Bloomberg News - A Guide to the Year’s Biggest Divorce

The U.K. and the European Union’s divorce proceedings will begin this year, ending a four-decade relationship.

So how did we get here, and what comes next? British voters demanded the breakup in a June 2016 referendum, but without a blueprint of how to unwind the relationship. 

U.K. Prime Minister Theresa May set a self-imposed deadline of March 31 to formally serve notice to the EU, after which the two sides are supposed to have two years to come to a settlement. But that could drag on, even stretching into the next decade.

May hasn’t given specifics of what she wants to achieve, but she has sent signals that her priorities are regaining control of immigration, getting out from the jurisdiction of European courts, and cutting back or eliminating money paid to Brussels. She may even be willing to give up access to the bloc’s single market for goods and services.

On the other side of the fight, EU leaders have warned May that she won’t be able to “cherry pick” the best perks of membership—such as tariff-free trade—without accepting the bits she doesn’t like, such as allowing EU citizens to work and live in any country that’s a member of the club.

In a sign the government knows just what it's up against, Brexit Secretary David Davis has described the talks the most “complicated negotiation of all time.”

by 

Simon Kennedy

Reuters News - Opinion: Trump's war on private debt to reshape markets: James Saft

U.S. President-elect Donald Trump speaks at his election night rally in Manhattan, New York, U.S., November 9, 2016. REUTERS/Carlo Allegri

By James Saft

(The opinions expressed here are those of the author, a columnist for Reuters.) Donald Trump's prospective attacks on private debt contrast strongly with his apparent comfort with rising public indebtedness. If carried out, both will have a massive impact on financial and asset markets.

Plans advanced or being considered by the President-elect and Republican leadership will make mortgage and corporate debt far less appealing to borrowers, potentially hitting house and share prices. At the same time, likely tax cuts and spending plans will inflate the public debt and boost economic growth, pushing yields on Treasuries higher.

Disadvantaging private debt while increasing public borrowing will have a mutually self-reinforcing effect, as rising interest rates make borrowing even less attractive for households and firms and increase the downward pressure on asset prices.

Like everything Trump proposes or considers, this may never happen, and financial markets certainly are not trading as if it will.

Under Republican House tax plans from last summer endorsed by Speaker Paul Ryan, the standard income tax deduction for married couples will almost double to $24,000. That's high enough to make taking the standard deduction more attractive than deducting mortgage interest for more than eight in 10 tax filers, according to the Tax Policy Center. For a vast swath of Americans, using debt to buy housing will suddenly make a lot less sense.

Trump's plans for corporate tax reform are similarly hostile to debt, no small irony for a man whose businesses have been liberal users of leverage, and, on occasion, defaulters on obligations.

Trump's pre-election plans called for eliminating the tax deductibility of interest expense for corporations as part of a framework designed to encourage domestic capital expenditure while cutting corporate tax rates. A similar plan has been put forward by Ryan.

Although analysts have paid more attention to Trump's proposals for a tax holiday for foreign earnings, and to plans for what amounts to a border tax that would penalize imports and subsidize exports, the anti-debt provisions would represent an earthquake in both the corporate finance and financial markets.

Total corporate debt, not including borrowings by finance firms, has grown by nearly 70 percent since before the financial crisis as companies, lured by low rates and encouraged by tax treatment, chose to borrow rather than sell equity to finance investment and fund dividends and share buybacks.

DEBT WHERE IS THY STING?

All of the tax cuts mooted by Trump and Republican leaders, along with planned infrastructure spending, are going to cost money. A pre-election analysis by the Committee for A Responsible Federal Budget found Trump's plans would increase the ratio of public debt to GDP to 105 percent by 2026, compared with its current path of 86 percent.

All of this spending, tax cuts and public borrowing will have a positive near-term impact on growth but will send interest rates higher, as we've seen with the Federal Reserve turning decidedly more hawkish. Ten-year Treasury yields, which form a baseline for much private borrowing, are already up by more than a third, to 2.37 percent, since shortly before the election.

It is important to stress that it is very uncertain what Trump and his Republican colleagues will actually attempt and be able to do. There will be fierce lobbying by the housing and mortgage industries to protect the mortgage deduction, for one thing. Plans to do away with corporate debt subsidies will also face opposition and may well not survive the inevitable negotiations and horse-trading as a tax reform plan moves toward reality.

If, however, even a proportion of the plans described above make it into law, we are going to see some big impacts on financial markets.

House prices will take a hit as the effect of the mortgage deduction subsidy falls away. Because the very wealthy may still itemize their deductions, the brunt of the impact will be felt in middle class housing and below, rather than at the top end.

But homebuilding and other real estate-related stocks will feel the chill.

The effect of eliminating corporate interest deductibility might be even more profound. While companies pay an effective tax rate of 30.8 percent on equity-financed investments today, according to the Council on Foreign Relations, the tax cut of debt funding is actually -7.4 percent. Naturally, companies now favor equity over debt. Under Trump's plans, both equity and debt-financed investments will incur a tax rate of about 10 percent.

