Bloomberg News - Investors Are Lab Rabbits in Central Bank Experiments

Ralph Orlowski/Bloomberg

European Central Bank President Mario Draghi said July 4 that the central bank expected its key interest rates "to remain at present or lower levels for an extended period of time."

The European Central Bank and Bank of England are emulating Ben S. Bernanke’s experiment in offering monetary-policy guidance to financial markets. Investors could well end up being the guinea pigs.
Bond prices have fluctuated during the last three months, with the yield on the 10-year Treasury note swinging from 1.63 percent to 2.74 percent, the fastest jump since 2010, as the Federal Reserve chairman struggled to provide a clearer picture of when and why the central bank will reduce and then end its asset purchases.
“If this is science, then we’re the little white lab rabbits,” said Vincent Reinhart, chief U.S. economist for Morgan Stanley in New York, who served as the Fed’s chief monetary-policy strategist from 2001 to 2007.
More communication mishaps are likely as the ECB and BOE strive to get their messages across to the market, said Gilles Moec, co-chief European economist at Deutsche Bank AG in London and a former Bank of France official. “The potential for the dialog between the central banks and the market to sometimes fail is significant,” he said.
All three monetary authorities meet separately this week, with the Fed gathering on July 30 and 31 and the ECB and BOE announcing policy decisions Aug. 1.
ECB President Mario Draghi said July 4 that the central bank expected its key interest rates “to remain at present or lower levels for an extended period of time.” The central bank’s main refinancing rate is 0.5 percent while its deposit facility rate is zero.

‘Not Warranted’

The BOE, led by new governor Mark Carney, declared the same day that market expectations of tighter credit were “not warranted.” It’s reviewing how it might implement guidance and has said the findings will have an “important bearing” on policy discussions in August.
The U.K. and euro region are adopting the Fed’s forward-guidance strategy in an effort to decouple their bond markets from that of the U.S., said Nathan Sheets, global head of international economics at Citigroup Inc. in New York.
“The U.S. economy is way ahead of the U.K. economy and the euro-area economy in terms of its place in the business cycle and the strength of its recovery,” said Sheets, a former director of international finance at the Fed. “Slightly higher rates in the U.S. were appropriate, but it’s hard to say that higher rates are appropriate for the U.K and the euro area.”

Partly Successful

Bond-yield forecasts by Sheets and his colleagues at Citigroup suggest the ECB and BOE will be partly successful in shielding their markets from the influence of the U.S. They predict yields will average 1.8 percent on 10-year German bunds in the fourth quarter of 2014 and 2.75 percent on same maturity U.K. gilts.
The yield on the 10-year bund was little changed at 1.68 percent as of 10:38 a.m. in London. The U.K. 10-year government bond was down 2 basis points at 2.32 percent.
They see a steeper rise in U.S. rates, with the yield on the 10-year Treasury note averaging 3.25 percent in the closing three months of 2014 compared with 2.56 percent at 4:45 p.m. in New York on July 26, according to Bloomberg Bond Trader data.
The euro and pound will lose ground against the dollar as a result, said David Bloom, global head of currency strategy at HSBC Holdings Plc in London. He sees the dollar “powering ahead” by the end of this year, with sterling weakening to $1.45 and the euro falling below $1.25. The former was $1.54 at 4:40 p.m in New York on July 26, while the latter was $1.33.

Considerable Period

The Fed began providing forward guidance to the markets in 2003, telling investors that policy could remain easy “for a considerable period” after it cut its short-term interest-rate target to what was then a record-low 1 percent.
The strategy evolved further during the financial crisis and its aftermath as the central bank looked for ways to stimulate the economy beyond reducing the interbank federal funds rate essentially to zero.
In 2011, the U.S. followed the lead of the Bank of Canada - - then headed by Carney -- and adopted a calendar-based funds forecast, saying the rate was likely to remain “exceptionally low” at least through mid-2013.
After extending such assurance twice, policy makers junked this approach at the end of 2012 and instead tied the rate target to specific economic thresholds. It now intends to keep short-term rates near zero at least as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
Joblessness was 7.6 percent in June, and inflation was 1 percent in May. The economy has grown at an average annual rate of 2.1 percent since the 18-month recession ended in June 2009.

Chancellor’s Request

The BOE will respond to Chancellor of the Exchequer George Osborne’s request for an assessment on thresholds and forward guidance when it presents its quarterly economic forecasts on Aug. 7, according to the minutes of the July 3-4 meeting. Any announcement about implementation would be made then, rather than after the next policy decision on Aug. 1.
More than half of 43 economists surveyed this month by Bloomberg News predict the BOE will adopt a data-contingent form of communication. Two in five see it embracing a calendar-based commitment.
Recent Fed research has highlighted the importance of forward guidance in aiding the economy while de-emphasizing the role played by quantitative easing, according to Sven Jari Stehn, an economist at Goldman Sachs Group Inc. in New York. It “is probably the more powerful tool,” he said in July 24 report to clients.

