Bloomberg News - Ruble Rebound Beating World Has Bondholders Waiting to Sell

The biggest recovery in emerging-market bonds and currencies has Russian investors poised to sell, even with oil prices bouncing back.

The ruble’s 5.7 percent rally last week was surpassed only by Ukraine’s hryvnia while top gains for Russia’s bonds pared this month’s declines as five-year yields tumbled 51 basis points in three days to 11.88 percent.

“Pressure on the markets is only rising,” Andres Vallejo, who helps manage the equivalent of $2.6 billion at Kapital Asset Management in Moscow,
said by phone on Friday. He’s getting ready to short-sell local bonds known as OFZs if yields fall to 11.25 percent.

The investor skepticism underscores doubts the central bank has much more scope to reduce interest rates after 6 percentage points of cuts since January aimed at rescuing Russia from its worst recession since 2009.

“It’s unlikely that yields will fall below 11 percent,” Igor Kozak, the head of fixed-income asset management at TKB Investment Partners in St. Petersburg, said by e-mail. “Probably, this is just a temporary movement and soon we’ll see another wave of selloffs as oil resumes declines."

Russia’s OFZs have handed investors a loss of 9.6 percent in August, the most in Europe, the Middle East and Africa, according to the Bloomberg Emerging Market Local Sovereign Index. That’s the worst monthly result since January. Quarter-to-date the currency is still down 15 percent.

Ruble Reprieve

A reprieve last week produced the ruble’s first weekly gain in 10 as crude prices rallied from a six-year low. The ruble added 0.9 percent to 65.402 versus the dollar.

Brent crude surged on Friday to trade above $50 a barrel for the first time since Aug. 13. Oil and natural gas contribute about 50 percent of Russia’s budget revenue.

The bounce-back in oil encouraged Dmitri Barinov at Union Investment Privatfonds GmbH in Frankfurt to close bets OFZ bond prices will drop.

“We may have seen the short-term lows in oil and I expect some stabilization in commodity prices,” Barinov, who oversees $2.6 billion of assets, said by e-mail.

Rebound Fizzles

Now that the ruble’s rebound this year has fizzled, the central bank has little scope to cut interest rates further. But it’s the prospect of U.S. interest rates rising that’s the main threat, according to Konstantin Artemov, a money manager at Raiffeisen Capital in Moscow.

"Of larger importance in September will be not the Bank of Russia rates decision, but the Fed rates decision,” Artemov, who sees yields on ruble debt trading between 11 and 11.5 percent, said by e-mail. “A 25 basis-point increase may trigger another wave of capital outflows from emerging markets, including Russia. And the ruble and OFZs look vulnerable.”

by  Ksenia Galouchko

BBC News - The six Cs of the China stock slump

The repercussions from "Black Monday" - the global markets turmoil caused by a plunge in Chinese stocks - continue to be felt on Tuesday.

To the uninitiated, the situation may seem bafflingly complex, here's a breakdown of the issues:

China

The story of China has been one of extraordinary growth in the last decade, but there have been recent concerns that there will be a significant economic slowdown.

One worry is that this would trigger panicked reactions from domestic investors and lead to a stock market crash.

With China establishing its Shanghai stock exchange only in 1990, its market is considered immature compared to the rest of the world.

Image captionChina's stock market is dominated by small-time investors

The shares are almost entirely owned by domestic traders, many of whom are 'mom and pop' investors with little experience in investing.

The lack of large, experienced and professional organisations as investors means that the market can be much more volatile.

Central bank

Over the last few months, China's central bank has been repeatedly propping up the stock market to ensure stability.

Image captionThere were expectations over the weekend that the central bank would pull another drastic move

They have been doing it through several big measures, such as cutting central bank interest rates - which allows more money to flow easily - and buying up shares to stop them from falling.

After losses last week, there was an expectation on Friday that there would be yet another such drastic move.

But that did not happen - causing panic to ripple out and a dramatic drop in shares on Monday. The stock market saw its worst single-day plunge since 2007.

Read more: China counts cost of Black Monday

Currency

One of the possible triggers for the drop in past trading sessions was the earlier decision by the central bank to devalue the yuan and allow it to trade more flexibly.

Unlike most currencies, the Chinese currency is not allowed to trade freely according to the number of buyers and sellers in international markets.