Corporate debt issuance will sink like a stone. So will share buybacks, though they may get a short-term bump from money brought back under any U.S. tax holiday. The math of borrowing in bond markets to buy back shares will get a lot less pretty. That could hurt share prices.

Corporate debt as an asset may get a bump. There will be less of it around and company finances may ultimately become more robust as companies pay down debt and issue equity.

In short, if Trump indeed does what he's indicated, the long-running romance between the U.S. private sector and debt will turn cold.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft).

(Editing by Dan Grebler)

BBC News - Pound falls on May's Brexit comments

The value of the pound has fallen to a two-month low against major currencies after Prime Minister Theresa May signalled the UK would pursue a so-called "hard Brexit" from the EU.

Sterling fell about 1% across the board. The only currency against which it gained ground was the Turkish lira.

The Prime Minister told Sky News on Sunday that she wanted the best possible deal for leaving the EU.

However, she dismissed the idea that the UK could "keep bits of membership".

She added: "We're leaving. We're coming out. We're not going to be a member of the EU any longer."

Commentators interpreted this as meaning that Mrs May would not seek to keep the UK in the EU's single market, with radical consequences for the country's economy.

'Populist politics'

By late morning, the pound was down 1.06% against the dollar at $1.2155, while against the euro, it was 0.89% lower at €1.1561.

"Sterling is on the back foot on Monday after Theresa May's comments were taken as a sign the UK government would prioritise immigration controls over single market access," said Neil Wilson, senior market analyst at ETX Capital.

"Domestic populist politics trumps the trade card for now, it seems, and that is weighing on the pound."

Mr Wilson predicted "more volatility" in the sterling exchange rate, adding that it could easily "bounce back" as the tone of political discourse shifted.

HSBC currency strategist Dominic Bunning agreed: "[Mrs] May saying that it's not about keeping 'bits' of the EU suggests it's not going to be about keeping access to the single market.

"She said we will have full control of our borders, and given what the other side of the debate - the EU - has said, that's not compatible with full access to the single market, free movement of capital, free movement of goods and services.

"That's the direct trade-off that the [foreign exchange] market is looking at."

Inflation rising

Paresh Davdra, chief executive of RationalFX, said: "The looming fears that the UK might exit the single market continue to weigh down on the pound, and we expect the volatility to continue until further and actual on-ground clarity emerge.

However, he added: "All is not lost for the UK, as the fall in the pound's value has attracted international market activity and simultaneously boosted the country's export figures."

The pound fell sharply in the immediate aftermath of the UK's June 2016 vote to leave the EU.

The weaker pound makes UK goods cheaper for buyers overseas, but increases the cost of imported goods.

Analysts expect UK inflation to pick up this year as the impact of higher import costs feeds through to the economy. Last week, a string of economic surveys indicated that companies were facing rising price pressures as import costs increased.

November's Consumer Prices Index (CPI) inflation rate was 1.2%, up from 0.9% in October and the highest since October 2014, when it stood at 1.3%.

Reuters News - Germany says can't figure out Trump's foreign policy goals

U.S. President-elect Donald Trump gestures as he speaks during a USA Thank You Tour event in Mobile, Alabama, U.S., December 17, 2016. REUTERS/Lucas Jackson

German officials who have held talks with members of U.S. President-elect Donald Trump's transition team have not been able to figure out what kind of foreign and security policy his administration wants to pursue, a spokesman said on Friday.

"It ultimately remains the case that there still is no clear, coherent and comprehensive picture of what kind of foreign and security policy the new Trump administration wants to pursue in the world," Foreign Ministry spokesman Martin Schaefer told a regular government news conference.

Trump has repeatedly praised Russian President Vladimir Putin and nominated people seen as friendly toward Moscow to senior administration posts.

Should Trump seek to improve relations with Kremlin, he could unsettle Germany, whose Chancellor Angela Merkel has supported the extension of European Union sanctions against Russia over its role in the conflict in Ukraine.

(Reporting by Joseph Nasr; Editing by Paul Carrel)

BBC News - UK service sector sees strong expansion in December

The UK service sector grew at its fastest pace for 17 months in December, a closely watched survey has indicated.

The Markit/CIPS services purchasing managers' index (PMI) rose to 56.2 last month, from 55.2 in November - the highest level since July 2015.

But inflationary pressure in the sector continued, with prices charged rising at the strongest rate since April 2011.

Services, which include areas such as retailing and banking, make up more than three-quarters of the UK economy.

Markit's Chris Williamson said it defied fears of a Brexit slowdown.

"At face value, this improvement suggests that the next move by the Bank of England is more likely to be a rate hike than a cut," he added.

However, Mr Williamson, Markit's chief economist, said policymakers were "clearly concerned about the extent to which Brexit-related uncertainty could slow growth this year".

As a result, he said, the Bank's Monetary Policy Committee would have to consider "the current resilience of the economy" alongside "elevated levels of uncertainty", meaning that interest rates could go either way.