Challenging Transition

That doesn’t mean the transition will be smooth. Whatever plan the BOE produces, it will have to contend with the difficulty of precommitting its nine independent policy makers, some of whom may be replaced by new officials before the goal is achieved because their terms end.
The ECB hasn’t given details on the length of its “extended period” of low rates, with policy makers offering differing interpretations. This has led to some confusion. Executive Board member Joerg Asmussen said July 9 in an interview with Reuters TV that “it is not six months, it is not 12, it goes beyond,” only to be corrected by an official clarification shortly after that the bank hadn’t provided an exact duration.
Guidance also can erode credibility. Picking an economic variable may create the impression that policy can be boiled down to a single indicator, while a time horizon may fall prey to unexpected events.

Credibility Gap

“Central banks have no idea what’s going to happen in the future, so to commit yourself to a particular policy stance carries risks,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “If things turn out to be different, you may have to renegotiate on your guidance, and the result of that is that any guidance given in the future would lack credibility.”
Officials still are willing to try new measures because economic recovery isn’t assured in Europe and could be undermined by rising bond yields.
Gross domestic product in the U.K. is 3.3 percent below its peak in early 2008, before the financial crisis struck, even though growth picked up to 0.6 percent in the second quarter from 0.3 percent in the first.

QE Suspension

The BOE already has bought 375 billion pounds ($577 billion) of bonds through quantitative easing, suspending the program at the end of 2012. Policy makers have held their key interest rate at a record low 0.5 percent since 2009. Minutes of this month’s policy decision showed some officials questioned the benefit of more QE.
The International Monetary Fund forecasts the economy in the 17-nation euro area will shrink 0.6 percent this year. Draghi has never used the Outright Monetary Transactions program he created in 2012 to back up his claim that officials are prepared to do whatever it takes to preserve the euro. The ECB cut its benchmark rate to a record-low 0.5 percent in May.
“They’re trying to address the pickup in yields without actually buying bonds,” said Azad Zangana, a former U.K. Treasury official and now an economist at Schroder Investment Management in London, which has $364 billion under management. “Forward guidance has been successful so far, it’s pushed yields back down, but there are limits to how far it can go.”
By Rich Miller & Jennifer Ryan

Bloomberg News - German Business Confidence Rises for a Third Month

German Business Confidence Rises a Third Month in Recovery Sign

Ralph Orlowski/Bloomberg

The Bundesbank last month cut its forecast for Germany's economic growth this year to 0.3 percent from 0.4 percent, and for 2014 to 1.5 percent from 1.9 percent, citing downside risks from European and global demand.

German business confidence rose for a third month in July, indicating that Europe’s largest economy is recovering as the 17-nation euro region tries to shake off its longest-ever recession.
The Ifo institute’s business climate index, based on a survey of 7,000 executives, rose to 106.2 from 105.9 in June. Economists predicted an increase to 106.1, according to the median of 45 forecasts in a Bloomberg News survey.

German unemployment unexpectedly declined in June and the nation led the first expansion in euro-area manufacturing in two years in July. The Bundesbank said this week that the domestic economy grew “strongly” in the second quarter, while warning of signs of a summer slowdown.
“There might be one or more potholes on the road but in general the German economy is moving in the right direction,” said Mario Gruppe, an economist at NordLB in Hanover. “For the euro area, there’s hope that the economy emerged from recession in the second quarter or at least flirted with stagnation.”
The euro rose after the report before giving up its gains. The currency was at $1.3189, down 0.1 percent, at 10:35 a.m. in Frankfurt. Germany’s benchmark DAX stock index dropped 0.4 percent to 8343.26.
Companies’ assessment of the current situation rose to 110.1 in July from 109.4, while a gauge of expectations fell to 102.4 from 102.5.

Manufacturing Survey

Manufacturing in the euro area, Germany’s biggest trading partner, unexpectedly expanded this month for the first time since July 2011, according to a survey of purchasing managers published yesterday by London-based Markit Economics. That lends support to European Central Bank President Mario Draghi’s prediction of a recovery later this year.
The region’s economy, which has contracted for six straight quarters, probably stagnated in the three months through June and will return to growth this quarter, according to a separate Bloomberg survey.
“The hope for the euro zone is that current, gradually rising confidence encourages businesses to increasingly pare back their job cutting and become more prepared to invest, and also encourages consumers to spend a little more,” said Howard Archer, chief European economist at IHS Global Insight in London.

Credit Standards

Daimler AG, the world’s third-largest maker of luxury vehicles, yesterday forecast “significant improvements” in its second-half performance amid signs the western European auto market has bottomed out. Vehicle sales dropped to a two-decade low in June, according to data from the European Automobile Manufacturers’ Association.
Euro-area banks eased their credit standards for loans to consumers in the second quarter for the first time since the end of 2007, the ECB said yesterday.
At the same time, financial institutions continued to tighten their policies for mortgages and company loans, it said. Lending to companies and households dropped for a 14th month in June, a separate ECB report showed today.
Growth is slowing in China, Germany’s third-biggest export destination. Manufacturing in the Asian country weakened more than estimated this month, a preliminary purchasing managers index by Markit Economics and HSBC Holdings Plc showed yesterday.