Rather, the central bank sets a daily rate to the US dollar and for the rest of the day, the yuan is allowed to trade 2% up or down from that rate.

Image captionHow many yuan you get for a dollar is crucial for exports

Earlier in August, the bank cut that rate by almost 2%, sending a first wave of insecurity through markets. The move was seen as an attempt to help exports by making Chinese goods cheaper abroad.

The central bank also said it would set the daily rate based on how the yuan traded the previous day, which means that it could fall a lot further in future.

Contagion

China's stock market slump caused investor uncertainty to spread across the region and then around the globe, destabilising stock markets in New York and Europe.

Image captionThe New York Stock Exchange suffered heavy losses on Monday

This knock-on effect has highlighted how much of a linchpin China's stock market is in the global marketplace.

Hong Kong-based investment analyst Peter Churchouse says China's market was "irrelevant" 35 years ago and as recent as a decade ago, it merely followed trends in the global economy.

But now the tables have turned, he says. "The global economy and global markets have a 'Made in China' label on them."

Read more: How China's share slump affects the world

Image captionThe sell-off highlighted how much of a linchpin China's stock market has become in the global marketplace

Correction or Crash?

Monday's global turmoil sparked fears of another international financial meltdown, but analysts say it was merely over-inflated markets correcting themselves. They are however warning of further slumps in the long run.

Nicholas Teo of financial analysis firm CMC Markets says financial markets were "intoxicated" by easy and cheap funding in recent years, boosting stocks' value and consumer spending.

The turmoil caused by China's stock slump "suggested that the great unwind of the excesses is beckoning".

As for China itself, analysts say that as the market matures over the years and investors become more experienced, it will become less volatile.

This could also happen if China's government removes some of the restrictions that hinder foreign ownership of shares, thus paving the way for bigger more professional firms to come in and inject stability. Currently foreigners only own 2% of stocks.

Image captionThe Chinese government restricts foreigners' trading of shares on its stock exchange

Consequence

Observers have described this incident as a "rude awakening" for global investors who have paid scant attention to China.

Extreme movements in China's market will probably become a more common sight, given its peculiarity of being dominated by small-time inexperienced investors.

Meanwhile China's economy is still expected to slow which in turn would affect the global economy, particularly Western growth, says the BBC's Duncan Weldon.

Read more: How worried should we be about Chinese share price falls?

The BBC's Robert Peston says that in the short term, the world will have an increase in spending power, but over the long term, this would make some countries like the UK considerably poorer.

Read more: Will China's slowdown make us poorer?

But many anticipate that the Chinese government will continue to prop up the economy one way or the other, and even more so in light of this recent financial volatility.

"It's difficult to see officials allowing the economy to slide further without some countervailing action," says Frederic Neumann, who co-heads Asian economics research at HSBC.

Reuters News - Surprised by global impact of yuan move, China looks to calm markets

A customer counts Chinese Yuan notes at a market in Beijing, August 12, 2015.

REUTERS/JASON LEE

China has been so surprised by the global reaction to its currency devaluation that it is likely to keep the yuan on a tight leash in the near-term to head off a currency war that could spark a broader financial crisis, policy insiders say.

Internal calls for the yuan to weaken by up to 10 percent since the Aug. 11 devaluation have faded as top leaders worry that market fears of such a move could fuel further capital outflows, signs of which have intensified in July and August.

Government economists and policy advisers say the People's Bank of China (PBOC) will now try to stop the yuan weakening much past 6.5 per dollar, which is 4.5 percent below its pre-devaluation levels. On Thursday morning, the yuan CNY=CFXS traded as low as 6.4162 per dollar.

"The global reaction was bigger than expected," said a senior economist at the cabinet's think-tank.

"The global economy is very fragile … competitive currency devaluations could in turn affect China's own economy - undermine its exports and investment."

Indeed, when cutting interest rates and bank reserve requirements on Tuesday, the PBOC said currency fluctuations had caused a shortfall in liquidity.

That was seen as a signal that capital outflows had accelerated since the devaluation as market investors feared China would drive the yuan lower.

An influential economist at a top government think-tank said policymakers may have underestimated the global impact from the yuan devaluation, which happened when jitters about China's slowdown had intensified due to a stock market plunge.