Economy 'resilient'

Earlier in the week, surveys in the construction and manufacturing sectors indicated a similar pattern of growth. Mr Williamson said that collectively, the surveys pointed to GDP growth of 0.5% in the fourth quarter of the year.

The "all-sector" PMI rose to 56.4 in December from 55.1 the previous month - itself the highest reading since July 2015. A figure above 50 indicates expansion.

Paul Sirani, chief market analyst at Xtrade, said the latest survey showed the service sector was going "from strength to strength".

"Strong services data provides a good indication that the UK economy remains resilient amid ongoing Brexit uncertainty. However, greater tests lie ahead," he added.

"Further changes in the wider political landscape in early 2017 are likely to ask more questions of the robust UK economy, with its response anyone's guess."

Price pressures

At the same time, a survey by the British Chambers of Commerce indicated that there had been "continued expansion" for both manufacturing and services in the final three months of the year, but "at a lower level for the services sector than before the EU referendum".

The BCC said: "Firms in both sectors, particularly in manufacturing, are facing pressure to raise prices, principally as a result of the cost of raw materials and other overheads."

Dr Adam Marshall, the BCC's director general, added: "Overall, our findings suggest growth will continue in 2017, albeit at a more modest pace.

"The government must act strongly this year to support investment and improve the business environment - both of which are crucial to boosting business confidence, and therefore further growth."

Reuters News - Wall St. opens 2017 with big gains as banks surge

By Yashaswini Swamynathan

A trader at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., December 30, 2016. REUTERS/Stephen Yang

Wall Street made big gains on Tuesday, its first day of trading in 2017, with all eyes on the Dow Jones Industrial Average as it zeroes in on the historic 20,000 mark.

After coming within a hair's breadth of the milestone in December as part of a post-election rally, the Dow was trading just 0.46 percent shy of the psychological milestone.

The Dow rose 13.4 percent in 2016 - its best performance in three years - registering strong gains in the past two months as investors bet that Presidential-elect Donald Trump would introduce market friendly policies such as tax cuts and simpler regulation.

Banks were the main drivers of the gains on Wall Street on Tuesday, with the S&P 500 financial sector .SPSY rising 1.33 percent. Barclays raised price targets on several Wall Street banks including Bank of America (BAC.N), Wells Fargo (WFC.N) and JPMorgan (JPM.N).

Goldman Sachs (GS.N) rose 1.5 percent to $243.50 and was the top stock on the Dow.

Feeding Wall Street's gains were oil prices, which hit an 18-month high as a deal to cut output took effect on Sunday, and upbeat China factory data. [O/R]

The dollar index .DXY was on a tear, notching its best day in nearly three weeks at 103.37, while higher inflation data sent European stocks to a one-year high.

At 9:40 a.m. ET, the Dow .DJI was up 143.1 points, or 0.72 percent, at 19,905.7, the S&P 500 .SPXwas up 16.11 points, or 0.72 percent, at 2,254.94 and the Nasdaq Composite index .IXIC was up 38.05 points, or 0.71 percent, at 5,421.16.

Ten of the 11 major S&P 500 indexes were higher, with the defensive real estate .SPLRCR and consumer staples .SPLRCS sectors bringing up the rear.

Utilities .SPLRCU, another defensive sector, was the only one in the red.

Marathon Petroleum (MPC.N) rose 6.8 percent to $53.74 after the company said it would explore a spinoff of its retail business, caving to pressure from activist investor Elliott Management.

Xerox (XRX.N) was the biggest percentage gainer on the S&P, rising nearly 16 percent, after the company said it completed the separation of its BPO unit Conduent.

Advancing issues outnumbered decliners on the NYSE by 2,121 to 597. On the Nasdaq, 1,900 issues rose and 545 fell.

The S&P 500 index showed 13 new 52-week highs and one new lows, while the Nasdaq recorded 73 new highs and six new lows.

(Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Saumyadeb Chakrabarty)

Bloomberg News - Congo Leaders Agree on December Elections to End Kabila Rule

Democratic Republic of Congo’s ruling party and opposition leaders have signed a deal designed to end President Joseph Kabila’s rule and halt the violence that has erupted over his refusal to step down.

Under the agreement reached late Saturday, delayed presidential, legislative and provincial elections will be held in December, after which Kabila will leave. Kabila, in power since 2001, has not yet signed the accord, which was mediated by the country’s powerful Catholic Church.

“Work must continue, political stability must be safeguarded by implementing every point of this new political roadmap,” the head of the United Nations mission in the Congo, Maman Sidikou, said in a statement e-mailed Sunday, shortly after the agreement was reached.

Elections in Africa’s biggest copper producer were to have been held in November but were postponed by the electoral commission, which cited financial and logistical constraints. Kabila’s second and final term was to have ended on Dec. 19.

An earlier political agreement that would have allowed Kabila to remain in power until at least April 2018 was rejected by most of Congo’s opposition parties, which said the president was purposely delaying the votes. At least 40 people died last week in protests against the president.

The new agreement has broader support, but meeting the new election timeline will be difficult. The national election commission had previously said it required at least 17 months to complete a voter registration process and hold the polls.