Tuesday, May 31, 2016

Reuters News - Global shares set for monthly gains, dollar's rally stalls

Global shares steadied at one-month highs on Tuesday, on track for a third straight month of gain, while the dollar's recent rally to two-month peaks on expectations the U.S. interest rates could rise next month took a breather.
European shares fell, hit by a drop in Volkswagen (VOWG_p.DE) whose shares retreated after the German carmaker reported first-quarter earnings, although the region's stock markets were set for their best monthly performance since late 2015.
The pan-European STOXX 600 and FTSEurofirst 300 indexes were in the red, having hit peaks in early trade. The broader MSCI world equity index, was up a tad at 1,676.96 points, its highest since late April.
U.S. stock futures pointed to a firm start on Wall Street where trading will resume after the Memorial Day holiday. Earlier, Japan's Nikkei index ended 1 percent higher, extending a 1.4 percent rally in the previous day. It is up 3.4 percent for May, thanks to a subdued yen.
The dollar index, which tracks the greenback against a basket of six major currencies, was flat at 95.524, off a two-month high of 95.968 struck on Monday, but still on track for a 2.6 percent gain for the month -- its best in six months.
The dollar has risen recently on expectations of higher U.S. rates. Fed Chair Janet Yellen said on Friday that the central bank should hike rates "in the coming months" if economic growth picks up and the labor market continues to improve.
"The question for me here is whether the dollar can carry on rallying on the prospect of the Fed raising rates faster over the next 18 months than is priced in, as opposed to rallying only on expectations of a move in June or July," said Kit Juckes, macro strategist at Societe Generale.
Investors are awaiting key data this week before taking fresh positions. May's U.S. private-sector ISM manufacturing data, due on Wednesday, and non-farm payrolls report on Friday will be scrutinized and solid readings could further heighten expectations for a move as soon as the Federal Reserve's next policy meeting on June 14-15.
Economists predict the jobs report will show that U.S. employers added 170,000 jobs, slightly more than they did in April. Hourly wages are expected to show a 0.2 percent increase from the previous month.
Investors were also keeping an eye on the weakening Chinese yuan with worries about growth in the world's second-largest economy creeping back. The yuan was on track for its second largest monthly fall on record after the central bank softened its midpoint to a 5-year low. [CNY/]
"The prospect of higher U.S. interest rates will, in due course, test both the global markets and China's policy to manage its currency," said Jade Fu, investment manager at Heartwood Investment Management.
"In an environment of dollar strength, the People's Bank of China may well be forced to further depreciate the renminbi, risking the possibility of a one-off currency intervention."
In the commodities sphere, moves in crude oil futures were limited before Thursday's meeting of the Organization of the Petroleum Exporting Countries. Most analysts did not expect any changes in the group's flat-out production.
There was no Monday settlement for U.S. crude futures because of the Memorial Day holiday. They were up 0.5 percent at $49.58, lifted by the start of the peak demand summer driving season in the U.S.
Brent crude futures were lower at $49.36 a barrel, on rising output from the Middle East, but poised for a gain of nearly 3 percent for the month.

(additional reporting by Sudip Kar-Gupta and Jemima Kelly; Editing by Ralph Boulton)

Monday, May 30, 2016

BBC News - Brexit 'huge blow' warns ex-World Trade Organisation boss

Peter SutherlandImage copyright

The World Trade Organisation's former director-general has warned that the UK economy risks a "huge blow" if it relies on the agency's global trading rules in the case of an EU leave vote.
The UK's services would be particularly vulnerable, while manufacturers would face "appalling complexity", Peter Sutherland told BBC Radio 5 Live.
Vote Leave campaigners argue the UK can rely on WTO rules in a Brexit vote.
A high-profile campaigner said Mr Sutherland's fears were misplaced.
Economists for Brexit group member Gerard Lyons, told the BBC Mr Sutherland was just "drawing his own conclusions".
"The reality is that the UK can leave the European Union and trade freely under World Trade Organisation rules," said Mr Lyons.
'Huge blow'
As a European Commissioner during the 1980s, Mr Sutherland helped lay the groundwork for the EU Single Market free trade area in goods and services.
He was director-general of the World Trade Organisation (WTO) between 1993-1995.
Mr Sutherland told Wake Up to Money the WTO could not be depended upon by those who favoured leaving the EU.