Rates Commitment

The Bundesbank last month cut its forecast for Germany’s economic growth this year to 0.3 percent from 0.4 percent, and for 2014 to 1.5 percent from 1.9 percent, citing downside risks from European and global demand. The ECB in June predicted a 0.6 percent contraction for the euro-area economy in 2013 and an expansion of 1.1 percent next year.
Draghi on July 4 made an unprecedented commitment to keep interest rates low for an extended period of time and said domestic demand should be supported by the accommodative monetary policy stance.
“Negative impulses from China will increasingly be offset by a stabilization in the euro area,” said Lothar Hessler, an economist at HSBC Trinkaus & Burckhardt AG in Dusseldorf. “That means the German economy should be able to maintain its growth momentum and move toward more normal growth rates.”
By Jana Randow

BBC News - World Bank: Africa held back by land ownership confusion

Africa's economic growth is being held back by confusion over who owns vast swathes of agricultural land, according to a World Bank report.

 

Cultivating land is risky because it can lead to legal disputes

The continent is home to half of the world's usable uncultivated land, yet has the highest poverty rate.
But the Bank said farmers' inability to prove ownership, legal disputes and land grabs had held back cultivation.
Land governance needs to be improved if Africa is to fully exploit its resources and create jobs, it said.
Writing in the report, Securing Africa's Land for Shared Prosperity, the Bank's vice-president for the continent, Makhtar Diop, said: "Despite abundant land and mineral wealth, Africa remains poor.
"Improving land governance is vital for achieving rapid economic growth and translating it into significantly less poverty and more opportunity for Africans, including women who make up 70% of Africa's farmers, yet are locked out of land ownership due to customary laws.
"The status quo is unacceptable and must change so that all Africans can benefit from their land," Mr Diop said.
The report recommends that governments secure tenure rights for communities and individuals, possibly using new and relatively cheap satellite technology to conduct land surveys.
The BBC's international development correspondent, Mark Doyle, says legal wrangles over land ownership are common in Africa.
"Risky"
"It's often the case that plots in urban areas have been divided, then sub-divided through generations of families, creating confusion over who owns what," our correspondent says.
"This makes long-term investment in things like farm machinery or irrigation risky."
The Bank said now was a good time to rationalise land ownership, so Africans could benefit more from surging commodity prices and strong levels of foreign investment.
Improved land management could also prevent land grabs, it said. In recent years, investors from richer countries, outside Africa, have bought millions of hectares of land and are able to claim that it is unoccupied.
But in some cases, the Bank said, established communities had been pushed off their farms.

BBC News - Export activity at highest level since 2007, says BCC

  Whisky accounts for a quarter of Britain's food and drink exports

UK export activity has reached levels not seen since the financial crisis, according to a report from the British Chambers of Commerce (BCC).

Its trade index rose to 118.12 in the second quarter, up 2.9% on the same period last year.
The index is based on export documents issued to businesses by the BCC.
The report includes a survey to measure confidence and the results suggest exporters are optimistic over future sales and profits.
The report's findings for the second quarter include:

• export orders for service firms hit a record
• 42% of manufacturing firms reported higher export sales
• 31% of firms expect to increase staff this year

"For the first time on record, these results are positive across the board. Export sales and orders have gone up, confidence is high and expectations around profitability have increased, " said John Longworth, director general of the BCC.
The latest government figures support the BCC's report.
In the three months to the end of May, excluding oil and other erratic items, exports rose 1.3%.

Bloomberg News - G-20 Reaches for Growth as China Changes Lending Rules

IMF Managing Director Christine Lagarde

Kirill Kudryavtsev/AFP/Getty Images

Christine Lagarde, managing director of International Monetary Fund (IMF), looks at empty seats as she poses for a family photo during the G20 Finance Ministers and Central Bank Governors' meeting in Moscow on July 20, 2013.

Global finance chiefs sought to buttress the global economic recovery with pledges to avoid spooking markets as China moved to scrap a lending rule that had constrained its banks.

Group of 20 nations will pursue “carefully calibrated and clearly communicated” policy moves so that the U.S. and Japan don’t cause cross-border damage when they start rolling back stimulus, they said after a two-day meeting of finance chiefs in Moscow. They will move “more rapidly” toward market-determined exchange rate systems, following China’s internal banking change, according to a July 20 statement.

“China’s action is probably the one thing that will help markets,”Lena Komileva, chief economist at G+ Economics in London, said in a July 20 telephone interview. “Global markets are dominated by a butterfly effect. If the Fed is to change domestic policy in response to U.S. economic conditions, it’s going to have global consequences.”

The G-20 heeded calls from emerging-market countries to guard against shockwaves when U.S. growth is secure enough for the Federal Reserve to cut back on its bond buying, according to the statement. It also repeated that nations should avoid competitive currency devaluations.

Speculation about developed economies scaling back their unprecedented monetary easing has roiled emerging-market currencies and bonds since G-20 finance chiefs last met in April. The dollar fell for a second week versus most major peers.

Bernanke’s Reassurance

Fed Chairman Ben S. Bernanke said the central bank wouldn’t slow its monthly bond-buying program unless warranted by economic conditions. Policy makers also sought to assure investors that the Fed will hold down the benchmark interest rate after ending bond buying.