"You chose the timing as the economy weakened and the stock market plunged, sending out a wrong signal to foreign countries that you want to spur the economy through devaluation and leading to competitive devaluations," said the economist, who last month discussed policy issues with Premier Li Keqiang.

"This put us on the defensive; it looks like China is the trigger."

Premier Li was quoted by state television as saying on Tuesday that there was no basis for continued depreciation.

RELATED COVERAGE

• › China media slams Western 'hype' over economic slowdown

China ran down its foreign exchange reserves by $340 billion from mid-2014 to the end of July, which some economists see as a proxy measure of outflows. No data is available yet, but analysts think the pace quickened after the devaluation.

The PBOC will count on its war chest of FX reserves – still the world's largest at $3.65 trillion - to defend the yuan from selling pressure as foreign investors flee the country and domestic investors convert yuan into dollars.

The PBOC did not respond to faxed questions from Reuters about its yuan policy.

OVERVALUED

China tightly manages its currency, allowing it to trade within a 2-percentage point band above or below a daily target set by the central bank.

On its own, the Aug. 11 devaluation, achieved by the PBOC setting its daily reference point nearly 2 percent lower against the dollar than the previous day, did not look like a massive move, and came with technical changes to make the exchange rate more market-determined.

But it stoked concerns about just how weak the Chinese economy really was and, coming days after poor trade data, sparked fears it was to prop up the struggling export sector.

Countries including Vietnam and Kazakhstan followed suit with currency depreciations of their own, and the spillover fears roiled first markets in emerging economies and then major economies.

"The yuan is seriously overvalued from the trade perspective and it's appropriate to let it depreciate," said a researcher at the National Development and Reform Commission (NDRC), China's top economic planning agency.

"But the global impact is bigger than domestic impact."

The NDRC economist expects that after a period of stability to restore calm the yuan would weaken further, especially if the U.S. Federal Reserve starts raising interest rates. But he believes the central bank will prop up the currency for now.

"The economy still faces big downward pressure. The 6.5 level should be an important bottom line."

REFORM STILL ON AGENDA

Cao Yuanzheng, chief economist at Bank of China, estimates that the yuan would have to weaken by at least 10 percent to have a meaningful impact on exports. And China's status as the world's largest trading nation - it overtook the United States in 2013 - means it needs to be aware of its influence.

"The renminbi is becoming an 'anchor' currency now. It's stability will have a big impact on other currencies," he said.

While the PBOC still wants to free up the currency further, in part to enable the yuan to be used by the International Monetary Funds for its Special Drawing Rights (SDRs) unit of account, policy insiders say it understands the need for stability now.

"The central bank hopes to push market reforms, but they also worry that there may be sharp volatility and big pressure on the yuan in the short term," said an economist at a top government think-tank.

"If the yuan falls further, other currencies may fall more sharply."

BEIJING | BY KEVIN YAO

(Reporting by Kevin Yao; Editing by John Mair and Alex Richardson)

BBC News - 'Decent growth ahead,' says CBI as it upgrades UK forecast

The UK is to enjoy "decent quarterly GDP growth" the CBI has predicted as it upgrades its forecasts for this year and next.

Image captionHousehold spending and "robust" investment growth will drive the UK's growth, the CBI says.

The business lobby group now expects growth of 2.6% this year and 2.8% next year, up from its June forecast of 2.4% and 2.5% respectively.

Increased household spending and "robust" investment growth will drive the improved growth, the CBI believes.

The CBI now expects interest rates to rise in the first quarter of next year.

In June, it had expected rates to begin rising from their historic low of 0.5% from the start of April next year.

But it now says the improved growth picture alongside "more hawkish" comments from the Bank of England's rate-setting Monetary Policy Committee had prompted it to bring its prediction forward.

"We now expect interest rates to rise to 0.75% in the first quarter of 2016, and then rise at a slow pace thereafter," the CBI said.

'Somewhat muted'

The CBI said it expected growth until the end of next year to continue at a similar pace to the three months to the end of June, averaging 0.7% a quarter.

Household spending and business investment would remain the two key factors driving growth next year, it added.

It said improved productivity had also helped to boost wage growth.

This combined with low inflation, largely due to the drop in commodity prices, meant households had more to spend, the CBI said.

