.S. would prove a
shock for the rest of the world.
On the sidelines of the symposium, Mr. Williams told
reporters that if the Fed raised rates and saw another
downturn, he didn't see the Feds policy as being irreversible
and the central bank was not out of ammunition to
counteract any future significant downturn, should more tools
be needed.
Fed officials have two more opportunities to raise rates this
year: one at their policy meeting in October and one at
Decembers meeting. Mr. Williams told reporters that Fed
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
However at least for now the Fed set aside such concerns out
of deference to a different worry: that a weak global economy
may pull down the U.S. Specifically Fed officials, including
Yellen, said a dip in measures of inflation expectations was
worrisome if it proves to reflect eroding confidence in the
recovery.
The expectations of businesses and consumers about inflation
is thought to play an important role in the actual pace of price
increases, as well as in decisions about savings, investment
and consumption that are central to economic growth.
San Francisco Fed President John Williams in remarks on
Saturday laid out the case for caution, and suggested he and
others now want more proof before a rate hike. Williams said
he still expects rates will rise this year as the "disinflationary"
impact of low oil prices and other outside influences fades,
and the U.S. economy continues to expand.
Still, "getting some more clarity around what is really
happening in the global economy, how is that affecting the
U.S. economy, and also seeing continued progress in the U.S.
economy -- these are all things I'm watching," Williams told
reporters when asked about a possible rate rise in October.
Williams, who is among the regional bank presidents who
does vote on interest rates this year, declined to specify
whether he sees October or December as the appropriate time
to go.
The Fed next meets in October and again in December.
Thirteen of 17 Fed members last week said they still expect to
hike rates this year.
(Full article click - Reuters)
UK News
We mustnt ban cash or inflate the pound
Taken from the Telegraph Saturday, 19 September 2015
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
Euro-zone
Matteo Renzi upbeat as Italy upgrades
growth forecasts
Taken from the FT Saturday, 19 September 2015
Italy has upgraded its economic forecasts for 2015 and 2016 in
a sign of growing confidence within the government of Matteo
Renzi, the reformist prime minister, that a recovery is taking
hold after three years of recession and stagnation.
Ahead of next months budget law, Italy said output would rise
by 0.9 per cent this year and 1.6 per cent next year, compared
with earlier forecasts of 0.7 per cent growth in 2015 and 1.4
per cent in 2016.
In 2015, we turned the corner, and in 2016 we have to
accelerate, Mr Renzi said at a press conference in Rome on
Friday night.
The improved economic outlook boosted by external factors
such as a lower euro and lower oil but also a bump in domestic
demand will also affect Italys budgetary picture, which has
long been a source of concern because of the countrys high
levels of indebtedness.
Pier Carlo Padoan, Italys finance minister, said he expected
Italys debt to gross domestic product ratio, which is forecast
at 132.8 per cent in 2015, to begin declining from 2016, for the
first time since 2007.
However, the drop in the debt will occur at a slower pace than
forecast last April, as Italy plans to make use of the improved
economic data and the related increase in tax revenues to
push through new stimulus measures, particularly a round of
tax cuts.
Italys budget deficit this year is forecast at 2.6 per cent, which
is well below the European Commissions threshold of 3 per
cent and is due to decline further to 2.2 per cent in 2016.
But that is higher than the 1.8 per cent level predicted in April.
Meanwhile, Italy has said it expects to reach structural
balance, which takes into account changes in the economic
cycle, one year later than previously predicted or in 2018
instead of 2017.
Even though Mr Renzi has frequently skirmished with
Brussels on the budget since taking office in February 2014, he
has also earned credit for pressing ahead with an aggressive
agenda of economic reforms. Italy has argued strenuously that
these should allow for greater flexibility with regard to EU
budget rules.
In an interview with Corriere della Sera, the Italian
newspaper, this week, Pierre Moscovici, the EU commissioner
for economic affairs, said Italys reform drive had been
encouraging, but added that it was too early to judge the
forthcoming budget.
(Full article click - FT)
---
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
Changes
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
Greece
Greek election scenarios: the good, the bad,
and the ugly
Taken from the Kathimerini Saturday, 19 September 2015
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
own
Grexit
as
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
FLASH BACK
Greece's defence minister threatens to send
migrants including jihadists to Western
Europe
Taken from the Telegraph Monday March 09 2015
News America
Brazils president feels
impeachment talk grows
the
heat
as
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
News Asia
Malaysia imposes travel bans over 1MDB
foreign police reports
Taken from the FT Saturday, 19 September 2015
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
U.S.
opens
money-laundering
investigation
amid
international 1MDB probe; Malaysia police arrest critic of
prime minister
The FBI has opened an investigation into allegations of
money-laundering related to a Malaysian sovereign wealth
fund, a person familiar with the matter said.
The scope of the investigation wasnt known. It is the latest in
a series of international investigations related to the fund that
have been revealed in the past several weeks.
The international investigations center on entities related to
1Malaysia Development Bhd., which was set up by Prime
Minister Najib Razak in 2009 to help drive the economy. The
fund is having difficulty repaying more than $11 billion of debt
and is at the center of investigations that are destabilizing the
government.
A Malaysian government probe found that nearly $700
million moved through banks, agencies and companies linked
to 1MDB before being deposited into Mr. Najibs alleged
private bank accounts ahead of a close election in 2013, the
Journal reported in July.
The source of the money is unclear, and the government
investigation hasnt detailed what happened to the funds that
allegedly went into Mr. Najibs personal accounts. Malaysias
anticorruption body in August said the funds were a donation
from the Middle East. The donor wasnt specified.
Mr. Najib has denied wrongdoing and denied taking money
for personal gain.
Late Friday, a former member of Malaysias ruling party who
had raised questions about money transfers to the Malaysian
prime minister was arrested on charges of attempting to
undermine democracy, his lawyer Matthias Chang said.
The arrest of Khairuddin Abu Hassan, who remained in
custody on Saturday, prevented him from traveling to New
York where he planned to urge U.S. authorities to investigate
the transfers, Mr. Chang said.
A spokeswoman for the FBIs New York office said that no
agent in the office had arranged to speak with Mr. Khairuddin
or had any previous contact with him.
Two of the transfers were made through the Singapore branch
of a Swiss private bank and routed via Wells Fargo & Co. Wells
Fargo declined to comment.
The Swiss attorney generals office has opened criminal
proceedings against two unidentified executives of 1MDB on
suspicion of corruption and money-laundering. It has frozen
tens of millions of dollars in Swiss bank accounts, officials said
in August.
Last week, 1MDB said none of its executives or board
members were the subject of criminal proceedings by the
Swiss attorney generals office, and that none of its accounts
were frozen there.
Authorities in Singapore also have frozen accounts linked to
1MDB and are investigating allegations related to the fund.
1MDB said none of its accounts were frozen and that it was
ready to assist any investigations subject to advice from the
appropriate Malaysian authorities.
(Full article click - WSJ)
---
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.