Treasury 10-year yields fell 10 basis points, or 0.10 percentage point, to 2.48 percent this week in New York, Bloomberg Bond Trader data showed. This week’s drop, combined with a 16 basis-point decline the previous five days, was the biggest back-to-back decrease since the period ended Aug. 31.

A U.S. Treasury Department official said the G-20 recognized that financial-market volatility has returned to normal. The official acknowledged a lot of interest in U.S. monetary and fiscal policy, while reiterating Washington’s call to do more to help the euro region emerge from recession.

‘Proper Manner’

The improving U.S. economy means a shift in Fed policy is coming and it will need to take place “in the proper manner,” according to Indonesian Finance Minister Chatib Basri.

“The question is about the pace,” he said in an interview. “Of course we have to wait for what will happen in the next couple of months.”

Global yields surged and equities fell after Bernanke signaled the U.S. central bank may start tapering its monthly stimulus program this year. U.S. 10-year yields, which climbed 36 basis points in June, have pared increases over the past two weeks as Bernanke eased those concerns in recent appearances.

On July 18 he said it was “way too early to make any judgment” about starting tapering in September. The previous day, he said the Fed’s quantitative easing is “by no means on a preset course” and may be reduced or expanded if needed, depending on economic conditions.

“We’ve all learned something from this,” Bank of Canada Governor Stephen Poloz said. A certain amount of reaction “is inevitable. You have to be mentally prepared for that and continue to emphasize that message and be very clear.”

From South Korea to South Africa, anticipation that the Fed would soon pare back its quantitative easing efforts drew calls for coordination so as not to choke global demand.

‘Crucial Challenge’

Several countries pointed out possible negative spillover effects emerging economies may face from developed economies unwinding stimulus, South Korean Finance Minister Hyun Oh Seok said. The “crucial challenge” is how financial markets manage these signals to avoid harming emerging markets and their currencies, South African Finance Minister Pravin Gordhan said.

“We really focused on growth and employment and what is the policy mix that will help improve growth encourage and create jobs,” International Monetary Fund Managing Director Christine Lagarde said in an interview with Bloomberg Television. “Central banks share that concern.”

China eliminated the lower limit on lending rates at its financial institutions in a move to address slowing growth and expand the role of markets. The People’s Bank of China acknowledged that it was a limited step and said that freeing up deposit rates would be more important.

‘Always Beneficial’

“Removing various limitations is always beneficial,” Russian Finance Minister Anton Siluanov told reporters. “It’s an additional stimulus so that the slowing growth, including in China, we’re seeing may be halted.”

Fed Vice Chairman Janet Yellen represented the U.S. central bank in Moscow, with Bernanke not in attendance. Brazilian Finance Minister Guido Mantega also didn’t participate, while Canadian Finance Minister Jim Flaherty was forced to spend the weekend at a hotel in the Russian capital after falling ill with a stomach flu, replaced in the talks by his deputy, Jean Boivin.

“Having a G-20 meeting at the present juncture without the chairman of the Federal Reserve is like Hamlet without the prince,” Paulo Nogueira Batista, Brazil’s executive director at the IMF, said in an interview.

‘Credible, Ambitious’

According to the final statement, G-20 nations will offer “credible, ambitious” fiscal strategies when leaders meet in St. Petersburg in September. Those strategies must be “sufficiently flexible to take into account near-term economic conditions” while also making debt levels more sustainable, according to the statement.

Germany had sought tougher language that would require medium-term budget targets and push the U.S. and Japan to follow through on previous commitments, said an official from a G-20 country. Germany in turn came under fire from the U.S. and South Korea, who pressed Europe to prioritize growth over debt-cutting measures.

The G-20 hasn’t yet decided if these targets will be binding, a second official said. Leaders will use the September summit to decide how to proceed on the fiscal strategies, said the official, who asked not to be named because the talks aren’t public.

Risks ‘Widespread’

The G-20 acknowledged that global risks aren’t confined to Europe, German Finance Minister Wolfgang Schaeuble told reporters after the meeting. The G-20 said in its final statement that the U.S. and Japanese economies are strengthening, while growth slows in emerging marketsand the euro area remains mired in recession.

“The global risks are widespread, and no longer, as in former years, only focused on the euro zone, and this view is also shared by all my colleagues,” he said.

The G-20 also endorsed the Organization for Economic Cooperation and Development’s plan for revamping global tax codes. The endorsement gives a boost to the Paris-based OECD’s efforts to prevent the largest companies from using complicated ownership structures and transfer pricing to avoid paying taxes where they do most of their business.

Schaeuble cautioned that caution is needed when considering how fast the recommendations could be phased in.

Reuters News - BRICS joint action at G20 summit may be wishful thinking

L-R) Brazil's President Dilma Rousseff, Russia's President Vladimir Putin, India's Prime Minister Manmohan Singh, China's President Hu Jintao and South African President Jacob Zuma pose for a picture after a BRICS leaders' meeting in Los Cabos June 18, 2012 file photo.

Credit: Reuters/Victor Ruiz Garcia

By Alonso Soto

BRASILIA | Fri Jul 19, 2013 1:11am EDT

(Reuters) - Plans by the world's leading emerging economies to join forces to battle the latest bout of global financial turbulence could remain on the drawing board once again at the G20 meeting in Moscow this week.