But it warned that the outlook on exports was "somewhat muted" with the strong pound hitting the UK's competitiveness abroad.

And it said eurozone growth would remain "subdued for the foreseeable future".

"Strong domestic demand and upbeat official data since our last forecast has boosted our outlook for 2015. We expect this strength to continue into next year," said CBI director for economics Rain Newton-Smith.

BBC News - Will China's slowdown make us poorer?

There has never been an economic story like China's - consistent rises in national income for 30 years at an annual rate of 10%, hundreds of millions of Chinese people lifted out of poverty, and expansion that took it from almost nowhere to become the world's second biggest economy, contributing 15% of global GDP and 25% of global GDP growth.

So it is no exaggeration to say that the story of the world economy since 1978 has been China's story - determining everything from our low and falling interest rates (because its manufacturing prowess tamed inflation almost everywhere) through to an unprecedented boom in the price of energy and raw materials.

But until today there was a plausible argument that what happened on its financial markets was not of great significance for the rest of us, because those markets were still relatively closed to foreign investors and were subject to significant state meddling.

Big implications

Till today's great awakening - when a rout on the Shanghai stock market, where most shares fell their maximum daily limit of 10%, has infected confidence everywhere.

Shares tumbled the world over - roughly 5% on average in Europe, less at this instant in North America.

Investors are in effect shouting that the era of so-called Chinese exceptionalism - that China can grow faster for longer than any other economy in history - is over, having become so dependent in recent years on debt-fuelled investment (which was what my film, How China Fooled the World, warned about at the start of 2014).

And they are not just delivering that verdict in falling shares, but in oil prices that have tumbled to the slum levels of 2009 and commodities in general are back at levels not seen since 1999.

All of this has big implications for most of us in the coming weeks and years.

Now we may be tempted to celebrate the increase in our spending power, thanks to the tumbling prices of food and energy that China's waning appetite has caused.

Turning Japanese?

And those with big debts may be chipper that both the US Federal Reserve and Bank of England may delay interest rate rises by yet another few months, because of concerns that China is exporting lower growth and deflation to us.

But we should be under no illusion that if China is turning Japanese - if it is on the verge of years of very low growth or even stagnation - we will all pay a big price.

That is especially true in the UK, where the big flaw in our recovery is that we are too dependent on spending by domestic consumers and domestic businesses - such that we are borrowing money from the rest of the world to finance our living standards in record amounts - or to use the jargon, we have a record current-account deficit or negative balance on our income from trade and investment with the rest of the world.

If a Chinese deceleration leads to a permanent slowdown in global growth, our ability to close that deficit through sales to the rest of the world would be impaired - which would force us to spend much less at home. Or to put it another way, we would become considerably poorer.

Robert PestonEconomics editor

Reuters News - Alarm bells ring as China sinks, dollar tumbles

Alarm bells rang across world markets on Monday as a 9 percent dive in Chinese shares and a sharp drop in the dollar and major commodities panicked investors.

European stocks .FTEU3 opened more than 3 percent in the red after their Asian counterparts slumped to 3-year lows as a three month-long rout in Chinese equities threatened to get out of hand. [.SS]

Safe-haven government bonds [EUR/GVD] and the yen JPY= and the euro EUR= rallied as widespread fears of a China-led global economic slowdown kicked in.

"Markets are panicking. Things are starting look like the Asian financial crisis in the late 1990s. Speculators are selling assets that seem the most vulnerable," said Takako Masai, head of research at Shinsei Bank in Tokyo.

With serious doubts now emerging about the likelihood of a U.S. interest rate rise this year, the dollar .DXY slid against other major currencies. It was last 121.05 yen having gone as low as 120.73 JPY= in Asia, a level last seen on July 9.

The Australian dollar AUD=D4 tanked to six-year lows and many emerging market currencies also plunged, whilst the frantic dash to safety pushed the euro EUR= to a 6-1/2-month high. [FRX/]

Commodity markets took a fresh battering. Brent and U.S. crude oil futures hit 6-1/2-year lows as concerns about a global supply glut added to worries over potentially weaker demand from China. [O/R][GOL/]

U.S. crude was down 3 percent at $39.20 a barrel CLc1 while Brent LCOc1 lost 2.4 percent to $44.40 a barrel.