Woman drinking coffee in Trafford CentreImage copyright
Image captionThe performance of the service sector is important for the UK as it accounts for more than three-quarters of the UK economy.

"The WTO would not give the right to provide services," he warned.
"At the moment the banking system of Britain provides services all over Europe because by being part of the European Union they have what's called a single passport and they can operate everywhere.
"If Britain left the European Union it would not have a single passport and many financial services companies might say 'we can't have our headquarters in a country that is outside the European Union' and they might well move.
"This would be a huge blow to the British economy," he told Wake Up to Money.

Trade and economy

How trade and the UK's economy are affected by membership of the EU.
Why this issue matters

The debate

  • About half of UK trade is conducted with the EU
  • The EU single market allows the free movement of goods, services, capital and workers
  • Trade negotiations with other parts of the world are conducted by the EU, not individual member states


  • UK companies would be freed from the burden of EU regulation
  • Trade with EU countries would continue because we import more from them than we export to them
  • Britain would be able to negotiate its own trade deals with other countries


  • Brexit would cause an economic shock and growth would be slower
  • As a share of exports Britain is more dependent on the rest of the EU than they are on us
  • The UK would still have to apply EU rules to retain access to the single market
The World Trade Organisation told the BBC: "the WTO does have financial services agreements but not all members are party to it and it is not a case of uniform commitments."
But Mr Lyons, former chief economist at Standard Chartered and a member ofEconomists for Brexit, a group of eight independent economists that favour leaving the EU, said Mr Sutherland needed to "look at the reality."
"Some people fear, and it's a misplaced fear, that if London were outside the European Union the City would somehow be affected," said Mr Lyons.
"London has continued to adapt and change and so too has the financial sector. Increasingly financial regulation is set at a global level."
'Appalling complexity'
Mr Sutherland has also warned that manufacturers could be hit if the UK votes to leave the EU, saying they will face more regulation than currently.
"If you sell manufactured goods into the European Union under WTO rules, you have to be able to prove - and this means inspections at borders - that the component parts are from Britain.
"If, for example, you are exporting cars and the engines are made in another country, that will all have to be checked and different tariff rates might be applicable to some of the components.
"You're in a new ball game of appalling complexity and the prospect of that should be extremely worrying to everyone in Britain."
'Under EU regulations, goods imported from outside the EU may be subject to tariffs.
However, Mr Lyons says the prospect should not fill UK exporters with dread.

Two workers weld vehicle panels in Nissan's Sunderland factory in north east England, 12 Nov 2014Image copyright
Image captionManufacturing accounts for about 10% of the output of the UK economy

"There are countries from all over the globe who are not in the Single Market who export into the EU.
"And the other 85% of the UK economy which is domestically focused won't need those rules and regulations."
'Destabilising effect'
Mr Sutherland also warned that a vote to leave the EU could be dangerous for the global economy and for European politics.
"I think it would have a traumatic effect which would roll way beyond Britain's shores.
"One of those consequences could be a destabilising effect on the European Union itself.
"If Britain leaves it will provide oxygen for the nationalism the European Union was created to compete with."
But Mr Lyons dismissed the concerns.
"There is considerable uncertainty for the UK if we tie ourselves to this slow growth region of the world economy and to the instability of the eurozone.
"The problems in the European Union are self made."