An exodus of capital from Brazil, Russia, India, China and South Africa prompted by an expected scale-back in U.S. monetary stimulus has raised fears about the health of their economies, which are already losing some of their luster.

The reversal of the "monetary tsunami" - as Brazil called the flood of cheap money from developed nations - prompted the South American nation's president, Dilma Rousseff, to phone her Chinese counterpart in June to discuss "coordinated action" to offset the sharp appreciation of the U.S. dollar.

Indeed, there are reasons for the BRICS to worry. Massive capital outflows have weakened most of their currencies, raising inflationary pressures and forcing Brazil and India to tighten liquidity at a time when their economies are underperforming.

This week's meeting of the 20 leading world economies was supposed to be the stage for the BRICS to discuss and propose joint measures to limit the fallout of a stronger greenback.

However, unlike their wealthier counterparts at the G7 group, the BRICS are still far from either coordinating monetary policy or jointly intervening in forex markets.

The BRICS surprised many by starting work on a $100 billion reserve fund and a joint development bank to reshape the global financial architecture long dominated by rich nations. These new institutions will still take some time to materialize.

Russia's Finance Minister Anton Siluanov acknowledged in an interview with Reuters that talks for measures to shield the BRICS from global headwinds are moving slowly.

Another BRICS official currently at the G20 meeting in Moscow put it more bluntly; "There are no discussions inside the BRICS about measures to battle a stronger dollar ... We just want to secure what we had agreed on previously."

Beyond promises to speed up the creation of the BRICS bank and a reserves fund, the five nations will again have little to show during the G20 meeting.

At their last summit in South Africa earlier this year, the BRICS, which make up a fifth of the global economy, disappointed many with what appeared to be lack of conviction to create the new institutions.

BRICS officials have shrugged off criticism saying that it takes time to build solid institutions. Some analysts point to disagreements inside the widely-diverse group as the cause for the delay. The reserves pool is expected to be formally launched at a BRICS summit in Brazil next year and the bank could take years to start lending money.

Brazil, one of driving forces behind the projects, did not send its finance minister to the G20 this week so he could focus on domestic problems instead.

BRICS STARDOM FADES

The group, which traces its origins from a term coined by a Goldman Sachs banker in a 2001 research note, has emerged as a possible counter balance to the hegemony of the United States,Japan and Europe on the global economic stage.

Until recently the group provided the main engines of growth for a global economy rattled by back-to-back crises in the developed world. The BRICS are now seeing their own economies fade somewhat.

In its latest health check of the world economy, the International Monetary Fund warned that the BRICS economies are running into speed bumps. The IMF cut its 2013 growth estimate for Russiato 2.5 percent from 3.4 percent and sees Brazil growing also 2.5 percent. Three years ago Brazil grew 7.5 percent.

That slowdown could further dim BRICS' hopes of joining forces to influence the global economy, analysts say.

"The BRICS will only persevere as a group ... if these countries continue to grow," said Marcos Troyjo, a former Brazilian diplomat who is co-director of Columbia University's BRICLab in New York.

"Because individually the situation in each of the BRICS countries is different the amount of coordinated efforts that can actually come to fruition is very thin."

Expectations of a withdrawal of U.S. monetary stimulus has further deteriorated their economies, sparking a sell-off in emerging-market markets as investors return in mass to safe-haven assets.

Emerging market stocks are down more than 9 percent this year - with Brazilian stocks losing a whopping 21 percent. The South African rand, India's rupee and the Brazilian real have been some of the world's worst performing currencies this year with losses reaching nearly 15 percent.

Not all their economic woes can be blamed of dwindling global liquidity.

Most BRICS failed to make the structural reforms needed to shield their economies after a decade of cheap money, gushing foreign investment and high commodity prices.

"There were some mistakes made along the way. We are not yet at a stage where the BRICS can change the fate of the world economy together," said a BRICS diplomat posted in Brazil. "But we are showing that we are on the way there."

Bloomberg News - China’s Treasuries Holdings Hit Record as Investors Sell

China Treasuries Holdings Hit Record as Private Investors Sell

Tomohiro Ohsumi/Bloomberg

China stayed the biggest foreign owner of Treasuries as its holdings increased by $25.2 billion to $1.316 trillion, according to Treasury Department data released today.

China’s holdings of U.S. Treasuries (BUSY) rose to a record in May even as net selling by private foreign investors in notes and bonds reached an all-time high, government data showed.

China stayed the biggest foreign owner of Treasuries as its holdings increased by $25.2 billion to $1.316 trillion, according to Treasury Department data released yesterday in Washington. Japan, the second-largest holder, cut its holdings to $1.11 trillion. The net long-term portfolio investment outflow was $27.2 billion after a revised decline of $21.8 billion the prior month.
The yield on the 10-year Treasury note reached a two-month high in May as speculation the Federal Reserve may consider tapering its unprecedented bond-purchase program crimped demand for the securities at the same time the Standard & Poor’s 500 Index increased to a record. China has increased its holdings of long-term U.S. government debt in seven of the past eight months of available figures.
“Foreign central banks found the levels and the opportunity to buy Treasuries more attractive than private accounts,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The month of May was characterized by a sharp sell-off,” so “some overseas markets were taking advantage of some higher-yielding Treasuries to add some additional duration exposure.”
U.S. residents bought a net $27.2 billion in foreign long-term securities, while non-government investors abroad were net sellers of a record $29 billion of Treasury bonds and notes, the report showed.