Copper, seen as a barometer of global industrial demand, tumbled 2.5 percent, with three-month copper on the London Metal Exchange CMCU3 hitting a six-year low of $4,920 a tonne. Nickel CMNI3 slid 4.6 percent to its lowest since 2009 at $9,730 a tonne.

(Story refiles to remove garble in third paragraph)

(Additional reporting by Pete Sweeney in Beijing and Shinichi Saoshiro Hideyuki Sano in Tokyo; editing by John Stonestreet)

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3 of 3

right

An investor stands in front of an electronic board showing stock information at a brokerage house in Shanghai, China, August 24, 2015.

REUTERS/ALY SONG

LONDON | BY MARC JONES

BBC News - Greece crisis: PM Alexis Tsipras quits and calls early polls

Greece's Prime Minister Alexis Tsipras has announced he is resigning and has called an early election.

Mr Tsipras, who was only elected in January, said he had a moral duty to go to the polls now a third bailout had been secured with European creditors.

The election date is yet to be set but earlier reports suggested 20 September.

Mr Tsipras will lead his leftist Syriza party into the polls, but he has faced a rebellion by some members angry at the bailout's austerity measures.

He had to agree to painful state sector cuts, including far-reaching pension reforms, in exchange for the bailout - and keeping Greece in the eurozone.

Greece received the first €13bn ($14.5bn) tranche of the bailout on Thursday after it was approved by relevant European parliaments.

It allowed Greece to repay a €3.2bn debt to the European Central Bank and avoid a messy default.

The overall bailout package is worth about €86bn over three years.

Lost majority

Alexis Tsipras made the announcement in a televised state address on Thursday.

"The political mandate of the 25 January elections has exhausted its limits and now the Greek people have to have their say," he said.

"I want to be honest with you. We did not achieve the agreement we expected before the January elections."

Mr Tsipras said he would seek the Greek people's approval to continue his government's programme.

Analysis: Chris Buckler, BBC News, Athens

In January, Alexis Tsipras went to the polls in Greece as a man who would stand against austerity. What a difference seven months makes. Now he is calling elections to ask the Greek public to support the way he is trying to lead this country out of its financial crisis.

That means spending cuts, tax rises and, of course, that third bailout that's already been agreed. All of that is opposed by a sizeable number of hard-left MPs within his own party, Syriza.

Mr Tsipras will argue this election is about bringing certainty to Greece's future. In the short-term at least, though, it will create political uncertainty. And that's becoming a pretty familiar feeling here in Athens.

Mr Tsipras said Greeks would have to decide whether he had represented them courageously with the creditors.

He met President Prokopis Pavlopoulos later in the evening to submit his resignation, Reuters reported, telling him: "The present parliament cannot offer a government of majority or a national unity government."

Greece will be run by a caretaker government ahead of the polls.

Alexis Tsipras (left) meets President Prokopis Pavlopoulos to submit his resignation

If a government resigns within a year of election, the constitution requires the president to ask the second-largest party - in this case the conservative New Democracy - to try to form an administration.

If this fails, the next largest party must be given a chance.

Analysts say both parties can waive this and allow the president to approve the snap election.

However, New Democracy leader Vangelis Meimarakis said it was his "political obligation and responsibility to exhaust all the options", even though the numbers suggest he has little chance.

Capital controls

Reacting to the news, Martin Selmayr, European Commission President Jean-Claude Juncker's chief-of-staff, tweeted that "swift elections in Greece can be a way to broaden support" for the bailout deal.

Chair of the eurozone finance ministers, Jeroen Dijsselbloem, said he hoped the resignation would not affect the bailout conditions.

"It is crucial that Greece maintains its commitments to the eurozone," he said.

Some 43 of Syriza's 149 MPs had either opposed the bailout or abstained in last Friday's Greek parliamentary vote that approved the deal.

The rebellion meant Mr Tsipras had effectively lost his parliamentary majority.

Mr Tsipras had won power on a manifesto of opposing the stringent austerity conditions that he has now accepted.

He said he was forced to do so because a majority of Greeks wanted to stay in the eurozone, and this could not be achieved in any other way.

Greece remains under strict capital controls, with weekly limits on cash withdrawals for Greek citizens.