Friday, May 27, 2016

BBC News - Oil hits $50 a barrel for first time this year

Oil rigs under construction at sunsetImage copyrighAGES

The price of oil has gone above $50 a barrel for the first time in 2016 as supply disruptions and increased global demand continue to fuel a recovery.
Benchmark Brent crude hit $50.22 per barrel at one stage on Thursday, its highest level since early November.
The rise followed US data showing that oil inventories had fallen after supply disruptions due to fires in Canada.
Brent crude has now risen 80% since it hit 13-year lows of below $28 a barrel at the start of the year.
US crude oil inventories fell by 4.2 million barrels to 537.1 million barrels in the week to May 20, according to US Department of Energy data.
Canada is the biggest supplier to the US and wildfires in the western provinces have reduced supplies by about a million barrels per day.
Talks in recent months between Opec and Russia about freezing oil production had already encouraged a price rise.
Short-term disruptions to oil supplies have also lifted the price, offsetting higher production from Iran and Saudi Arabia.
As well as the disruption to key oil production facilities in Canada, attacks by militant groups continue to restrict oil pipelines in Nigeria.
Demand has also been better than expected from major economies such as China, India and Russia.
Michael Hewson, chief market analyst at CMC Markets, said: "We do now appear to be seeing the effects that the decline in US output is having, and while supplies remain elevated, the glut does now appear to be diminishing."


Against this backdrop, analysts are starting to raise their forecasts.
Goldman Sachs said earlier this month that it now expected oil prices to consistently hit $50 a barrel in the second half of 2016 and $60 by the end of 2017.
The US bank said: "The oil market continues to deliver its share of surprises, with low prices driving disruptions in Nigeria, higher output in Iran and better demand.
"With each of these shifts significant in magnitude, the oil market has gone from nearing storage saturation to being in deficit much earlier than we expected."

Oiling the gears

In a sign of growing confidence, oil companies have started preparing for higher prices.
BP said last month it had budgeted for prices of at least between $50 and $55 a barrel in 2017.
And last month US oil producer Pioneer Natural Resources announced plans to add up to 10 new rigs when the oil price gets back up to $50.
Adam Laird, an investment manager at Hargreaves Lansdown, told the BBC: "This is an area that's been starved of resources and investment and that psychological barrier [of $50] could be enough to make some executives reassess."
However, Mr Laird cautioned that price volatility was likely to continue. "It's too early to say this is the beginning of the big rebound," he said.
Abhishek Deshpande, an oil markets analyst at Natixis, agreed and said: "We believe that the market is going up, but if it goes too quickly there will be auto-corrections."

Thursday, May 26, 2016

Reuters News - U.S. rates may rise 'fairly soon,' Brexit a concern: Fed's Powell

The U.S. Federal Reserve on Thursday continued to lay the groundwork for an interest rate increase in the next two months, with a senior policymaker saying the economy will likely be ready for such a move "fairly soon."
Federal Reserve Governor Jerome Powell, a voting member of the U.S. central bank's rate-setting committee, said in a speech in Washington that he felt the economy was on a "solid footing" and within reach of the Fed's inflation and employment goals.
But he added that the uncertainty surrounding Britain's June 23 referendum on whether to leave the European Union was an argument in favor of the Fed exercising "caution" as it ponders whether to raise rates at its June 14-15 policy meeting
That has shifted market expectations that had been discounting higher rates until later in the year, with trading in federal funds futures on Thursday implying a 26 percent chance of an increase next month and 56 percent in July.
David Stockton, the Fed's former research director, said on Thursday he felt the only thing holding the central bank back from raising rates in June was the "Brexit" vote.
The Fed will hold another policy meeting on July 26-27.
Powell, however, struck an overall positive tone about the U.S. economy in an appearance at the Peterson Institute for International Economics, becoming the latest Fed policymaker in recent days to say it may be time to notch rates higher.
The Fed's Washington-based Board of Governors has a decisive role in setting monetary policy, and its members have a permanent vote on the committee that sets the central bank's key federal funds rate.
"There are good reasons to think that underlying growth is stronger than these recent readings suggest," Powell said. "If incoming data support these expectations, I would see it as appropriate to continue to gradually raise the federal funds rate."Powell said he felt that data showing continued job creation and evidence of rising wages were a more important signal about the economy's direction than recent weakness in consumer spending and business investment.
Powell spoke a day before a scheduled public appearance by Fed Chair Janet Yellen. Yellen's remarks on Friday as well as those in a speech in early June will be closely parsed for clues about the Fed's monetary policy stance going into the June meeting.
After increasing rates in December for the first time in a decade, the Fed has watched tentatively as global markets seesawed and weak growth in China, Japan and Europe threatened to pull the U.S. recovery off track.
But the Fed now regards those risks as "waning," and the minutes from its April policy meeting showed several policymakers keying in on a possible June rate increase
Though Fed policymakers, including Powell on Thursday, have said they see little broad systemic risk in a British departure from the EU, they still regard it as an international risk at a time when the U.S. economy has been weighed down by poor global demand and a rising dollar.
"Brexit is likely to stay their hand" in June, Stockton said, but "they are on track" for July.