Official Purchases

Net buying by official entities of long-term Treasuries totaled $40.3 billion, according to the report, leaving net Treasury purchases for the month of $11.3 billion after factoring in private net selling, according to the data.
The yield on the 10-year Treasury note is 2.53 percent late yesterday in New York, up from 1.63 percent on May 1.
The S&P 500 Index rose 2.1 percent in May, the seventh straight monthly advance, before falling 1.5 percent last month. Investors in U.S. Treasuries lost 1.94 percent in May, the biggest monthly drop in data going back to 2010, according to Bloomberg World Bond Indexes.
The Bloomberg U.S. Dollar Index, a gauge of the greenback’s value against 10 major currencies weighted by liquidity and trade flows, rose 2.7 percent.
Including short-term securities such as stock swaps, the total cross-border inflow was $56.4 billion in May, compared with a $28.3 billion gain the prior month, the report showed.

BBC News - 'Brexit': IEA offers prize for UK exit plan from EU

The Institute of Economic Affairs (IEA) has announced that it is holding a competition to find the best plan for a UK exit from the European Union.

The IEA Brexit prize is denominated in euros, not pounds

The free-market think tank said it would award its Brexit Prize to whoever came up with the best blueprint for the UK after the EU, covering the country's withdrawal and post-exit repositioning.

The winning entry will be awarded 100,000 euros (£86,525).

The IEA said it was time to look at how the UK might fare without the EU.

It said: "We need to give serious consideration to how the UK could have a free and prosperous economy outside the EU, given that exit is a serious possibility after the next election."

Entrants, who can be individuals or corporate bodies, are invited to submit a 2,000-word outline proposal by 16 September. The authors of about 20 of those entries will be given four months to produce a more detailed version.

The nine judges include former Chancellor of the Exchequer Lord Lawson, who wrote a newspaper article in May calling for the UK to leave the EU.

Another judge is economist Roger Bootle, founder of Capital Economics, who won last year's £250,000 Wolfson Economics prize awarded for the best plan for dealing with member states leaving the eurozone.

Lord Lawson said he welcomed the IEA's initiative, adding: "Now that we have been promised an in-out referendum on Britain and the EU in 2017, it is essential that this momentous decision is preceded by a well-informed debate. The winning entries in this competition will be an important contribution to that process."

BBC News - Africa's economy 'seeing fastest growth'

Africa's economy is growing faster than any other continent, according to the African Development Bank (AfDB).

Middle income countries now account for nearly half of African states

A new report from the AfDB said one-third of Africa's countries have GDP growth rates of more than 6%.

The costs of starting a business have fallen by more than two-thirds over the past seven years, while delays for starting a business have been halved.

The continent's middle class is growing rapidly - around 350 million Africans now earn between $2 and $20 a day.

The share of the population living below the poverty line in Africa has fallen from 51% in 2005 to 39% in 2012.

Africa's collective gross domestic product (GDP) per capita reached $953 last year, while the number of middle income countries on the continent rose to 26, out of a total of 54.

The AfDB's Annual Development Effectiveness Report said the growth was largely driven by the private sector, thanks to improved economic governance and a better business climate on the continent.

"This progress has brought increased levels of trade and investment, with the annual rate of foreign investment increasing fivefold since 2000. For the future, improvements in such areas as access to finance and quality of infrastructure should help improve Africa's global competitiveness," the report said.

Infrastructure

The AfDB points to the increase in regional economic co-operation and intra-African trade as being the drivers of growth in the future.

However, the AfDB said inadequate infrastructure development remained a "major constraint" to the continent's economic growth.

"Africa currently invests just 4% of its collective GDP in infrastructure, compared with China's 14%," the bank's report said.

"While sustainable infrastructure entails significant up-front investments, it will prove cost-effective in the longer term."

Despite the improving picture overall, the AfDB cautioned that substantial differences in incomes remained.

"The challenge will be to address continuing inequality so that all Africans, including those living in isolated rural communities, deprived neighbourhoods, and fragile states are able to benefit from this economic growth," it said.

BBC News - Bank of Japan sees modest recovery in economy

The Bank of Japan (BoJ) has said the country's economy is "starting to recover modestly".

Bank of Japan governor Haruhiko Kuroda is pumping cash into the economy

The upbeat assessment of the economy came as the BoJ left its huge monetary easing programme unchanged.

It is the first time the BoJ has described the world's third-largest economy as being on the path towards expansion in more than two years.

The bank is to stick to its plan of pumping more than 60tn yen ($606bn; £402bn) a year into the economy.

The programme is known as "Abenomics'' after Prime Minister Shinzo Abe, who took office late last year.

The BoJ has been flagging up steady improvements in the economy for the past six months, but Thursday's announcement is the first to point to a broad recovery.

"With regard to the outlook, Japan's economy is expected to recover moderately on the back of the resilience in domestic demand and the pick-up in overseas economies," the BoJ said in a statement.

Bloomberg News - EU Unveils Bank-Failure Plan in Face of German Opposition

Jock Fistick/Bloomberg

Michel Barnier, the EU’s financial-services chief, will unveil the European Commission’s proposal for a single bank resolution mechanism today in Brussels, a day after German Finance Minister Wolfgang Schaeuble urged restraint if the bloc is to avoid conflicts with its basic laws.

The European Union’s executive arm is heading for a showdown with Germany over its blueprint for shuttering or restructuring failing banks, a plan intended to complement the European Central Bank’s oversight of lenders.

Michel Barnier, the EU’s financial-services chief, will unveil the European Commission’s proposal for a single bank resolution mechanism today in Brussels, a day after German Finance Minister Wolfgang Schaeuble urged restraint if the bloc is to avoid conflicts with its basic laws.

“I would strongly ask the commission in its proposal for an SRM to be very careful, and to stick to the limited interpretation of the given treaty,” Schaeuble said yesterday. “We have to stick to the given legal basis, as otherwise we risk major turbulence.”

EU leaders last month reiterated their support for setting up the resolution mechanism as an integral part of a planned banking union, without specifying how it should work. At issue is how much authority the new European entity would possess, and what recourse national governments would have to dispute its decisions.

“From a political point of view, the conferral of a power to wind up banks on the commission is arguably the greatest transfer of sovereignty in the history of the EU and points towards a fiscal, as well as economic and monetary, union,” Alexandria Carr, a lawyer in the London office of Mayer Brown, said by e-mail.

Rapid Progress

A draft outline of the EU plan, seen by Bloomberg News, would make the commission responsible for deciding whether action is needed to stabilize or wind down a failing bank, and would also involve the establishment of a cross-border resolution fund financed by the banking industry.

Both the commission and the ECB have urged rapid progress toward a centralized system to bolster confidence in the bloc’s banks and break the financial link between lenders and sovereigns. The project has also received support from other euro nations, including France and Italy.

The plan will address a “fragmentation” in bank oversight and an absence of effective decision-making processes that was revealed during the financial crisis, Barnier said in an interview, citing the dismemberment of Dexia SA as an example of authorities having to “improvise” a solution.

The proposal, which will target the euro area and other nations that sign their banks up for ECB supervision, require approval by governments and the European Parliament before it takes effect.

‘Significant Legal Risk’

Germany has repeatedly urged the EU to embark on treaty changes to ease its path to banking union, arguing that the bloc’s current rulebook limits the powers that can be handed to central authorities. It has sought to build support behind an alternative blueprint for a network of national resolution authorities.

A central authority that is ultimately backed by the taxpayer “would imply significant legal risk both in terms of European law and constitutional law,” according to a discussion paper circulated by the German government in March.

Other nations have rejected the need for up-front treaty changes, warning that they would cause unacceptable delays.

The commission’s plan has been designed to prevent decisions about the commitment of national taxpayer money being taken out of national hands, Barnier said.

‘Exceptional Cases’

“The text states explicitly that the resolution board would not, in any scenario, be allowed to commit a member state’s public money without its agreement,” he said. “We are talking here about very exceptional cases, as all our rules are aimed at avoiding taxpayer contributions.”

Under the commission’s plan, a bank resolution board, involving national regulators, would assess whether a bank’s finances have deteriorated to the point where intervention is needed, and if so make a recommendation to the commission to initiate resolution.

The board would decide what action should be taken, such as creditor writedowns or asset transfers, and issue instructions to national regulators.

Finance ministers and European Parliament lawmakers began negotiations this month on a related EU law that sets out how forced creditor losses at failing banks should be undertaken.

“From a legal point of view, it is dubious whether the EU’s existing legal architecture is sufficient to support the commission being given such a power or the establishment of what is effectively debt mutualization in the shape of a resolution fund,” Carr said. “And from a practical point of view, it is far from clear how such a mechanism, which would inevitably bring the commission into conflict with the views of national resolution authorities, would work.”

Bank Levies

The single bank resolution fund, which could be tapped to cover restructuring costs at failing banks, would be built up through levies on the banking industry, with individual banks’ contributions linked to the riskiness of their activities. The fund would over time replace national-level backstops and would have the ability to borrow from the market.

Nations are split over how far EU-level measures should be taken to break the bank-sovereign link. Governments in the strongest fiscal position have argued that responsibility needs to fall mainly on national shoulders, with limited access to common backstops, while also trying to reassure investors that the euro area will preserve financial stability.

Lehman Brothers

The haggling is a far cry from 2008, when banks in the biggest European countries, as well as the U.S., required bailouts following the collapse of Lehman Brothers Holdings Inc.

In a single day, Oct. 13, 2008, France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.7 trillion) to guarantee bank loans and take stakes in lenders.