(Reporting by Howard Schneider and Linday Dunsmuir; Editing by Paul Simao)

Wednesday, May 25, 2016

BBC News - UK borrowing higher than expected in April

George OsborneImage copyrightAP
Government borrowing was higher than analysts' expectations in April after forecasts for company tax payments fell short of hopes.
The Office for National Statistics said borrowing, excluding support for state-owned banks, was £7.2bn in April.
That was down from £7.5bn last year but higher than analysts' forecasts of about £6.6bn.
The ONS also revised up its estimate of the amount borrowed in the financial year to March to £76bn.
That was £2bn more than its previous estimate, and £3.8bn above the prediction that had been made by the independent Office for Budget Responsibility (OBR), which produces forecasts for government.
The main reason for the lower figure was weaker-than-expected income from workers' national insurance contributions.
The ONS says annual borrowing has been falling in general since the peak reached in the 2009-10 financial year.
Last year's figure was £15.7bn lower than for the year before, and is half that borrowed in 2009-10.

'Muted start'

The ONS said that total public sector net debt - excluding public sector banks - by the end of April stood at £1.596 trillion, the equivalent of 83.3% of gross domestic product.
April's figure was affected by less-than-expected tax income from companies. Corporation tax revenue fell 5.1% from a year earlier to £5.8bn.
But it was boosted by changes to property taxes, introduced in April for buyers of second homes and investment properties.
The figures for April were saw the biggest take of stamp duty on land and property on record of £1.3bn.
The Chancellor, George Osborne, has laid out targets for borrowing, which he has pledged to continue to bring down.
Howard Archer, chief economist at IHS Global Insight, said: "The muted start to fiscal year 2016-17 will fuel doubts about George Osborne's ability to get the deficit down to £55.5bn in 2016-17.
"It will also likely fuel even larger doubts about his ability to meet his long-term objective of a surplus of £10.4bn in 2019-20, especially as he now has to cover the £4.4bn gap that has resulted from the dropping of the planned cuts to disability benefits."
Martin Beck, senior economic advisor to the EY ITEM Club, echoed that view: "This looks to be a tall order, particularly given that the recent weakness in activity appears to be dampening growth in tax receipts. The government will need to see a strong rebound in activity in the second half of the year if it is to have a realistic chance of keeping its deficit reduction plan on track."

Tuesday, May 24, 2016

Bloomberg News - Here's How Likely Banks Think Brexit Is

Symbolic U.K. Goods As Brexit Debate Continues
With just under a month to go until the U.K. vote on EU membership, investors are relatively sanguine as a flurry of polls show the remain camp firmly in the lead and betting odds for the U.K. staying in the trade bloc are at their shortest yet.
Analysts at Nomura see the likelihood of a Brexit at 25 percent while Societe Generale economists put the probability as high as 45 percent.
Short-sterling markets price the possibility the Bank of England’s next move may be a rate cut, a sign there’s still uncertainty about the June 23 vote outcome, according to analysts at the Royal Bank of Scotland Group PLC. Barclays PLC analysts say a vote for Brexit could see rates cut, possibly to zero, while Morgan Stanley expects a cut to 10 basis points under this scenario. Both say quantitative easing could resume.
Favored trades include selling sterling, peripheral European government bonds and FTSE 250 stocks.