The Dutch government still owns ABN Amro Group NV and only this year took over SNS Reaal NV (SR). Germany established a 500 billion-euro fund to guarantee bank debt. Taxpayers extended aid to Commerzbank AG, Bayerische Landesbank (BLGZ), HSH Nordbank AG, Hypo Real Estate Holding AG (HRX), IKB Deutsche Industriebank AG (IKB) and WestLB AG.

Michael Meister, the deputy caucus leader of Chancellor Angela Merkel’s party in the German parliament, said earlier this month that lawmakers would resist any attempt to set up a common bank resolution fund.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net;Rebecca Christie in Brussels at rchristie4@bloomberg.net

Reuters News - Hot money exodus sends currency wars into reverse

Turkish lira banknotes are seen in this picture illustration taken in Istanbul October 18, 2011.

Credit: Reuters/Murad Sezer

LONDON | Tue Jul 9, 2013 10:58am BST

(Reuters) - Turkey's efforts to pull the lira off record lows on Monday are likely to be emulated across emerging markets as central banks fight to avert an exodus of foreign capital driven by the impending turn in U.S. policy.

It's all a far cry from a year or so ago, when emerging market exporters were battling rising exchange rates and Brazil was accusing Western policymakers of waging currency wars by flooding the world with cheap money.

Turkey is now tightening its policy as the U.S. Federal Reserve considers reducing the flood of cheap money that has stoked the investment boom in emerging financial markets.

Swaps markets are pricing in interest rate increases across the developing world, in some cases of hundreds of basis points, reflecting the new worry for emerging central banks: currency collapse.

Last week's robust jobs data from the United States has upped the stakes for emerging markets by crystallising belief the Federal Reserve will start unwinding its $85 billion monthly stimulus by autumn. Futures contracts moreover now expect a U.S. interest rate rise as early as 2014.

Such an early rate rise does look unlikely. But the shift nevertheless heaps pressure on emerging central banks to make the first - defensive - move if they are to stem a flood of cash from their markets back to the dollar and Treasury markets.

On Monday, Turkey sold over $2 billion and pledged "strong additional tightening" to prop up the lira.

While the central bank says the moves are aimed at curbing loan growth, the end game clearly is the lira. Currency weakness spells trouble for inflation which is running at 8 percent. But more importantly, it provides a big incentive for foreigners holding Turkish assets to cut and run.

"The (Turkish central bank) has a choice, let the lira go weaker to the detriment of already high inflation, blow scarce FX reserves in defence of the lira, or tighten policy," Standard Bank analyst Tim Ash said.

Across most of the developing world, outflows have gathered pace leaving many currencies at multi-month or multi-year lows.

Swaps are pricing in 250 basis points of policy tightening in Turkey in the next three months, 140 bps in Brazil, 75 bps in South Korea, half a percentage point in South Africa and a quarter point in Poland.

While rate rises of such magnitude might be unlikely, the fact is that a Fed-imposed monetary tightening is gradually taking hold. . Emerging markets could be pushed to tighten policy to ward off capital outflows, South Korea's central bank governor Kim Choong-soo admitted last month.

NO OPTION

When Brazil's finance minister Guido Mantega complained about currency war, "he didn't think that in a few months, the war he would be fighting would be to strengthen the real," UBS strategist Manik Narain said.

"Emerging markets have imported U.S. monetary policy for five years but they haven't imported the recovery. Now the Fed is effectively tightening so they too are forced to tighten."

With economies already weakening, policymakers will be reluctant to tighten policy. Instead countries including India, Russia, Indonesia, Peru and Poland have been selling dollars.

But some, such as India, Turkey and South Africa, have little hard currency to sell given import needs and outstanding external debt, whether corporate or sovereign.

Those that have an inflation problem or large oil import bills in dollars - such as India or Turkey - simply cannot risk letting currency weakness go too far.

And central bank interventions are less efficacious once market appetite turns. Brazil's real, for instance, is down 10 percent in two months even though the central bank has sold $20 billion in derivatives in this period.

Given the scale of capital inflows into emerging markets - $4.2 trillion since the Fed first started its money printing, according to the Institute of International Finance - it is easy to see why central banks are jittery. Turkey, for instance, has a balance of payments deficit of around $50 billion a year.

To see what a difference emerging currency moves are making to unhedged investors, check out returns on Turkish assets. Lira-denominated bonds are broadly flat on the year in local currency terms, JPMorgan's GBI Index series shows. But a dollar-based investor would have lost 3.5 percent already in 2013.

Similarly, dollar-based losses on Turkish stocks are double the losses in lira at almost 15 percent.

POLICY THIS WEEK

This week Brazil is expected to raise rates by half a point on Wednesday and Indonesia is expected to hike by 25 bps on Thursday after promising a "stronger policy mix". Some analysts say a bigger rate hike is possible in Brazil.

But many such as Colm McDonagh, head of emerging markets at Insight Investment, see the market as too aggressive in pricing rate hikes. While inflationary pressures are higher in India and Brazil, they are less so in South Africa or Mexico, he noted.

"It's not clear that we will see across-the-board interest rate hikes," McDonagh said.

"It depends on inflation dynamics. Some countries look to their currency to be the shock absorption mechanism but if it's going to cause inflation, then they have to take it via rates."

(Reporting by Sujata Rao; Editing by Ruth Pitchford)