Baseline scenario is that the U.K. doesn’t leave the EU. Uncertainty is likely to weigh on investment and consumption, analysts write in a note dated April 19. A hypothetical exit would lead to a marked slowdown in activity in the second half of 2016 and in 2017 with average quarterly growth dropping to -0.1 percent in the second half and gross domestic product contracting by 0.4 percent in 2017.
Bank of England may cut rates by 50 basis points and could extend QE by another 100 billion to 150 billion pounds.
Remain cautious on peripheral spreads, which will find it difficult to tighten meaningfully given risks associated with the EU referendum and domestic political issues.


The MPC-dated SONIA strip suggests policy easing expectations revolve largely around a “leave” vote with the lowest point in the curve in autumn 2016, unwinding steadily thereafter, economist Ross Walker writes in note dated May 18.
Expect liquidity to dry up in coming weeks. The referendum is one of four global risk events taking place over 11 days in June, strategist Simon Peck writes in May 20 note. The others are the Bank of Japan meeting, Spanish elections and the European Central Bank’s next targeted long-term loans operation. If the U.K. votes to remain in the EU, the spread between 10-year Italian bonds against German bunds may quickly tighten by 60 to 70 basis points.
July and August dated SONIA look good value as Brexit is 6 percent discounted in July whereas it officially should be 50 percent. This favors long positions in safe haven bonds, which appear very underpriced for some outcomes in the upcoming events.

Morgan Stanley

Expect a gradual pick up in domestic inflation, leading to rate rises from early 2017 on a remain vote, analysts write in May 5 research note.
Uncertainty over the government, Scotland’s stance and trade will hit growth on a vote to leave, with a fall in the pound pushing inflation above target. BOE may cut the bank rate to 10 basis points and do another 50 billion of QE if a vote to leave leads to recession
U.K. and European equities could fall by 15-20 percent in the event of Brexit, albeit not necessarily in one immediate hit
Given the lack of Brexit-related premium in the price of 10Y gilts, maintain long vs 10Y Treasuries, analysts including Anton Heese write in May 20 research note. 10-year gilts are expected to perform ok in a “remain” scenario and to outperform significantly on risk off should there be a vote to leave, Heese says.

Bank of America Merrill Lynch

Polls suggest a remain vote is increasingly likely, Robert Wood writes in May 20 note; underlying economy is slowing and BOE’s latest forecasts suggest risks of rate cuts even in a “remain” scenario are rising.
Expect renewed period of pound weakness heading into the referendum, after seasonal outperformance in April, analysts write in May 20 note. The pound is vulnerable to further losses. as it was ahead of 2015 election. Favor shorting gilts versus bunds both as a trade working in a Brexit scenario and on diverging supply dynamics; keep front-end steepener in sterling swaps against flattener in euro swaps.

Societe Generale

See risk of Brexit at 45 percent. Brexit would hit growth by 0.5-1 percent for 10 years, analysts including Brian Hilliard write in March 10 note. The pound could trade below $1.30 and the euro could drop below parity against the dollar.
Risks of Brexit have diminished according to betting odds and the polls, but the 4y1y/5y1y/6y1y fly remains close to lows even as the front end has steepened. There’s potential for a return to levels seen in February and in 2015, Jason Simpson writes in May 20 note.


The extent to which U.K. activity data is weakening ahead of the referendum will be an important factor for BOE policy decisions, whatever the outcome of the vote, analyst Allan Monks writes in May 20 note.
Expect a further 10 percent drop in the pound following a vote to leave, pushing inflation to close to 3 percent by the end of 2017. Taylor rule analysis suggests BOE cutting rates to zero isn’t unreasonable. The pound would have to fall by 30 percent to make a rate cut look unlikely if the U.K. voted to leave, Monks writes on May 23.
Vote to stay won’t necessarily leave prime minister David Cameron in authoritative control of his own party, Malcolm Barr writes in May 11 note.
Turn neutral on duration, take profit on long 10-year Gilts against USTs as markets re-price Brexit risk, strategists including Fabio Bassi write May 20. If Brexit happens, favor exporters over domestic corporates, and FTSE 100 against FTSE 250, JPMorgan equity strategists including Mislav Matejka and Emmanuel Cau write in April 25 note.


See around a 25 percent likelihood the U.K. votes to leave the EU, analysts say in May 11 note. Most likely policy response will be for MPC to cut rates on any signs real economic data are deteriorating. If that’s sustained, the MPC may bring the Bank Rate to slightly negative before restarting QE although that’s not a foregone conclusion.
If poor market functioning facilitated a pound collapse far beyond the 10-15 percent trade-weighted fall Nomura expects, BOE intervention won’t be out of the question. Its efficacy though would be questioned by the markets. Expect significant curve steepening in a Brexit scenario.

Credit Suisse

Expect the U.K. to vote to stay, analysts including Neville Hall write in May 19 research note. The televised debate on June 21 may prove to be key.
The economy may not bounce back in the second half on a remain vote. Expect an immediate, simultaneous economic and financial shock on a vote to leave.
Buy USD/SEK 2-month 8.6372 strike 15d call to hedge for Brexit, a EUR/USD 2-month 1.1669 strike 25d call for a “remain” vote. Favor long FTSE 100 vs FTSE 250 in stocks.


Market-implied measures of Brexit risk indicate a “remain” is more likely, Sam Hill says in May 18 client note.
In a Brexit scenario, the uncertainty surrounding options for U.K.-EU relations may lead to a 2 percent to 4 percent decline in GDP over a 2-year to 3-year timeframe.
BOE cutting rates toward zero and the potential for further QE gilt purchases would lead to lower gilt yields. The pound could fall 10-15 percent. Favor trading the pound tactically. The dominant risk is that implied probability of exit risk rises, currency strategists say in May 6 research.

Deutsche Bank

In baseline view the U.K. stays, expect economy to grow at around 2 1/4 per cent this year and next. BOE may raise rates before end 2016, economist George Buckley writes in client on April 4. Brexit would be highly damaging for the economy.
The pound may bounce on a remain vote but downside risk to economy suggests selling the currency, analysts write in May 20 note. Favor buying 9-month GBP/USD put, shorting GBP TWI.


Central case is U.K. votes to remain in the EU.
Forecast for first rate rise pushed back to May 2017 from Nov. 2016 and GDP forecasts for 2016 lowered to 1.8% vs 1.9% and for 2017 to 2.1% vs 2.2%, Simon Wells writes in note dated May 16. If the U.K. votes to leave, BOE cutting rates can’t be ruled out, but this isn’t HSBC’s central case.
Expect gilt yields to head lower and favor 5-year to 10-year segment of the curve; 2 to 5-year segment to flatten, Bert Lourenco says in May 12 note.


Expect markets to price in confrontational negotiations between the EU and the U.K. if it votes to leave. The pound would be most vulnerable, analysts Nishay Patel and John Wraith write in May 22 note.
See 10-year Italy-Germany spreads widening to above 175 basis points, Ireland-Germany to over 90 basis points and Spain to underperform Italy.
If the U.K. votes to stay, peripheral spreads may tighten vs Germany and the pound may appreciate over the remainder of the year.

Goldman Sachs

Don’t favor playing the pound against the euro to express a view on a possible exit as it wouldn’t be good news for the rest of Europe either. It’s not inconceivable for investors to sell euro-area assets as a result, strategist Silvia Ardagna writes in April 4 note.
If the U.K. remains in EU, the currency market would have to price a more hawkish BOE, and an earlier start and faster pace in tightening than discounted in forwards. Expect 15 percent upside in the pound over 12 months in this instance.